Accounting for

Merchandising Operations
Chapter 5

Wild and Shaw

Fundamental Accounting Principles
24th Edition
 Chapter 5 Learning Objectives
CONCEPTUAL
C1 Describe merchandise activities and identify income components for a merchandising company.
C2 Identify and explain the inventory asset and cost flows of a merchandising company.

PROCEDURAL
P1 Analyze and record transactions for merchandise purchases using a perpetual system.
P2 Analyze and record transactions for merchandise sales using a perpetual system.
P3 Prepare adjustments and close accounts for a merchandising company.
P4 Define and prepare multiple-step and single-step income statements.
 Learning Objective C1

Describe merchandise
activities and identify income
components for a
merchandising company.

3
 Reporting Income for a Service
Organization
Service organizations sell time to
earn revenue.

Examples: Accounting firms, law firms,

and plumbing services Exhibit
5.1

Learning Objective C1: Describe merchandise activities and identify income components for a
merchandising company.
Reporting Income for a Merchandiser
Merchandising companies sell products to
earn revenue.
Examples: sporting goods, clothing, and auto parts stores

Exhibit
5.2

Learning Objective C1: Describe merchandise activities and identify income components for
a merchandising company.
 Learning Objective C2

Identify and explain the

inventory asset and cost flows
of a merchandising company.
 Operating Cycle for
a Merchandiser
Begins with the purchase of merchandise and
ends with the collection of cash from the sale
of merchandise.
Exhibit
5.3

Learning Objective C2: Identify and explain the inventory asset and cost flows of
a merchandising company.
 Inventory Systems: Graphic

Exhibit
5.4

Learning Objective C2: Identify and explain the inventory asset and cost flows of
a merchandising company.
 Inventory Systems: Definitions

➢Perpetual systems ➢Periodic systems

➢ updates accounting ➢ Updates records for
records for each purchase and sale of
purchase and sale of merchandise only at the
merchandising end of the accounting
period

Learning Objective C2: Identify and explain the inventory asset and cost flows of
a merchandising company.
 Learning Objective P1

Analyze and record

transactions for merchandise
purchases using a perpetual
system.
 Purchases without Cash Discounts
On November 2, Z-Mart purchased $500 of
merchandise inventory for cash.

Learning Objective P1: Analyze and record transactions for merchandise purchases using
a perpetual system.
 Purchases with Cash Discounts
On November 2, Z-Mart purchased $500 of
merchandise inventory on account, credit
terms are 2/10, n/30.

Learning Objective P1: Analyze and record transactions for merchandise purchases using
a perpetual system.
 Purchase Discounts

2/10,n/30
Number of
Otherwise,
Discount Days Credit
Net (or All)
Percent Discount Is Period
Is Due in 30
Available
Days
Learning Objective P1: Analyze and record transactions for merchandise purchases
using a perpetual system.
 Credit Terms
A deduction from the invoice price granted
to induce early payment of the amount due.

Exhibit
5.5

Learning Objective P1: Analyze and record transactions for merchandise purchases
using a perpetual system.
 Invoice Exhibit
5.6

Learning Objective P1: Analyze and record transactions for merchandise purchases using
a perpetual system.
 Payment within Discount
Period: Journal Entry
On November 12, Z-Mart paid the amount
due on the purchase of November 2.

Learning Objective P1: Analyze and record transactions for merchandise purchases using a perpetual system.
 Payment within Discount
Period: Ledger Accounts
After we post these entries, the accounts
involved look like these:

Learning Objective P1: Analyze and record transactions for merchandise purchases using a perpetual system.
 Payment after Discount Period
On December 2, Z-Mart paid the amount
due on the purchase of November 2.

Learning Objective P1: Analyze and record transactions for merchandise purchases using a perpetual system.
 Purchases with Returns and
Allowances
Purchase Return:
Merchandise returned by the purchaser to the
supplier.
Purchase Allowance:
A price reduction to the buyer of defective or
unacceptable merchandise.

Learning Objective P1: Analyze and record transactions for merchandise purchases using a perpetual system.
 Purchases Allowances
On November 5, Z-Mart (buyer) issues a $30
debit memorandum for an allowance from
Trex for defective merchandise.

