Chapter 5

Accounting for
Merchandising Businesses
Financial and Managerial Accounting
8th Edition
Warren Reeve Fess
PowerPoint Presentation by Douglas Cloud
Professor Emeritus of Accounting
Pepperdine University

Copyright 2004 South-Western, a division

of Thomson Learning. All rights reserved.
Task Force Image Gallery clip art included in this
electronic presentation is used with the permission of
NVTech Inc.

Some
Some of
of the
the action
action has
has been
been automated,
automated, so
so
click
click the
the mouse
mouse when
whenyou
you see
see this
this
lightning
lightning bolt
bolt in
in the
the lower
lower right-hand
right-hand
corner
corner of
of the
the screen.
screen. You
You can
can point
point and
and
click
click anywhere
anywhere on
on the
the screen.
screen.

Objectives
Objectives
1. Distinguish the activities of a service
After
studying
business from
of athis
merchandising
Afterthose
studying
this
business. chapter,
chapter, you
you should
should
2. Describe and illustrate
the financial
be
be able
able to:
to:
statements of a merchandising business.
3. Describe the accounting for the sale of
merchandise.
4. Describe the accounting for the
purchase of merchandise.

Objectives
Objectives
5. Describe the accounting for transportation costs,
sales taxes, and trade discounts.
6. Illustrate the dual nature of merchandising
transactions.
7. Prepare a chart of accounts for a merchandising
business.
8. Describe the accounting cycle for a
merchandising business.
9. Compute the ratio of net sales to assets as a
measure of how effectively a business is using
its assets.

Nature
Nature of
of Businesses
Businesses
Service Business
Fees earned
Operating expenses
Net income

$XXX
XXX
$XXX

Nature
Nature of
of Businesses
Businesses
Merchandising Business
Sales
Cost of Merchandise Sold
Gross Profit
Operating Expenses
Net Income

$XXX
XXX
$XXX
XXX
$XXX

Collection
Activity

Purchasing
Activity
Cash

Accounts
Receivable
Raw Materials
Products

Sales
Activity

Production
Activity

Multiple-Step
Income
Statement

NetSolutions
Income Statement For the Year Ended
December 31, 2007
Revenue from sales:
Sales
$720,185
Less:Sales returns and allowances $ 6,140
Sales discounts
5,790
11,930
Net sales
$708,255
Cost of merchandise sold
525,305
Gross profit
$182,950

Continued

Operating expenses:
Selling expenses:
Sales salaries expense
$56,230
Advertising expense
10,860
Depr. Expensestore equipment 3,100
Miscellaneous selling expense
630
Total selling expenses
$ 70,820
Administrative expenses:
Office salaries expense
$21,020
Rent expense
8,100
Depr. expenseoffice equipment 2,490
Insurance expense
1,910
Office supplies expense
610
Misc. administrative expense
760
Total admin. expenses
34,890
Total operating expenses
105,710
Income from operations
$ 77,240

Continued

Other income and expenses:

Rent revenue
Interest expense
Net income

Concluded

$ 600
(2,440)

(1,840)
$75,400

Periodic
Periodic vs.
vs. Perpetual
Perpetual Methods
Methods of
of
Accounting
Accounting
Periodic Method
A method of determining the cost of merchandise
sold and the amount of merchandise on hand
Under this method, the inventory records do not
show the amount available for sale or the amount
sold during the period

Periodic
Periodic vs.
vs. Perpetual
Perpetual Methods
Methods of
of
Accounting
Accounting
Perpetual Method
Under this method, each purchase and sale of
merchandise is recorded in the inventory and the
cost of merchandise sold accounts.
The amount of merchandise available for sale
and the amount sold are continuously disclosed in
the inventory records.

