Kế toán tài chính 2 - Chapter 5: Merchandising operations

Merchandising OperationsMultimedia Slides by: Gail A. Mestas, MAcc, New Mexico State UniversityChapter 5Learning ObjectivesIdentify the management issues related to merchandising businesses.Compare the income statements for service and merchandising concerns, and define the components of the merchandising income statement.Define and distinguish the terms of sale for merchandising transactions.Prepare an income statement and record merchandising transactions under the perpetual inventory system.2Copyright © Houghton Mifflin Company. All rights reserved.Supplemental ObjectivesPrepare an income statement and record merchandising transactions under the periodic inventory system.Prepare a work sheet and closing entries for a merchandising concern using the perpetual inventory system.Prepare a work sheet and closing entries for a merchandising concern using the periodic inventory system.Apply sales and purchases discounts to merchandising transactions.3Copyright © Houghton Mifflin Company. All rights reserved.Management Issues in Merchandising BusinessesObjective 1Identify the management issues related to merchandising businesses4Copyright © Houghton Mifflin Company. All rights reserved.Merchandising Businesses earn income by buying and selling products or merchandiseCan be wholesalers or retailersUse the same basic accounting methods as service companiesThe process is more complex than for service companies because of the buying and selling of merchandiseThe goods on hand for sale to customers are called merchandise inventory5Copyright © Houghton Mifflin Company. All rights reserved.Management Issues in Merchandising BusinessesCash flow managementProfitability managementChoice of inventory systemControl of merchandising operations6Copyright © Houghton Mifflin Company. All rights reserved.Cash Flow Management involves managing a company’s receipts and payments of cashIf bills cannot be paid when due, the company may be forced out of businessMerchandising businesses engage in a series of transactions called the operating cycle7Copyright © Houghton Mifflin Company. All rights reserved.The Operating CycleTransactions in the operating cycle includePurchase of merchandise inventory for cash or creditPayment for purchases made on creditSales of merchandise inventory for cash or on creditCollection of cash from credit sales8Copyright © Houghton Mifflin Company. All rights reserved.Merchandise inventory is purchased for cash or on creditCashAccounts PayableMerchandise InventoryPurchasefor cashPurchaseon creditThe Operating Cycle of Merchandising Concerns AccountsReceivablePayments are made for purchases on creditPaymentof cashMerchandise is sold for cash or on credit Salesfor cash Saleson creditCash is collected from credit salesCollection of cash9Copyright © Houghton Mifflin Company. All rights reserved.The Financing Period is the time period from the purchase of inventoryuntil it is ultimately sold and collectedless the amount of time creditors give the company to pay for the inventoryAlso called the cash gapThis is the period of time the company will be without cash from a particular series of transactionsThe company will need to have funds available or borrow from the bankThis is why cash flow management is important10Copyright © Houghton Mifflin Company. All rights reserved.The Financing Period IllustratedAverage days to collect on receivables is 60 days (Cash is received)Inventory is purchased on credit (Accounts Payable)InventorypurchasedCash receivedInventory soldCash paidTerms for payment are 30 days (Cash is paid)Average days to sell inventory is 60 days – sold on credit (Accounts Receivable)The financing period, or cash gap, is 90 days(120 days – 30 days)11Copyright © Houghton Mifflin Company. All rights reserved.Target’s financing period is shorter because it sells most of its merchandise for cashThe Financing Period (cont’d)The financing period Varies for different companiesCan be 120 days, or even longer, for merchandising companiesExample12Copyright © Houghton Mifflin Company. All rights reserved.Types of payments for purchasesCashBank credit cardStore creditFunds from these sales are available to the merchandiser immediatelyMerchandiser must wait a period of time before receiving cashCash Versus CreditRetailers reduce their financing period (improve their cash flow) by selling as much