Jashore University of Science

and Technology
Presentation Topic : Accounting for Merchandising
Operations
Course name : Principles of Financial Accounting
Course code:1104
Faculty: Tarun Sen
Department : Accounting & Information Systems
Welcome to Our Presentation

Introducing Group Members

Akash Biswas
Group Leader
 Introducing Group Members

Bristy Nag Bijoy Das

Group Member Group Member
 Introducing Group Members

Jannatul Mawa Esha Sonia Islam Faria

Group Member Group Member
 Introducing Group Members

Shaiful Islam Sabiha Islam

Group Member Group Member
Accounting for
Merchandising
Operations
 Merchandising Operations

Merchandising Companies
Buy and Sell Goods

Wholesaler Retailer Consumer

The primary source of revenues is referred to as

sales revenue or sales.
Merchandising Operations

Income Measurement
Not used in a Service business.
Sales Less
Revenue
Illustration 5-1

Cost of Equals Gross Less

Goods Sold Profit

Operating Equals Net

Cost of goods sold is the total
Income
cost of merchandise sold during Expenses
(Loss)
the period.
 Operating Cycles
Illustration 5-2
The operating
cycle of a
merchandising
company
ordinarily is
longer than that
of a service
company.
Flow of Costs

Perpetual System
Features:
1. Purchases increase Merchandise Inventory.
2. Freight costs, Purchase Returns and Allowances and
Purchase Discounts are included in Merchandise
Inventory.
3. Cost of Goods Sold is increased and Merchandise
Inventory is decreased for each sale.
4. Physical count done to verify Merchandise Inventory
balance.

The perpetual inventory system provides a continuous record

of Merchandise Inventory and Cost of Goods Sold.
Flow of Costs

Periodic System
Features:
1. Purchases of merchandise increase Purchases.
2. Ending Inventory determined by physical count.
3. Calculation of Cost of Goods Sold:

Beginning inventory $ 100,000

Add: Purchases, net 800,000
Goods available for sale 900,000
Less: Ending inventory 125,000 $
Cost of goods sold 775,000
Under the perpetual inventory system, companies record in the
Merchandise Inventory account the purchase of goods they
intend to sell.

Illustration: On the basis of the sales invoice and receipt of the

merchaindise ordered from PW Audio Supply ,Sauk
Stereo records the 3800 purchage as follows:

May 4 Merchandise inventory 3,800

Accounts payable 3,800
Recording Purchases of merchandise

Freight Costs – Terms of Sale

Illustration 5-6

Seller places goods Free

On Board the carrier, and
buyer pays freight costs.

Seller places goods Free

On Board to the buyer’s
place of business, and
seller pays freight costs.

Freight costs incurred by the seller are an operating expense.

Recording Purchases under Perpetual System

Illustration: Assume upon delivery of the goods on May

6, Sauk Stereo pays Acme Freight Company $150 for
freight charges, the entry on Sauk Stereo’s books is:

May 6 Freight-In (or Delivery Expense) 150

Cash 150
Illustration: Assume upon delivery of the goods on May 6,
Sauk Stereo pays Acme Freight Company $150 for freight
charges, the entry on Sauk Stereo’s books is: (Perpetual
system)
May 6 Merchandise inventory 150
Cash 150
Recording Purchases of merchandise

Purchase Returns and Allowances

Purchaser may be dissatisfied because goods are
damaged or defective, of inferior quality, or do not
meet specifications.

Purchase Return Purchase Allowance

Return goods for credit May choose to keep the
if the sale was made on merchandise if the seller
credit, or for a cash will grant an allowance
refund if the purchase (deduction) from the
was for cash. purchase price.
Recording Purchases under Perpetual System

Illustration: Assume that on May 8 Sauk Stereo returned to PW

Audio Supply goods costing $300.

May 8 Accounts payable 300

Merchandise inventory 300
Recording Purchases of merchandise

Purchase Discounts
Credit terms may permit buyer to claim a cash
discount for prompt payment.

Advantages:
Purchaser saves money. Seller
shortens the operating cycle.

Example: Credit terms of 2/10, n/30, is read “two-ten, net

thirty.” 2% cash discount if payment is made within 10 days.
Recording Purchases of merchandise

Purchase Discounts Terms

2/10, n/30 1/10 EOM 1% n/10 EOM Net

2% discount if discount if amount due

paid within 10 paid within within the first
days, otherwise first 10 days of 10 days of the
net amount due next month. next month.
within 30 days.
Recording Purchases under Perpetual System

Illustration: Assume Sauk Stereo pays the balance due of

$3,500 (gross invoice price of $3,800 less purchase returns and
allowances of $300) on May 14, the last day of the discount
period. Prepare the journal entry Sauk makes to record its May
14 payment.

May 14 Accounts payable 3,500

Merchandise Inventory 70
Cash 3,430

(Discount = $3,500 x 2% = $70)

Recording Purchases under Perpetual System

Illustration: If Sauk Stereo failed to take the discount, and

instead made full payment of $3,500 on June 3, the journal
entry would be:

June 3 Accounts payable 3,500

Cash 3,500
Recording Sales of Merchandise

• Made for cash or credit (on account).

