Accounting for Merchandising

BusinessFebruary 17, 2013

Learning Objectives

• Describe merchandising and identify business examples

• Describe merchandising activities and identify the components of income for a merchandising entity

• Describe the business documents used• Describe both perpetual and periodic inventory

systems.• Analyze and record transactions for merchandise

purchases

Service vs Merchandising

Service Business• Net income is the difference between its revenues

and the expenses incurred in providing the services

Merchandising Business• Earns net income by buying and selling

merchandise• Merchandise inventories represent goods intended

for sale

Wholesale vs Retail

Wholesaler• An intermediary that buys products from

manufacturers or other wholesalers and sells them to retailers or other wholesalers

Retailer• Buys products from the manufacturers or

wholesalers and sells them to consumers

Manufacturer Wholesaler Retailer Customer

Measuring Net Income

• Net income to a merchandiser implies that revenue from selling merchandise exceeds both the cost of the merchandise sold to customers and the cost of other expenses for the period.

Measuring Net Income

Net Income

(Loss)

Less

LessEquals

Equals

SalesRevenue

Cost of Goods Sold

Gross Profit

Operating Expenses

Sales Revenue – income earned in selling merchandise

Cost of Goods Sold – cost of merchandise sold during the period Operating Expenses – expenses

incurred in running the business

Operating Cycle for a Merchandiser

Purchases

Merchandiseinventory

Credit sales

Accountreceivable

CashcollectionPurchases

Merchandiseinventory

Cashsales

Cash SaleCash Sale Credit SaleCredit Sale

Business Documents

Main Source, Inc. Invoice614 Tech Avenue Date NumberNashville, TN 37651 5/4/05 358-BI

Sold To

Name: Barbee, Inc. Attn: Tom Bell Address: One Willow Plaza Cookeville, Tennessee 38501

P.O. 167 Sales: 25 Terms 2/10,n/30 Ship: FedEx PrepaidItem Description Quanity Price AmountAC417 250 Backup System 500 54.00$ 27,000$

Sub Total 27,000 We appreciate your business! Ship Chg. -

Tax - Total 27,000$

Inventory Systems

+

+

Beginninginventory

Beginninginventory

Net cost ofpurchasesNet cost ofpurchases

Merchandiseavailable for sale Merchandiseavailable for sale

Ending InventoryEnding Inventory Cost of GoodsSold

Cost of GoodsSold

=

Inventory Systems

Two alternative inventory accounting system:• Periodic Inventory System – cost of goods are

determined only at the end of an accounting period– Low Value, High Quantity Inventories

• Perpetual Inventory System – maintains detailed records of the cost of each inventory item and continuously show the inventory that should be on hand– High Value, Low Quantity Inventories

Periodic Inventory System

• Purchases – is debited when goods are bought from supplier; classified as part of the account Cost of Goods Sold upon sale or as Merchandising Inventory, an asset account, if unsold.

• The purchase account is used only for goods purchased for resale.

• The purchase transaction is normally recorded by the purchaser when the goods are received from the seller.

• Every purchase should be supported by business document that provide written evidence of the transaction.– Cash purchases – cash register receipt indicating the

items purchased– Credit purchases – purchase invoice indicating the total

purchase price and other relevant information

Periodic Inventory System

• Purchase returns and allowances account represents reduction in the cost of goods purchased. It is a contra account to purchase and its normal balance is credit.

• Debit memorandum – a document the purchaser issues to inform the supplier of a debit made to the supplier’s account, including the reason for the return or allowance.

Periodic Inventory System

• Purchase discount is based on the invoice cost less returns and allowances, if any.

• The Purchase Discount account is used to record the amount saved by paying promptly. It is a contra account having a normal credit balance.

Periodic Inventory System

Types of Discount

DISCOUNT

CASHDISCOUNT

TRADEDISCOUNT

PURCHASEDISCOUNT

SALEDISCOUNT

• Trade discounts are given to reduce the list price to actual sales price which may be due to the volume of transactions.

• A buyer and or the seller does not record the list prices and the trade discounts in its accounts. Instead, a buyer/seller records purchases or sales net of the trade discount (at invoice price).

Trade Discount

• Cash discounts are normally given to encourage prompt payment.

• Some common examples of cash discount terms:– 2/10, n/30– 2/10, 1/15, n/30– 2/10 EOM, n/60

Cash Discount

• On May 5, ABC Co. purchased merchandise from XYZ Co. worth P100,000 less 10, terms 2/10, n/30.

• On May 8, ABC Co. returned defective merchandise worth P10,000.

• On May 15, ABC Co. paid his balance to XYZ Co. in full.

Sample Transaction