Nature of Merchandising Business - DOC by y65rj6

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									Chapter 5:
Accounting for Merchandising Business


Nature of Merchandising Business
         Revenue activities of a merchandising business involve the
           buying and selling of merchandise.
         They purchase merchandise to resell to customers
              o Cost of merchandise sold – an expense account
         SALES – COST OF MERCHANDISE SOLD = Gross Profit
         Merchandise inventory – merchandise on hand at the end of an
           accounting period.
         Assume – perpetual inventory systems
              o Each purchase and sale of merchandise is recorded as it
                 occurs.

Accounting for Purchases:

        Example 1: Purchase merchandise for resale $4,000 on account.

Date            Account                 PR       Debit             Credit
Mar 1     Merchandise inventory              $4,000
            Accounts payable                                  $4,000



Purchases Discounts

        Credit terms – terms of when payments for merchandise are to be
        made.

                Net 30 days – full amount due in 30 days
                2/10 – 2% discount if paid within 10 days
                            Called purchases discounts

        Purchases discounts are discounts taken by the buyer for early
        Payment of an invoice.

        These discounts reduce the cost of the merchandise purchased.

        Should be taken when offered if not it is a LOSS to the business.

Winter, 2000
Prof. M. Mari
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Chapter 5:
Accounting for Merchandising Business


Example 2: Purchase merchandise for resale $4,000, terms 2/10, n/30 on
account.

        Invoice:                         $4,000
        Discount (2% x $4,000)               80
        Net of discount                  3,920

Date            Account                 PR       Debit         Credit
Mar 1     Merchandise inventory              $3,920
            Accounts payable                               $3,920


Record all entries with the amount net of the discount.


Example 3: Purchase merchandise for resale $6,000, terms 1/15, n/30 on
account.


 Date              Account              PR        Debit        Credit




Example 4: Purchase merchandise for resale $4,000, terms 2/10, n/30 on
account.

        Date          Account            PR        Debit       Credit
Mar 1           Merchandise inventory          $4,000
                  Accounts payable                          $4,000




Winter, 2000
Prof. M. Mari
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Chapter 5:
Accounting for Merchandising Business

Paid within the discount period.

Invoice:                     $4,000
      Discount (2% x $4,000)     80
      Net of discount         3,920


     Date        Account                  PR      Debit        Credit
Mar 09    Accounts payable                     $4,000
            Cash                                           3,920
           Merchandise inventory                             80


We reduce the merchandise inventory by the amount of the discount to show
the correct cost of the merchandise.


If not paid within the discount period.

     Date        Account                  PR      Debit        Credit
Mar 15    Accounts payable                     $4,000
            Cash                                           4,000




Example 5: Purchase merchandise for resale $6,000, terms 1/15, n/30 on
account.

       Date           Account           PR      Debit          Credit




Winter, 2000
Prof. M. Mari
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Chapter 5:
Accounting for Merchandising Business

Paid within the discount period.




       Date            Account            PR     Debit        Credit




If not paid within the discount period.

       Date            Account            PR     Debit        Credit




Purchases Returns and Allowances
  o Purchase returns – merchandise is returned to the seller
  o Purchase allowances – price adjustment
  o Debit memorandum – notification of the return or allowance by seller


Example 6: Returned merchandise on account $2,500.


     Date        Account                  PR      Debit       Credit
Mar 09    Accounts payable                     $2,500
            Cash                                          $2,500




Winter, 2000
Prof. M. Mari
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Chapter 5:
Accounting for Merchandising Business


Example 7: Purchased merchandise of $8,000 on terms 2/10,n/30. Ennis
pays the original invoice less a return of $2,500 within the discount period.
Record the above entries.


       Date              Account             PR       Debit           Credit




Accounting for Sales
     Under the perpetual inventory system, all sales require the reporting
     of the removal of inventory from the books at the same time.

