Ccounting Principles,: Weygandt, Kieso, & Kimmel
Ccounting Principles,: Weygandt, Kieso, & Kimmel
Prepared by
Marianne Bradford, Ph. D.
Bryant College
Accounting for
Merchandising Operations
Accounting for
Merchandising Operations
Accounting for
Merchandising Operations
Forms of Financial
Statements
Multiple-step income
statement
Single-step income
statement
Classified balance sheet
STUDY OBJECTIVE 1
A merchandising company is an
enterprise that buys and sells goods to
earn a profit.
1) Wholesalers sell to retailers
2) Retailers sell to consumers
A merchandiser’s primary source of
revenue is sales.
MEASURING NET INCOME
Expenses for a merchandising company are divided
into two categories:
1) cost of goods sold and
2) operating expenses
Cost of goods sold is the total cost of merchandise
sold during the period.
Operating expenses are expenses incurred in the
process of earning sales revenue. Examples are sales
salaries and insurance expense.
Gross profit is equal to Sales Revenue less Cost of
Goods Sold.
ILLUSTRATION 5-1
INCOME MEASUREMENT PROCESS FOR A
MERCHANDISING COMPANY
Sales Less
Revenue
Equals
Equals
Operating Net
Expenses Income
(Loss)
ILLUSTRATION 5-2
OPERATING CYCLES FOR A SERVICE
COMPANY AND A MERCHANDISING COMPANY
Service Company
Receive Perform
Cash Cash Services
Accounts
Receivable
Merchandising Company
Receive Buy
Cash Inventory
Cash
Sell Inventory
Accounts Merchandise
Receivable Inventory
INVENTORY SYSTEMS
GENERAL JOURNAL
Date Account Titles and Explanation Dr. Cr.
May 4 Merchandise Inventory 3,800
Accounts Payable 3,800
(To record goods purchased on
account, terms 2/10, n/30, from
Highpoint Electronic)
GENERAL JOURNAL
Date Account Titles and Explanation Dr. Cr.
May 8 Accounts Payable 300
Merchandise Inventory 300
(To record return of inoperable
goods received from Highpoint
Electronic, DM No. 126)
GENERAL JOURNAL
Date Account Titles and Explanation Dr. Cr.
May 6 Merchandise Inventory 150
Cash 150
(To record payment of freight,
terms FOB shipping point)
When the purchaser directly incurs the freight costs, the account
Merchandise Inventory is debited and Cash is credited.
ACCOUNTING FOR
FREIGHT COSTS
GENERAL JOURNAL
Date Account Titles and Explanation Dr. Cr.
May 4 Freight-out (Delivery Expense) 150
Cash 150
(To record payment of freight on
goods sold FOB destination)
GENERAL JOURNAL
Date Account Titles and Explanation Dr. Cr.
May 14 Accounts Payable 3,500
Cash 3,430
Merchandise Inventory 70
(To record payment within
discount period)
GENERAL JOURNAL
Date Account Titles and Explanation Debit Credit
June 3 Accounts Payable 3,500
Cash 3,500
(To record payment with no
discount taken)
GENERAL JOURNAL
Date Account Titles and Explanation Dr. Cr.
May 4 Cash
2,200
Sales
(To record daily cash sales) 2,200
GENERAL JOURNAL
Date Account Titles and Explanation Dr. Cr.
May 4 Accounts Receivable 3,800
Sales
(To record credit sales to Chelsea 3,800
Video per invoice #731)
GENERAL JOURNAL
Date Account Titles and Explanation Dr. Cr.
May 14 Cash 3,430
Sales Discounts 70
Accounts Receivable 3,500
(To record collection within 2/10,
n/30 discount period from Chelsea
Video)
GENERAL JOURNAL
Date Account Titles and Explanation Debit Credit
2002 (1)
Dec. 31 Sales 480,000
Income Summary 480,000
(To close income statement
accounts with credit balances)
CLOSING ENTRIES
Cost of Goods Sold is a new account that must be closed to
Income Summary.
GENERAL JOURNAL
Date Account Titles and Explanation Debit Credit
2002 (2)
Dec. 31 Income Summary
450,000
Sales Returns and Allowances
12,000
Sales Discounts
8,000
Cost of goods sold 316,000
Store Salaries Expense 45,000
Rent Expense 19,000
Freight-out 7,000
Advertising Expense 16,000
Utilities Expense 17,000
Depreciation Expense 8,000
Insurance Expense 2,000
(To close income statement
accounts
with debit balances)
CLOSING ENTRIES
GENERAL JOURNAL
Date Account Titles and Explanation Debit Credit
2002 (3)
Dec. 31 Income Summary 30,000
R. A. Lamb, Capital 30,000
(To close net income to capital)
(4)
31 R. A. Lamb, Capital 15,000
R. A. Lamb, Drawing 15,000
(To close drawings to capital)
HIGHPOINT ELECTRONIC
Income Statement
For the Year Ended December 31, 2002
Revenues
Net sales All data are classified under $ 460,000
Interest revenue two categories: 3,000
Gain on sale of equipment 1 Revenues 600
Total revenues 2 Expenses 463,600
Expenses Only one step is required in
Cost of goods sold determining net income or $ 316,000
Selling expenses net loss. 76,000
Administrative expenses 38,000
Interest expense 1,800
Casualty loss from vandalism 200
Total expenses 432,000
Net income $ 31,600
STUDY OBJECTIVE 6
Adjustments Columns
1 A merchandising company usually has the
same types of adjustments as a service
company.
2 Work sheet adjustments b, c, and d are for
insurance, depreciation, and salaries.
Adjusted Trial Balance - The adjusted trial
balance shows the balance of all accounts after
adjustment at the end of the accounting period.
ILLUSTRATION 5-11
WORK SHEET FOR A
MERCHANDISING COMPANY
HIGHPOINT ELECTRONIC
Work Sheet
For the Year Ended December 31, 2002
Adjusted Income
Trial Balance Statement Balance Sheet
Account Titles Dr. Cr. Dr. Cr. Dr. Cr.
Cash 9,500 9,500
Accounts Receivable 16,100 16,100
Merchandise Inventory 40,000 40,000
Prepaid Insurance 1,800 1,800
Store Equipment 80,000 80,000
Accumulated Depreciation 24,000 24,000
Accounts Payable 20,400 20,400
R.A. Lamb, Capital 83,000 83,000
R.A. Lamb, Drawing 15,000 15,000
Sales 480,000 480,000
Sales Returns and Allowances 12,000 12,000
Sales Discounts 8,000 8,000
Cost of Goods Sold 316,000 316,000
Freight-out 7,000 7,000
Advertising Expense 16,000 16,000
Rent Expense 19,000 19,000
Store Salaries Expense 45,000 45,000
Utilities Expense 17,000 17,000
Totals
Insurance Expense 2,000 2,000
Depreciation Expense 8,000 8,000
Salaries Payable 5,000 5,000
Totals 612,400 612,400 450,000 480,000 162,400 132,400
Net Income 30,000 30,000
Totals 480,000 480,000 162,400 162,400
USING A WORK SHEET
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CHAPTER 5
ACCOUNTING FOR MERCHANDISING OPERATIONS