as possible for cashEncourage sales by cash or bank credit card13Copyright © Houghton Mifflin Company. All rights reserved.Profitability Management is a complex activity that includes achieving a satisfactory gross marginand maintaining acceptable levels of operating expenses14Copyright © Houghton Mifflin Company. All rights reserved.Profitability Management (cont’d)Achieving a satisfactory gross margin depends onSetting appropriate prices for merchandisePurchasing merchandise at favorable prices and termsMaintaining acceptable levels of operating costs depends onControlling expensesUsing an operating budget is an efficient way to control expensesOperating efficiently15Copyright © Houghton Mifflin Company. All rights reserved.Operating Budgets consist of detailed listings of projected selling expenses and general and administrative expenses for a company Reflect management’s operating plansAt year-end and key times during the year, management should compare actual and budgeted expenses and make adjustments to operations16Copyright © Houghton Mifflin Company. All rights reserved.Choice of Inventory SystemTwo basic systemsPerpetual inventory systemPeriodic inventory systemManagement must choose the system or combination of systems that is best for achieving the company’s goals17Copyright © Houghton Mifflin Company. All rights reserved.Perpetual Inventory Systemdetermines inventory by keeping continuous records of the quantity and, usually, the cost of individual items as they are bought and sold 18Copyright © Houghton Mifflin Company. All rights reserved.Perpetual Inventory System (cont’d)Detailed data enable management toDetermine product availabilityCan respond to customers’ inquiriesAvoid running out of stockAble to order inventory more effectivelyControl financial costs associated with investments in inventory19Copyright © Houghton Mifflin Company. All rights reserved.Accounting for Inventory Under the Perpetual SystemPurchasesThe cost of each item is recorded in the Merchandise Inventory accountSalesThe cost of each item is transferred from the Merchandise Inventory account to the Cost of Goods Sold accountThereforeMerchandise Inventory account balance = Cost of goods on handCost of Goods Sold account balance = Cost of merchandise sold to customers20Copyright © Houghton Mifflin Company. All rights reserved.Periodic Inventory System determines inventory by a physical count taken at the end of the accounting periodNo detailed records of the actual inventory on hand are maintained during the accounting periodAmount of inventory on hand is accurate only on the balance sheet date21Copyright © Houghton Mifflin Company. All rights reserved.Periodic Inventory SystemUsed to reduce the amount of clerical workLack of records could lead to lost sales or high operating costsMore likely to be used bySmaller companiesCompanies that sell high volumes of low value itemsDrugstoresAutomobile parts storesDepartment storesDiscount storesGrain companies22Copyright © Houghton Mifflin Company. All rights reserved.Perpetual Inventory SystemMore likely to be used byLarger companiesCompanies that sell high-value itemsAutomobilesAppliances23Copyright © Houghton Mifflin Company. All rights reserved.Control of Merchandising OperationsPrincipal transactions of merchandising businesses areBuying assetsSelling assetsInvolve cash, accounts receivable, and merchandise inventoryThese assets are vulnerable to theft and embezzlementManagement must use internal controls to protect these assets24Copyright © Houghton Mifflin Company. All rights reserved.Internal ControlInternal control is created by establishingAn environment of controlAccounting systemsControl procedures25Copyright © Houghton Mifflin Company. All rights reserved.Physical InventoryA physical count of all merchandise on handRequired under both the perpetual and periodic inventory systemsUnder the perpetual inventory system, the actual count is compared to accounting records to determine any shortages that may existUsed to facilitate control over merchandise inventory26Copyright © Houghton Mifflin Company. All rights reserved.Merchandise Inventoryincludes all goods intended for salethat are owned by a businessIncludes all goods intended for sale, regardless of where they are located, such asGoods in transit if title has passed to the merchantDamaged or obsolete goods that can be sold at reduced pricesDoes not include