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Merchandising Activities• A merchandising company is an enterprise that buys
and sells goods to earn a profit.1. Wholesalers sell to retailers.2. Retailers sell to consumers.
• A merchandiser’s primary source of revenue is sales, whereas a service company’s primary source of revenue is service revenue.
Financial Performance of a Merchandising Company
Sales Revenue
Cost ofGoods Sold
Cost ofGoods Sold
Less
Gross Profit
Gross Profit
Equals
Operating Expenses
Less
Net Income(Loss)
Equals
Merchandising Cash Flow
Beginning Inventory
Goods Purchased
during period
Cost of Goods Available for Sale
Ending Inventory
(Balance Sheet)
Cost of Goods Sold (Income
Statement)
Not Sold
Sold
Inventory Systems
Merchandising entities may use either (or both) of the following inventory systems:
1. Perpetual – where detailed records of each inventory purchase and sale are maintained. Cost of goods sold is calculated at the time of each sale.
2. Periodic – detailed records are not maintained. Cost of goods sold is calculated only at the end of the accounting period.
Recording Purchases
J1Date Account Title and Explanation Ref Debit CreditMay 4 Merchandise Inventory 3,800
Accounts Payable 3,800 To record goods purchased on account, terms n/30.
General Journal
For purchases on account, Merchandise Inventory is debited and Accounts Payable is credited. For cash purchases, Merchandise Inventory is debited and Cash is credited.
Accounting for Merchandise Purchases• To determine the inventory value, we must adjust
the invoice cost for:– Discounts given to a purchaser by a supplier.– Any returns and allowances for unsatisfactory items
received from a supplier.– Any required freight costs paid by a purchaser.
Trade Discounts vs. Purchase/Sales Discounts• Trade Discounts: Used by manufacturers and
wholesalers to change selling prices without republishing their catalogues. – Already deducted from the purchase price before the
transaction is recorded• Sales and Purchase Discounts: A deduction from
the invoice price granted to induce early payment of the amount due. Example – 2/10, n30 – Deducted after the initial journal entry that recorded the
purchase
Purchase Discounts
2/10,n/302/10,n/30Number of
Days Discount is Available
Number of Days
Discount is Available
Otherwise, Net (or All)
is Due
Otherwise, Net (or All)
is Due
Within CreditPeriod
Within CreditPeriod
Discount Percent
Discount Percent
Example• Purchased $900 of merchandise on credit on March
1st. Discount terms 2/10 n/30• Company paid the bill on March 10th.
Date Account Titles and Explanation PR Debit Credit
Mar. 1
Mar. 10
Merchandise Inventory Accounts Payable Purchased merchandise on account
Accounts Payable Merchandise Inventory CashPaid for Mar. 1 purchase within the discount period
900
900
900
18882
Purchase Returns and Allowances• Purchase returns are merchandise received by a purchaser
but returned to the supplier.• A purchase allowance is a reduction in the cost of defective
merchandise received by a purchaser from a supplier.• A debit memorandum is a form issued by the purchaser to
inform the supplier of a debit made to the supplier's account, including the reason for a return or allowance. Memorandum gets its name from the issuer.
• Entry (On the books of the purchaser) Debit Accounts Payable or Cash (if refund given) and Credit Inventory
Transportation Costs• FOB shipping point—buyer pays shipping costs.
– Title transfers at shipping point – Increases cost of merchandise– Debit Inventory, Credit Cash or Accounts Payable (if to
be paid for with merchandise later)• FOB destination—seller pays shipping costs.
– Title transfers at destination. – Operating expense for seller– Debit Delivery Expense (if you are the seller), Credit
Cash.
Accounting for Merchandise Sales• Sales transactions—Recording has two parts:
– Recognize revenue—Debit Accounts Receivable (or cash), Credit Sales (both for the invoice amount)
– Recognize cost—Debit Cost of Goods Sold, Credit Inventory (both for the cost of the inventory sold)
Example• A company sold $500 worth of merchandise for $800 on
credit on March 1st. Credit terms 3/10 n/EOM.
Date Account Titles and Explanation PR Debit Credit
Mar. 1 Accounts Receivable Revenue Sold merchandise on account
Cost of Goods Sold Merchandise Inventory To record the cost of merchandise
800
500
800
500
Sales Discounts• Discounts awarded to customers for payment within the
discount period. Recorded upon collection for sale. • Sales Discount is a contra-revenue account—subtraction
from Sales. • Collection after discount period—Debit Cash, Credit
Accounts Receivable (full invoice amount).• Collection within discount period—Debit Cash (invoice
amount less discount), Debit Sales Discount (discount amount), Credit Accounts Receivable (invoice amount).
Example
• Customer paid for March 1st purchase on March 8th.
Date Account Titles and Explanation PR Debit Credit
Mar. 8 CashSales Discounts Accounts Receivable Sold merchandise on account
776 24
800
Sales Returns and Allowances• Sales returns—merchandise customers return to
the seller after a sale. • Sales allowances—reductions in the selling price of
merchandise sold to customers (usually for damaged merchandise that a customer is willing to keep at a reduced price).
• Sales Returns and Allowances is a contra-revenue account—subtraction from Sales
Sales Returns and Allowances• Entry: Debit Sales Returns and Allowances and a
Credit Accounts Receivable.Additional entry if returned merchandise is saleable:Debit Inventory, Credit Cost of Goods Sold
• Sales Returns and Allowances is a contra-revenue account—subtraction from Sales.
Example• March 15: Customer purchased 100 items for $12
per item. Each item has a cost of $5.• March 18: Customer returned 5 items that were
damaged. Items were destroyed.• March 20: Customer returned 3 items that were the
wrong colour. Items were returned to inventory.
Example ContinuedDate Account Titles and Explanation PR Debit Credit
Mar. 15
Mar. 18
Mar. 20
Accounts Receivable Revenue
Cost of Goods Sold Merchandise Inventory
Sales Returns and Allowances Accounts Receivable
Sales Returns and Allowances Accounts Receivable
Merchandise Inventory Cost of Goods Sold
1200
500
60
36
15
1200
500
60
36
15
Shrinkage• An adjusting entry is required to account for any
inventory loss.• Shrinkage is determined by comparing a physical
count of the inventory with recorded quantities.• Entry: Debit Cost of Goods Sold, Credit Inventory