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.???
 Recording Sales of Merchandise

Sales Returns and Allowances sales Discounts

Company sale in May 4 goods for $3,800 to Sauk Stereo

revenue recognition when The Cost of these Goods was 2400
the performance obligation
GENERAL JOURNAL
is satisfied. Typically, the Date Account Titles and Explanation Ref. Debit Credit
performance obligation is 3800
Accounts Receivable
satisfied when the goods Sales Revenue 3800
May 4
transfer from the seller to Cost of Goods Sold 2400
the buyer Inventory 2400

Company sale in May 5 goods for $7,200 to Sauk Stereo

The Cost of these Goods was 80% of sales revenue
 Sales Returns and Allowances

GENERAL JOURNAL
Date Account Titles and Explanation Ref. Debit Credit
Sales Returns and Sales Returns and Allowances 300
Allowances (a contra Accounts Receivable 300
May 4
account to Sales Inventory 140
Revenue) Cost of Goods Sold 140

GENERAL JOURNAL
If Y company returns 5 Date Account Titles and Explanation Ref. Debit Credit
goods for X company with
a price of $ 1000 per unit,
May 4
these goods cost $800 per
unit. Record this.
 Sales Discounts

GENERAL JOURNAL
Date Account Titles and Explanation Ref. Debit Credit
Accounts Receivable
If X Company Sales 4 May 4 Sales Revenue
Quantity with $1000 with Cost of Goods Sold
discount 2/ 10, n/ 30 Record Inventory
this on May 4, If cash May 9 Cash
Sales Discount
received on May 9. Accounts Receivable

GENERAL JOURNAL
Date Account Titles and Explanation Ref. Debit Credit

Refer to the above, If cash

is received on June 19. June 19
On September 5, Z Company buys merchandise on account from G Company.
The selling price of the goods was $15,000, and the cost to G Company was
$8,000. On September 8, Z returns defective goods with a selling price of
$2,000 and a fair value of 300. Record the transactions on the books of G
Company.
Summary
Summary
Example
• On June 10, Vareen Company purchased £8,000 of merchandise from Harrah Company, FOB shipping
point, terms 3/10, n/30.
• On June 10, Vareen company sold goods for Pioneers company £8,000, credit terms are 3/10, n/30 FOB
shipping point, the cost of these goods is 4,800.
• 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 12, Pioneer company returned damaged goods totaling £300, the cost of these goods is £ 70
• On June 19, Vareen pays Harrah Company in full, less the purchase discount. Both companies use a
perpetual inventory system.
• On June 19, Vareen received the payment from Pioneers company.
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
Example 1
• On June 10, Vareen company sold goods for pioneers company,
credit terms are 2/10, n/30 FOB shipping point.
• On June 12, Pioneer company returned damaged goods totaling
£300, the cost of these goods is £ 70
• On June 19, Vareen received the payment from Pioneers company.
Required:
Journalize the previous transactions using perpetual inventory
system.
Example
• P5-1A Ready-Set-Go, Ltd. distributes suitcases to retail stores and extends credit terms
of 1/10, n/30 to all of its customers. At the end of June, Ready-Set-Go’s inventory
consisted of suitcases costing £1,200. During the month of July, the following
merchandising transactions occurred.
• July 1 Purchased suitcases on account for £1,620 from Trunk Manufacturers, FOB destination, terms
2/10, n/30. The appropriate party also made a cash payment of £100 for freight on this date.
• 3 Sold suitcases on account to Satchel World for £2,200. The cost of suitcases sold was £1,400.
• 9 Paid Trunk Manufacturers in full.
• 12 Received payment in full from Satchel World.
• 17 Sold suitcases on account to Lady GoGo for £1,400. The cost of the suitcases sold was £1,030.
• 18 Purchased suitcases on account for £1,900 from Holiday Manufacturers, FOB shipping point, terms
1/10, n/30. The appropriate party also made a cash payment of £125 for freight on this date.
• 20 Received £300 credit (including freight) for suitcases returned to Holiday Manufacturers.
• 21 Received payment in full from Lady GoGo.
• 22 Sold suitcases on account to Vagabond for £2,400. The cost of suitcases sold was £1,350. 30 Paid
Holiday Manufacturers in full.
• 31 Granted Vagabond £200 credit for suitcases returned costing £120.
Instructions
(a) Journalize the transactions using a perpetual inventory system.
Example
• P5-4A J. Zheng, a former professional tennis star, operates Zheng’s Tennis Shop, Ltd. at the
Yalong River Resort. At the beginning of the current season, the ledger of Zheng’s Tennis Shop
showed Cash ¥2,200, Inventory ¥1,800, and Share Capital—Ordinary ¥4,000. The following
transactions were completed during April.
• Apr. 4 Purchased racquets and balls from Jay-Mac Co. ¥760, FOB shipping point, terms 2/10, n/30. 6
Paid freight on purchase from Jay-Mac Co. ¥40.
• 8 Sold merchandise to members ¥1,150, terms n/30. The merchandise sold had a cost of ¥790.
• 10 Received credit of ¥60 from Jay-Mac Co. for a racquet that was returned.
• 11 Purchased tennis shoes from Li Sports for cash, ¥420. 13 Paid Jay-Mac Co. in full.
• 14 Purchased tennis shirts and shorts from Everett Sportswear ¥800, FOB shipping point, terms 3/10,
n/60.
• 15 Received cash refund of ¥50 from Li Sports for damaged merchandise that was returned.
• 17 Paid freight on Everett Sportswear purchase ¥30.
• 18 Sold merchandise to members ¥980, terms n/30. The cost of the merchandise sold was ¥520.
• 20 Received ¥600 in cash from members in settlement of their accounts
• Apr. 21 Paid Everett Sportswear in full.
• 27 Granted an allowance of ¥40 to members for tennis clothing that did not fi t properly.
• 30 Received cash payments on account from members, ¥820.
Instructions
(a) Journalize the April transactions using a perpetual inventory system.
(b) (Enter the beginning balances in the ledger accounts and post the April transactions. (Use J1 for the
journal reference.)
(c) Prepare a trial balance on April 30, 2017