C5 - 1
Learning Objectives
Power Notes
1,Nature of Merchandising Business
2a,Accounting for Purchases
2b,Accounting for Sales
2c,Transportation Costs
2d,Merchandise Transactions
3,Merchandising Chart of Accounts
4,Merchandising Income Statement
5,Merchandising Accounting Cycle
6,Financial Analysis and Interpretation
Chapter F5
Accounting for Merchandising Businesses
C5
C5 - 2
Nature of Merchandising Businesses
Inventory Costs and Relationships
Perpetual Inventory Systems
Merchandising Transactions
Merchandising Chart of Accounts
Merchandising Financial Statements
Ratio of Net Sales to Assets
Slide # Power Note Topics
3
6
8
13
25
27
34
Power NotesChapter F5
Accounting for Merchandising Businesses
Note,To select a topic,type the slide # and press Enter.
C5 - 3
Merchandising and Inventory
Merchandising involves selling inventory
Inventory is usually an important asset
Inventory must be accounted for
periodically or perpetually
Traditional periodic method is often being
replaced by perpetual inventory accounting
C5 - 4
Income Statement Comparison
Fees earned $150,000
Operating expenses 120,000
Net income $ 30,000
Service Business
Sales revenue $600,000
Cost of mdse,sold 450,000
Gross profit $150,000
Operating expenses 120,000
Net income $ 30,000
Merchandising Business
20% of revenues
5% of revenues
C5 - 5
Income Statement Comparison
Fees earned $150,000
Operating expenses 120,000
Net income $ 30,000
Service Business
Sales revenue $600,000
Cost of mdse,sold 450,000
Gross profit $150,000
Operating expenses 120,000
Net income $ 30,000
Merchandising Business
20% of revenues
5% of revenues
75% of revenues
C5 - 6
LIABILITIES
OWNER’S
EQUITY
REVENUES
ASSETS
COSTS
&EXPENSES
Inventory Costs and Relationships
Merchandise
Inventory
Cost of
Mdse,Sold
If merchandise inventory is,,,,,,,
Cost of merchandise sold is,,,,,,
Gross profit and net income are,,,
Ending owner’s equity is,,,,,,,,,
overstated
understated
overstated
overstated
Net Income
C5 - 7
LIABILITIES
OWNER’S
EQUITY
REVENUES
ASSETS
COSTS
&EXPENSES
Inventory Costs and Relationships
Merchandise
Inventory
Cost of
Mdse,Sold
If merchandise inventory is,,,,,,,
Cost of merchandise sold is,,,,,,
Gross profit and net income are,,,
Ending owner’s equity is,,,,,,,,,
understated
overstated
understated
understated
Net Income
C5 - 8
Continuous determination of inventory value
Continuous determination of gross profit
Affordable with computers,scanners,and bar
codes on most products
Perpetual inventory accounting provides
management controls
Managers know which items are selling fastest
and the profit margin on those items
Advantages of Using Perpetual Inventory
C5 - 9
Perpetual Inventory System
General Journal
Description Debit Credit
General Ledger
Mdse,Inventory 5,000
Accts,Payable 5,000
Mdse,Inventory
5,000A
Cost of Mdse,Sold
A
In a perpetual system,
Mdse,Inventory is an
active asset account.
All changes are recorded
as they occur.
Purchase on account
Return of merchandise
A
B
C5 - 10
Perpetual Inventory System
General Journal
Description Debit Credit
General Ledger
Mdse,Inventory 5,000
Accts,Payable 5,000
Accts,Payable 1,000
Mdse,Inventory 1,000
Mdse,Inventory
5,000A
Cost of Mdse,Sold
1,000A B
B
4,000Bal
In a perpetual system,
Mdse,Inventory is an
active asset account.
All changes are recorded
as they occur.
Purchase on account
Return of merchandise
Sale of merchandise
A
B
C
C5 - 11
Perpetual Inventory System
General Journal
Description Debit Credit
General Ledger
Mdse,Inventory 5,000
Accts,Payable 5,000
Accts,Payable 1,000
Mdse,Inventory 1,000
Accts,Receivable 3,250
Sales 3,250
Cost of Mdse,Sold 2,500
Mdse,Inventory 2,500
Mdse,Inventory
5,000A
Cost of Mdse,Sold
2,500
Purchase on account
Return of merchandise
Sale of merchandise
1,000A B
B
C
C2,500
1,500
C
Bal
A
B
C
In a perpetual system,
Mdse,Inventory is an
active asset account.
