Accounting 1 Instructor Notes

Size: px
Start display at page:

Download "Accounting 1 Instructor Notes"

Transcription

1 Accounting 1 Instructor Notes CHAPTER 6 ACCOUNTING FOR MERCHANDISING BUSINESS Accounting for a merchandising business is much more complex than a service business. This is because a service business sells a service and has no inventory. Think about a merchandiser like J.C. Penney's. They must design a system to record the receipt of the goods they will be selling (like the jeans they have bought from Levi's and are now in the store to sell to customers) and keep track of what is available for sale as well as where the merchandise is located. When the Levi's jeans are sold by Penney's to the customer, the sale and the cost of the good sold must be recorded. As it is sold, the jeans are taken out of the store's inventory. There is also other data to consider like shipping costs discounts, and returns. Think about if you buy something from Amazon.com. If the shipping is free, then the maximum price you would be willing to pay would be the same price you saw it for in a local store. If shipping is added on, you have to consider that as part of your purchase price. In this chapter we will learn how to journalize for the buyer and seller of merchandise. We will also look at the financial statements for the merchandiser. INCOME STATEMENT Income statement for merchandising vs. service business The main differences relate to how the revenue and expenses are handled. In a merchandising business you have Cost of Merchandise Sold (COMS). See examples of each in textbook.

2 ACCOUNTING FOR PURCHASES (Buyer Entries) When we make purchases for resale do the following: Merchandise Inventory 2,000 Cash 2,000 Or on account: Merchandise Inv. 2,000 AP 2,000 PURCHASE DISCOUNT We are sometimes allowed to take a discount if paid within a certain time from the invoice date. Some examples would be 2/10 or n/30. That would mean you could take a 2% discount if you pay within 10 days from the invoice date (2/10). Otherwise you pay the full amount in 30 days (n/30). N/EOM means the net amount is due by the end of the month. PURCHASE RETURNS AND ALLOWANCES Sometimes you have to return an item. The journal entry would be like the following: AP 100 SHIPPING COST FOR PURCHASES Shipping cost can be handled many different ways. It can be FOB (free on Board) to shipping point and the buyer is billed by the seller (this means the seller takes it to the shipping station but adds the shipping cost from the shipping station to buyer s location on to the buyer s invoice). The shipping is billed (added to invoice) by the seller to the buyer. This is the most common way shipping is handled. When you buy something

3 online, the seller adds shipping to your invoice. It can be FOB to destination (this means the seller will pay the shipping cost, buyer pays nothing). For example, you buy something online and you get free shipping. The buyer pays nothing, the seller pays the shipping. It can also be sent FOB (free on Board) to shipping point COD (collect on delivery) or paid in advance. In this case it would say FOB to shipping point, but make no reference to the buyer being billed or invoiced by the seller. Your book and handout has examples for each of these. Keep in mind that shipping is not eligible for the discount. Summary of Shipping Costs for BUYER and how to journalize Transportation: 1. FOB to Destination- Seller pays all transportation costs, buyer pays NO transportation costs. Buyer - No journal entry 2. FOB to Shipping point and seller adds transportation cost to the buyer's invoice (bills the buyer for the transportation). Assume transportation cost is $100 Buyer- AP FOB to Shipping Point and buyer pays up front the transportation costs (it would then make no mention of being billed or invoiced for the transportation). Assume $100 transportation costs again. Buyer- Let s add on to our example by saying there was $25 of shipping expense, FOB to shipping point and shipping costs were added to our invoice. As the buyer we would add it to Merchandise Inventory AND since we were billed for it, AP. We can do it as one Journal entry so let s change the one above. Use the originally purchase of 2,000 but add on the $25 Shipping charge (you can do as one entry): Merchandise Inv. 2,025 AP 2,025

4 PAYMENT OF PURCHASE AND CALCULATING DISCOUNT Let's repeat two of our journal entries and then show how payment is calculated and journalized. Assume we made the following purchases. We then had the following return. Terms are 2/10 and we are paying within the 10 days, shipping is FOB to shipping point and has been added to our invoice. Shipping and returns are not eligible for the discount. Purchase entry: Merchandise Inv. (2,000 merchandise, $25 shipping) 2,025 AP 2,025 Entry for return: AP 100 Do the following for the payment and discount calculation: Merchandise + shipping return = AP Balance (AP will be debited for 1,925 when payment is made, full balance before discount is taken) 2, = 1,925 AP needs to be closed out for 1,925. Only 1,900 (of the 1,925) is eligible for the discount (1, shipping). Shipping is part of AP, but not eligible for discount. Assume the 2% discount 1,900 * 2% =38 discount (this is credited to Merchandise Inventory) Cash to pay (Credited to cash) AP Discount 1, = 1,887 So to journalize the payment would look like: AP 1,925 Merchandise Inv. (for Discount) 38 Cash 1,887

