Accounting for Merchandising Operations

Merchandising companies that purchase and sell directly to consumers are called retailers.
Merchandising companies that sell to retailers are known as wholesalers.
The primary source of revenues for merchandising companies is the sale of merchandise,
often referred to simply as sales revenue or sales.

two categories of expenses: cost of goods sold and operating expenses.

Cost of goods sold is the total cost of merchandise sold during the period.
 Cost Flow

Goods
Inventor Materia
purchas
es
y l use
Material
purchases price Beginning
Beginning
+ Inventory
Inventory
transportation fee
+ +
+
Insurance costs Purchases Purchases
- - -
return Ending Inventory
Sold Goods
- Allowed
= =
discount Cost of Goods Sold
Ending Inventory
 Accounting for Merchandising Operations
Cost of goods sold is the total cost of merchandise sold during the period.
 Inventory

PERPETUAL SYSTEM PERIODIC SYSTEM

In a perpetual inventory system, companies keep In a periodic inventory system,
detailed records of the cost of each inventory companies do not keep detailed
purchase and sale. inventory records of the goods on hand
We can determine the cost of goods sold each throughout the period.
time a sale occurs. We can determine the cost of goods
- accounting records continuously perpetually— sold only at the end of the accounting
show the quantity and cost of the inventory period
- provides better control over inventories
- EQO
- Covering shortages
 Recording Purchases of Merchandise

Purchases Returns and Allowances freight bills Purchase Discounts

Companies GENERAL JOURNAL

Date Account Titles and Explanation Ref. Debit Credit
purchase Inventory 5000
inventory Jan 1 Cash 5000
using cash Inventory 3000
or credit (on Jan 4 Accounts Payable 3000
account).
GENERAL JOURNAL
For example, if X (the buyer) buys Date Account Titles and Explanation Ref. Debit Credit
2 Lap with $15000 per one for
cash and 4 Printers with $5000 May 15
per one on account, on May 15.
Record this purchases
 We are recording freight bills according to the sales agreement.

The letters FOB mean free on board. Thus, FOB destination means that the seller
FOB shipping point means that the seller places the goods free on board to the
places the goods free on board the carrier, buyer’s place of business, and the seller
and the buyer pays the freight costs. pays the freight.
 For example, if X (the buyer) purchases 2 Camera with $20000 per one for cash the
agreement was FOB shipping point with $1000, on May 15. Record this purchase

GENERAL JOURNAL
Date Account Titles and Explanation Ref. Debit Credit

May 15

For example, refer to the above example if the agreement was FOB destination
with $1000, on May 15. Record this purchase
 Purchase Returns and Allowances
A purchaser may be dissatisfied with the merchandise received because the goods are
damaged or defective, of inferior quality, or do not meet the purchaser’s specifications.

purchaser may return the goods to The purchaser may choose to keep the
the seller for credit if the sale was merchandise if the seller is willing to grant an
allowance (deduction) from the purchase
made on credit, or for a cash refund if price. This transaction is known as a
the purchase was for cash. purchase allowance.

GENERAL JOURNAL
Assume that X company
Date Account Titles and Explanation Ref. Debit Credit
returned goods costing
$ 300 to PW Audio May 17
Supply on May 17.
 GENERAL JOURNAL
Assume that X company Date Account Titles and Explanation Ref. Debit Credit
returned goods costing
$ 600 to PW Audio May 18
Supply on May 18.

GENERAL JOURNAL
Date Account Titles and Explanation Ref. Debit Credit
Assume that X company
gets a purchase allowance May 19
Of $ 900 for cash on May
19.
 Purchase Discounts
The credit terms of a purchase on account may permit the buyer to claim a cash discount for prompt
payment. The buyer calls this cash discount a purchase discount. This incentive offers advantages to both
parties: The purchaser saves money, and the seller can shorten the operating cycle by converting the
accounts receivable into cash.
Credit terms specify the amount of the cash discount and time period in which it is offered. Credit terms as
2/10, n/30, which is read “two-ten, net thirty.” This means that the buyer may take a 2% cash discount on
the invoice price if payment is made within 10 days. Otherwise, the invoice price is due 30 days from the
invoice date.

assume Sauk Stereo pays the balance GENERAL JOURNAL

due of $3,500 (gross invoice price of Date Account Titles and Explanation Ref. Debit Credit
$3,800 less purchase returns and 3500
allowances of $300) on May 14, the last May 14
Accounts Payable
3430
day of the discount period. The cash Cash
discount is $70 ($3,500 × 2%), and Sauk Inventory 70
Stereo pays $3,430 ($3,500 − $70).

If Sauk Stereo failed to take the discount and instead made a full payment of €3,500
on June 3, it would debit Accounts Payable and credit Cash for €3,500 each.???
 Summary
Perpetual-System
Example
• On June 10, Vareen Company purchased £8,000 of merchandise from Harrah
Company, FOB shipping point, terms 3/10, n/30.
• Vareen pays the freight costs of £400 on June 11.
• Damaged goods totaling £300 are returned to Harrah for credit on June 12.
The fair value of these goods in £70.
• On June 19, Vareen pays Harrah Company in full, less the purchase discount.
Both companies use a perpetual inventory system.
Instructions
(a) Prepare separate entries for each transaction on the books of Vareen
Company.
(b) Prepare separate entries for each transaction for Harrah Company. The
merchandise purchased by Vareen on June 10 had cost Harrah £4,800
Solution