All changes are recorded
as they occur.
C5 - 12
Perpetual Inventory System
General Journal
Description Debit Credit
General Ledger
Mdse,Inventory
5,000A
Cost of Mdse,Sold
2,500
Purchase on account
Return of merchandise
Sale of merchandise
1,000A B
B
C
C2,500
1,500
C
Bal
A
B
C
In a perpetual system,
Mdse,Inventory is an
active asset account.
All changes are recorded
as they occur.
Mdse,Inventory 5,000
Accts,Payable 5,000
Accts,Payable 1,000
Mdse,Inventory 1,000
Accts,Receivable 3,250
Sales 3,250
Cost of Mdse,Sold 2,500
Mdse,Inventory 2,500
C5 - 13
Credit Terms,Cash Discounts
Credit Terms,2/10,n/30
Is invoice
paid within 10
days of
invoice
date?
Full amount is due
within 30 days of
invoice date.
No
C5 - 14
2% of invoice
amount is
allowed as a
cash discount.
Credit Terms,Cash Discounts
Credit Terms,2/10,n/30
Is invoice
paid within 10
days of
invoice
date?
Yes
Full amount is due
within 30 days of
invoice date.
No
C5 - 15
2% of invoice
amount is
allowed as a
cash discount.
Credit Terms,Cash Discounts
Credit Terms,2/10,n/30
Is invoice
paid within 10
days of
invoice
date?
Yes
Full amount is due
within 30 days of
invoice date.
No
Example,Merchandise was
purchased for $1,500 with credit
terms of 2/10,n/30,Payment
within 10 days is calculated as:
Invoice $1,500
Less 2% discount 30
Net cost paid $1,470
C5 - 16
Selling and Buying Merchandise Inventory
Description Debit Credit
Accts,Receivable 1,500
Sales 1,500
Cost of Mdse,Sold 900
Mdse,Inventory 900
Mdse,Inventory 1,470
Accts,Payable 1,470
Seller Buyer
Description Debit Credit
Jan 12,Merchandise was sold with credit terms of 2/10,n/30.
Jan 22,Payment was made within the discount period.
Recorded at net cost
$1,500 - $30 (discount)
C5 - 17
Selling and Buying Merchandise Inventory
Description Debit Credit
Accts,Receivable 1,500
Sales 1,500
Cost of Mdse,Sold 900
Mdse,Inventory 900
Cash 1,470
Sales Discounts 30
Accts,Receivable 1,500
Mdse,Inventory 1,470
Accts,Payable 1,470
Accts,Payable 1,470
Cash 1,470
Seller Buyer
Description Debit Credit
Jan 12,Merchandise was sold with credit terms of 2/10,n/30.
Jan 22,Payment was made within the discount period.
Recorded at net cost
$1,500 - $30 (discount)
C5 - 18
Selling and Buying Merchandise Inventory
Description Debit Credit
Accts,Receivable 1,500
Sales 1,500
Cost of Mdse,Sold 900
Mdse,Inventory 900
Cash 1,470
Sales Discounts 30
Accts,Receivable 1,500
Mdse,Inventory 1,500
Accts,Payable 1,500
Accts,Payable 1,500
Mdse,Inventory 30
Cash 1,470
Seller Buyer
Description Debit Credit
Jan 12,Merchandise was sold with credit terms of 2/10,n/30.
Jan 22,Payment was made within the discount period.
Recorded at full cost
C5 - 19
Accounting for Merchandise Transactions
Description Debit Credit
Accts,Receivable 5,000
Sales 5,000
Cost of Mdse,Sold 3,500
Mdse,Inventory 3,500
Mdse,Inventory 5,000
Accts,Payable 5,000
Scully Company (Seller) Burton Co,(Buyer)
Description Debit Credit
July 5,Scully Company sold merchandise on account to
Burton Co.,$5,000,terms FOB destination,n/30,The cost
of the merchandise sold was $3,500.
