Service vs.

Merchandising Companies
Lecture Accounting for Service organizations sell time to
Merchandising earn revenue.
Operations Examples: accounting firms, law firms,
and plumbing services.
Merchandising companies sell
products to earn revenue.
Examples: sporting goods, clothing, and
Financial Accounting for Business auto parts stores

Service vs. Merchandising Companies Merchandising Activities

Merchandising Companies

Manufacturer Wholesaler Retailer Customer

 Operating Cycle for a
Merchandising Companies Merchandiser
Begins with the purchase of merchandise and ends with
the collection of cash from the sale of merchandise.
Merchandising Company
Balance Sheet
Cash Sale Credit
December 31, 2012
Cash Sale
Purchases Purchases
Assets Liabilities collection
Cash $ 10,200 Accounts payable $ 1,200
Merchandise Inventory 1,200 Notes payable 4,000
Equipment 16,000 Total liabilities $ 5,200 Merchandise
Equity 22,200
Cash Accounts inventory
Total liabilities and
sales receivable
Total assets $ 27,400 equity $ 27,400

Merchandise Credit sales

inventory
4-6

Inventory Systems

Beginning
inventory + Net cost of
purchases

Merchandise
available for sale

Cost of
Ending
Inventory + Goods
Sold
Merchandise Purchases 
Main Source, Inc. Invoice
614 Tech Avenue Date Number

On June, 20, Melton Company

Nashville, TN 37651  5/4/12 358-BI

purchased $14,000 of merchandise 

S
o
Name: Barbee, Inc.
Seller Invoice date Purchaser
l

inventory paying cash. d Attn: Tom Bell

Address: One Willow Plaza
Order number Credit terms
T Cookeville, Tennessee
Freight terms Goods Invoice amount
o 38501
  
P.O. 167 Sales: 25 Terms 2/10,n/30 Ship: FedEx Prepaid
Item Description Quanity Price Amount

GENERAL JOURNAL Page 55

AC417  250 Backup System 500 $ 54.00 $ 27,000

Date Description PR Debit Credit

Jun 20 Merchandise Inventory 14,000
Cash 14,000
Sub Total 27,000
We appreciate your business! Ship Chg. -
Tax -
Total $ 27,000


Trade Discounts Purchase Discounts

Used by manufacturers and
wholesalers to change selling prices
A deduction from the invoice
without republishing their catalogs. price granted to induce early
payment of the amount due.

Terms
Example Quantity sold 1,000 Discount Period Credit Period
JenCo, Inc. offers a 30% trade Price per unit $ 5.25 Time
discount on orders of 1,000 Total 5,250
units or more of their popular Less 30% discount (1,575) Due Full amount Full amount due
less discount
product Racer. Each Invoice price $ 3,675
Racer has a list price of $5.25.
Purchase or Sale
 Purchase Discounts Purchase Discounts
On May 7, Martin, Inc. purchased
$27,000 of Merchandise Inventory
on account, credit terms are 2/10,
n/30.

GENERAL JOURNAL Page 49

Date Description PR Debit Credit
May 7 Merchandise Inventory 27,000
Accounts Payable 27,000
Number of
Days Otherwise,
Discount Discount Is Net (or All) Credit
Percent Available Is Due Period

Purchase Discounts Purchase Discounts

After we post these entries, the
On May 15, Martin, Inc. paid the
accounts involved look like this:
amount due on the purchase of May 7.

GENERAL JOURNAL Page 55

Date Description PR Debit Credit
Merchandise Inventory
May 15 Accounts payable 27,000 Accounts Payable
Cash 26,460 5/7 27,000 5/15 540 5/15 27,000 5/7 27,000
Merchandise inventory 540 Bal. 26,460
Bal. 0

$27,000 × 2% = $540 discount

 Managing Discounts Annual Managing Discounts
Rate
If we fail to take a 2/10, n/30 You purchase a batch of products on
discount, is it really expensive? terms of 3/10, n/90, but your
company has limited cash and you
must borrow funds at an 11% annual
rate if you are to pay within the
365 / 20 X 2% = 36.5% discount period.
Do you take advantage of the
Days in Percent paid to keep
Year money
purchase discount?

Number of additional days

before payment

Purchase Returns and Allowances Purchase Returns and Allowances

On May 9, Barbee, Inc. purchased
Purchase Return . . . $20,000 of Merchandise Inventory
on account, credit terms are 2/10,
Merchandise returned by the n/30.
purchaser to the supplier.
Purchase Allowance . . .
GENERAL JOURNAL Page 34
A reduction in the cost of Date Description PR Debit Credit
May 9 Merchandise Inventory 20,000
defective merchandise received by Accounts Payable 20,000
a purchaser from a supplier.
 Purchase Returns and Allowances Purchase Returns and Allowances
On May 10, Barbee, Inc. returned On May 18, Barbee, Inc. paid the
$500 of defective merchandise to amount owed for the May 9 purchase.
the supplier.

