Chapter 4Chapter 4

Accounting for Merchandising Accounting for Merchandising BusinessesBusinesses

Accounting for Merchandising Accounting for Merchandising BusinessesBusinesses

Learning ObjectivesLearning Objectives

After studying this chapter, you should be able to… Distinguish the activities and financial statements of a service

business from those of a merchandising business Describe and illustrate the financial statements of a

merchandising business Describe the accounting for the sale of merchandise Describe the accounting for the purchase of merchandise Describe the accounting for transportation costs and sales taxes Illustrate the dual nature of merchandising transactions Describe the accounting for merchandise shrinkage

Learning Objective 1Learning Objective 1

Distinguish the activities and financial statements of a service business from

those of a merchandising business

Service Businesses vs. Merchandise Operations

• Merchandise Operations– Revenue activities involve the buying

and selling of merchandise.– Example: Home Depot Inc.

• Service Businesses– Revenue activities involve providing

services to customers.– Example: Family Health Care, P.C.

Gross Profit for a Merchandise Operation

Gross Profit = Net Sales – COGSGross Profit = Net Sales – COGS

• Net Sales: revenue less returns and discounts

• Cost of Goods Sold: cost paid for merchandise

Learning Objective 2Learning Objective 2

Describe and illustrate the financial statements of a merchandising

business

NetSolutions – Multiple-Step Income Statement

Measures income/loss from the core operations

of the business

Assume a perpetual inventory system

Considers customer

returns and discounts

NetSolutions – Cost of Merchandise Sold – Periodic Inventory

NetSolutions – Income Statement

NetSolutions – Retained Earnings Statement

NetSolutions – Balance Sheet

Value of units on hand, not sold

NetSolutions – Statement of Cash Flows

Equals cash on balance sheet

Learning Objective 3Learning Objective 3

Describe the accounting for the sale of merchandise

NetSolutions - Sales Transactions

Sample Sales Invoice

Credit terms

Sales Discounts

NetSolutions - Sales Discounts

Sales Returns and Allowances

NetSolutions - Sales Returns and Allowances

Learning Objective 4Learning Objective 4

Describe the accounting for the purchase of merchandise

Purchase Transaction - Using the Perpetual System

Purchase Discounts

Purchase Returns and Allowances

NetSolutions - Return of Merchandise

Learning Objective 5Learning Objective 5

Describe the accounting for transportation costs and sales taxes

Transportation Costs

NetSolutions - Transportation Costs

Sales Taxes

Sale is made, liability for sales tax

recorded as an obligation of the

seller

Payment is made to state taxing

authority to satisfy obligation

Learning Objective 6Learning Objective 6

Illustrate the dual nature of merchandising transactions

Dual Nature of Merchandise Transactions

Company A Company A records a salerecords a saleCompany A Company A records a salerecords a sale

Company B Company B records a purchaserecords a purchase

Company B Company B records a purchaserecords a purchase

Learning Objective 7Learning Objective 7

Describe the accounting for merchandise shrinkage

Merchandise Shrinkage

NetSolutions - Merchandise Shrinkage

End of Chapter 4End of Chapter 4