Learning Objective P1: Analyze and record transactions for merchandise purchases using a perpetual system.
 Purchases Returns
Z-Mart purchases $250 of merchandise on June 1 with terms 2/10,
n/60. On June 3, Z-Mart returns $50 of goods before paying the
invoice. When Z-Mart pays on June 11, it takes the 2% discount
only on the $200 remaining balance.

Learning Objective P1: Analyze and record transactions for merchandise purchases using a perpetual system.
 Purchases and Transportation Costs
Exhibit
5.7

Learning Objective P1: Analyze and record transactions for merchandise purchases using a perpetual system.
 Transportation Costs
Z-Mart purchased merchandise on terms of
FOB shipping point. The transportation
charge is $75.

Learning Objective P1: Analyze and record transactions for merchandise purchases using a perpetual system.
 Itemized Costs of Purchases
Exhibit
5.8

Learning Objective P1: Analyze and record transactions for merchandise purchases using a perpetual system.
 Learning Objective P2

Analyze and record

transactions for merchandise
sales using a perpetual system.

25
 Accounting for Merchandise
Sales
Exhibit
5.9

26
Learning Objective P2: Analyze and record transactions for merchandise sales using a perpetual system.
 Sales of Merchandise
Each sales transaction for a seller of
merchandise involves two parts:

Revenue received
Recognition of the
in the form of an
cost of merchandise
asset from a
sold to a customer.
customer.

Learning Objective P2: Analyze and record transactions for merchandise sales using a perpetual system.
 Sales without Cash Discounts
Z-Mart sold $1,000 of merchandise on credit. The
merchandise has a cost basis to Z-Mart of $300.
Revenue side journal entry:

Cost side journal entry:

Learning Objective P2: Analyze and record transactions for merchandise sales using a perpetual system.
 Sales Discounts
Sales discounts on credit sales can benefit a seller by
decreasing the delay in receiving cash and reducing future
collection efforts.

Learning Objective P2: Analyze and record transactions for merchandise sales using a perpetual system.
 Sales with Cash Discounts
Z-Mart completes a $1,000 credit sale with terms of 2/10, n/45.

Buyer pays within discount period:

Buyer pays after discount period:

Learning Objective P2: Analyze and record transactions for merchandise sales using a perpetual system.
 Sales Returns and Allowances
Sales returns and allowances usually involve
dissatisfied customers and the possibility of
lost future sales.

Sales returns refer Sales allowances

to merchandise that refer to reductions in
customers return to the selling price of
the seller after a merchandise sold to
sale. customers.

Learning Objective P2: Analyze and record transactions for merchandise sales using a perpetual system.
 Sales with Returns and Allowances
Customer returns merchandise which sold
for $15 and cost $9.

Returned Goods - Not Defective:

Returned Goods - Are Defective:

Learning Objective P2: Analyze and record transactions for merchandise sales using a perpetual system.
 Buyer Granted Allowances
Assume that $40 of the merchandise Z-Mart
sold on November 12 is defective but the
buyer decides to keep it because Z-Mart
offers a $10 price reduction.

Learning Objective P2: Analyze and record transactions for merchandise sales using a perpetual system.
 Learning Objective P3

Prepare adjustments and close

accounts for a merchandising
company.

34
 Merchandising Cost Flow in the
Accounting Cycle Exhibit
5.10

Learning Objective P3: Prepare adjustments and close accounts for a merchandising company.
 Adjusting Entries for Merchandisers
Shrinkage: adjustment to reflect loss of merchandise:

Sales Discounts, Returns and Allowances:

New revenue recognition rules require reporting of sales at
net amount expected. Adjusting entries required for:
1. Expected sales discounts
2. Expected returns and allowances (revenue side)
3. Expected returns and allowances (cost side)

Learning Objective P3: Prepare adjustments and close accounts for a merchandising company.
 Closing Entries for Merchandisers
Exhibit
5.11

Learning Objective P3: Prepare adjustments and close accounts for a merchandising company.
 Learning Objective P4

Define and prepare multiple-

step and single-step income
statements.
 Multiple-Step Income Statement
Exhibit
5.13

Learning Objective P4: Define and prepare multiple-step and single-step income statements.
 Single-Step Income Statement
Exhibit
5.14

Learning Objective P4: Define and prepare multiple-step and single-step income statements.
 Classified Balance Sheet
Exhibit
5.15

Highly
Liquid

Less
Liquid

Learning Objective P4: Define and prepare multiple-step and single-step income statements.
End of Chapter 5

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