5 ACCOUNTING FOR SALES (Seller Entries) When sale for cash, at the end of the day you do the following: Cash 1,800 Sales 1,800 Or a sale on account would be: AR 1,800 Sales 1,800 In perpetual system account for Cost of Merchandise Sold (COMS) with either cash or AR sale. COMS 1,200 Merch. Inv. 1,200 Bank Card (such as Visa and Mastercard) sales are usually treated as cash sales. The cash is deposited from the bank issuing the bank card and increases your account like cash. Cash 1,000 Sales 1,000 There is usually a handling expense by the bank to the merchandising company for handling of the bank card receipts (around 1.5%), but having a bank card lets the customer buy more from you. Credit Card Expense 48 Cash 48 SHIPPING COST FOR SELLER Shipping cost can be handled many different ways. It can be FOB (free on Board) to shipping point and the buyer is billed by the seller (this means the seller takes it to the shipping station but adds the shipping cost from the shipping station to buyer s location on to the buyer s invoice). The shipping is billed (added to invoice) by the seller to the buyer. This is the most common way shipping is handled. When you buy something online, the seller adds shipping to your invoice. It can be FOB to destination (this means the seller will pay the shipping cost, buyer pays

6 nothing). For example, you buy something online and you get free shipping. The buyer pays nothing, the seller pays the shipping. It can also be sent FOB (free on Board) to shipping point COD (collect on delivery) or paid in advance. In this case it would say FOB to shipping point, but make no reference to the buyer being billed or invoiced by the seller. Your book and handout has examples for each of these. Keep in mind that shipping is not eligible for the discount. Summary of Shipping Costs for SELLER and how to journalize Transportation: 1. FOB to Destination- Seller pays all transportation costs, buyer pays NO transportation costs. Seller- Delivery Expense 100 (remember that the Buyer - No journal entry) 2. FOB to Shipping point and seller adds transportation cost to the buyer's invoice (bills the buyer for the transportation). Assume transportation cost is $100. Seller- AR 100 Remember for the Buyer it would be- AP 100

7 3. FOB to Shipping Point and buyer pays up front the transportation costs (it would then make no mention of being billed or invoiced for the transportation). Assume $100 transportation costs again. Seller - No journal entry Remember for the Buyer it would be- Let's put it all together. Sales made by accepting the good credit rating of a customer (no credit card is used) are placed in accounts receivable. Assume net 30 days when initially recording entry (If discount is allowed, it is recorded when customer pays). There are two entries needed, one for the sale, and one for the movement out of merchandise inventory into COMS (at cost). A third entry is needed for shipping when it is billed to the buyer on the invoice: AR 1,000 Sales 1,000 COGS 800 Merch. Inv. 800 AR 100 SALES RETURNS AND ALLOWANCES If a customer returns an item, you set up a returns and allowances account. Customer returns $200 of the above purchase. Cost to use was $160. Sales Returns and allowances 200 AR 200 Merch. Inv. 160 COMS 160

8 SELLER RECEIVES PAYMENT The Seller should receive cash for merchandise sold on AR, less any returns, and also for any shipping cost that were added. Remember shipping is not eligible for a discount. Assuming payment of the last two entries (sell and the return). Assume the sale if for 1,000 and terms are 2/10 with FOB to shipping point. Cost of merchandise is 800 and transportation of 100 was added to the buyers invoice: AR 1,000 Sales 1,000 COGS 800 Merch. Inv. 800 AR 100 Followed by the return of $200 and the cost to us was $160: Sales Returns and allowances 200 AR 200 Merch. Inv. 160 COMS 160 Now let's record the payment received from the buyer: Sale on AR Returns credited to AR + shipping 1, = 900 (credited to AR) 900 is the amount to close out AR. Assume a 2% discount: (AR shipping) * discount = Amount of Sales Discount ( ) * 2% = 16 discount (debit to Sales Discount) Cash to be received: AR balance Sales Discount = 884

9 To Journalize: Cash 884 Sales Discount 16 AR 900 NOTICE that Sales discounts and Sales returns and allowances are normally debited because they are reductions of Sales, which is usually credited!!! SUMMARY CHART FOR SHIPPING COSTS How to journalize Transportation ( = amount of transportation costs) Remember: Shipping is NOT eligible for a discount. Buyer FOB to Destination (seller pays all transportation costs, buyer pays no transportation costs) FOB to Shipping point and seller bills (invoices) buyer for transportation costs) FOB to Shipping point and not added to a bill or invoice (buyer may pay in advance or COD) No Entry Merchandise Inv. AP Merchandise Inv. Cash Seller Delivery Expense Cash AR Cash No Entry SALES TAXES Normally sales tax is added on to the sale and placed into a special state sales tax account and paid to the state once a month. It is a liability, until paid. Assume a sale of 100 and 6% sales tax AR (or Cash) 106 Sales 100 Sales tax payable 6

10 When paid, say the total in sales tax payable for the period is 2,900 Sales tax payable 2,900 Cash 2,900 INCOME STATEMENT There is the single step and multistep. More merchandising companies are using the multistep. Look at Single step Income Statement example in textbook. Look at Multistep Income Statement example in textbook. The multistep looks long but if you break it up into the three parts as illustrated, that will make it easier. You need to know how to both the single step and the multistep format for an income statement.