Cost
Cost of
of Merchandise
Merchandise Purchased
Purchased
Purchases
Less: Purchase returns and
allowances
$9,100
Purchase discounts
2,525
Net purchases
Add transportation-in
Cost of merchandise purchased

$521,980

11,625
$510,355
17,400
$527,755

Cost
Cost of
of Merchandise
Merchandise Sold
Sold
Merchandise inventory, 1/1/07
$ 59,700
Purchases
$521,980
Less: Purchase returns and
allowances
$9,100
Purchase discounts
2,525
11,625
Net purchases
$510,355
Add transportation-in
17,400
Cost of merchandise purchased
527,755
Merchandise available for sale
$587,455
Less merchandise inventory, 12/31/07
62,150
Cost of merchandise sold
$525,305

Single-Step Income
Statement for a
Merchandising
Business

NetSolutions
Income Statement
For the Year Ended December 31, 2007
Revenues:
Net sales
Rent revenue
Total revenues
Expenses:
Cost of merchandise sold
Selling expenses
Administrative expenses
Interest expense
Total expenses
Net income

$708,255
600
$708,855
$525,305
70,820
34,890
2,440
633,455
$ 75,400

Retained Earnings
Statement

NetSolutions
Retained Earnings Statement
For the Year Ended December 31, 2007

Retained earnings, 1/1/07

Net income for year
Less dividends
Increase in owners equity
Retained earnings, 12/31/07

$128800
$75,400
18,000
57,400
$186,200

Balance Sheet

NetSolutions
Balance Sheet
December 31, 2007
Assets
Current assets:
Cash
Accounts receivable
Merchandise inventory
Office supplies
Prepaid insurance
Total current assets

Continued

$52,950
91,080
62,150
480
2,650
$209,310

Property, plant, and equipment:

Land
$20,000
Store equipment
$27,100
Less accumulated
depreciation
5,70021,400
Office equipment
$15,570
Less accumulated
depreciation
4,72010,850 Total property, plant, and
equipment
52,250
Total assets
$261,560

Continued

Liabilities
Liabilities
Current
Current liabilities:
liabilities:
Accounts
$22,420
Accounts payable
payable
$22,420
Note
5,000
Notepayable
payable(current
(current portion)
portion)
5,000
Salaries
1,140
Salariespayable
payable
1,140
Unearned
1,800
Unearnedrent
rent
1,800
Total
$$ 30,360
Totalcurrent
currentliabilities
liabilities
30,360
Long-term
Long-term liabilities:
liabilities:
Note
20,000
Notepayable
payable(due
(due 2017)
2017)
20,000
Total
$$ 50,360
Totalliabilities
liabilities
50,360
Stockholders
StockholdersEquity
Equity
Capital
$$ 25,000
Capitalstock
stock
25,000
Retained
186,200
Retainedearnings
earnings
186,200 211,200
211,200
Total
Totalliab.
liab.and
andstockholders
stockholdersequity
equity

$261,560
$261,560

Sales
Sales Transactions
Transactions

Cash
Cash Sales
Sales
JOURNAL
Description

Date
2007

1 Jan. 3 Cash
2
3
4

PAGE 26
Post.
Ref.

Dr

Cr.

1 800 00

Sales

To record cash sales.

On
On January
January 3,
3, aa firm
firm sold
sold $1,800
$1,800
of
of merchandise
merchandise for
for cash.
cash.

1 800 00

Cash
Cash Sales
Sales
6

3 Cost of Merchandise Sold

Merchandise Inventory

8
9

1 200 00
1 200 00

To record the cost of

merchandise sold.

10

Using
Using aa perpetual
perpetual inventory,
inventory, the
the inventory
inventory
cost
cost of
of $1,200
$1,200 must
must be
be recorded.
recorded.

Cash
Cash Sales
Sales
JOURNAL
Description

Date
2007

1 Jan. 31 Credit Card Expense

2
3
4
5

PAGE 28
Post.
Ref.

Dr

Cr.

48 00

Cash

To record service charges

on credit card sales for the
month.

At
Credit
the
card
sales
the
(MasterCard
$48
or
At
Credit
the end
end
cardof
of
sales
the month,
month,
(MasterCard
$48 was
was
or
sent
Visa)
to
cover
recorded
this
as
charge.
sales.
sent
Visa)
toare
are
cover
recorded
this service
service
as cash
cash
charge.
sales.

