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Chapter 3 Fundamental I PPt

Chapter Three covers the accounting principles for merchandising operations, highlighting the differences between service and merchandising companies, and detailing the recording of purchases and sales under both perpetual and periodic inventory systems. It explains the operating cycle of merchandising companies, including the calculation of cost of goods sold and the preparation of income statements. The chapter also discusses the importance of sales revenue, operating expenses, and the impact of purchase returns, allowances, and discounts on financial records.

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0% found this document useful (0 votes)
7 views55 pages

Chapter 3 Fundamental I PPt

Chapter Three covers the accounting principles for merchandising operations, highlighting the differences between service and merchandising companies, and detailing the recording of purchases and sales under both perpetual and periodic inventory systems. It explains the operating cycle of merchandising companies, including the calculation of cost of goods sold and the preparation of income statements. The chapter also discusses the importance of sales revenue, operating expenses, and the impact of purchase returns, allowances, and discounts on financial records.

Uploaded by

falmeabdu9
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
You are on page 1/ 55

Chapter Three

Accounting for
Merchandising
Operations
LEARNING OBJECTIVES
After studying this chapter, you should be able
to:
1. Identify the differences between service and
merchandising companies.
2. Explain the recording of purchases under a
perpetual inventory system.
3. Explain the recording of sales revenues under a
perpetual inventory system.
4. Explain the steps in the accounting cycle for a
merchandising company.
5. Prepare an income statement for a merchandiser.
What is a Merchandising Company?

• Merchandising companies are firms which buy products


& sell for their customers.
• A merchandising business sells tangible goods to its
customers. When we say goods it can be anything that has
physical characteristics that you can see and touch (i.e.
tangible).
• E.g television sets, cars, office table and chair (furniture),
to chewing gums, toothbrushes and various stationeries
and etc.

• These goods that a merchandising company sells to its


customers are called merchandise inventory.
 Merchandising companies that purchase and sell directly
to consumers are called retailers.

 Merchandising companies that sell to retailers are known


as wholesalers.
• A wholesaler is a trader, which buys goods from
manufacturers and sells them to a retailer or another
wholesaler.
• Retailer who sells the goods to the final consumer by buying
them from wholesalers (or sometimes from a manufacturer).

 The primary source of revenues for merchandising


companies is the sale of merchandise, often referred to
simply as sales revenue or sales.
• A merchandising company has 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.
Merchandising Operations

The operations of a merchandising business involve:-


 the purchase of merchandise for sale (purchasing),
 the sale of the products to customers (sales), and
 the receipt of cash from customers (collection).

 This overall process is referred to as the operating cycle.


 Thus, the operating cycle begins with spending cash, and
it ends with receiving cash from customers.

 The primary source of revenues is referred to as sales


revenue or sales.
Cont’d
Income
Measurement
Not used in a Service Illustration 5-1
Sales Less
Business. Income Measurement
Revenue Process for A
Merchandising Company

Cost of Equals Gross Less

Goods Sold Profit

Operating EqualsNet Income


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

Illustration
5-3
Flow of Costs
Illustration
5-4

Companies use either a Perpetual Inventory System


or a Periodic Inventory System to account for
Cont’d
PERPETUAL SYSTEM
 Maintain detailed records of the
cost of each inventory purchase and
sale.
 Records continuously show inventory
that should be on hand for every item.
 Company determines cost of goods
sold each time a sale occurs.
Cont’d
PERIODIC SYSTEM
 Do not keep detailed records of the goods on
hand.
 Cost of goods sold determined by count at the
end of the accounting period.
 Calculation ofInventory
Beginning Cost of Goods Sold:
€ 100,000
Add: Purchases, net 800,000
Goods Available for Sale 900,000
Less: Ending Inventory 125,000
Cost of Goods Sold € 775,000
Cont’d
ADVANTAGES OF THE PERPETUAL SYSTEM

 Traditionally used for merchandise with


high unit values.
 Shows the quantity and cost of the
inventory that should be on hand at any
time.
 Provides better control over
inventories than a periodic system.
> DO IT!

Indicate whether the following statements are True or


False.
1. The primary source of revenue for a merchandising
company results from performing services for
customers.
2. The operating cycle of a service company is usually
shorter than that of a merchandising company.
3. Sales revenue less cost of goods sold equals gross
profit.
4. Ending inventory plus the cost of goods purchased
equals cost of goods available for sale.
Cont…
Recording Purchases of
3.
Merchandise

2.
Made using cash or credit (on account).
 Normally record when
goods are received
from the seller.
 Purchase invoice
should support each
credit purchase.

