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Introduction to merchandising business 02172013

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Introduction to merchandising business 02172013

  1. 1. Accounting for Merchandising Business February 17, 2013
  2. 2. Learning Objectives • Describe merchandising and identify business examples • Describe merchandising activities and identify the components of income for a merchandising entity • Describe the business documents used • Describe both perpetual and periodic inventory systems. • Analyze and record transactions for merchandise purchases
  3. 3. Service vs Merchandising Service Business • Net income is the difference between its revenues and the expenses incurred in providing the services Merchandising Business • Earns net income by buying and selling merchandise • Merchandise inventories represent goods intended for sale
  4. 4. Wholesale vs Retail Wholesaler • An intermediary that buys products from manufacturers or other wholesalers and sells them to retailers or other wholesalers Retailer • Buys products from the manufacturers or wholesalers and sells them to consumers Manufacturer Wholesaler Retailer Customer
  5. 5. Measuring Net Income • Net income to a merchandiser implies that revenue from selling merchandise exceeds both the cost of the merchandise sold to customers and the cost of other expenses for the period.
  6. 6. Measuring Net Income Net Income (Loss) Less LessEquals Equals Sales Revenue Cost of Goods Sold Gross Profit Operating Expenses Sales Revenue – income earned in selling merchandise Cost of Goods Sold – cost of merchandise sold during the period Operating Expenses – expenses incurred in running the business
  7. 7. Operating Cycle for a Merchandiser Purchases Merchandise inventory Credit sales Account receivable Cash collectionPurchases Merchandise inventory Cash sales
  8. 8. Business Documents Main Source, Inc. Invoice 614 Tech Avenue Date Number Nashville, TN 37651 5/4/05 358-BI S o l d T o Name: Barbee, Inc. Attn: Tom Bell Address: One Willow Plaza Cookeville, Tennessee 38501 P.O. 167 Sales: 25 Terms 2/10,n/30 Ship: FedEx Prepaid Item Description Quanity Price Amount AC417 250 Backup System 500 54.00$ 27,000$ Sub Total 27,000 We appreciate your business! Ship Chg. - Tax - Total 27,000$
  9. 9. Inventory Systems + + Beginning inventory Net cost of purchases Ending Inventory Cost of Goods Sold =
  10. 10. Inventory Systems Two alternative inventory accounting system: • Periodic Inventory System – cost of goods are determined only at the end of an accounting period – Low Value, High Quantity Inventories • Perpetual Inventory System – maintains detailed records of the cost of each inventory item and continuously show the inventory that should be on hand – High Value, Low Quantity Inventories
  11. 11. Periodic Inventory System • Purchases – is debited when goods are bought from supplier; classified as part of the account Cost of Goods Sold upon sale or as Merchandising Inventory, an asset account, if unsold. • The purchase account is used only for goods purchased for resale.
  12. 12. • The purchase transaction is normally recorded by the purchaser when the goods are received from the seller. • Every purchase should be supported by business document that provide written evidence of the transaction. – Cash purchases – cash register receipt indicating the items purchased – Credit purchases – purchase invoice indicating the total purchase price and other relevant information Periodic Inventory System
  13. 13. • Purchase returns and allowances account represents reduction in the cost of goods purchased. It is a contra account to purchase and its normal balance is credit. • Debit memorandum – a document the purchaser issues to inform the supplier of a debit made to the supplier’s account, including the reason for the return or allowance. Periodic Inventory System
  14. 14. • Purchase discount is based on the invoice cost less returns and allowances, if any. • The Purchase Discount account is used to record the amount saved by paying promptly. It is a contra account having a normal credit balance. Periodic Inventory System
  16. 16. • Trade discounts are given to reduce the list price to actual sales price which may be due to the volume of transactions. • A buyer and or the seller does not record the list prices and the trade discounts in its accounts. Instead, a buyer/seller records purchases or sales net of the trade discount (at invoice price). Trade Discount
  17. 17. • Cash discounts are normally given to encourage prompt payment. • Some common examples of cash discount terms: – 2/10, n/30 – 2/10, 1/15, n/30 – 2/10 EOM, n/60 Cash Discount
  18. 18. • On May 5, ABC Co. purchased merchandise from XYZ Co. worth P100,000 less 10, terms 2/10, n/30. • On May 8, ABC Co. returned defective merchandise worth P10,000. • On May 15, ABC Co. paid his balance to XYZ Co. in full. Sample Transaction