Merchandise that has been soldDamaged or obsolete goods that cannot be sold27Copyright © Houghton Mifflin Company. All rights reserved.Inventory LossesResult from spoilage, shoplifting, and theft by employeesPeriodic inventory systemNo means to identify losses because the costs are automatically included in cost of goods soldPerpetual inventory systemLosses equal the difference between the inventory records and the physical countUpdate inventory by crediting Merchandise Inventory and debiting Cost of Goods Sold28Copyright © Houghton Mifflin Company. All rights reserved.DiscussionWhat four issues must managers of merchandising businesses face?The four issues that managers of merchandising businesses face are Cash flow managementProfitability managementChoosing between the periodic and the perpetual inventory systems, and Establishing an internal control structure that protects the business’s assets29Copyright © Houghton Mifflin Company. All rights reserved.Income Statement for a Merchandising ConcernObjective 2Compare the income statements for service and merchandising concerns, and define the components of the merchandising income statement30Copyright © Houghton Mifflin Company. All rights reserved.Income Statement for a MerchandiserConsists of three major partsNet salesCost of goods soldOperating expensesThere is also a subtotal for gross margin(Net Sales – Cost of Goods Sold)Income statements for service businesses do not include gross margin computations31Copyright © Houghton Mifflin Company. All rights reserved.The Components of Income Statements for Service and Merchandising CompaniesNet Salesconsists of the gross proceeds from sales of merchandiseAlso simply called salesAmount of sales and trends in net sales over time are used to analyze a company’s progress 33Copyright © Houghton Mifflin Company. All rights reserved.Net SalesNet Sales = Gross Sales – Sales Returns and Allowances – DiscountsGross Sales = Total Cash Sales + Total Credit Sales during a given accounting periodThis follows the revenue recognition ruleRevenue is recognized even though cash may not be collected until the following accounting period Sales Returns and AllowancesA contra-revenue accountUsed to accumulate cash refunds, credits on account, and allowances off selling prices for defective or unsatisfactory merchandise34Copyright © Houghton Mifflin Company. All rights reserved.Cost of Goods Sold is the amount paid for merchandise sold,or the cost to manufacture products that were sold,during an accounting periodAlso called cost of sales35Copyright © Houghton Mifflin Company. All rights reserved.Gross Marginis the difference between net sales and cost of goods soldNet Sales – Cost of Goods Sold = Gross MarginAlso called gross profit36Copyright © Houghton Mifflin Company. All rights reserved.Both are useful in planning business operationsGross MarginManagement is interested in both the amount of gross margin and the percentage of gross margin37Copyright © Houghton Mifflin Company. All rights reserved.Operating Expenses are the expensesother than cost of goods soldthat are incurred in running a businessOperating expenses are grouped into categoriesSelling expensesGeneral and administrative expensesCareful planning and control of operating expenses can improve a company’s profitability38Copyright © Houghton Mifflin Company. All rights reserved.Selling ExpensesIncludeCost of storing goodsCost of preparing goods for saleAdvertising and promoting salesDelivering goods to the buyerCalled freight out expense or delivery expenseGeneral occupancy expenses (may be allocated among selling expenses and general and administrative expenses)Rent expenseUtilities expenseInsurance expense39Copyright © Houghton Mifflin Company. All rights reserved.General and Administrative ExpensesIncludeGeneral office expensesAccountingPersonnelCredit and collectionsExpenses that apply to overall operationsGeneral occupancy expenses (may be allocated among general and administrative expenses and selling expenses)Rent expenseUtilities expenseInsurance expense40Copyright © Houghton Mifflin Company. All rights reserved.Net Income is what remains of gross margin after operating expenses are deductedIt is the final figure, or “bottom line,” of the income statement Represents the amount of business earnings that accrue to the ownersManagement and owners use net income to measure whether a business has operated