Chapter

Accounting for
Merchandising
Operations

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100 Shares

Merchandising?
$1 par value

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Learning
Learning Objectives
Objectives
Describe merchandising
activities and identify income
components for a
merchandising company.
Identify and explain the
inventory asset of a
merchandising company.
Describe both perpetual and
periodic inventory systems.
Analyze and record transactions
for merchandise purchases

using a perpetual system

Analyze and record transactions
for merchandise sales using a
perpetual system.
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Analyze and interpret cost flows

and operating activities of a
merchandising company.
Prepare adjustments and close
accounts for a merchandising
company.
Define and prepare multiplestep and single-step income
statements.
Record and compare
merchandising transactions
using both periodic and
perpetual inventory systems.

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Merchandising
Merchandising Activities
Activities
Service organizations sell time to earn revenue.
Examples: accounting firms, law firms, and plumbing
services
Revenues

Minus

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Expenses

Equals

Net
income

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Merchandising
Merchandising Activities
Activities
Merchandising Companies
Manufacturer

Wholesaler

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Retailer

Customer

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Reporting
Reporting Income
Income for
for aa Merchandiser
Merchandiser
Merchandising companies sell products to earn revenue.
Examples: sporting goods, clothing, and auto parts
stores
Net
Sales

Minus

Cost of Equals
Goods Sold

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Gross
Profit

Minus

Expenses

Equals

Net
Income

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Operating
Operating Cycle
Cycle for
for aa Merchandiser
Merchandiser
Begins with the purchase of merchandise and ends
with the collection of cash from the sale of
merchandise.
Cash Sale
Purchases

Credit Sale
Cash
collection

Purchases

Merchandise
inventory

Account
receivable

Cash
sales

Merchandise
inventory
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Credit sales
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Inventory
Inventory Systems
Systems
Beginning
inventory

Net cost of
purchases

+
Merchandise
=
available for sale

Ending Inventory
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Cost of Goods
Sold
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Inventory
Inventory Systems
Systems
Perpetual
Inventory
System

Detailed records of the cost of each

item are maintained, and the cost
of each item sold is determined
from records when the sale occurs.
Applied in this chapter

Periodic
Inventory
System
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Cost of goods sold is determined

only at the end of an accounting
period.
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Accounting
Accounting for
for Merchandise
Merchandise Purchases
Purchases
On 20 June, Jason Inc. purchased $14,000 of
Merchandise Inventory paying cash.

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Seller Invoice date

Purchaser Order number
Credit terms Freight terms
Goods Invoice amount

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Trade
Trade Discounts
Discounts
Used by manufacturers and wholesalers to offer
better prices for greater quantities purchased.

Example
Example

Matrix,
Matrix, Inc.
Inc. offers
offers aa 30%
30% trade
trade
discount
discount on
on orders
orders of
of 1,000
1,000
units
units or
or more
more of
of their
their popular
popular
product
product Racer.
Racer. Each
Each
Racer
Racer has
has aa list
list price
price of
of $5.25.
$5.25.

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Purchase
Purchase Discounts
Discounts
A deduction from the invoice price granted to
induce early payment of the amount due.

Terms
Time
Due

Discount Period

Credit Period

Full amount
less discount

Full amount due

Purchase or Sale
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Purchase
Purchase Discounts
Discounts

2/10,n/30
Discount
Discount
Percent
Percent

Number
Number of
of
Days
Days
Discount
Discount Is
Is
Available
Available

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Otherwise,
Otherwise,
Net
Net (or
(or All)
All)
Is
Is Due
Due

Credit
Credit
Period
Period

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Purchase
Purchase Discounts
Discounts
On
On 7 May, Jason Inc. purchased $27,000 of
Merchandise
Merchandise Inventory
Inventory on
on account,
account, credit
credit
terms
terms are
are 2/10,
2/10, n/30.
n/30.

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Purchase
Purchase Discounts
Discounts
On
On 15
15 May,
May, Jason
Jason Inc.
Inc. paid
paid the
the amount
amount due on
the
the purchase
purchase of
of 77 May.
May.

$27,000 2% = $540 discount

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Purchase
Purchase Discounts
Discounts
After we post these entries, the accounts
involved look like this:
Merchandise Inventory
5/7

27,000 5/15

540

Bal. 26,460

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Accounts Payable
5/15 27,000 5/7 27,000
Bal.

