Chapter 7
The Merchandising Company
Merchandising
• Sell goods (products)
• Net Income:Revenue – Cost of Goods Sold = Gross Profit
Gross Profit – Expenses = Net Income
• Schedule of Cost of Goods Sold provides details on an income statement
Schedule of Cost of Goods Sold
Inventory, October 1 22,154.00$ Add: Purchases 48,966.00$ Less: Purchase Discounts 2,300.00$ Purchases Returns & Allowances 4,502.00 6,802.00 42,164.00 Add: Transportation on Purchases 1,209.00 Cost of Goods Available for Sale 65,527.00$ Less Inventory October 31 19,877.00 Cost of Goods Sold 45,650.00
Goods CompanySchedule of Cost of Goods Soldmonth ended October 31, 2005
Inventory
• An account that stores the value of goods not yet resold
• Periodic System: count merchandise not sold at the end of the period to determine cost of goods sold
• Perpetual System: record inventory and cost of goods sold when sales made
“Cost” Accounts
• Purchases: debit when buying goods for resale in periodic system
• Purchase Returns and Allowances: credit when returning goods not useful
• Purchase Discounts: credit when making payment for good early
• Transportation on Purchases: debit to receive goods, similar to expense
• Cost of Goods Sold is created at period end in periodic and debited in every sale in perpetual
Revenue Accounts
• Sales: credited to indicate revenue
• Sales Returns and Allowances: debited to show customer not satisfied with goods
• Sales Discounts: debited when customer pays early
Terms of Sale
• COD: customer pays when goods delivered
• Net 30: full amount due in 30 days
• EOM: full amount due at end of the month
• 2/10, n/30: receive 2% discount if paid within 10 days after invoice received
Invoices
• Sales Invoice: dr A/R cr Sales
• Credit Invoice: dr Sales Returns cr A/R
• Purchase Invoice: dr Purchases or Inventory cr A/P
Journal Entries
• Credit Sale
dr A/R 300cr Sales 300
1/10, net 30, invoice #45
dr Sales Returns and Allowance 100cr A/R 100
• Return
Journal Entries (periodic)
• Payment within discount period
dr Cash 297 dr Sales Discounts 3
cr A/R 300
• Payment beyond discount
dr Cash 300cr A/R 300
Journal Entries (periodic)
• Purchase goods for resale (periodic)
dr Purchases 400cr Cash or A/P 400
2/15, n/30, invoice #P398
• Payment within discount period*
dr A/P 400cr Purchase Discounts 8cr Cash 392
Cheque #26 for invoice #P398
* Otherwise A/P and Cash
Journal Entries
• Transportation (for goods for resale) dr Transportation-In 50
cr A/P or Cash 50
• Delivery Charge (for goods sold to customers)
dr Delivery Expense 25cr A/P or Cash 25
Journal Entries (perpetual)
• Sale: dr A/R or Cash 400
cr Sales 400
and
dr Cost of Goods Sold 300cr Inventory 300
• Purchase good for resale:
dr Inventory 300cr A/P or Cash 300
Journal Entries (perpetual)
• Inventory shortage (count at end of period)
dr Inventory Shortage 20cr Inventory 20
Charge shortage to expense
Sales Taxes
• GST: Goods and Services Tax 5%• PST: Provincial Sales Tax 8%• Typical Sale:
dr Cash or A/R 113cr Sales 100cr GST Payable 5cr PST Payable 8
Sales Taxes• GST on Purchases:
dr Purchases (or Inventory, etc.) 200 dr GST Refundable 10
cr Cash or A/P 210
• “Remit” GST if owing:
