BAF3M Accounting

Chapter 11 – Accounting for a Merchandising Business

• Merchandising Video

• So far, we’ve only studied service businesses, now we move on to merchandising businesses – Major difference is inventory “stuff to sell”– Two major categories

• Wholesaler – buys from manufacturers and sells to retailers

• Retailers – buys from wholesalers and sells to final consumers

11.1 Merchandise Inventory

• Merchandise is the name given to items bought by a business in order to be sold to consumers

• Merchandising businesses have the extra cost of inventory compared to service businesses– This is an I/S amount called “Cost of Goods

Sold” aka “COGS”

A SIMPLIFIED PARTIAL BALANCE SHEET SHOWING MERCHANDINSE INVENTORY

AS A CURRENT ASSET

CURRENT ASSETS

Bank $1 2 0 5

Account Receivable 18 3 0 5

Merchandise Inventory 42 5 8 2

Supplies 5 2 6

Prepaid Insurance 3 5 6 4 $69 1 8 2

PLANT AND EQUIPMENT

Store Equipment $25 6 5 8

Delivery Equipment 18 3 5 0 44 0 0 8

$113 1 9 0

30-Jun-08

BALANCE SHEET

EASTPORT HARDWARE

11.1 Merchandise Inventory

• The goal is to sell inventory quickly thus inventory moves in and out of the business frequently

SO…1) There is inventory to begin the accounting period with.2) Merchandise is sold and moves out throughout the

inventory period.3) Merchandise is replaced by the purchase of new stock

from time to time.4) The ending inventory should be more or less the same

as the beginning inventory.

INVENTORY CYCLE

11.1 Merchandise Inventory

• COGS on the I/S p.

formula to calculate the COGS figure

Cost of Beg. Inv

+ Cost of Merch Purchases

- Cost of Ending inventory

= Cost of Merch sold

A SIMPLE INCOME STATEMENT FOR A MERCHANDISING

BUSINESS

REVENUE Sales $231 9 6 7COST OF GOODS SOLD Inventory, January 1 $55 3 2 5 Purchases 120 4 0 2 Cost of Goods Available for Sale $175 7 2 7 Less Inventory, December 31 57 3 5 0 Cost of Goods Sold 118 3 7 7GROSS PROFIT $113 5 9 0OPERATING EXPENSES Bank Charges Expense $ 3 7 5 Building Maintenance Expense 8 7 5 Car Expense 2 5 0 7 Depreciation Expense 1 0 7 5 Miscellaneous Expense 2 7 5 Rent Expense 12 0 0 0 Telephone Expense 9 5 7 Utilities Expense 1 8 5 0 Wages Expense 36 5 8 7TOTAL OPERATING EXPSES 56 5 0 1

NET INCOME $57 0 8 9

EASTPORT HARDWAREINCOME STATEMENT

30-Jun-08

OBSERVE THE FOLLOWING ABOUT THE PRECEEDING INCOME

STATMENT

1) The C.O.G.S. is considered to be so significant that the statement is prepared in 2 stages.

2) The first stage determines the gross profit. Gross profit is the difference between the selling price and the cost price of the goods sold. It can also been seen as the profit figure before deducting expenses.

3) The C.O.G.S. is shown on the income statement.

4) The expense section is now called OPERATING EXPENSES.

CLOSING ENTRIES FOR A MERCHANDISING COMPANY

• The process is the exact same as in a service company

• The steps go:1) Close revenue/sales to income summary2) Close expenses to income summary3) Close income summary to capital4) Close drawings to capital

• The process neatly cancels out the old inventory figure and sets up the new one, so that you will have the correct opening balances

SOME NEW TERMS

PURCHASE RETURNS & ALLOWANCES – used to record the value of merchandise returned (damaged goods, mistaken deliveries, etc.) to the supplier

PURCHASE DISCOUNTS – used to record discounts given for early payment

SALES DISCOUNTS – the seller may give discounts to credit customers if they pay within a specified time period

FREIGHT IN VS. DELIVERY EXPENSE

FREIGHT IN - the cost incurred to ship the merchandise to the store or warehouse

DELIVERY EXPENSE – this account is used to record the cost of shipping the sold merchandise to the customer

JOURNAL ENTRIES

•The merchandise purchased during the fiscal period is collected in the Purchases account. •This account if found in the expense section of the ledger.

HMV purchased 600 CD’s for resale at a cost of $10/cd.

Particulars P.R.

Purchases 6 0 0 0-

GST Recoverable 3 0 0-

Bank 6 3 0 0-

Date Debit Credit

JOURNAL ENTRIES

•If a customer returns a good because it is damaged, not what they expected etc. The entry is as follows.

A customer returned 20 CDs to HMV that were purchased for $20 each.

Particulars P.R.

Sales Returns and Allowances 4 0 0-

PST Payable 3 2-

GST Payable 2 0-

Cash 4 5 2-

Date Debit Credit