GENERAL JOURNAL Page 61

Date Description PR Debit Credit

GENERAL JOURNAL
JOURNAL Page
Page 37
37 May 18 Accounts payable 19,500
Date Description
Description PR
PR Debit
Debit Credit
Credit Merchandise inventory 390
May 10 Accounts payable 500 Cash 19,110
Purchase $ 20,000
Merchandise Inventory 500 Return (500)
Amount Due 19,500
Discount (390)
Cash Paid $ 19,110

Transportation Costs Transportation Costs

Seller Buyer On May 12, Barbee, Inc. purchased
$8,000 of Merchandise for cash and
also paid $100 transportation costs.

FOB shipping point FOB destination

(buyer pays)
Merchandise (seller pays)

Ownership transfers GENERAL JOURNAL Page 39

to buyer when goods Transportation Date Description PR Debit Credit
May 12 Merchandise Inventory 8,100
Terms are passed to costs paid by
Cash 8,100
FOB shipping point Carrier Buyer
FOB destination Buyer Seller
On July 6, 2012 Seller Co. sold $7,500 of Recording Purchases Information
merchandise to Buyer Co.; terms of 2/10,n/30.
The shipping terms were FOB shipping point.
Matrix, Inc.
The shipping cost was $100. Which of the
Total Cost of Merchandise Purchases
following will be part of Buyer’s July 6 For Year Ended December 31, 2012
journal entry? Invoice cost of merchandise purchases $ 692,500
Less:
a. Credit Sales $7,500 Purchase discounts received (10,388)
b. Credit Purchase Discounts $150 Purchase returns and allowances (4,275)
Add:
c. Debit Merchandise Inventory $100
Cost of transportation-in 4,895
d. Debit Accounts Payable $7,450 Total cost of merchandise purchases $ 682,732
FOB shipping point indicates the buyer
ultimately pays the freight. This is recorded with
a debit to Merchandise Inventory.

Sales of Merchandise
Each sales transaction for a seller
of merchandise involves two parts:
1. Revenue received in the form of
an asset from the customer.
2. Recognition of the cost of
merchandise sold to the customer.
 Sales Transactions Sales Discounts
On March 18, TwoCom sold $25,000 On June 8, Borey Co. sold
of merchandise on account. The merchandise costing $3,500 for
merchandise was carried in $6,000 on account. Credit terms
inventory at a cost of $18,000. were 2/10, n/30.

GENERAL JOURNAL Page 3 GENERAL JOURNAL Page 3

Date Description PR Debit Credit Date Description PR Debit Credit
Mar. 18 Accounts Receivable 25,000 Jun 8 Accounts Receivable 6,000
Sales 25,000 Sales 6,000

Cost of Goods Sold 18,000 Cost of Goods Sold 3,500

Merchandise Inventory 18,000 Merchandise Inventory 3,500

Sales Discounts Sales Returns and Allowances

On June 17, Borey Co. received a On June 12, Borey Co. sold merchandise
check for $5,880 in full payment of costing $4,000 for $7,500 on account
the June 8 sale. The credit terms were 2/10, n/30.

GENERAL JOURNAL Page 4

GENERAL JOURNAL Page 5 Date Description PR Debit Credit
Date Description PR Debit Credit Jun 12 Accounts Receivable 7,500
Jun. 17 Cash 5,880 Sales 7,500
Sales Discounts 120
Cost of Goods Sold 4,000
Accounts Receivable 6,000
Merchandise Inventory 4,000
Sales Returns and Allowances Sales Returns and Allowances
On June 14, merchandise with a sales On June 20, Borey received the
price of $800 and a cost of $470 was amount owed to it from the sale of
returned to Borey. The return is June 12.
related to the June 12 sale.
GENERAL JOURNAL Page 3
GENERAL JOURNAL Page 6
Date Description PR Debit Credit Date Description PR Debit Credit
Jun 14 Sales Returns and Allowances 800 Jun 20 Cash 6,566
Accounts Receivable 800 Sales Discounts 134
Account Receivable 6,700
Merchandise Inventory 470 Sale $ 7,500
Return (800)
Cost of Goods Sold 470 Amount Due $ 6,700
Discount (134)
Cash Received $ 6,566

Exh.