dr GST Payable 500cr GST Refundable 450cr Cash 50
• Refund of GST is owed:
dr GST Payable 450 dr Cash 50
cr GST Refundable 500
Credit Cards
• Increases sales• Typical Sale:
dr Cash 660dr Visa Discount Expense 18
cr Sales 600cr PST Payable 48cr GST Payable 30
$600 x 3% visa charge
Debit Cards• Charged by banks and as good as cash to retailer
dr Cash 112.75dr Debit Card Expense 0.25
cr Sales 100cr PST Payable 8cr GST Payable 5
Worksheet (perpetual)Six months ending
DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
8,952.00 8,952.00 -
7,500.00 7,500.00 -
Allowance for Bad Debts - 215.00 775.00 990.00
Inventory 22,154.00 22,154.00 19,877.00 19,877.00
2,900.00 1,400.00 1,500.00 -
4,800.00 200.00 4,600.00 -
18,650.00 18,650.00 -
Accum. Depreciation 1,800.00 800.00 2,600.00
18,700.00 18,700.00 -
Accum. Depreciation 5,500.00 1,200.00 6,700.00
1,000.00 1,000.00
22,150.00 22,150.00
GST Payable 3,214.00 3,214.00
GST Recoverable 2,155.00 2,155.00
PST Payable 3,996.00 3,996.00
41,997.00 41,997.00
22,559.00 22,559.00 -
119,877.00 119,877.00
Sales Returns and Allow. 2,687.00 2,687.00
Service Revenue 15,899.00 15,899.00
Purchases 48,966.00 48,966.00
Purchases R & A 4,502.00 4,502.00
Freight-in 1,209.00 1,209.00
310.00 310.00
6,500.00 6,500.00
1,350.00 1,350.00
680.00 680.00
18,000.00 18,000.00
2,415.00 2,415.00
29,663.00 29,663.00
220,150.00 220,150.00
Bad Debts Expense 775.00 775.00
Insurance Expense 200.00 200.00
Supplies Expense 1,400.00 1,400.00
800.00 800.00
1,200.00 1,200.00
4,375.00 4,375.00 138,309.00 160,155.00 104,493.00 82,647.00
21,846.00 - - 21,846.00
160,155.00 160,155.00 104,493.00 104,493.00
December 31, 2002
Supplies
Prepaid Insurance
Merch CompanyWorksheet
ADJUSTMENTS INCOME STATEMENT BALANCE SHEET
Accounts Receivable
Cash
ACCOUNTSTRIAL BALANCE
Furniture and Equipment
Automobile
Accounts Payable
Bank Loan
A. Merch, Capital
A. Merch, Drawings
Telephone Expense
Interest Expense
Rent Expense
Wages Expense
Sales
Bank Charges
Car Expense
Miscellaneous Expense
Dep,n Expense, F&E
Dep'n Expense, Auto
Net Income
Original NEW
Close all
Close all
Complete Income StatementSix months ending December 31, 2002
RevenueSales 119,877.00$ Less Sales Returns & Allowances 2,687.00 117,190.00$ Service Revenue 15,899.00 Total Revenue 133,089.00$ Cost of Goods SoldInventory, beginning 22,154.00$ Add: Purchases 48,966.00$ Less: Purchases Returns & Allowances 4,502.00 44,464.00 Add: Freight-in 1,209.00 Cost of Goods Available for Sale 67,827.00$ Less Ending Inventory 19,877.00 Cost of Goods Sold 47,950.00 Gross Margin 85,139.00$ ExpensesBank Charges 310.00$ Car Expense 6,500.00 Interest Expense 1,350.00 Miscellaneous Expense 680.00 Rent Expense 18,000.00 Telephone Expense 2,415.00 Wages Expense 29,663.00 Bad Debts Expense 775.00 Insurance Expense 200.00
Supplies Expense 1,400.00
Dep,n Expense, F&E 800.00
Dep'n Expense, Auto 1,200.00 63,293.00
Net Income 21,846.00$
Merch CompanyIncome Statement
Chart of Accounts
• Assets 100s (e.g. Inventory 130)• Liabilities 200s• Equities 300s• Revenues 400s (e.g. Sales 400, Sales
Returns 401)• Cost Accounts 500s (e.g. Cost of Goods
Sold 500, Purchases 500, Purchase Returns 501, etc.)
• Expenses 600s