Chapter 5: Accounting for Merchandising Business

Merchandising Business

Sells merchandise that is produced by other companies such as:

• Whole-seller

• Retailer

Wholeseller

Sells merchandise to other companies rather than to final consumer

• Business-2-Business

Retailer

Purchase Merchandise from Companies and sells directly to consumers

• Business-2-Consumer

Operating Cycle of Merchandising Business

process of companies spending cash, generating revenue, and receiving cash

• operating between merchandise is different than service due to merchandise business having to purchase merchandise for sale to customers

• Financial Statements are also different due to merchandise having Sales, COGS, Gross Profit, Operating Expense, that equal operating income; while sales only have fees and operating expense

Subsidiary Ledger

Large # of individual account with common characteristics that be grouped together in a separate ledger

• Accounts Receivable (customer ledger) — lists individual customers account in alphabetical order

• Accounts Payable (creditors ledger) — lists individual creditors account in alphabetical order

• Individual sub ledger (Inventory Ledger) — lists individual inventory by item (bar code) number

General Ledger and Special Ledger

Prime ledger that contains all balance sheet and income statement accounts

used to record special type transactions

Controling Ledger

each subsidiary ledger is represented in general by summarizing account

• Controlling Ledger = Subsidiary Ledger

What are the two systems for accounting merchandising transactions?

Perpetual — each purchase & sale is recorded in inventory account and related to subsidiary ledger

• DEBIT: Inventory (purchased)

Periodic — Inventory does not show amount of merchandise available for sale or amount sale

• instead of listed inventory on hand its called physical inventory

• DEBIT: Purchases (purchased)

FOB Shipping Point and FOB destination (Free on Board)

FOB Shipping → buyer pays freight costs from shipping point to final destination

FOB Destination → Seller pays freight costs from shipping point to final buyer destination

What are the two types of adjusting process that are different from service?

Inventory Shrinkage — the loss of products between when a business buy and when it sells them different

Customer Returns & Allowance — Sellers are required to estimate customer returns, refunds, and allowances at the end of the accounting period.

What is the adjusting entry for inventory shrinkage?

Cost of Goods Sold xxx

Inventory xxx

Customer Returns & Allowance

Based upon these estimates, two adjusting journal entries are recorded.

• The first adjusting entry debits Sales and credits Customer Refunds Payable for estimated customer refunds and allowances.

• The second adjusting entry debits Estimated Returns Inventory and credits Cost of Goods Sold for merchandise that is expected to be returned.

What is the entry for estimated refunds and allowances?

Sales xxxx

Customer Refunds Payable xxxxx

What is the entry for items actually being returned?

Estimated Returns Inventory xxx

Cost of Goods Sold xxx

What is the entry for Cash refund?

Customer Refunds Payable xxxx

Cash xxx

What is the entry for returned merchandise?

Inventory xxx

Estimated Returned Inventory xxx

Financial Statement & Closing entries for retail business

Primarily affects the income statement and is normally prepared in either a single-step or multiple-step income statement

• The revenue activities of a service business involve providing services to customers.

• For a merchandising business, the revenues from selling merchandise are reported as sales, and its cost is recognized as an expense.

• This expense is called the cost of goods sold or cost of merchandise sold.

  • The cost of goods sold is subtracted from sales to arrive at gross profit.

  • Gross profit is the profit before deducting operating expenses.

  • Operating expenses are subtracted from gross profit to arrive at operating income.

• Merchandise on hand (not sold) at the end of an accounting period is called inventory or merchandise inventory.

  • Inventory is reported as a current asset on the balance sheet.

Single-Step Income

Steps is only deducting Revenues — Expenses

Multiple-Step Income

Contains several sections, subsections, and subtotal

Asset Turnover

Measures how a business uses its sales to general sales

• Sales / Average total Assets

Sales Discount

a discount seller offers buyer for early payment

Gross Method

Sales invoice with credit terms that include a discount for early payment is recorded at invoice amount

• Record the full invoice amount.

Net Method

Sales invoice with credit term that include discount for early payment recorded as Net Amount

• Record the invoice amount minus the potential discount.

What is the periodic inventory system?

• Purchases

• Purchase Discount (-)

• Purchase Return & Allowance (-)

• Freight-In (+)

Credit Terms and Credit Period

When payments are to be made

When the buyer is allowed an amount of time

Debit Memorandum (Debit Memo)

informs the seller of the amount the buyer proposes to debit to the account payable

Coupon? Rebate? Point of Sale Coupons?

provides the customer a discount when purchasing a products)

provides the customer a refund after the product is purchased.

A coupon has no value and the retailer has no obligation until a customer purchases merchandise and presents the coupon. As a result, no liability (journal entry) is recorded by the retailer when the coupon is issued.

Coupon Payable?

we must multiple times the extimated percentage then multiplied by its price liability

Purchase

Are recorded in the purchase account rather than the inventory account

Purchase Discount

Is recorded as a deduction from purchases from period (subtract)

• B2B (business-to-business) purchases may include a discount by the supplier (vendor) to encourage the buyer to pay before the end of the credit period.

  • For example, a supplier may offer 2/10, n/30, which means a 2% discount if the buyer pays within 10 days of the invoice date. If the buyer does not take the discount, the total invoice amount is due within 30 days.

• Taken by a buyer that reduce the costs of the merchandise purchased

DEBIT: Accounts Payable

CREDIT: Purchase Discount

Purchases Returns and Allowances

Deducted from purchases

• Closing differs because of inventory; there is no COGS to close. Instead, those are closed

DEBIT → ACCOUNTS PAYABLE

CREDIT → INVENTORY

Cash Sales

Are made by using debit cards (bank cards)

• debit card sales are recorded as cash sales

• sales may also be made using credit cards like Visa & Mastercard

  • Credit card sales are normally processed by a clearinghouse that contacts the bank that issued the card.

  • The issuing bank then electronically transfers cash directly to the retailer's bank account.

Sales Incentives, Promotions, and discounts

• Retailers frequently offer sales incentives, promotions, and discounts.

• Discounts may also be offered to encourage customers to pay early.

• Such incentives and promotions often take the form of coupons and rebates.

  • A coupon provides the customer a discount when purchasing a products).

  • A rebate provides the customer a refund after the product is purchased.

• The accounting for a coupon or rebate depends upon its terms and how it can be redeemed by the customer.

• In contrast, assume that a coupon is issued when customers purchase merchandise.

• In this case, when the retailer sold the merchandise, it incurred a future obligation (liability) to the customer.

• As a result, the retailer must estimate the dollar value of coupons that will be redeemed, reduce sales, and record a related liability.

Trade Discounts

• Wholesalers may offer special discounts off list prices to government agencies or businesses that order large quantities.

• Sellers and buyers do not normally record the list prices of merchandise and trade discounts in their accounts.

Credit Memo

Indicating the intent to credit the customer's accounts receivable

Customer Refunds Payable xxx

Accounts Receivable xxx

What is the entry for recording the receipt amount due?

Cash xxx

Accounts receivable xxx

What is the entry for refunds made within the account?

Accounts Payable xxx

Inventory xxx

Freight-in Journal entry?

Debit: Freight-in

Credit: Cash