C5 - 20
Accounting for Merchandise Transactions
Description Debit Credit
Transportation Out 250
Cash 250
Mdse,Inventory 5,000
Accts,Payable 5,000
No entry.
Scully Company (Seller) Burton Co,(Buyer)
Description Debit Credit
July 7,Scully Company paid transportation costs of $250,
for delivery of merchandise sold to Burton Co.
Accts,Receivable 5,000
Sales 5,000
Cost of Mdse,Sold 3,500
Mdse,Inventory 3,500
C5 - 21
Accts,Receivable 5,000
Sales 5,000
Cost of Mdse,Sold 3,500
Mdse,Inventory 3,500
Transportation Out 250
Cash 250
Accounting for Merchandise Transactions
Description Debit Credit
Sales Ret,& Allow,1,000
Accts Receivable 1,000
Mdse,Inventory 700
Cost of Mdse,Sold 700
Mdse,Inventory 5,000
Accts,Payable 5,000
No entry.
Accts,Payable 1,000
Mdse,Inventory 1,000
Scully Company (Seller) Burton Co,(Buyer)
Description Debit Credit
July 13,Scully Company issued Burton Co,a credit memo for
merchandise returned,$1,000,The merchandise cost was $700.
C5 - 22
Accounting for Merchandise Transactions
Description Debit Credit
Cash 4,000
Accts,Receivable 4,000
Accts,Payable 4,000
Cash 4,000
Scully Company (Seller) Burton Co,(Buyer)
Description Debit Credit
July 15,Scully Company received payment from
Burton Co,for purchase of July 1.
C5 - 23
Cash 4,000
Accts,Receivable 4,000
Accounting for Merchandise Transactions
Description Debit Credit
Accts,Receivable 12,500
Sales 12,000
Cash 500
Cost of Mdse,Sold 7,200
Mdse,Inventory 7,200
Scully Company (Seller) Burton Co,(Buyer)
Description Debit Credit
July 18,Scully Company sold merchandise on
account to Burton Co.,$12,000,terms FOB
shipping point,2/10,n/eom,Scully Company
prepaid transportation costs of $500,Cost of
merchandise sold was $7,200.
Accts,Payable 4,000
Cash 4,000
Mdse,Inventory 12,500
Accts,Payable 12,500
C5 - 24
Cash 4,000
Accts,Receivable 4,000
Accts,Receivable 12,500
Sales 12,000
Cash 500
Cost of Mdse,Sold 7,200
Mdse,Inventory 7,200
Accounting for Merchandise Transactions
Description Debit Credit
Cash 12,260
Sales Discounts 240
Accts,Receivable 12,500
Accts,Payable 4,000
Cash 4,000
Mdse,Inventory 12,500
Accts,Payable 12,500
Accts,Payable 12,500
Mdse,Inventory 240
Cash 12,260
Scully Company (Seller) Burton Co,(Buyer)
Description Debit Credit
July 28,Scully Company received payment from
Burton Co,less discount (2% x $12,000).
