Accounting for Merchandising Businesses

Transcription

1 Accounting for Merchandising Businesses LearningObjective1 Distinguish between the activities and financial statements of service and merchandising businesses. Nature of Merchandising Businesses Service Business Provide services rather than products to customers. Merchandising Business Sell products they purchase from other business to customers. Manufacturing Business Change basic input in to products that are sold to customers. LearningObjective2 Describeand illustrate the financial statements of a merchandising business. Sales is the total amount charged to customers for merchandise sold, including cash sales and sales on account. Sales returns and allowances are granted by the seller to customers for damaged or defective merchandise. Trade Discount is granted by the seller to government agencies or business that order large quantities. Sales discounts are granted by the seller to customers for early payment of amounts owed. purchase return The buyer may return damaged or defective merchandise to the seller. purchase discounts Sellers may offer customers sales discounts for early payment of their bills. From the buyer s perspective, such discounts are referred to as. Page 1

2 LearningObjective3 Describeand illustrate the accounting for merchandising transactions including: sale of merchandise; purchase of merchandise; freight; sales taxes and trade discounts; dual nature of merchandising transactions. On January 3, Net Solutions sold$1,800 of merchandise for cash. The cost of merchandise sold and the decrease in merchandise inventory are also recorded. The cost of merchandise sold on January 3 is$1,200. On January 12, Net Solutions sold merchandise on account for $510. The cost of merchandise sold was$280. Jan.3 1,800 Sales 1,800 Jan.3 Jan.12 Jan.12 Cost of merchandise sold Account receivable Sales Cost of merchandise sold 1, , Sales Discounts The terms for when payments for merchandise are to be made are called credit terms. If payment is required on delivery, the terms are cash or net cash. Otherwise, the buyer is allowed an amount of time, known as the credit period, in which to pay. Credit Terms To encourage the buyer to pay before the end of the credit period, the seller may offer adiscount,suchas2/10,n/30.these terms indicate that a two percent discount can be taken if the invoice is paid within ten days. After ten days the full amount is due by the thirtieth day from the invoice date. Page 2

3 Receipts on Account On January 7, Net solutions sold merchandise on account $1,500 to Kool Co. terms2/10, n/30. The cost of merchandise sold is$400. On January 17, Net Solutions receives the amount due within ten days, so the buyer deducted $30($1,500x2%) from the invoice amount. Jan.7 Accounts Receivable 1,500 Sales 1,500 Jan.7 Cost of Merchandise sold Jan.17 Sales discounts 1, Account receivable 1,500 Credit Memo(sales Retunes and allowance) A credit memorandum, often called a credit memo, authorizes a credit to (decreases) the buyer s account receivable. On January 13,Net solution issued Credit Memo No.32 to Krier Company for merchandise returned. Selling price, $225;cost to Net Solutions,$140. Jan.13 Jan.13 Sales returns and allowances Account receivable Krier Co. Cost of merchandise sold Purchase Transactions On January 3, Net Solutions purchased merchandise for cash. On January 4, Net Solutions purchased merchandise on account from Thomas Corporation. Jan.3 2,510 2,510 Jan.4 Account payable-thomas Corporation 9,250 9,250 Page 3

4 Purchases Discounts A buyer may receive a discount from the seller (sales discount) for early payment of the amount owed. From the buyer s perspective, such discounts are called purchases discounts. Alpha Technologies issued an invoice for $ to Net Solutions dated March12,with terms 2/10,n/30. Mar. 12 Account payable-alpha Technologies March22, Net Solutions pays the amount due, less the discount, on March22. Mar. 22 Account payable-alpha Technologies Merchandise Inventory 2, Discount Not Taken Assume that, instead of paying the invoice within the discount period, Net Solutions pays the invoice on April11. Apr.11 Account payable-alpha Technologies Purchases Returns and Allowances A purchases return involves actually return in merchandise that is damaged or does not meet the specifications of the order. From a buyer s perspective, such returns are called purchases returns and allowances. A debit memorandum, often called a debit memo, in forms the seller of the amount the buyer proposes to debit to the account payable due the seller. Page 4

5 Debit Memo Net Solutions receives a delivery from Maxim Systems and determines that $900 of the items are not the merchandise ordered. Debit memorandum#18 is issued to Maxim Systems. Net Solutions records the return of the merchandise as follows: Mar.7 Account payable-maxim Systems Merchandise Purchased On May2, Net Solutions purchased $5,000 of merchandise on account from Delta Data Link, terms 2/10,n/30. On May4, Net Solutions returned $ of the merchandise purchased from Delta Data Link. May.2 5,000 Account payable-delta Data Link 5,000 May.4 Account payable-delta Data Link Invoice Paid On May12,Net Solutions paid for the purchase of May 2 less the return and discount. May. 12 Account payable-delta Data Link 2,000 1, Page 5

