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Accounting For Merchandising Operations: Lecture-4

1. The document discusses accounting for merchandising operations, specifically comparing service companies to merchandising companies. 2. It explains the operating cycle of a merchandising company which involves purchasing inventory, selling inventory to customers, and recognizing costs of goods sold and revenue. 3. The key issues covered are how to account for freight costs, purchase discounts, purchase returns, sales returns, sales discounts, and inventory valuation methods.

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Nirjon Bhowmic
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45 views11 pages

Accounting For Merchandising Operations: Lecture-4

1. The document discusses accounting for merchandising operations, specifically comparing service companies to merchandising companies. 2. It explains the operating cycle of a merchandising company which involves purchasing inventory, selling inventory to customers, and recognizing costs of goods sold and revenue. 3. The key issues covered are how to account for freight costs, purchase discounts, purchase returns, sales returns, sales discounts, and inventory valuation methods.

Uploaded by

Nirjon Bhowmic
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Accounting for

Merchandising Operations
Lecture-4
Operating Cycles
• Service Company:
Perform services

Receive Cash A/R


• Can Also produce Unearned service revenue if
fees are taken before providing service.
• Merchandising Company:

Company Company
Sells FG Sea Receives FG Inventory
A B

Recognize COGS
Sell
Recognize Revenue
Issues:
Inventory
1. Who will pay the Freight cost? Buyer or seller?
2. How to adjust any purchase discount?
3. How to adjust Purchase return?
4. How to adjust Sales return?
5. How to adjust Sales discount?
6. How to calculate Inventory? Which inventory system they follow, i.e., perpetual or periodic inventory system?
Inventory System
• Perpetual Inventory System:
– Companies continuously keeps detailed records of
the cost of each inventory purchase and sale.
– Company determines the cost of goods sold each
time a sale occurs.
• Periodic Inventory System:
– COGS is determined at the end of the period.
– Physical inventory count to determine COGS on
hand
• Perpetual System:
– Inventory purchase Record Purchase of inventory Item
sold Record Revenue and COGS No entry at the end of
period
– Recording: Dr. A/R or Cash, Cr. Sales Revenue
Dr. COGS, Cr. Finished Goods
• Periodic System
– Inventory purchase Record Purchase of inventory Item
sold Record Revenue only Compute and record COGS at
the end of period
– Recording: Begging Finished Good inventory + Purchase
including freight cost (If any) - Purchase Return-Purchase
Discount - Ending finished goods = COGS
• Freight Cost:
– FOB shipping point: when buyer pays the freight
cost
– FOB destination: when seller pays the freight cost
• Purchase discount:
– 2/10, n/30
• Freight cost incurred by Buyer:
– Dr Inventory
• Cr Cash or A/P
• Freight cost incurred by Seller:
– Dr Freight-out (Delivery expense)
• Cr Cash or A/P
• Buyer:
– Purchase Return
• Dr A/P
– Cr Inventory
– Purchase Discount: 2/10, n/30
• Dr A/P
– Cr Cash
– Cr Inventory
** Here the reduction of inventory indicated the amount of discount.
(Gross method)
• Dr A/P
– Cr Cash
** Here the discount is already adjusted at the time of purchasing and
hence buyer does not record the amount of discount. (Net method)
• Seller:
– Record Sales: (Perpetual System)
– Dr A/R or Cash
• Cr Revenue
– Dr COGS
• Cr Inventory
• Sales Return:
– Dr Sales Return
• Cr A/R
– Dr Inventory
• Cr COGS
• Sales Discount
– Dr Cash
– Dr Sales Discount
• Cr A/R
• Seller:
– Record Sales: (Periodic System)
– Begging Finished Good inventory + Purchase
including freight cost (If any) - Purchase Return-
Purchase Discount - Ending finished goods = COGS

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