C5 - 25
NetSolutions
Merchandising Chart of Accounts
Balance Sheet Accounts
200 Liabilities
210 Accounts Payable
211 Salaries Payable
212 Unearned Rent
215 Notes Payable
300 Stockholders’ Equity
310 Capital Stock
311 Retained Earnings
312 Dividends
313 Income Summary
100 Assets
110 Cash
111 Notes Receivable
112 Accounts Receivable
113 Interest Receivable
115 Merchandise Inventory
116 Office Supplies
117 Prepaid Insurance
120 Land
123 Store Equipment
124 Accumulated Depreciation—
Store Equipment
125 Office Equipment
126 Accumulated Depreciation—
Office Equipment
C5 - 26
NetSolutions
Merchandising Chart of Accounts
Income Statement Accounts
600 Other Income
610 Rent Revenue
611 Interest Revenue
700 Other Expense
710 Interest Expense
400 Revenue
410 Sales
411 Sales Returns and
Allowances
412 Sales Discounts
500 Costs and Expenses
510 Cost of Merchandise Sold
520 Sales Salaries Expense
521 Advertising Expense
522 Depreciation Expense—
Store Equipment
523 Transportation Out
529 Misc,Selling Expense
530 Office Salaries Expense
531 Rent Expense
532 Depreciation Expense—
Office Equipment
533 Insurance Expense
534 Office Supplies Expense
539 Misc,Admin,Expense
C5 - 27
NetSolutions
Income Statement (Multiple-Step)
For Year Ended December 31,2004
Continued
Revenue from sales:
Sales $ 720,185
Less:Sales returns and allow,$ 6,140
Sales discounts 5,790 11,930
Net sales $708,255
Cost of merchandise sold 525,305
Gross profit $182,950
C5 - 28
Operating expenses:
Selling expenses:
Sales salaries expense $60,030
Advertising expense 10,860
Depr,expense–store equip,3,100
Miscellaneous selling expense 630
Total selling expenses $ 74,620
Administrative expenses:
Office salaries expense $21,020
Rent expense 8,100
Depr,expense–office equip,2,490
Insurance expense 1,910
Office supplies expense 610
Misc,admin,expenses 760
Total admin,expenses 34,890
Total operating expenses 109,510
Income from operations $ 73,440
Continued
C5 - 29
Other income:
Interest revenue $ 3,800
Rent revenue 600
Total other income $ 4,400
Other expense:
Interest expense 2,440 1,960
Net income $75,400
C5 - 30
NetSolutions
Income Statement (Single-Step)
For Year Ended December 31,2004
Revenues:
Net sales $708,255
Interest revenue 3,800
Rent revenue 600
Total revenues $712,655
Expenses:
Cost of merchandise sold $525,305
Selling expenses 74,620
Administrative expenses 34,890
Interest expense 2,440
Total expenses 637,255
Net income $ 75,400
C5 - 31
NetSolutions
Balance Sheet
December 31,2004
Continued
Assets
Current assets:
Cash $ 52,950
Notes receivable 35,000
Accounts receivable 55,880
Interest receivable 200
Merchandise inventory 62,150
Office supplies 480
Prepaid insurance 2,650
Total current assets $209,310
C5 - 32
NetSolutions
Balance Sheet
December 31,2004
Assets
Property,plant,and equipment:
Land $ 20,000
Store equipment $ 27,100
Less accum,depreciation 5,700 21,400
Office equipment $ 15,570
Less accum,depreciation 4,720 10,850
Total property,plant,and
equipment 52,250
Total assets $261,560
Continued
C5 - 33
NetSolutions
Balance Sheet
December 31,2004
Liabilities
Current liabilities:
Accounts payable $ 22,420
Note payable (current portion) 5,000
Salaries payable 1,140
Unearned rent 1,800
Total current liabilities $30,360
Long-term liabilities:
Note payable (due 2001) 20,000
Total liabilities $ 50,360
Owner’s Equity
Capital stock $ 25,000
Retained earnings 186,200 211,200
Total liabilities and owner’s equity $261,560
C5 - 34
Profitability Analysis
Profitability is the ability of an entity to earn profits.
This ability to earn profits depends on the
effectiveness and efficiency of operations as well
as resources available.
Profitability analysis focuses primarily on the
relationship between operating results reported in
the income statement and resources reported in
the balance sheet.
C5 - 35
Profitability Measures — Effective Use of Assets
Ratio of Net Sales to Assets
2003 1992
Net sales $1,498,000 $1,200,000
Total assets:
Beginning of year $1,053,000 $1,010,000
End of year 1,044,500 1,053,000
Total $2,097,500 $2,063,000
Average $1,048,750 $1,031,500
C5 - 36
Ratio of Net Sales to Assets
Use,To assess the effectiveness
in the use of assets.
Net sales $1,498,000 $1,200,000
Total assets:
Beginning of year $1,053,000 $1,010,000
End of year 1,044,500 1,053,000
Total $2,097,500 $2,063,000
Average $1,048,750 $1,031,500
Ratio of net sales to assets 1.4 1.2
Profitability Measures — Effective Use of Assets
2003 2002
C5 - 37
Note,To see the topic slide,type 2 and press Enter.