Illustration 5-6
Sales Invoice Used As
Purchase
Invoice By Sauk Stereo
Cont’d
Illustration
Illustration: Sauk Stereo 5-6

(the buyer) uses as a


purchase invoice the sales
invoice prepared by PW
Audio Supply, Inc. (the
seller). Prepare the
journal entry for Sauk
Stereo for the invoice from
PW Audio Supply.

May 4 Inventory 3,800


Accounts Payable
3,800
Freight Costs
Ownership of the goods
passes to the buyer
when the public carrier
accepts the goods from
the seller.

Ownership of the goods


remains with the seller
until the goods reach
the buyer.

Illustration 5-
Freight costs incurred by the seller are an
7 Shipping operating expense.
Terms
Cont’d
Illustration: Assume upon delivery of the goods on
May 6, Sauk Stereo pays Public Freight Company
€150 for freight charges, the entry on Sauk Stereo’s
books is:
May 6 Inventory 150
Cash

150
Assume the freight terms on the invoice in Illustration
5-6 had required PW Audio Supply to pay the
freight charges, the entry by PW Audio Supply would
have been:
May 4 Freight-Out (Delivery Expense)150
Cash
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


Return goods for credit if Allowance
May choose to keep the
the sale was made on merchandise if the
credit, or for a cash seller will grant a
refund if the purchase reduction from the
was for cash. purchase price.
Cont’d
Illustration: Assume Sauk Stereo returned goods
costing €300 to PW Audio Supply on May 8.

May 8 Accounts Payable 300


Inventory 300
Cont’d
Question #1
In a perpetual inventory system, a return of
defective merchandise by a purchaser is recorded
by crediting:
a. Purchases
b. Purchase Returns
c. Purchase Allowance
d. Inventory
Solution
Purchase Discounts

Credit terms may permit buyer to claim a cash


discount for prompt payment.

Advantages:
 Purchaser saves money.
 Seller shortens the operating cycle by converting
the accounts receivable into cash earlier.

Example: Credit
terms may read
2/10, n/30.
Cont’d

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

2% discount if 1% discount if Net amount


paid within 10 paid within due within the
days, first 10 days first 10 days
otherwise net of next month. of the next
amount due month.
within 30
days.
Cont’d
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 Stereo makes on May 14 to record the
payment.
May 14 Accounts Payable 3,500
Inventory 70
Cash 3,430

(Discount = €3,500 x 2% = €70)


Cont’d
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
Cont’d
Should discounts be taken when offered?

Discount of 2% on €3,500 €70.00


€3,500 invested at 10% for 20 days 19.18
Savings by taking the discount €50.82

Example: 2% for 20 days = Annual rate of 36.5%


€3,500 x 36.5% x 20 ÷ 365 = €70
Summary of Purchasing
Transactions
Inventory
Debit Credit

4th - Purchase 3,800 300 8th - Return


6th - Freight-in 150 70 14th - Discount

Balance 3,580
> DO IT!
On September 5, Zhu Company buys merchandise on
account from Gao Company. The selling price of the
goods is ¥15,000, and the cost to Gao Company was
¥8,000. On September 8, Zhu returns defective goods
with a selling price of ¥2,000. Record the transactions
on the books of Zhu Company.
Sept. 5 Inventory 15,000
Accounts Payable 15,000
Sept. 8 Accounts Payable 2,000
Inventory 2,000
Recording Sales of
3.
Merchandise
 3.
Made using cash or credit (on account). Illustration
5-6
 Sales revenue, like
service revenue, is
recorded when the
performance obligation
is satisfied.
 Performance obligation
is satisfied when the
goods are transferred
from the seller to the
buyer.
 Sales invoice should
Cont’d

Journal Entries to Record a Sale

#1 Cash or Accounts Receivable XXX Selling


Sales Revenue XXX Price

#2 Cost of Goods Sold XXX


Cost
Inventory XXX
Cont’d
Illustration: PW Audio Supply records the sale of
€3,800 on May 4 to Sauk Stereo on account
(Illustration 5-6) as follows (assume the merchandise
cost PW Audio Supply €2,400).

