Chapter 6 Accounting for Merchandising Businesses

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1 1 C h a p t e r 6 Chapter 6 Accounting for Merchandising Businesses Learning Objective 1 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 into products that are sold to customers. Learning Objective 2 Describe and illustrate the financial statements of a merchandising business. is the total amount charged to customers for merchandise sold, including cash sales and sales on account. 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. discounts are granted by the seller to customers for early payment of amounts owed. The buyer may return damaged or defective merchandise to the seller (purchase return). Sellers may offer customers sales discounts for early payment of their bills. From the buyer s perspective, such discounts are referred to as purchase discounts. Learning Objective 3 Describe and illustrate the accounting for merchandising transactions including: sale of merchandise; purchase of merchandise; freight; sales taxes and trade discounts; dual nature of merchandising transactions.

2 2 C h a p t e r 6 On January 3, NetSolutions 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, NetSolutions sold merchandise on account for $510. The cost of merchandise sold was $280. Jan. 3 1,800 1,800 Jan. 3 Cost of merchandise sold 1,200 1,200 Jan. 12 Account receivable Jan. 12 Cost of merchandise sold 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 a discount, such as 2/10, 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. Receipts on Account On January 7, Netsolutions sold merchandise on account $1,500 to Kool Co. terms 2/10, n/30. The cost of merchandise sold is $400. On January 17, NetSolutions receives the amount due within ten days, so the buyer deducted $30 ($1,500 x 2%) from the invoice amount.

3 3 C h a p t e r 6 Jan. 7 Accounts Receivable 1,500 1,500 Jan. 7 Cost of Merchandise sold Jan. 17 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, Netsolution issued Credit Memo No. 32 to Krier Company for merchandise returned. Selling price, $225; cost to NetSolutions, $140. Jan. 13 returns and allowances 225 Account receivable Krier Co. 225 Jan Cost of merchandise sold 140 Purchase Transactions On January 3, NetSolutions purchased merchandise for cash. On January 4, NetSolutions purchased merchandise on account from Thomas Corporation Jan. 3 Jan. 4 Purchases Discounts Account payable - Thomas Corporation 2,510 9,250 2,510 9,250 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. Purchase Transactions

4 4 C h a p t e r 6 Alpha Technologies issued an invoice for $ to NetSolutions dated March 12, with terms 2/10, n/30. Mar. 12 Account payable - Alpha Technologies March 22, NetSolutions pays the amount due, less the discount, on March 22. Mar. 22 Account payable - Alpha Technologies Merchandise Inventory 2, Discount Not Taken Assume that, instead of paying the invoice within the discount period, NetSolutions pays the invoice on April 11. Apr. 11 Account payable - Alpha Technologies Purchases Returns and Allowances A purchases return involves actually returning 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, informs the seller of the amount the buyer proposes to debit to the account payable due the seller. Debit Memo NetSolutions 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. NetSolutions records the return of the merchandise as follows:

5 5 C h a p t e r 6 Mar. 7 Account payable - Maxim Systems Merchandise Purchased On May 2, NetSolutions purchased $5,000 of merchandise on account from Delta Data Link, terms 2/10, n/30. On May 4, NetSolutions returned $ of the merchandise purchased from Delta Data Link. May. 2 5,000 Account payable - Delta Data Link 5,000 May. 4 Invoice Paid Account payable - Delta Data Link On May 12, NetSolutions paid for the purchase of May 2 less the return and discount. May. 12 Account payable - Delta Data Link 2,000 1, Freight

6 6 C h a p t e r 6 If ownership 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 ownership 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 June 10, NetSolutions 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 June 15, NetSolutions sells merchandise to Kranz Company on account, $700, terms FOB destination. The cost of the merchandise sold is $480. On June 15, NetSolutions pays freight of $40 on the sale of June 15. June. 15 Account receivable - Kranz Company Jun. 15 June. 15 Trade Discounts Cost of Merchandise Sold Delivery expense When wholesalers offer special discounts to certain classes of buyers who order large quantities, these discounts are called trade discounts.