This is the last slide in Chapter F5,
Power NotesChapter F5
Accounting for Merchandising Businesses
Learning Objectives
Power Notes
1,Nature of Merchandising Business
2a,Accounting for Purchases
2b,Accounting for Sales
2c,Transportation Costs
2d,Merchandise Transactions
3,Merchandising Chart of Accounts
4,Merchandising Income Statement
5,Merchandising Accounting Cycle
6,Financial Analysis and Interpretation
Chapter F5
Accounting for Merchandising Businesses
C5
C5 - 2
Nature of Merchandising Businesses
Inventory Costs and Relationships
Perpetual Inventory Systems
Merchandising Transactions
Merchandising Chart of Accounts
Merchandising Financial Statements
Ratio of Net Sales to Assets
Slide # Power Note Topics
3
6
8
13
25
27
34
Power NotesChapter F5
Accounting for Merchandising Businesses
Note,To select a topic,type the slide # and press Enter.
C5 - 3
Merchandising and Inventory
Merchandising involves selling inventory
Inventory is usually an important asset
Inventory must be accounted for
periodically or perpetually
Traditional periodic method is often being
replaced by perpetual inventory accounting
C5 - 4
Income Statement Comparison
Fees earned $150,000
Operating expenses 120,000
Net income $ 30,000
Service Business
Sales revenue $600,000
Cost of mdse,sold 450,000
Gross profit $150,000
Operating expenses 120,000
Net income $ 30,000
Merchandising Business
20% of revenues
5% of revenues
C5 - 5
Income Statement Comparison
Fees earned $150,000
Operating expenses 120,000
Net income $ 30,000
Service Business
Sales revenue $600,000
Cost of mdse,sold 450,000
Gross profit $150,000
Operating expenses 120,000
Net income $ 30,000
Merchandising Business
20% of revenues
5% of revenues
75% of revenues
C5 - 6
LIABILITIES
OWNER’S
EQUITY
REVENUES
ASSETS
COSTS
&EXPENSES
Inventory Costs and Relationships
Merchandise
Inventory
Cost of
Mdse,Sold
If merchandise inventory is,,,,,,,
Cost of merchandise sold is,,,,,,
Gross profit and net income are,,,
Ending owner’s equity is,,,,,,,,,
overstated
understated
overstated
overstated
Net Income
C5 - 7
LIABILITIES
OWNER’S
EQUITY
REVENUES
ASSETS
COSTS
&EXPENSES
Inventory Costs and Relationships
Merchandise
Inventory
Cost of
Mdse,Sold
If merchandise inventory is,,,,,,,
Cost of merchandise sold is,,,,,,
Gross profit and net income are,,,
Ending owner’s equity is,,,,,,,,,
understated
overstated
understated
understated
Net Income
C5 - 8
Continuous determination of inventory value
Continuous determination of gross profit
Affordable with computers,scanners,and bar
codes on most products
Perpetual inventory accounting provides
management controls
Managers know which items are selling fastest
and the profit margin on those items
Advantages of Using Perpetual Inventory
C5 - 9
Perpetual Inventory System
General Journal
Description Debit Credit
General Ledger
Mdse,Inventory 5,000
Accts,Payable 5,000
Mdse,Inventory
5,000A
Cost of Mdse,Sold
A
In a perpetual system,
Mdse,Inventory is an
active asset account.
All changes are recorded
as they occur.
Purchase on account
Return of merchandise
A
B
C5 - 10
Perpetual Inventory System
General Journal
Description Debit Credit
General Ledger
Mdse,Inventory 5,000
Accts,Payable 5,000
Accts,Payable 1,000
Mdse,Inventory 1,000
Mdse,Inventory
5,000A
Cost of Mdse,Sold
1,000A B
B
4,000Bal
In a perpetual system,
Mdse,Inventory is an
active asset account.
All changes are recorded
as they occur.
Purchase on account
Return of merchandise
Sale of merchandise
A
B
C
C5 - 11
Perpetual Inventory System
General Journal
Description Debit Credit
General Ledger
Mdse,Inventory 5,000
Accts,Payable 5,000
Accts,Payable 1,000
Mdse,Inventory 1,000
Accts,Receivable 3,250
Sales 3,250
Cost of Mdse,Sold 2,500
Mdse,Inventory 2,500
Mdse,Inventory
5,000A
Cost of Mdse,Sold
2,500
Purchase on account
Return of merchandise
Sale of merchandise
1,000A B
B
C
C2,500
1,500
C
Bal
A
B
C
In a perpetual system,
Mdse,Inventory is an
active asset account.