Recording Sales Information

6-11

Additional
Merchandising
Matrix, Inc.
Computation of Gross Profit Issues
For Year Ended December 31, 2012

Sales $ 2,451,000
Less:
Sales discounts $ 29,412
Sales returns and allowances 18,500 47,912
Net sales $ 2,403,088
Cost of goods sold (1,928,600)
Gross profit $ 474,488

Sales discounts and returns

and allowances are
Contra Revenue accounts.
 The Accounting Cycle Adjusting Entries
Prepaid Expenses
Depreciation
Unearned Revenue
Accrued Expenses
Accrued Revenue- There’s
more!

Perpetual Systems – Inventory Shrinkage Inventory Shrinkage – Example

Suppose that Z-Mart’s Inventory account
Shrinkage is the term used to refer at year-end 2012 has a balance of $21,250,
to the loss of inventory and it is but that a physical count reveals only
computed by comparing a physical $21,000 of inventory on hand.
count of inventory with recorded
amounts. A physical count is usually
performed at least once annually.
GENERAL JOURNAL Page 49
Usually charged to cost of goods sold. Date Description PR Debit Credit
Dec 31 Cost of Goods Sold 250
Merchandise Inventory 250
To a dj ust for $250 i nventory shri nk a ge
revea l ed by physi ca l i nventory count.
 Bob's Shop for Men

Closing Entries
Adjusted Trial Balance
December 31, 2012

Cash $ 7,700
We have some
Close the Revenue Accounts Accounts receivable
Merchandise inventory
11,200
14,300
new accounts
Supplies 1,300

Close the Expense Accounts Equipment

Accum. depr.- Equip.
41,200
$ 7,000
Accounts payable 16,400
Close these with
Close the Income Summary Salaries payable 800
Common stock
Retained earnings
20,000
18,600
the expense
Close the Dividends Account Sales
Sales discounts 4,300
323,800 accounts.
Sales returns 2,000
Cost of goods sold 233,200
Admin. salaries expense 18,200
Sales salaries expense 29,600

There’s Insurance expense

Rent expense
1,200
8,100

more! Supplies expense

Advertising expense
1,000
13,300
$ 386,600 $ 386,600

Bob's Shop for Men

Adjusted Trial Balance
December 31, 2002 Step 1: Close the Revenue Accounts to
Cash
Accounts receivable
$ 7,700
11,200
Income Summary.
Merchandise inventory 14,300
Supplies 1,300
Equipment 41,200
Accum. depr.- Equip. $ 7,000
Accounts payable 16,400
GENERAL JOURNAL Page87
Salaries payable 800 Let’s prepare the Date Description PR Debit Credit
Common stock 20,000
Retained earnings 18,600 closing entries for Dec. 31 Sales 323,800
Sales 323,800
Sales discounts 4,300 Bob’s Shop for Income Summary 323,800
Sales returns
Cost of goods sold
2,000
233,200
Men.
Admin. salaries expense 18,200
Sales salaries expense 29,600 Income Summary
Insurance expense 1,200
Rent expense 8,100 323,800
Supplies expense 1,000
Advertising expense 13,300
$ 386,600 $ 386,600
Step 2: Close the Expense Accounts to Step 2: Close Debit Balances in Temporary
Income Summary. Accounts to Income Summary.
GENERAL JOURNAL Page 87 GENERAL JOURNAL Page 87
Date Description PR Debit Credit Date Description PR Debit Credit
Dec. 31 Income Summary 310,900 Dec. 31 Income Summary 310,900
Sales Discounts 4,300 Sales Discounts 4,300
Sales Returns 2,000 Sales Returns 2,000
Cost of Goods Sold 233,200 Cost of Goods Sold 233,200
Adm. Salaries Exp. 18,200 Adm. Salaries Exp. 18,200
Sales Salaries Exp. 29,600 Sales Salaries Exp. 29,600
Insurance Expense 1,200 Insurance Expense 1,200
Rent Expense 8,100 Rent Expense 8,100
Income Summary
Supplies Expense 1,000 Supplies Expense 1,000
310,900 323,800
Advertising Expense 13,300 Advertising
12,900 Expense 13,300

Step 3: Close Income Summary to Inventory Systems

Retained Earnings

GENERAL JOURNAL Page87

Beginning
inventory + Net cost of
purchases
Date Description PR Debit Credit
Dec. 31 Income Summary 12,900
Retained Earnings 12,900 Merchandise
available for sale

Income Summary
Cost of
310,900
12,900
323,800 Ending
Inventory + Goods
-0- Sold
 Merchandising Cost Accounts Income Statement Formats
Beginning
Net cost of
inventory
Year 1 + purchases
Multiple-Step

= Merchandise
available for sale Single-Step
Ending Inv.
Year 1 + Cost of Goods
Sold
Income
Statement

