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Principles
Prepared by:
Carole Bowman, Sheridan College
CHAPTER
5
ACCOUNTING FOR
MERCHANDISING
OPERATIONS
MERCHANDISING COMPANY
Receive
Cash
Cash
Perform
Services
Accounts
Receivable
Merchandising Company
Receive
Cash
Cash
Sale
Inventory
Sell Inventory
Accounts
Receivable
Merchandise
Inventory
ILLUSTRATION 5-1
Less
Equals
Cost
Costof
of
Goods
GoodsSold
Sold
Gross
Gross
Profit
Profit
Less
Equals
Operating
Expenses
Net
Income
(Loss)
INVENTORY SYSTEMS
Merchandising entities may use either (or
both) of the following inventory systems:
1. Perpetual where detailed records of each
inventory purchase and sale are maintained.
Cost of goods sold is calculated at the time of
each sale.
2. Periodic detailed records are not
maintained. Cost of goods sold is calculated
only at the end of the accounting period.
This chapter covers the perpetual method.
RECORDING COST OF
GOODS PURCHASED
When
PURCHASES OF
MERCHANDISE
General Journal
Date Account Title and Explanation Ref
May 4 Merchandise Inventory
Accounts Payable
To record goods purchased on
account, terms n/30.
Debit
3,800
J1
Credit
3,800
FREIGHT COSTS
The
ACCOUNTING FOR
FREIGHT COSTS
Merchandise Inventory is debited by the buyer, if the
buyer pays the freight bill (FOB shipping point).
Freight Out (or Delivery Expense) is debited by the
seller, if the seller pays the freight bill (FOB
destination).
ACCOUNTING FOR
FREIGHT COSTS
General Journal
Date Account Title and Explanation
May 4 Merchandise Inventory
Cash
To record payment of freight.
Ref
Debit
150
J1
Credit
150
General Journal
Date Account Title and Explanation
May 8 Accounts Payable
Merchandise Inventory
To record return of goods.
Ref
Debit
300
J1
Credit
300
PURCHASE DISCOUNTS
Credit
SALES TRANSACTIONS
Revenues
SALES TRANSACTIONS
General Journal
Date Account Title and Explanation
May 4 Accounts Receivable
Sales
To record credit sale.
May 4 Cost of Goods Sold
Merchandise Inventory
To record cost of merchandise
sold.
Ref
Debit
3,800
J1
Credit
3,800
2,400
2,400
SALES TAXES
Ref
Debit
300
J1
Credit
300
140
140
QUANTITY DISCOUNTS
A quantity discount is the offer of a cash
discount to a customer in return for a volume
sale.
Quantity discounts result in a sales price
reduction. They are not separately journalized.
Instead the sale is recorded at the reduced
price.
SALES DISCOUNTS
A sales
COMPLETING THE
ACCOUNTING CYCLE
A merchandising
COMPLETING THE
ACCOUNTING CYCLE
A merchandising
ILLUSTRATION 5-9
STATEMENT PRESENTATION OF
SALES REVENUE SECTION
As contra revenue accounts, sales returns and
allowances (and sales discounts, if any) are
deducted from sales in the income statement to
arrive at Net Sales.
HIGHPOINT ELECTRONIC
Income Statement (Partial)
For the Year Ended December 31, 2002
Sales revenue
Sales
$ 480,000
Less: Sales returns and allowances
20,000
Net sales
$ 460,000
ILLUSTRATION 5-10
$$ 460,000
460,000
316,000
$ 144,000
100%
69%
31%
ILLUSTRATION 5-12
Gross profit
Operating expenses
Net income
$ 144,000
114,000
$ 30,000
ILLUSTRATION
5-14
This is the format
of a multi-step
income statement
that has both
operating and nonoperating
activities.
As shown, the nonoperating activities
are reported
immediately after
the companys
primary operating
activities.
HIGHPOINT ELECTRONIC
Income Statement
For the Year Ended December 31, 2002
Sales revenue
Sales
Less: Sales returns and allowances
Net sales
Cost of goods sold
Gross profit
Operating expenses
Selling expenses
Salaries expense
$
Advertising expense
Amortization expense
Freight out
Total selling expenses
Administrative expenses
Rent expense
$
Utilities expense
Insurance expense
Total administrative expenses
Total operating expenses
Income from operations
Other revenue and gains
Interest revenue
$
Gain on sale of equipment
Total non-operating revenue and gain
Other expenses and losses
Interest on expense
$
Casualty loss from vandalism
Total non-operating expense and loss
Net non-operating revenue
Net income
$ 480,000
20,000
460,000
316,000
144,000
45,000
16,000
8,000
7,000
$ 76,000
19,000
17,000
2,000
38,000
114,000
30,000
3,000
600
$
3,600
1,800
200
2,000
$
1,600
31,600
9,500
16,100
40,000
1,800
67,400
56,000
$ 123,400
Inventory turnover
Days sales in inventory
INVENTORY TURNOVER
Inventory turnover =
Cost of goods sold
Average inventory
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