May 4 Accounts Receivable 3,800


Sales Revenue 3,800

4 Cost of Goods Sold 2,400


Inventory 2,400
Sales Returns and Allowances
 “Flip side” of purchase returns and
allowances.
 Contra-revenue account to Sales Revenue
(debit).
 Sales not reduced (debited) because:

► Would obscure importance of sales returns


and allowances as a percentage of sales.

► Could distort comparisons.


Cont’d
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 Inventory 140
Cost of Goods Sold 140
Cont’d
Illustration: Assume the returned goods were
defective and had a scrap value of €50, PW Audio
would make the following entries:

May 8 Sales Returns and Allowances 300


Accounts Receivable 300

8 Inventory 50
Cost of Goods Sold 50
Cont’d
Question #2
The cost of goods sold is determined and
recorded each time a sale occurs in:
a. periodic inventory system only.
b. a perpetual inventory system only.
c. both a periodic and perpetual inventory
system.
d. neither a periodic nor perpetual inventory
system.
Solution
Sales Discount
 Offered to customers to promote prompt
payment of the balance due.
 Contra-revenue account (debit) to Sales
Revenue.
Cont’d
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 Cash 3,430
14 Sales Discounts 70 *
Accounts Receivable 3,500

* [(€3,800 – €300) X 2%]


> DO IT!
On September 5, Zhu Company buys merchandise on
account from Gao Company. The selling price of the
goods is ¥15,000, and the cost to Gao Company was
¥8,000. On September 8, Zhu returns defective goods
with a selling price of ¥2,000 and the fair value of ¥300.
Record the transactions on the books of Gao Company.

Sept. Accounts Receivable 15,000


5 Sales Revenue 15,000
Sept. Cost of Goods Sold 8,000
5 Inventory 8,000
> DO IT!
On September 5, Zhu Company buys merchandise on
account from Gao Company. The selling price of the
goods is ¥15,000, and the cost to Gao Company was
¥8,000. On September 8, Zhu returns defective goods
with a selling price of ¥2,000 and the fair value of ¥300.
Record the transactions on the books of Gao Company.

Sept. Sales Returns and Allowances 2,000


8 Accounts Receivable 2,000
Sept. Inventory 300
8 Cost of Goods Sold 300
Completing the Accounting
3.
Cycle
4.
 Up to this point, we have illustrated the basic
entries for transactions relating to purchases
and sales in a perpetual inventory system.
 Now we consider the remaining steps in the
accounting cycle for a merchandising
company.
 Each of the required steps described in
Chapter 2 for service companies apply to
merchandising companies.
Periodic Inventory
3. System
6.
Determining CoGS Under a Periodic
System
 No running account of changes in inventory.
 Ending inventory determined by physical
count.
 Cost of goods sold not determined until the
end of the period.
Determining CoGS Under a
Periodic System
Illustration 5B-2: CoGS for a Merchandiser Using a Periodic
Inventory System

Illustration 5B-2
Recording Merchandise
Transactions
 Record revenues when sales are made.

 Do not record cost of merchandise sold on the


date of sale.
 Physical inventory count determines:
► Cost of merchandise on hand and
► Cost of merchandise sold during the period.
 Record purchases in Purchases account.
 Purchase returns and allowances, Purchase
discounts, and Freight costs are recorded in
separate accounts.
Recording Purchases of
Merchandise
Illustration: On the basis of the sales invoice
(Illustration 5-6) 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
Cont’d
Freight Costs
Illustration: If Sauk pays Public 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
Cont’d
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
Cont’d
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 of
Merchandise
Illustration: PW Audio Supply, records the sale of
€3,800 of merchandise to Sauk Stereo on May 4
(sales invoice No. 731, Illustration 5-6) as follows.

May 4 Accounts Receivable 3,800


Sales Revenue
3,800
No entry is recorded for Cost of Goods Sold at
the time of the sale under a Periodic System.
Cont’d
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 8 Sales Returns and Allowances 300

Accounts Receivable
300
Cont’d
Sales Discount
Illustration: On May 14, PW Audio Supply receives
payment of €3,430 on account from Sauk Stereo. PW
Audio honors the 2% cash discount and records the
payment of Sauk’s account receivable in full as
follows.
May 14 Cash 3,430
Sales Discounts 70
Accounts Receivable 3,500
Cont’d
Comparison of Entries
Illustration 5B-3: Comparison of Entries for Perpetual Vs Periodic
Inventory Systems
Cont’d
Comparison of Entries
Illustration 5B-3: Comparison of Entries for Perpetual Vs Periodic
Inventory Systems
The End of Chapter
3
Thank You!!!

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