7 7 C h a p t e r 6 Homework: Dual Nature of Merchandise Transactions Each merchandising transaction affects a buyer and a seller. In the following illustrations, we show how the same transactions would be recorded by both the seller and the buyer. July 1. Scully Company sold merchandise on account to Burton Co., $7,500, terms FOB shipping point, n/45. The cost of the merchandise sold was $4,500. July 2. Burton Company paid transportation charges of $150 on the July 1 purchase from Scully Company. 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. July 7. Scully Company paid transportation costs of $250 for delivery of merchandise sold to Burton Company on July 5. July 13. Scully Company issued Burton Company a credit memorandum for merchandise returned, $1,000. The cost of the merchandise returned was $700. July 15. Scully Company received payment from Burton Company for purchase of July 5. July 18. Scully Company sold merchandise on account to Burton Company, $12,000, terms FOB shipping point, 2/10, n/eom. The cost of the merchandise sold was $7,200. Jul. 20 Burton Co. Paid fright of $ 400. July 28. Scully Company received payment from Burton Company for purchase of July 18, less discount (2% $12,000). PR 6-5A: -related and purchase-related transactions The following were selected from among the transactions completed by Sandusky Co. during December of the current year.

8 8 C h a p t e r 6 Dec. 3 Purchased merchandise on account from Hillsboro Co., list price $38,000, trade discount 25%, terms FOB shipping point, 2/10, n/30, and paid the fright of $ Purchased merchandise on account from Deepwater Co., $18,750, terms FOB destination, 2/10, n/30. 6 Sold merchandise on account to Zion Co. list price $27,000, trade discount 35%, terms 2/10, n/30. The cost of the merchandise sold was $14, Returned $ of merchandise purchased on Dec. 5 from Deepwater Co. 13 Paid Hillsboro Co. on account for purchase of Dec. 3, less discount. 15 Paid Deepwater Co. on account for purchase of Dec. 5, less return of Dec. 7 and discount. 16 Received cash on account from sale of Dec. 6 to Zion Co., less discount. 19 Sold merchandise cash $58,000. The cost of merchandise sold was $43, Sold merchandise on account to Smith River Co., $15,400, terms 2/10, n/30. The cost of the merchandise sold was $9, Sold merchandise for cash, $33,600. The cost of the merchandise sold was $20, Received merchandise returned by Smith River Co. from sale on Dec. 22, $2,400. The cost of the returned merchandise was $1,400. PR 6-6A: -related and purchase-related transactions for seller and buyer. The following selected transactions were completed during November between Sycamore Co. and Bonita Co. Nov. 2 Sycamore Co. sold merchandise on account to Bonita Co., $16,000, terms FOB shipping point, 2/10, n/30. The cost of the merchandise sold was $10, Bonita paid fright of $ Sycamore Co. sold merchandise on account to Bonita Co., $24,750, terms FOB destination, 1/15, n/eom. The cost of the merchandise sold was $14, Sycamore Co. paid freight of $640 for delivery of merchandise sold to Bonita Co. on Nov Bonita Co. returned $5,750 of merchandise purchased on account on Nov. 8 from Sycamore Co. the cost of the merchandise returned was $. 12 Bonita Co. paid Sycamore Co. for purchase of Nov. 2, less discount. 23 Bonita Co. paid Sycamore Co. for purchase of Nov. 8, less discount and less return of Nov Sycamore Co. sold merchandise on account to Bonita Co., $13,200, terms FOB shipping point, n/eom. The cost of the merchandise sold was $8, Bonita Co. paid freight of $290 on Nov. 24 purchase from Sycamore Co. 30 Bonita Co. paid Sycamore Co. on account for purchase of Nov. 24

9 9 C h a p t e r 6 Transactions on Account Account receivable Cost of merchandise sold Cost of merchandise sold No discount Discounts (Receipts on Account) Discounts Account Receivables Returns and allowances Returns and allowances 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