Becomes beginning Balance

inventory of Year 2 Sheet

Multiple-Step Income Statementep

Single-Step Income Statement
Income Statement
Bob's Shop for Men
Income Statement
For Year Ended December 31, 2012
Sales $ 323,800
Less: Sales discounts $ 4,300
Bob's Shop for Men Sales returns 2,000 6,300
Net sales $ 317,500
Income Statement Cost of Goods Sold 233,200
For Year Ended December 31, 2012 Gross profit $ 84,300
Operating expenses:
Net sales $ 317,500 Selling expenses:
Salaries expense $ 29,600
Cost of goods sold $ 233,200 Advertising expense 13,300 $ 42,900
Operating expenses 71,400 General and administrative expenses:
Adm. salaries expense $ 18,200
Total expense 304,600 Insurance expense 1,200
Net income $ 12,900 Rent expense 8,100
Supplies expense 1,000 28,500
Total operating expenses 71,400
Net income $ 12,900
 Summary of Merchandising Entries Summary of Merchandising Entries

Acid-Test Ratio Gross Margin Ratio

Acid-test Quick assets Gross

= Net sales - Cost of goods sold
ratio Current liabilities margin =
Net sales
ratio
Acid-test Cash + S/T investments + Current receivables
=
ratio Current liabilities
Percentage of dollar sales available to
cover expenses and provide a profit.
A common rule of thumb is the acid-test ratio should
have a value of at least 1.0 to conclude a company is
unlikely to face liquidity problems in the near future.
4-55 4-56
 Tutorial 4.1 Tutorial 4.1
Prepare journal entries to record the following July 8 Sold merchandise that had cost $1,200 for
merchandising transactions of Bask Company, which $1,600 cash.
applies the perpetual inventory system. (Hint: It will help July 9 Purchased merchandise from Lane Co. for
to identify each receivable and payable; for example, $2,300 under credit terms of 2/15, n/60, FOB
record the purchase on July 1 in Accounts Payable — destination, invoice dated July 9.
Black.) July 11 Received a $200 credit memorandum from
July 1 Purchased merchandise from Black Company for Lane Co. for the return of part of the merchandise
$6,000 under credit terms of 1/15, n/30, FOB shipping purchased on July 9.
point, invoice dated July 1. July 12 Received the balance due from Coke Co. for
July 2 Sold merchandise to Coke Co. for $800 under the invoice dated July 2, net of the discount.
credit terms of 2/10, n/60, FOB shipping point, invoice July 16 Paid the balance due to Black Company within
dated July 2. The merchandise had cost $500. the discount period.
July 3 Paid $100 cash for freight charges on the
purchase of July 1.

Tutorial 4.1 Tutorial 4.2 (Excel)

July 19 Sold merchandise that cost $900 to AKP Co. The following unadjusted trial balance is
for $1,250 under credit terms of 2/15, n/60, FOB prepared at fiscal year-end for Rex Company
shipping point, invoice dated July 19.
July 21 Issued a $150 credit memorandum to AKP Co.
for an allowance on goods sold on July 19.
July 24 Paid Lane Co. the balance due after deducting
the discount.
July 30 Received the balance due from AKP Co. for the
invoice dated July 19, net of discount.
July 31 Sold merchandise that cost $3,200 to Coke Co.
for $5,000 under credit terms of 2/10, n/60, FOB
shipping point, invoice dated July 31.
 Tutorial 4.2 (Excel) Tutorial 4.2 (Excel)
Rent expense and salaries expense are equally divided Rent expense and salaries expense are equally divided
between selling activities and the general and administrative between selling activities and the general and administrative
activities. Rex Company uses a perpetual inventory system. activities. Rex Company uses a perpetual inventory system.
Required Required
1. Prepare adjusting journal entries to reflect each of the 1. Prepare adjusting journal entries to reflect each of the
following: following:
a. Store supplies still available at fiscal year-end amount to $1,650. a. Store supplies still available at fiscal year-end amount to $1,650.
b. Expired insurance, an administrative expense, for the fiscal year b. Expired insurance, an administrative expense, for the fiscal year
is $1,500. is $1,500.
c. Depreciation expense on store equipment, a selling expense, is c. Depreciation expense on store equipment, a selling expense, is
$1,400 for the fiscal year. $1,400 for the fiscal year.
d. To estimate shrinkage, a physical count of ending merchandise d. To estimate shrinkage, a physical count of ending merchandise
inventory is taken. It shows $11,100 of inventory is still available at inventory is taken. It shows $11,100 of inventory is still available at
fiscal year-end. fiscal year-end.

Tutorial 4.2 (Excel)

2. Prepare a multiple-step income
statement for fiscal year 2011.
3. Prepare a single-step income
statement for fiscal year 2011.