48 00

Sales
Sales on
on Account
Account
Jan. 12 Accounts ReceivableSims Co.

510 00

Sales

510 00

Invoice No. 7172.

12 Cost of Merchandise Sold
Merchandise Inventory

280 00
280 00

Cost of merchandise sold

on Invoice No. 7172.

On
On January
January 12,
12, aa firm
firm sold
sold Sims
Sims Company
Company
merchandise
merchandise on
on account,
account, $510.
$510. The
The cost
cost of
of
the
the merchandise
merchandise to
to the
the seller
seller was
was $280.
$280.

Sales
Sales Discounts
Discounts
The
The terms
terms for
for when
when payments
payments for
for
merchandise
merchandise are
are to
to be
be made
made are
are
called
called credit
credit terms.
terms.
IfIf buyer
buyer isis allowed
allowed an
an
amount
amount of
of time
time to
to pay,
pay, itit isis
known
known as
as the
the credit
credit period.
period.

Sales
Sales Discounts
Discounts
Credit Terms
If invoice is
paid within
10 days of
invoice date
$1,470 paid (less
2% as a cash
discount)

Invoice for
$1,500
Terms:
2/10, n/30

Sales
Sales Discounts
Discounts
Credit Terms

Invoice for
$1,500
Terms:
2/10, n/30

If invoice is
NOT paid
within 10
days of
invoice date
$1,500 PAID

Sales
Sales Discounts
Discounts
Jan. 22 Cash

1 470 00

Sales Discounts
Accounts ReceivableSims Co.

30 00
1 500 00

Collection of Invoice
No. 7172, less discount.

On
On January
January 22,
22, the
the firm
firm receives
receives $1,470
$1,470
from
from Sims
Sims Co.
Co. which
which isis the
the amount
amount due
due of
of
$1,500
$1,500 less
less aa 22 percent
percent discount.
discount.

Sales
Sales Returns
Returns and
and Allowances
Allowances
Merchandise
Merchandise that
that isis returned
returned to
to the
the
vendor
vendor isis referred
referred to
to as
as aa sales
sales return.
return.
IfIf there
there isis aa defect
defect in
in the
the product
product or
or the
the
wrong
wrong item
item was
was shipped,
shipped, the
the seller
seller
may
may reduce
reduce the
the initial
initial price
price at
at which
which
the
the goods
goods were
were sold.
sold. This
This isis known
known as
as
aa sales
sales allowance.
allowance.

Sales
Sales Returns
Returns and
and Allowances
Allowances
Jan. 13 Sales Returns and Allowances

225 00

Accounts ReceivableKrier Co.

225 00

Credit Memo No. 32.

13 Merchandise Inventory
Cost of Merchandise Sold
Cost of merchandise
returnedCredit Memo 32.

140 00
140 00

On
On January
January 13,
13, issued
issued Credit
Credit Memo
Memo 32
32 to
to Krier
Krier
Company
Company for
for merchandise
merchandise returned
returned to
to NetSolutions.
NetSolutions.
Selling
Selling price,
price, $225;
$225; cost
cost to
to NetSolutions,
NetSolutions, $140.
$140.

Purchase
Purchase
Transactions
Transactions

Purchase
Purchase Transactions
Transactions
Date

Description

2007

1 Jan. 3 Merchandise Inventory

2
3
4

Cash
Purchased inventory from

Post.
Ref.

Dr

Cr.

2 510 00
2 510 00

Bowen Co.

On
On January
January 13,
13, Purchased
Purchased merchandise
merchandise
for
for cash
cash from
fromAlden
Alden Company,
Company, $2,510.
$2,510.

Purchase
Purchase Discounts
Discounts
Whats
Whats the
the last
last
day
day the
the invoice
invoice
can
can be
be paid?
paid?
Alpha
Alpha Technologies
Technologies
issues
issues an
an invoice
invoice for
for
$3,000
$3,000 to
to
NetSolutions
NetSolutions dated
dated
March
March 12,
12, with
with terms
terms
2/10,
2/10, n/30.
n/30.