All changes are recorded
as they occur.
C5 - 12
Perpetual Inventory System
General Journal
Description Debit Credit
General Ledger
Mdse,Inventory
5,000A
Cost of Mdse,Sold
2,500
Purchase on account
Return of merchandise
Sale of merchandise
1,000A B
B
C
C2,500
1,500
C
Bal
A
B
C
In a perpetual system,
Mdse,Inventory is an
active asset account.
All changes are recorded
as they occur.
Mdse,Inventory 5,000
Accts,Payable 5,000
Accts,Payable 1,000
Mdse,Inventory 1,000
Accts,Receivable 3,250
Sales 3,250
Cost of Mdse,Sold 2,500
Mdse,Inventory 2,500
C5 - 13
Credit Terms,Cash Discounts
Credit Terms,2/10,n/30
Is invoice
paid within 10
days of
invoice
date?
Full amount is due
within 30 days of
invoice date.
No
C5 - 14
2% of invoice
amount is
allowed as a
cash discount.
Credit Terms,Cash Discounts
Credit Terms,2/10,n/30
Is invoice
paid within 10
days of
invoice
date?
Yes
Full amount is due
within 30 days of
invoice date.
No
C5 - 15
2% of invoice
amount is
allowed as a
cash discount.
Credit Terms,Cash Discounts
Credit Terms,2/10,n/30
Is invoice
paid within 10
days of
invoice
date?
Yes
Full amount is due
within 30 days of
invoice date.
No
Example,Merchandise was
purchased for $1,500 with credit
terms of 2/10,n/30,Payment
within 10 days is calculated as:
Invoice $1,500
Less 2% discount 30
Net cost paid $1,470
C5 - 16
Selling and Buying Merchandise Inventory
Description Debit Credit
Accts,Receivable 1,500
Sales 1,500
Cost of Mdse,Sold 900
Mdse,Inventory 900
Mdse,Inventory 1,470
Accts,Payable 1,470
Seller Buyer
Description Debit Credit
Jan 12,Merchandise was sold with credit terms of 2/10,n/30.
Jan 22,Payment was made within the discount period.
Recorded at net cost
$1,500 - $30 (discount)
C5 - 17
Selling and Buying Merchandise Inventory
Description Debit Credit
Accts,Receivable 1,500
Sales 1,500
Cost of Mdse,Sold 900
Mdse,Inventory 900
Cash 1,470
Sales Discounts 30
Accts,Receivable 1,500
Mdse,Inventory 1,470
Accts,Payable 1,470
Accts,Payable 1,470
Cash 1,470
Seller Buyer
Description Debit Credit
Jan 12,Merchandise was sold with credit terms of 2/10,n/30.
Jan 22,Payment was made within the discount period.
Recorded at net cost
$1,500 - $30 (discount)
C5 - 18
Selling and Buying Merchandise Inventory
Description Debit Credit
Accts,Receivable 1,500
Sales 1,500
Cost of Mdse,Sold 900
Mdse,Inventory 900
Cash 1,470
Sales Discounts 30
Accts,Receivable 1,500
Mdse,Inventory 1,500
Accts,Payable 1,500
Accts,Payable 1,500
Mdse,Inventory 30
Cash 1,470
Seller Buyer
Description Debit Credit
Jan 12,Merchandise was sold with credit terms of 2/10,n/30.
Jan 22,Payment was made within the discount period.
Recorded at full cost
C5 - 19
Accounting for Merchandise Transactions
Description Debit Credit
Accts,Receivable 5,000
Sales 5,000
Cost of Mdse,Sold 3,500
Mdse,Inventory 3,500
Mdse,Inventory 5,000
Accts,Payable 5,000
Scully Company (Seller) Burton Co,(Buyer)
Description Debit Credit
July 5,Scully Company sold merchandise on account to
Burton Co.,$5,000,terms FOB destination,n/30,The cost
of the merchandise sold was $3,500.