successfully during the past accounting period41Copyright © Houghton Mifflin Company. All rights reserved.DiscussionWhat are the three major parts of an income statement for a merchandising company?Net salesCost of goods soldOperating expenses42Copyright © Houghton Mifflin Company. All rights reserved.Terms of SaleObjective 3Define and distinguish the terms of sale for merchandising transactions43Copyright © Houghton Mifflin Company. All rights reserved.Trade Discounts are reductions off list or catalog pricesOffered by manufacturers and wholesalersUsually 30 percent or moreExampleAn article is listed at $1,000 with a trade discount of 40 percentSale price = $1,000(1.00 – 0.40) = $60044Copyright © Houghton Mifflin Company. All rights reserved.Trade Discount Termsn/10 (net 10)Amount is due 10 days after the invoice daten/10 eom (net 10 end-of-month)Amount is due 10 days after the end of the month in which the invoice is dated45Copyright © Houghton Mifflin Company. All rights reserved.Sales Discountsgive buyers discounts for early paymentAre intended to increase the seller’s liquidity by reducing the amount of money tied up in accounts receivableIt is usually advantageous for buyers to take advantage of sales discounts46Copyright © Houghton Mifflin Company. All rights reserved.Sales Discount Terms2/10, n/30Amount may be paid within 10 days of the invoice date with a 2 percent discount Or wait up to 30 days and pay the full amount47Copyright © Houghton Mifflin Company. All rights reserved.Shipping TermsSeller pays shipping costsBuyer pays shipping costsFOB destinationFOB Shipping PointFOB means “free on board”Title of merchandise passes from seller to buyer at the point merchandise is shippedTitle of merchandise passes from seller to buyer when the merchandise reaches its destination48Copyright © Houghton Mifflin Company. All rights reserved.Credit Card SalesIf seller accepts a credit card payment, the customer signs a sales invoiceThe sale is communicated to the seller’s bank and a cash deposit is made in the seller’s accountSeller does not have to establish customer's credit, collect from the customer, or tie up money in accounts receivableThe seller pays the lender (credit card company) from 2 to 6 percent of the sale amount for the service49Copyright © Houghton Mifflin Company. All rights reserved.Accounting for Credit Card SalesExampleA customer charges a $1,000 purchase on a Visa credit cardVisa charges a 4 percent discount on salesThe seller will pay Visa $40 ($1,000 x .40)Journal entry50Copyright © Houghton Mifflin Company. All rights reserved.DiscussionWhat is the difference between a trade discount and a sales discount?Trade discountA deduction off a list or catalog price Sales discountA discount given to a buyer for early payment for sales made on credit51Copyright © Houghton Mifflin Company. All rights reserved.Applying the Perpetual Inventory SystemObjective 4Prepare an income statement and record merchandising transactions under the perpetual inventory system52Copyright © Houghton Mifflin Company. All rights reserved.The Merchandise Inventory account on the balance sheet is updated at the same timeThe Cost of Goods Sold account is continually updated during the accounting periodIncome Statement When Using the Perpetual Inventory System53Copyright © Houghton Mifflin Company. All rights reserved.Transactions Related to the Purchase of MerchandisePurchases of merchandise on creditTransportation costs on purchasesPurchases returns and allowancesPayments on account54Copyright © Houghton Mifflin Company. All rights reserved.Under the perpetual inventory system, the cost of merchandise purchased is placed in the Merchandise Inventory account at the time of purchaseOct. 3: Received merchandise purchased on credit from Neebok Company, invoice dated October 1, terms n/10, FOB shipping point, $4,890Purchases of Merchandise on Credit55Copyright © Houghton Mifflin Company. All rights reserved.Freight In, or Transportation In, is the transportation cost of receiving merchandiseOct. 