6 Freight If owner ship of the merchandise passes to the buyer when the seller delivers the merchandise to the freight carrier, the terms are said to be FOB(free on board) shipping point. If owner ship of the merchandise passes to the buyer when the buyer receives the merchandise, the terms are said to be FOB(free on board) destination. On June10, Net Solutions buys merchandise from Magna Data on account,$900,terms FOB shipping point and pays the shipping cost of$50. June Account payable-magna Data 900 Jan Sale Plus Freight Cost On June15, Net Solutions sells merchandise to Kranz Company on account,$700,terms FOB destination. Thecostofthemerchandisesoldis$480. On June15, NetSolutionspaysfreightof$40on the saleofjune15. June.15 Account receivable-kranz Company 700 Sales 700 Jun.15 Cost of Merchandise Sold June.15 Delivery expense Page 6

7 Trade Discounts When wholesalers offer special discounts to certain classes of buyers who order large quantities, these discounts are called trade discounts. Financial Statements for a Merchandising Business: Multiple-step Income statement manes the INCOME STATEMENT contains several sections, subsections and subtotals. Revenue and Sales Sales, Sales returns and allowances and sales discounts. Net Sales is determined by subtracting Sales returns and allowances and Sales discounts from Sales. Net Sales=Sales-(Sales returns and allowances +Sales discounts) Cost of Merchandising Sold is the cost of merchandising sold to customers, merchandise consist of all the costs acquiring the merchandise and readying it sales, such as purchase and freight cost. Cost of Merchandising Sold =Inventory1/1 +Cost of Purchases- Inventory13/12 Cost of Purchases=Purchases-Purchases returns and allowances-purchasesdiscounts Gross Profit is computed subtraction the cost of merchandise from net sales. Gross Profit= Net Sales- Cost of Merchandising Sold Income from Operation is determined by subtracting operation expenses (sales expenses, administrative expense) from gross profit. Income from Operation= Gross Profit- Expenses Other Income and Expense Items are not related to the primary operation of the business. For examples interest revenues and interest expenses. Net income = Income from Operation+ Other Income-Other expenses. Page 7

8 Net Solutions Income Statement For the Year Ended December 31,2007 Revenue from sales: Sales $ Less: Sales returns and allowances $6.140 Sales discounts Net sales $ Cost of merchandise sold Gross profit $ Operiting expenses: Selling expenses: Sales salareis expenses Advertising expenses Depr. Expenses-store equipment Miscellouns selling expenses 630 Total selling expenses $ Administrative expenses: Office saleries expenses Rent expenses Depr. Expenses-office equipment Insurance expenses Office supplies expenses 610 Miscellouns administrative expenses 760 Total administrative expenses Total operiting expenses Income from operation $ Other income and expenses: Rent revune 600 Interest expenses (2.440) (1.840) Net income $ Page 8

9 Step Income Statements from emphasizes total revenues and total expenses are determining net income. Net Solutions Income Statement For the year Ended December 31, 2007 Revenues: Net sales Rent revenue 600 Total revenues Expenses: Cost of merchandise sold 525,305 Selling expenses 70,820 Administrative expenses 34,890 Interest expense 2,440 Total expenses 633,455 Net income 75,400 Net Solutions Statement of owner's equity For the year Ended December 31, 2007 Chris Clark, Capital 1/1/ ,800 Net income for year 75,400 Less: withdrawals 18,000 Increase in Owner's equity 57,400 Chris Clark, Capital 12/31/ ,200 Page 9

10 Net Solutions Statement of financial position For the year Ended December 31, 2007 Assets Current Assets: 52,950 Account receivable 91,080 62,150 Office supplies 480 Prepaid insurance 2,650 Total current assets 209,310 Property, plant, and equipment: Land 20,000 Store equipment 27,100 Less accumulated depreciation 5,700 Net Store equipment Office equipment 15,570 Less accumulated depreciation 4,720 Net Office equipment 10,850 Total Property, plant, and equipment 52,250 Total Assets 261,560 Liabilities Current Liabilities: Account 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 2017) 20,000 Total Long-term Liabilities 20,000 Owner's equity Chris Clark, Capital 211,200 Total Owner's equity 211,200 Total Liabilities and Owner's equity 261,560 Page 10

11 Sales Transactions Sales Sales on Account Account receivable Sales Sales Cost of merchandise sold Cost of merchandise sold No Sales discount Sales Discounts (Receipts on Account) Sales Discounts Account Receivables Sales Returns and allowances Sales Returns and allowances Sales Returns and allowances Account Receivables Merchandise Inventory Cost of merchandise sold Purchase Transactions Purchase Merchandise Inventory No Discount Account payable Purchased on Account Merchandise Inventory Account Payable Purchases Discounts Account payable Discount Not Taken Account payable Purchases Returns and Allowances Account payable Page 11

12 Net Sales=Sales-(Sales returns and allowances +Sales discounts) Cost of Merchandising Sold =Inventory1/1 +Cost of Purchases- Inventory13/12 Cost of Purchases=Purchases-Purchases returns and allowances-purchasesdiscounts Gross Profit= Net Sales- Cost of Merchandising Sold Income from Operation= Gross Profit- Expenses Net income = Income from Operation+ Other Income-Other expenses. Page 12