ACCOUNTING FOR MERCHANDISING

We learned from the previous chapter, the accounting for the simplest type of business the
service company/business. This business renders services to customers or client for a fee. While
Merchandising represents goods or items intended for sale by a merchandiser in the normal
course of business operations.

A merchandising business differs from a service company/business. Accounting for a

merchandising business is more complex that a service business. For example the accounting
system for a merchandiser must be designed to record the receipt of goods for resale’s, keep tract
of the goods available for sales, and record the sale and cost of the merchandise sold.

In this hand outs you will focus on the accounting principles and concepts for merchandising
business. We begin our discussion by highlighting the basic differences between the activities of
a service and merchandising business. The revenue activities of a service business involve
providing services to customers. In contrast, the revenue activities of merchandising business
must first purchase merchandise for sale. When this merchandise is sold, the revenue is reported
as sales.

ACCOUNTING FOR INVENTORIES

The cost of inventory is a significant item in many business financial statements. Thus
goods internal control over inventory must be maintained. The primary objectives of internal
control over inventory are safeguarding the inventory and properly reporting it in the financial
statement

THE TWO ACCOUNTING SYSTEMS USED FOR INVENTORIES ARE:

1. Perpetual Inventory System

2. Periodic Inventory System

PERPETUAL INVENTORY SYSTEM

The perpetual inventory system provides records of the quantity and cost of each item of
inventory and continuously show the cost of goods on hand. This inventory system has
traditionally been used by companies that sell high-unit value items such as automobiles,
computers, stereo, air-condition furniture etc.
Under the perpetual inventory method, the cost of each item is debited to the
MERCHANDISE INVENTORY account as it is purchased. As item are sold, the
MERCHANDISE INVENTORY ACCOUNT is credited and the COST OF GOODS SOLD is
debited for the cost of the item sold.

PERIODIC INVENTORY SYSTEM

Under the periodic inventory system, the count of the physical inventory takes place
periodically, usually at the end of the accounting period, and no detailed records of the physical
on hand are maintained during the period. The PURCHASES account is used to record the cost
of merchandise bought by the business. When merchandise is sold, revenue is recorded but not
the cost of merchandise sold.
The periodic inventory system is used by merchandising is used by merchandising with
low value items of inventory. This is used for its simplicity but it provides little control over
inventory. Any items not included in the physical count of inventory at the end of the period are
assumed to have been sold.

Some common examples of cash discount terms are: (Seller view point cash discount is called
SALES DISCOUNT., buyer’s view point is called PURCHASE DISCOUNT).
1) 2/10 2) 2/10, 1/15, n/30 3) 2/EOM, n/60

Transportation of goods
1. FOB Shipping point – the term means free on board at shipping point. The purchases or
buyer agreed to shoulder all the transportation cost from the point of shipment up to the
point of destination.. the buyer receives title to the goods at shipping point
2. FOB Destination – the term means free on board at destination. The seller agreed to
shoulder all the transportation cost from the point of shipment up to the point of destination.
The buyer receives title to the goods at point of destination.
 1. Freight In – the freight in account is used to record freight cost incurred by the buyer in
acquiring the merchandise. Another name for freight in is transportation in which has a
normal debit balance. Freight in is shown in the Cost of Goods Sold section of the
Income statement or Statement of Performance. It is added to purchases to arrive at the
total cost of goods purchased.

2. Freight Out – the freight out account is used to record shipping costs shouldered by the
seller for sales of merchandise to customers. Another term is Delivery expense which is
shown in the Selling Expense section of the Income Statement.

A. Sales Transaction
B. Purchases transaction
1. Cash sales, 15,000 1. Cash purchase of goods 35,000
2. Sales on account, 20,000 2. Goods to be sold are purchased for 22,000.
3. Sales of 50,000 for cash of 20,000, Terms: N/30
balance on account. 3. Purchase of merchandise, 60,000. Terms:
4. Good costing 40,000 are sold for 20,000 cash, balance on account.
60,000. Terms: Cash of 50,000 4. Goods are purchased for 70,000 by giving a
balance in a 60-day promissory note. 60-day, promissory note.
5. Goods costing 25,000 are sold for 5. Some of the goods purchased are found to
50,000. Terms: 8,000 cash, 12,000 be defective and are returned to the
collectible in seven (7) days, and supplier. A cash refund of 7,000 is received.
remainder in a 30-day-note. 6. Some of the goods purchased in No.2 are
found to be defective. Upon notifying the
6. The customer in No. 1 returns some
supplier, an allowance of 3,000 is granted
of the items sold to him for being
to the business
defective. Refund of 5,000 is made.
7. Goods ae purchased for 38,000 on account.
7. The customer in No.2 notifies us that A discount of 1,500 may be availed of if the
some of the goods he bought were account is paid with ten days
defective. An Allowance of 1,000 is 8. The account in No.7 is paid after eight (8)
granted. days.
8. Goods costing 32,000 are sold for 9. Freight charges on purchases totaling 6,500
45,000, on account. A discount of Are paid.
1,000 is to be granted if the customer
pays within 10 days
9. The customer in No.8 pay his
account in full after 6 days.

C. Transactions:
1. Purchased merchandise on account, 50,000. Terms 2/10, n/30
2. Paid transportation cost of merchandise purchased 2,000
3. Returned 3,000 worth of goods purchased in (1)
4. Paid within the discount period the purchases made in (1)
5. Merchandise costing 10,000 were sold on account for 20,000. Terms 2/10, n/30
6. Merchandise costing 2,000 were returned from transaction (5). The goods were sold for 4,000.
7. Collected within the discount period the sales made in number (5), less the return made in number (6)