Purchase
Purchase Discounts
Discounts
The
The full
full amount
amount isis
Lets
do
due
on
11.
Lets
do aa simple
simple
due
on April
April
11.
calculation.
calculation.

Invoice period
Days in March 31
Date of invoice 12
Remaining days
April

30
19
11

Purchase
Purchase Discounts
Discounts
We
Wecan
can borrow
borrow at
at an
an annual
annual interest
interest rate
rate
of
of 6%.
6%. Should
Should we
we borrow
borrow the
the to
to pay
pay the
the
invoice
invoice within
within the
the discount
discount period?
period?
$60
$60 discount
discount
(2%
(2% xx
$3,000)?
$3,000)?

Purchase
Purchase Discounts
Discounts
Lets
Lets see
see Interest
Interest on
on
the
the amount
amount due
due of
of $3,000
$3,000
less
less the
the 22 percent
percent

Discount
$60.00
Interest for 20 days
at the rate of 6%
on $2,940
9.80
Savings from
borrowing
$50.20

Purchase
Purchase Discounts
Discounts
Looks
Looks like
like we
we should
should take
take
advantage
advantage of
of the
the discount
discount even
even ifif
we
we have
have to
to borrow
borrow the
the money.
money.
Discount
$60.00
Interest for 20 days
at the rate of 6%
on $2,940
9.80
Savings from
borrowing
$50.20

Purchase
Purchase Discounts
Discounts
JOURNAL
Date

Description

2007

1 Mar. 12 Merchandise Inventory

2
3
4

PAGE 27
Post.
Ref.

Dr

Cr.

3 000 00

Accounts PayableAlpha
Technologies

On
On March
March 12,
12, NetSolutions
NetSolutions purchased
purchased
merchandise
merchandise on
on account
account from
fromAlpha
Alpha
Technologies,
Technologies, $3,000.
$3,000.

3 000 00

Purchase
Purchase Discounts
Discounts
JOURNAL
Description

Date
2007

1 Mar. 22 Accounts PayableAlpha Technol.

2

Cash

3
4

Merchandise Inventory

PAGE 27
Post.
Ref.

Dr

Cr.

3 000 00
2 940 00
60 00

IfIf payment
payment isis made
made by
by March
March 22
22 NetSolutions
NetSolutions
records
records the
the discount
discount as
as aa reduction
reduction in
in cost.
cost.

Purchase
Purchase Discounts
Discounts
JOURNAL
Description

Date
2007

1 Apr. 11 Accounts PayableAlpha Technol.

2

Cash

PAGE 27
Post.
Ref.

Dr

Cr.

3 000 00
3 000 00

3
4
5

IfIf NetSolutions
NetSolutions does
does not
not pay
pay the
the invoice
invoice until
until
April
April 11,
11, itit would
would pay
pay the
the full
full amount.
amount.

Purchases
Purchases Returns
Returns and
and Allowances
Allowances
A
Apurchases
purchases return
return involves
involves actually
actually
returning
returning merchandise
merchandise that
that isis
damaged
damaged or
or does
does not
not meet
meet the
the
specifications
specifications of
of the
the order.
order.
When
When the
the defective
defective or
or incorrect
incorrect
merchandise
merchandise isis kept
kept by
by the
the buyer
buyer and
and
the
the vendor
vendor makes
makes aa price
price adjustment,
adjustment,
this
this isis aa purchases
purchases allowance.
allowance.

Purchases
Purchases Returns
Returns and
and Allowances
Allowances
You
You sent
sent me
me the
the wrong
wrong interface
interface cards.
cards.
Well
Well send
send aa debit
debit memorandum
memorandum with
with the
the
returned
returned items.
items.
NetSolutions
NetSolutions received
received the
the
delivery
delivery from
from Maxim
Maxim
Systems
Systems and
and determined
determined that
that
$900
$900 of
of the
the items
items were
were not
not
the
the merchandise
merchandise ordered.
ordered.
Debit
Debit memorandum
memorandum #18
#18 isis
issued
issued to
to Maxim
Maxim Systems.
Systems.