4: Received bill from Transfer Freight Company for transportation costs on October 3 shipment, invoice dated October 1, terms n/10, $160Transportation costs are accumulated in the Freight In account, which is a component of cost of goods soldTransportation Costs on Purchases56Copyright © Houghton Mifflin Company. All rights reserved.Oct. 6: Returned merchandise received from Neebok Company on October 3 for credit, $480Under the perpetual inventory system, the returned merchandise is removed from the Merchandise Inventory accountPurchases Returns and Allowances57Copyright © Houghton Mifflin Company. All rights reserved.Oct. 10: Paid in full the amount due to Neebok Company for the purchase of October 3, part of which was returned on October 6Payments on Account58Copyright © Houghton Mifflin Company. All rights reserved.Transactions Related to Sales of MerchandiseSales of merchandise on creditPayment of delivery costsReturns of merchandise soldReceipts on account59Copyright © Houghton Mifflin Company. All rights reserved.Sales of Merchandise on CreditUnder the perpetual inventory system, two entries are necessary. Oct. 7: Sold merchandise on credit to Gonzales Distributors, terms n/30, FOB destination, $1,200; the cost of the merchandise was $720The sale is recorded and Cost of Goods Sold is updated by a transfer from Merchandise Inventory60Copyright © Houghton Mifflin Company. All rights reserved.Freight Out Expense, or Delivery Expense, is often paid by the seller to facilitate salesOct. 8: Paid transportation costs for the sale on October 7, $78Delivery costs are accumulated in the Freight Out Expense account, which is shown as a selling expense on the income statementPayment of Delivery Costs61Copyright © Houghton Mifflin Company. All rights reserved.Returns of Merchandise SoldOct. 9: Return of merchandise sold on October 7 accepted from Gonzales Distributors for full credit and returned to merchandise inventory, $300; the cost of the merchandise was $180The Sales Returns and Allowances account gives management a readily available measure of unsatisfactory products or customer dissatisfaction, which can be indicated by returns and allowances62Copyright © Houghton Mifflin Company. All rights reserved.If merchandise is not returnedor will not be resold, this transaction is not recordedReturns of Merchandise SoldOct. 9: Return of merchandise sold on October 7 accepted from Gonzales Distributors for full credit and returned to merchandise inventory, $300; the cost of the merchandise was $180Under the perpetual inventory system, the cost of the returned merchandise must be transferred from Cost of Goods Sold to Merchandise Inventory63Copyright © Houghton Mifflin Company. All rights reserved.Nov. 5: Received payment in full from Gonzales Distributors for sale of merchandise on October 7, less the return on October 9Receipts on Account64Copyright © Houghton Mifflin Company. All rights reserved.DiscussionHow are merchandising transactions recorded under the perpetual inventory system?Merchandising transactions are recorded during the accounting periods, as purchases, sales, and other inventory transactions take place65Copyright © Houghton Mifflin Company. All rights reserved.Applying the Periodic Inventory SystemSupplemental Objective 5Prepare an income statement and record merchandising transactions under the periodic inventory system66Copyright © Houghton Mifflin Company. All rights reserved.Applying the Periodic Inventory SystemCost of goods sold must be computed in the income statement when using the periodic inventory systemIt is not updated for purchases, sales, and other transactions during the accounting period67Copyright © Houghton Mifflin Company. All rights reserved.The Components of Cost of Goods Sold68Copyright © Houghton Mifflin Company. All rights reserved.Cost of goods available for sale must be determined first Income Statement When Using the Periodic Inventory SystemUnder the periodic inventory system, cost of goods sold must be computed 69Copyright © Houghton Mifflin Company. All rights reserved. Cost of Goods Available for Sale is the sum of two factors,beginning inventory and the net cost of purchases during the year70Copyright © Houghton Mifflin Company. All rights reserved. Net Cost of Purchases71Copyright © Houghton Mifflin Company. All rights reserved.Transactions Related to Purchases of MerchandisePurchases of merchandise on creditTransportation costs on purchasePurchases returns and allowancesPayments on account72Copyright © Houghton Mifflin Company. All rights reserved.Purchases of Merchandise on CreditUnder the periodic inventory system, the total cost of merchandise purchased for resale during the period is accumulated in the Purchases accountOct. 