       1. CASH SALES

                Example 8: Sold merchandise for cash $5,000. Cost of
                merchandise sold $3,200
                Date           Account            PR      Debit      Credit
                      Cash                              $5,000
                        Sales                                       $5,000

                       Cost of merchandise sold            3,200
                         Merchandise inventory                          3,200

                Note: that sales are credited for the sales price and merchandise
                inventory is credited for the COST.
Winter, 2000
Prof. M. Mari
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Chapter 5:
Accounting for Merchandising Business


       2. MASTERCARD OR VISA
            The transaction requires a debit to CASH since the money is
            deposited in the vendor’s account overnight.

                But a reduction of the cash account must be made for the
                service charge from the credit card company, which is directly
                taken out of the account.

                Example 9: Sold merchandise on VISA $10,000. Cost of
                merchandise sold is $4,000. Credit card expense is 3% of sales.


                Date            Account             PR      Debit       Credit
                       Cash                               $10,000
                        Sales                                          $10,000

                       Cost of merchandise sold           4,000
                         Merchandise inventory                         4,000

                       Credit card expense                300
                         Cash                                          300




                Example 10: Sold merchandise on VISA $6,000. Cost of
                merchandise sold is $3,000. Credit card expense is 3% of sales.


                Date            Account             PR      Debit       Credit




Winter, 2000
Prof. M. Mari
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Chapter 5:
Accounting for Merchandising Business


       3. SALES ON ACCOUNT
            Includes sales to nonblank credit cards such as AMERICAN
            EXPRESS

                Example 11: Sold merchandise on account $6,000. Cost of
                merchandise sold is $3,000.

                Date           Account            PR     Debit       Credit
                       Accounts receivable             $6,000
                         Sales                                      6,000

                       Cost of merchandise             3,000
                        Merchandise inventory                       3,000




Sales Discounts – reduction in the price of the good for early payment.

                Example 12: Sold merchandise on account $5,000, terms 2/10,
                n/30. Cost of merchandise sold is $4,000.

                Date           Account            PR     Debit       Credit
                       Accounts receivable             $5,000
                         Sales                                      5,000

                       Cost of merchandise             4,000
                        Merchandise inventory                       4,000




Winter, 2000
Prof. M. Mari
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Chapter 5:
Accounting for Merchandising Business

                Paid within the discount period

                Date            Account             PR       Debit     Credit
                       Cash                                4,900
                       Sales discounts                      100
                        Accounts receivable                            5,000


                Sales discount – expense account, which increases with a debit.


Sales Returns and Allowances
           An expense account, which increases with a debit.


                Example 13: Sold merchandise on account $7,000, terms 1/15,
                n/30. Cost of merchandise sold is $3,800.

                Date           Account              PR      Debit      Credit
                       Accounts receivable                $7,000
                         Sales                                         7,000

                       Cost of merchandise                3,800
                        Merchandise inventory                          3,800




                Return merchandise with sales price of $2,000 and cost of
                $1,000.

                Date            Account             PR       Debit     Credit
                       Sales returns                      2,000
                        Accounts receivable                            2,000

                       Merchandise inventory              1,000
                        Cost of merchandise sold                       1,000


Winter, 2000
Prof. M. Mari
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Chapter 5:
Accounting for Merchandising Business

Sales Taxes
      Liability to the business
             Create a SALES TAX PAYABLE account



       Example 14: Sold merchandise on account $7,000, plus 5% sales tax.
       Cost of merchandise sold is $3,800.

                Date           Account              PR      Debit       Credit
                       Accounts receivable                $7,350
                         Sales                                          7,000
                        Sales tax payable                                350

                       Cost of merchandise                3,800
                        Merchandise inventory                           3,800




Transportation Costs

       F.O.B. – Free on board

                Shipping point – buyers pays the transportation costs
                Destination - seller pays the transportation costs


      Homework: EX 5-1, 5-5, 5-8, 5-9, 5-13, 5-14, 5-16, 5-17
      Turn in: P5-2A and P5-1A
      Extra Credit : P5-3A




Winter, 2000
Prof. M. Mari
Page 9

								
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