Purchases
Purchases Returns
Returns and
and Allowances
Allowances
Mar. 7 Accounts PayableMaxim Systems
Merchandise Inventory
Debit Memo No. 18

900 00
900 00

Purchases
Purchases Returns
Returns and
and Allowances
Allowances
On
On May
May 2,
2, NetSolutions
NetSolutions purchased
purchased $5,000
$5,000
of
of merchandise
merchandise from
from Delta
Delta Data
Data Link,
Link,
subject
subject to
to terms
terms 2/10,
2/10, n/30.
n/30.
May 2 Merchandise Inventory
Accounts PayableDelta Data
Purchased merchandise.

5 000 00
5 000 00

Purchases
Purchases Returns
Returns and
and Allowances
Allowances
On
On May
May 4,
4, NetSolutions
NetSolutions returns
returns
$3,000
$3,000 of
of the
the merchandise.
merchandise.
May 4 Accounts PayableDelta Data Links
Merchandise Inventory
Returned portion of
merchandise purchased.

3 000 00
3 000 00

Purchases
Purchases Returns
Returns and
and Allowances
Allowances
On
On May
May 12,
12, NetSolutions
NetSolutions pays
pays the
the amount
amount due.
due.
May 12 Accounts PayableDelta Data Links
Cash
Merchandise Inventory
Paid invoice.

2 000 00

($5,000
($5,000
$3,000)
$3,000) xx
2%
2%

1 960 00
40 00

Transportation
Costs

FOB
FOB Shipping
Shipping Point
Point
Buyer pays freight costs and debits
Merchandise Inventory

Fruit Express

Title
Title passes
passes to
to buyer
buyer as
as
shipment
shipment leaves
leaves
shipping
shipping point.
point.

FOB
FOB Shipping
Shipping Point
Point
June 10 Merchandise Inventory
Accounts PayableMagna Data
Purchased merchandise, terms
FOB shipping point.

900 00

10 Merchandise Inventory
Cash
Paid shipping cost on
merchandise purchased.

50 00

900 00

50 00

On
On June
June 10,
10, NetSolutions
NetSolutions buys
buys merchandise
merchandisefrom
from
Magna
Magna Data
Data on
on account,
account, $900,
$900, terms
terms FOB
FOB shipping
shipping
point
point and
and pays
pays the
the transportation
transportation cost
cost of
of $50.
$50.

FOB
FOB Destination
Destination
Seller pays freight costs and debits
Transportation Out

Fruit Express

Title
Title passes
passes to
to buyer
buyer
upon
upon arrival
arrival at
at
destination.
destination.

FOB
FOB Destination
Destination
June 15 Accounts ReceivableKranz Co.
Sales
Sold merchandise, terms FOB
destination.
15 Cost of Merchandise Sold
Merchandise Inventory

700 00
700 00

480 00
480 00

Cost of sale of Kranz Co .

On
On June
June 15,
15, NetSolutions
NetSolutions sells
sells merchandise
merchandise to
to Kranz
Kranz
Company
Company on
on account,
account, $700,
$700, terms
terms FOB
FOB destination.
destination.
The
The cost
cost of
ofthe
the merchandise
merchandise sold
sold isis $480.
$480.
NetSolutions
NetSolutions pays
pays the
the transportation
transportation cost
cost of
of$40.
$40.

FOB
FOB Destination
Destination
June 15 Transportation Out
Cash
Paid shipping cost on
merchandise sold.

40 00
40 00

On
On June
June 15,
15, NetSolutions
NetSolutions sells
sells merchandise
merchandise to
to Kranz
Kranz
Company
Company on
on account,
account, $700,
$700, terms
terms FOB
FOB destination.
destination.
The
The cost
cost of
ofthe
the merchandise
merchandise sold
sold isis $480.
$480.
NetSolutions
NetSolutions pays
pays the
the transportation
transportation cost
cost of
of$40.
$40.