C5 - 20
Accounting for Merchandise Transactions
Description Debit Credit
Transportation Out 250
Cash 250
Mdse,Inventory 5,000
Accts,Payable 5,000
No entry.
Scully Company (Seller) Burton Co,(Buyer)
Description Debit Credit
July 7,Scully Company paid transportation costs of $250,
for delivery of merchandise sold to Burton Co.
Accts,Receivable 5,000
Sales 5,000
Cost of Mdse,Sold 3,500
Mdse,Inventory 3,500
C5 - 21
Accts,Receivable 5,000
Sales 5,000
Cost of Mdse,Sold 3,500
Mdse,Inventory 3,500
Transportation Out 250
Cash 250
Accounting for Merchandise Transactions
Description Debit Credit
Sales Ret,& Allow,1,000
Accts Receivable 1,000
Mdse,Inventory 700
Cost of Mdse,Sold 700
Mdse,Inventory 5,000
Accts,Payable 5,000
No entry.
Accts,Payable 1,000
Mdse,Inventory 1,000
Scully Company (Seller) Burton Co,(Buyer)
Description Debit Credit
July 13,Scully Company issued Burton Co,a credit memo for
merchandise returned,$1,000,The merchandise cost was $700.
C5 - 22
Accounting for Merchandise Transactions
Description Debit Credit
Cash 4,000
Accts,Receivable 4,000
Accts,Payable 4,000
Cash 4,000
Scully Company (Seller) Burton Co,(Buyer)
Description Debit Credit
July 15,Scully Company received payment from
Burton Co,for purchase of July 1.
C5 - 23
Cash 4,000
Accts,Receivable 4,000
Accounting for Merchandise Transactions
Description Debit Credit
Accts,Receivable 12,500
Sales 12,000
Cash 500
Cost of Mdse,Sold 7,200
Mdse,Inventory 7,200
Scully Company (Seller) Burton Co,(Buyer)
Description Debit Credit
July 18,Scully Company sold merchandise on
account to Burton Co.,$12,000,terms FOB
shipping point,2/10,n/eom,Scully Company
prepaid transportation costs of $500,Cost of
merchandise sold was $7,200.
Accts,Payable 4,000
Cash 4,000
Mdse,Inventory 12,500
Accts,Payable 12,500
C5 - 24
Cash 4,000
Accts,Receivable 4,000
Accts,Receivable 12,500
Sales 12,000
Cash 500
Cost of Mdse,Sold 7,200
Mdse,Inventory 7,200
Accounting for Merchandise Transactions
Description Debit Credit
Cash 12,260
Sales Discounts 240
Accts,Receivable 12,500
Accts,Payable 4,000
Cash 4,000
Mdse,Inventory 12,500
Accts,Payable 12,500
Accts,Payable 12,500
Mdse,Inventory 240
Cash 12,260
Scully Company (Seller) Burton Co,(Buyer)
Description Debit Credit
July 28,Scully Company received payment from
Burton Co,less discount (2% x $12,000).