3: Received merchandise purchased on credit from Neebok Company, invoice dated October 1, terms n/10, FOB shipping point, $4,890The Purchases account does not indicate whether merchandise has been sold or is still on hand73Copyright © Houghton Mifflin Company. All rights reserved.Transportation Costs on PurchasesFreight In, or Transportation In, is the transportation cost of receiving merchandiseOct. 4: Received bill from Transfer Freight Company for transportation costs on October 3 shipment, invoice dated October 1, terms n/10, $160Transportation costs are accumulated in the Freight In account, which is included in cost of goods sold74Copyright © Houghton Mifflin Company. All rights reserved.Purchases Returns and AllowancesOct. 6: Returned merchandise received from Neebok Company on October 3 for credit, $480Under the periodic inventory system, the amount of the allowance or returned merchandise is recorded in the Purchases Returns and Allowances accountThe Purchases Returns and Allowances account Is a contra-purchases account Carries a normal credit balanceIs deducted from purchases on the income statement75Copyright © Houghton Mifflin Company. All rights reserved.Payments on AccountOct. 10: Paid in full the amount due to Neebok Company for the purchase of October 3, part of which was returned on October 676Copyright © Houghton Mifflin Company. All rights reserved.Transactions Related to Sales of MerchandiseSales of merchandise on creditPayment of delivery costsReturns of merchandise soldReceipts on account77Copyright © Houghton Mifflin Company. All rights reserved.Sales of Merchandise on CreditUnder the periodic inventory system, only one entry is necessary. The Cost of Goods Sold account is not used because the Merchandise Inventory account is not updated until the end of the accounting period.Oct. 7: Sold merchandise on credit to Gonzales Distributors, terms n/30, FOB destination, $1,20078Copyright © Houghton Mifflin Company. All rights reserved.Payment of Delivery CostsFreight Out Expense, or Delivery Expense, is often paid by the seller to facilitate salesOct. 8: Paid transportation costs for the sale on October 7, $78Delivery costs are accumulated in the Freight Out Expense account, which is shown as a selling expense on the income statement79Copyright © Houghton Mifflin Company. All rights reserved.Returns of Merchandise SoldOct. 9: Return of merchandise sold on October 7 accepted from Gonzales Distributors for full credit and returned to merchandise inventory, $300The Sales Returns and Allowances account is used to accumulate returns and allowances to customers for wrong or unsatisfactory merchandise.The Sales Returns and Allowances account Is a contra-revenue account Carries a normal debit balanceIs deducted from sales on the income statement80Copyright © Houghton Mifflin Company. All rights reserved.Receipts on AccountNov. 5: Received payment in full from Gonzales Distributors for sale of merchandise on October 7, less the return on October 981Copyright © Houghton Mifflin Company. All rights reserved.DiscussionHow are merchandising transactions recorded under the periodic system?Merchandising transactions are recorded at the end of the accounting period; therefore, Costs of Goods Sold and Inventory must be computed at that time82Copyright © Houghton Mifflin Company. All rights reserved.The Merchandising Work Sheet and Closing Entries: The Perpetual Inventory SystemSupplemental Objective 6Prepare a work sheet and closing entries for a merchandising concern using the perpetual inventory system83Copyright © Houghton Mifflin Company. All rights reserved.Work Sheet and Closing Accounts for a Merchandising CompanyBasically the same as for a service company but includes accounts needed to handle merchandising transactionsTreatment of these accounts depends on whether perpetual or periodic inventory system is used84Copyright © Houghton Mifflin Company. All rights reserved.Comparison of Merchandising Accounts to be Closed at End of PeriodPerpetual Inventory SystemPeriodic Inventory SystemSalesSales Returns and AllowancesCost of Goods SoldFreight InSalesSales Returns and AllowancesSales DiscountsPurchasesPurchases Returns and AllowancesPurchases DiscountsFreight InMerchandise InventoryNotice that the Merchandise Inventory account is not involved in the closing process under the perpetual inventory system85Copyright © Houghton Mifflin Company. All rights reserved.Merchandise