Sales
Sales Taxes
Taxes
Aug. 12 Accounts ReceivableLemon Co.

106 00

Sales
Sales Taxes Payable
Invoice No. 339

On
On August
August 12,
12, merchandise
merchandise isis sold
sold on
on
account
account to
to Lemon
Lemon Company,
Company, $100.
$100. The
The
state
state has
has aa 6%
6% sales
sales tax.
tax.

100 00
6 00

Sales
Sales Taxes
Taxes
Sept.15 Sales Tax Payable
Cash
Payment for sales taxes
collected during August.

2 900 00
2 900 00

On
On September
September 15,
15, the
the seller
seller sends
sends in
in aa
payment
payment of
of $2,900
$2,900 to
to the
the taxing
taxing unit
unit for
for
the
the August
August taxes
taxes collected.
collected.

Illustration
Illustration of
of Accounting
Accounting for
for
Merchandise
Merchandise Transactions
Transactions
Scully Company (Seller)

Accounts ReceivableBurton Co.

Sales

7,500

Cost of Merchandise Sold

Merchandise Inventory

4,500

7,500
4,500

Burton Company (Buyer)

Merchandise Inventory.
Accounts PayableScully Co.

7,500

7,500

July 1. Scully Company sold merchandise on account

to Burton Co., $7,500, terms FOB shipping point, n/45.
The cost of the merchandise sold was $4,500.

Illustration
Illustration of
of Accounting
Accounting for
for
Merchandise
Merchandise Transactions
Transactions
Scully Company (Seller)

No entry.

Burton Company (Buyer)

Merchandise Inventory
Cash

150

150

July 2. Burton Company paid transportation charges of

$150 on July 1 purchase from Scully Company.

Illustration
Illustration of
of Accounting
Accounting for
for
Merchandise
Merchandise Transactions
Transactions
Scully Company (Seller)

Accounts ReceivableBurton Co.

Sales

5,000

Cost of Merchandise Sold

Merchandise Inventory

3,500

5,000
3,500

Burton Company (Buyer)

Merchandise Inventory.
Accounts PayableScully Co.

5,000

5,000

July 5. Scully Company sold merchandise on account

to Burton Co., $5,000, terms FOB shipping point,
n/30. The cost of the merchandise sold was $3,500.

Illustration
Illustration of
of Accounting
Accounting for
for
Merchandise
Merchandise Transactions
Transactions
Scully Company (Seller)

Transportation Out
Cash

250

250

Burton Company (Buyer)

No entry.
July 7. Scully Company paid transportation costs
of $250 for delivery of merchandise sold to
Burton Company on July 5.

Illustration
Illustration of
of Accounting
Accounting for
for
Merchandise
Merchandise Transactions
Transactions
Scully Company (Seller)

Sales Returns and Allowances

Accounts ReceivableBurton Co.
Merchandise Inventory
Cost of Merchandise Sold

1,000
700

1,000
700

Burton Company (Buyer)

Accounts PayableScully Co.

Merchandise Inventory

1,000

1,000

July 13. Scully Company issued Burton Company a credit

memorandum for $1,000 of merchandise returned from a July 5
purchase on account. The cost of the merchandise was $700.

Illustration
Illustration of
of Accounting
Accounting for
for
Merchandise
Merchandise Transactions
Transactions
Scully Company (Seller)

Cash
Accounts ReceivableBurton Co.

4,000

4,000

Burton Company (Buyer)

Accounts PayableScully Co.

Cash

4,000

4,000

July 15. Scully Company received payment

from Burton Company for purchase of July 5.