• Normally recorded when earned, usually when

goods transfer from seller to buyer.

• Steps for recording sales

1. Record the sale: Debit the cash or accounts receivable

account and credit the sales revenue account.

2. Record the cost of goods sold: Debit the cost of goods sold
account and credit the inventory account.

3.Record any returns or allowances: If the customer returns

merchandise, record the return and any allowance granted.
Recording Sales of Merchandise

Two Journal Entries to Record a Sale

#1 Cash or Accounts receivable Dr Selling

Sales Cr Price

#2 Cost of goods sold Dr

Cost
Merchandise inventory Cr
Recording Sales of Merchandise

Illustration: Assume PW Audio Supply records its May 4 sale

of $3,800 to Sauk Stereo (Illustration 5-5) as follows. Assume
the merchandise cost PW Audio Supply $2,400.

May 4 Accounts receivable 3,800

Sales 3,800

May4 Cost of goods sold 2,400

Merchandise inventory 2,400
Recording Sales of Merchandise

Sales Returns and Allowances

• Sales returns and allowances are refunds or
credits given to customers for returned products or
products that they are allowed to keep without full
payment.

• Sales returns and allowances are deducted from

sales revenue when net sales are calculated.
Recording Sales of Merchandise

Illustration: Prepare the entry PW Audio Supply would make to

record the credit for returned goods that had a $300 selling
price (assume a $140 cost). Assume the goods were not
defective.

May 8 Sales returns and allowances 300

Accounts receivable 300

8 Merchandise inventory 140

Cost of goods sold 140
Recording Sales of Merchandise

Sales Discount

• A sales discount is a reduction in

the price of a product or service that
is offered by the seller, in exchange
for early payment by the buyer.

• An example of a sales discount is for

the buyer to take a 1% discount in
exchange for paying within 10 days of
the invoice date, rather than the
normal 30 days.
Recording Sales of Merchandise

Illustration: Assume Sauk Stereo pays the balance due of

$3,500 (gross invoice price of $3,800 less purchase returns and
allowances of $300) on May 14, the last day of the discount
period. Prepare the journal entry PW Audio Supply makes to
record the receipt on May 14.

May 14 Cash 3,430

Sales discounts 70 *
Accounts receivable 3,500

* [($3,800 – $300) X 2%]

Periodic Inventory System

Periodic System
Separate accounts used to record purchases,
freight costs, returns, and discounts.

Company does not maintain a running account

of changes in inventory.

Ending inventory determined by physical count.

Periodic Inventory System

Calculation of Cost of Goods Sold

Illustration 5A-1

$316,000
Recording Purchases under Periodic System

Illustration: On the basis of the sales invoice (Illustration 5-5)

and receipt of the merchandise ordered from PW Audio Supply,
Sauk Stereo records the $3,800 purchase as follows.

May 4 Purchases 3,800

Accounts payable 3,800
Recording Purchases under Periodic System
Freight Costs
Illustration: If Sauk pays Haul-It Freight Company $150 for
freight charges on its purchase from PW Audio Supply on May 6,
the entry on Sauk’s books is:

May 6 Freight-in (Transportation-in) 150

Cash 150

SO 7 Explain the recording of purchases and sales of

inventory under a periodic inventory system.
Recording Purchases under Periodic System
Purchase Returns and Allowances
Illustration: Sauk Stereo returns $300 of goods to PW Audio
Supply and prepares the following entry to recognize the return.

May 8 Accounts payable 300

Purchase returns and allowances 300
Recording Purchases under Periodic System
Purchase Discounts
Illustration: On May 14 Sauk Stereo pays the balance due on
account to PW Audio Supply, taking the 2% cash discount
allowed by PW Audio for payment within 10 days. Sauk Stereo
records the payment and discount as follows.

May 14 Accounts payable 3,500

Purchase discounts 70
Cash 3,430
Recording Sales under Periodic System

Illustration: PW Audio Supply, records the sale of $3,800 of

merchandise to Sauk Stereo on May 4 (sales invoice No. 731,
Illustration 5-5) as follows.

May 4 Accounts receivable 3,800

Sales 3,800

No entry is recorded for cost of goods sold at the time of

the sale under a periodic system.
Recording Sales under Periodic System

Sales Returns and Allowances

Illustration: To record the returned goods received from

Sauk Stereo on May 8, PW Audio Supply records the $300
sales return as follows.

May 4 Sales returns and allowances 300

Accounts receivable 300
Recording Sales under Periodic System

Sales Discounts
Illustration: On May 14, PW Audio Supply receives payment o
$3,430 on account from Sauk Stereo. PW Audio honors the 2
cash discount and records the payment of Sauk’s accoun
receivable in full as follows.

May 14 Cash Sales 3,430

discounts 70
Accounts receivable 3,500
Comparison of Entries—Perpetual Vs. Periodic

Illustration 5A-2
Comparison of Entries—Perpetual Vs. Periodic

Illustration 5A-2