Inventory AccountUnder the perpetual system, the Merchandise Inventory account is not involved in the closing process because it is up to date at the end of the accounting periodUnder the periodic system, no entries are made to the Merchandise Inventory account until the closing process at the end of the accounting period86Copyright © Houghton Mifflin Company. All rights reserved. Work Sheet ColumnsEnter balances from ledger accounts to trial balance columnsEnter adjusting entries in the Adjustments columnsTotal columns to prove debits equal creditsExtend balances to Income Statement and Balance Sheet columnsRecord adjusting entries from work sheet to general journal, then post to ledgerXXX XXX XXX XXXThe Adjusted Trial Balance columns have been omitted because only a few adjusting entries are required for Fenwick Fashions Company87Copyright © Houghton Mifflin Company. All rights reserved. Balance Sheet ColumnsPerpetual Inventory SystemEnding Merchandise Inventory is in both the Trial Balance and Balance Sheet columns88Copyright © Houghton Mifflin Company. All rights reserved. Income Statement Columns Perpetual Inventory SystemThe difference between the Income Statement column totals is net income89Copyright © Houghton Mifflin Company. All rights reserved. Closing Entries Perpetual Inventory SystemDebit Income Summary and credit the accounts in the Income Statement Debit column90Copyright © Houghton Mifflin Company. All rights reserved.Closing EntriesPerpetual Inventory System (cont.)91Copyright © Houghton Mifflin Company. All rights reserved. Closing Entries Perpetual Inventory System (cont.)Debit the accounts in the Income Statement Credit column and credit Income Summary92Copyright © Houghton Mifflin Company. All rights reserved.Closing Entries Perpetual Inventory System (cont.)Next, the balances in the Income Summary and Withdrawal accounts are closed to the Capital accountNotice that the amount required to close the Income Summary account is equal to net income for the period93Copyright © Houghton Mifflin Company. All rights reserved.DiscussionUnder the perpetual inventory system, is the Merchandise Inventory account involved in the closing process? No. Under the perpetual system, the Merchandise Inventory account is not involved in the closing process because it is up to date at the end of the accounting period94Copyright © Houghton Mifflin Company. All rights reserved.The Merchandising Work Sheet and Closing Entries: The Periodic Inventory SystemSupplemental Objective 7Prepare a work sheet and closing entries for a merchandising concern using the periodic inventory system95Copyright © Houghton Mifflin Company. All rights reserved.Merchandise Inventory AccountUnder the periodic inventory system, the Merchandise Inventory account requires special treatmentBecause merchandise purchases are accumulated in the Purchases accountNo entries are made to the Merchandise Inventory account during the accounting period96Copyright © Houghton Mifflin Company. All rights reserved. Merchandise Inventory AccountPeriodic Inventory SystemThe beginning balance of the Merchandise Inventory account, which appears in the Trial Balance Debit column, is extended to the Income Statement Debit column97Copyright © Houghton Mifflin Company. All rights reserved. Merchandise Inventory AccountPeriodic Inventory SystemThis has the effect of adding beginning inventory to net purchases because the Purchases account is also in the Income Statement Debit column98Copyright © Houghton Mifflin Company. All rights reserved. Merchandise Inventory AccountPeriodic Inventory SystemThe ending balance of the Merchandise Inventory account is then inserted in the Income Statement Credit columnDetermined by a physical count99Copyright © Houghton Mifflin Company. All rights reserved. Merchandise Inventory AccountPeriodic Inventory SystemThis has the effect of subtracting ending inventory from goods available for sale in order to calculate cost of goods sold100Copyright © Houghton Mifflin Company. All rights reserved. Merchandise Inventory AccountPeriodic Inventory SystemFinally, the ending Merchandise Inventory is inserted in the Balance Sheet Debit column because it will appear on the balance sheet101Copyright © Houghton Mifflin Company. All rights reserved. Closing Entries Periodic Inventory SystemDebit Income Summary and credit the accounts in the Income Statement Debit column102Copyright © Houghton Mifflin Company. All rights reserved.Closing Entries Periodic Inventory System (cont.)103Copyright © Houghton Mifflin Company. All rights reserved. Closing Entries Periodic Inventory System (cont.)Debit the accounts in the Income Statement Credit column and credit Income Summary104Copyright © Houghton Mifflin Company. All rights reserved.Closing Entries Periodic Inventory System (cont.)105Copyright © Houghton Mifflin Company. All rights reserved.Closing Entries Periodic Inventory System (cont.)Next, the balances in the Income Summary and Withdrawal accounts are closed to the Capital account106Copyright © Houghton Mifflin Company. All rights reserved.Accounting for DiscountsSupplemental Objective 8Apply sales and purchases discounts to merchandising transactions107Copyright © Houghton Mifflin Company. All rights reserved.Sales Discountsare discounts given to buyers for early payment for sales made on creditAre recorded only at the time the customer paysThe Sales Discounts account Is a contra-revenue accountCarries a normal debit balanceIs deducted from sales on the income statement108Copyright © Houghton Mifflin Company. All rights reserved.Sept. 20: Sold merchandise to a customer, terms 2/10, n/60, $300Nov. 19: Customer pays on account for September 20 saleThe customer paid the full sale amount of $300 because payment was made after the 10 day sales discount periodTransactions Involving No Sales Discounts109Copyright © Houghton Mifflin Company. All rights reserved.Sept. 20: Sold merchandise to a customer, terms 2/10, n/60, $300Sept. 29: Customer pays on account for September 20 saleThe customer paid only $294 [$300 – ($300 x .02)] because payment was made within the 10-day sales discount periodTransactions Involving Sales Discounts110Copyright © Houghton Mifflin Company. All rights reserved.Purchases Discountsare discounts taken by merchants for early payment for merchandise purchased on creditUsually do not apply to freight, postage, taxes, or other charges appearing on the invoiceThe Purchases Discounts account Is a contra-purchases accountCarries a normal credit balanceIs deducted from purchases on the income statement111Copyright © Houghton Mifflin Company. All rights reserved.Nov. 12: Made a credit purchase of merchandise, terms 2/10, n/30, $1,500Dec. 12: Paid on account for November 12 sale, less amount for returned merchandiseThe full sale amount of $1,500, less $200 for returned merchandise, was paid because payment was made after the 10-day purchases discount periodNov. 14: Returned merchandise purchased November 12 on credit, $200Transactions Involving No Purchases Discounts112Copyright © Houghton Mifflin Company. All rights reserved.Nov. 12: Made a credit purchase of merchandise, terms 2/10, n/30, $1,500Nov. 22: Paid on account for November 12 sale, less amount for returned merchandiseA purchases discount of $26 [($1,500 - $200) x .02] was recorded, because payment was made within the 10-day purchases discount periodNov. 14: Returned merchandise purchased November 12 on credit, $200Transactions Involving Purchases Discounts113Copyright © Houghton Mifflin Company. All rights reserved.DiscussionWhat is the normal balance of the Sales Discounts account? Is it an asset, a liability, an expense, or a contra-revenue account?The normal balance of the Sales Discounts account is a debit balance Sales Discounts is a contra-revenue account. It is deducted from gross sales on the income statement114Copyright © Houghton Mifflin Company. All rights reserved.Time for ReviewIdentify the management issues related to merchandising businessesCompare the income statements for service and merchandising concerns, and define the components of the merchandising income statementDefine and distinguish the terms of sale for merchandising transactionsPrepare an income statement and record merchandising transactions under the perpetual inventory system115Copyright © Houghton Mifflin Company. All rights reserved.And Finally Prepare an income statement and record merchandising transactions under the periodic inventory systemPrepare a work sheet and closing entries for a merchandising concern using the perpetual inventory systemPrepare a work sheet and closing entries for a merchandising concern using the periodic inventory systemApply sales and purchases discounts to merchandising transactions116Copyright © Houghton Mifflin Company. All rights reserved.