Illustration
Illustration of
of Accounting
Accounting for
for
Merchandise
Merchandise Transactions
Transactions
Continued (Seller)

Cost of Merchandise Sold

Merchandise Inventory

7,200

7,200

Burton Company (Buyer)

July 18. Scully Company sold merchandise on account to Burton

Company, $12,000, terms FOB shipping point, 2/10, n/eom. Scully
prepaid transportation costs of $500, which were added to the
invoice. The cost of the merchandise sold was $7,200.

Illustration
Illustration of
of Accounting
Accounting for
for
Merchandise
Merchandise Transactions
Transactions
Scully Company (Seller)

Cost of Merchandise Sold

Merchandise Inventory

7,200

7,200

Burton Company (Buyer)

Merchandise Inventory
Accounts PayableScully Co.

12,500

12,500

July 18. Scully Company sold merchandise on account to Burton

Company, $12,000, terms FOB shipping point, 2/10, n/eom. Scully
prepaid transportation costs of $500, which were added to the
invoice. The cost of the merchandise sold was $7,200.

Illustration
Illustration of
of Accounting
Accounting for
for
Merchandise
Merchandise Transactions
Transactions
Scully Company (Seller)

Cash
Sales Discounts
Accounts ReceivableBurton Co.

12,260
240

12,500

Burton Company (Buyer)

Accounts PayableScully Co.

Merchandise Inventory
Cash

12,500

July 28. Scully Company received payment

from Burton Company for purchase of July
18, less discount (2% x $12,000).

240
12,260

NetSolutions
Chart of Accounts
Balance Sheet Accounts
110
112
115
116
117
120
123
124
125
126

100 Assets
Cash
Accounts Receivable
Merchandise Inventory
Office Supplies
Prepaid Insurance
Land
Store Equipment
Accumulated Depreciation
Store Equipment
Office Equipment
Accumulated Depreciation
Office Equipment

210
211
212
215

200 Liabilities
Accounts Payable
Salaries Payable
Unearned Rent
Notes Payable

300
310
311
312
313

Stockholders Equity
Capital Stock
Retained Earnings
Dividends
Income Summary

NetSolutions
Chart of Accounts
Income Statement Accounts
400 Revenues
410 Sales
411 Sales Returns and
Allowances
412 Sales Discounts
600 Other Income
610 Rent Revenue
700 Other Expense
710 Interest Expense

500 Costs and Expenses

510 Cost of Merchandise Sold
520 Sales Salaries Expense
521 Advertising Expense
522 Depreciation Expense
Store Equipment
523 Transportation Out
529 Miscellaneous Selling Expense
530 Office Salaries Expense
531 Rent Expense
532 Depreciation Expense
Office Equipment
533 Insurance Expense
534 Office Supplies Expense
539 Miscellaneous Admin. Expense

Merchandise
Merchandise Inventory
Inventory
Shrinkage
Shrinkage
NetSolutions
NetSolutions inventory
inventory
records
records indicate
indicate that
that
$63,950
$63,950 of
of merchandise
merchandise
should
should be
be available
available for
for sale
sale
on
on December
December 31,
31, 2007.
2007.
The
The physical
physical count
count reveals
reveals
that
that only
only $62,150
$62,150 isis
actually
actually available.
available.

Merchandise
Merchandise Inventory
Inventory
Shrinkage
Shrinkage
Adjusting Entry
Dec. 31 Cost of Merchandise Sold

1 800 00

Merchandise Inventory

Inventory records $63,950

Inventory count
62,150
Inventory shortage $ 1,800

1 800 00

Profitability Measures -- Effective Use of Assets

Ratio
Ratio of
of Net
Net Sales
Sales to
toAssets
Assets
Net sales
Total assets:
Beginning of year
End of year
Average
Ratio of net sales to assets

Sears
Penney
$41,366,000 $31,846,000

$50,409,000 $19,742,000
$44,317,000 $20,908,000
$47,363,000 $20,325,000
.87 to 1

1.57 to 1

Ratio
Ratio Use:
Use: To
Toassess
assess the
the effectiveness
effectiveness in
in the
the
use
useof
of assets
assets to
to generate
generate sales.
sales.

Chapter 5
The
The End
End