C5 - 25
NetSolutions
Merchandising Chart of Accounts
Balance Sheet Accounts
200 Liabilities
210 Accounts Payable
211 Salaries Payable
212 Unearned Rent
215 Notes Payable
300 Stockholders’ Equity
310 Capital Stock
311 Retained Earnings
312 Dividends
313 Income Summary
100 Assets
110 Cash
111 Notes Receivable
112 Accounts Receivable
113 Interest Receivable
115 Merchandise Inventory
116 Office Supplies
117 Prepaid Insurance
120 Land
123 Store Equipment
124 Accumulated Depreciation—
Store Equipment
125 Office Equipment
126 Accumulated Depreciation—
Office Equipment
C5 - 26
NetSolutions
Merchandising Chart of Accounts
Income Statement Accounts
600 Other Income
610 Rent Revenue
611 Interest Revenue
700 Other Expense
710 Interest Expense
400 Revenue
410 Sales
411 Sales Returns and
Allowances
412 Sales Discounts
500 Costs and Expenses
510 Cost of Merchandise Sold
520 Sales Salaries Expense
521 Advertising Expense
522 Depreciation Expense—
Store Equipment
523 Transportation Out
529 Misc,Selling Expense
530 Office Salaries Expense
531 Rent Expense
532 Depreciation Expense—
Office Equipment
533 Insurance Expense
534 Office Supplies Expense
539 Misc,Admin,Expense
C5 - 27
NetSolutions
Income Statement (Multiple-Step)
For Year Ended December 31,2004
Continued
Revenue from sales:
Sales $ 720,185
Less:Sales returns and allow,$ 6,140
Sales discounts 5,790 11,930
Net sales $708,255
Cost of merchandise sold 525,305
Gross profit $182,950
C5 - 28
Operating expenses:
Selling expenses:
Sales salaries expense $60,030
Advertising expense 10,860
Depr,expense–store equip,3,100
Miscellaneous selling expense 630
Total selling expenses $ 74,620
Administrative expenses:
Office salaries expense $21,020
Rent expense 8,100
Depr,expense–office equip,2,490
Insurance expense 1,910
Office supplies expense 610
Misc,admin,expenses 760
Total admin,expenses 34,890
Total operating expenses 109,510
Income from operations $ 73,440
Continued
C5 - 29
Other income:
Interest revenue $ 3,800
Rent revenue 600
Total other income $ 4,400
Other expense:
Interest expense 2,440 1,960
Net income $75,400
C5 - 30
NetSolutions
Income Statement (Single-Step)
For Year Ended December 31,2004
Revenues:
Net sales $708,255
Interest revenue 3,800
Rent revenue 600
Total revenues $712,655
Expenses:
Cost of merchandise sold $525,305
Selling expenses 74,620
Administrative expenses 34,890
Interest expense 2,440
Total expenses 637,255
Net income $ 75,400
C5 - 31
NetSolutions
Balance Sheet
December 31,2004
Continued
Assets
Current assets:
Cash $ 52,950
Notes receivable 35,000
Accounts receivable 55,880
Interest receivable 200
Merchandise inventory 62,150
Office supplies 480
Prepaid insurance 2,650
Total current assets $209,310
C5 - 32
NetSolutions
Balance Sheet
December 31,2004
Assets
Property,plant,and equipment:
Land $ 20,000
Store equipment $ 27,100
Less accum,depreciation 5,700 21,400
Office equipment $ 15,570
Less accum,depreciation 4,720 10,850
Total property,plant,and
equipment 52,250
Total assets $261,560
Continued
C5 - 33
NetSolutions
Balance Sheet
December 31,2004
Liabilities
Current liabilities:
Accounts payable $ 22,420
Note payable (current portion) 5,000
Salaries payable 1,140
Unearned rent 1,800
Total current liabilities $30,360
Long-term liabilities:
Note payable (due 2001) 20,000
Total liabilities $ 50,360
Owner’s Equity
Capital stock $ 25,000
Retained earnings 186,200 211,200
Total liabilities and owner’s equity $261,560
C5 - 34
Profitability Analysis
Profitability is the ability of an entity to earn profits.
This ability to earn profits depends on the
effectiveness and efficiency of operations as well
as resources available.
Profitability analysis focuses primarily on the
relationship between operating results reported in
the income statement and resources reported in
the balance sheet.
C5 - 35
Profitability Measures — Effective Use of Assets
Ratio of Net Sales to Assets
2003 1992
Net sales $1,498,000 $1,200,000
Total assets:
Beginning of year $1,053,000 $1,010,000
End of year 1,044,500 1,053,000
Total $2,097,500 $2,063,000
Average $1,048,750 $1,031,500
C5 - 36
Ratio of Net Sales to Assets
Use,To assess the effectiveness
in the use of assets.
Net sales $1,498,000 $1,200,000
Total assets:
Beginning of year $1,053,000 $1,010,000
End of year 1,044,500 1,053,000
Total $2,097,500 $2,063,000
Average $1,048,750 $1,031,500
Ratio of net sales to assets 1.4 1.2
Profitability Measures — Effective Use of Assets
2003 2002
C5 - 37
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This is the last slide in Chapter F5,
Power NotesChapter F5
Accounting for Merchandising Businesses