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Failure
Failure to
to Pay
Pay Within
Within the
the Discount
Discount Period
Period
If we fail to take a 2/10, n/30
discount, is it really expensive?
365 days 20 days 2% = 36.5% annual rate
Days
Days
in
in aa
year
year

Number
Number
of
of additional
additional
days
days before
before
payment
payment

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Percent
Percent
paid
paid to
to
keep
keep
money
money

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Purchase
Purchase Returns
Returns and
and Allowances
Allowances
Purchase Return . . .
Merchandise
Merchandise returned
returned by
by the
the purchaser
purchaser to
to
the
the supplier.
supplier.

Purchase Allowance . . .
A
A reduction
reduction in
in the
the cost
cost of
of defective
defective
merchandise
merchandise received
received by
by aa purchaser
purchaser from
from aa
supplier.
supplier.

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Purchase
Purchase Returns
Returns and
and Allowances
Allowances
On
On 99 May,
May, Matrix
Matrix Inc.
Inc. purchased
purchased $20,000
$20,000 of
of
Merchandise
Merchandise Inventory
Inventory on
on account,
account, credit
credit
terms
terms are
are 2/10,
2/10, n/30.
n/30.

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Purchase
Purchase Returns
Returns and
and Allowances
Allowances
On
On 10
10 May,
May, Matrix Inc. returned
returned $500 of
defective
defective merchandise
merchandise to
to the
the supplier.

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Purchase
Purchase Returns
Returns and
and Allowances
Allowances
On 18 May, Matrix Inc. paid the amount owed for
the purchase of 9 May.

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Transportation
Transportation Costs
Costs
Seller

FOB shipping point

(buyer pays)

Buyer

Merchandise

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FOB destination
(seller pays)

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Transportation
Transportation Costs
Costs
On 12 May, Jason Inc. purchased $8,000 of
Merchandise Inventory for cash and also paid
$100 transportation costs.

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Quick
Quick Check
Check

On
On 66 July
July 2007
2007 Seller
Seller Co.
Co. sold
sold $7,500
$7,500 of
of
merchandise
merchandise to
to Buyer
Buyer Co.;
Co.; terms
terms of
of 2/10,n/30.
2/10,n/30. The
The
shipping
shipping terms
terms were
were FOB
FOB shipping
shipping point.
point. The
The
shipping
shipping cost
cost was
was $100.
$100. Which
Which of
of the
the following
following will
will
be
be part
part of
of Buyers
Buyers 6July
6July journal
journal entry?
entry?
a.
a. Credit
Credit Sales
Sales $7,500
$7,500
b.
b. Credit
Credit Purchase
Purchase Discounts
Discounts $150
$150
c.
c. Debit
Debit Merchandise
Merchandise Inventory
Inventory $100
$100
d.
d. Debit
Debit Accounts
Accounts Payable
Payable $7,450
$7,450
FOB shipping point indicates the buyer
ultimately pays the freight. This is recorded with
a debit to Merchandise Inventory.
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Itemized
Itemized Cost
Cost of
of Merchandise
Merchandise Purchased
Purchased

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Accounting
Accounting for
for Merchandise
Merchandise Sales
Sales

Sales
Sales discounts
discounts and
and returns
returns and
and allowances
allowances are
are Contra
Contra Revenue
Revenue accounts.
accounts.
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Sales
Sales of
of Merchandise
Merchandise
On 18 March, Diamond Store sold $25,000 of
merchandise on account. The merchandise was
carried in inventory at a cost of $18,000.

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Sales
Sales Discounts
Discounts
On 8 June, Barton Co. sold merchandise costing $3,500
for $6,000 on account. Credit terms were 2/10, n/30.
Lets prepare the journal entries.

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Sales
Sales Discounts
Discounts
On 17 June, Barton Co. received a check for
$5,880 in full payment of the 8 June sale.

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Sales
Sales Returns
Returns and
and Allowances
Allowances
On 12 June, Barton Co. sold merchandise
costing $4,000 for $7,500 on account The
credit terms were 2/10, n/30.

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Sales
Sales Returns
Returns and
and Allowances
Allowances
On 14 June, merchandise with a sales price of $800 and
a cost of $470 was returned to Barton. The return is
related to the 12 June sale.

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Sales
Sales Returns
Returns and
and Allowances
Allowances
On 20 June, Barton received the amount owed
to it from the sale of 12 June.

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Lets complete the

accounting cycle
by preparing the
closing entries for
Barton.

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Step
Step 11:: Close
Close Credit
Credit Balances
Balances in
in Temporary
Temporary Accounts
Accounts
to
to Income
Income Summary.
Summary.

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Step
Step 22:: Close
Close Debit
Debit Balances
Balances in
in Temporary
Temporary Accounts
Accounts to
to
Income
Income Summary.
Summary.

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Step
Step 33:: Close
Close Income
Income Summary
Summary to
to Owners
Owners Capital
Capital

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Step
Step 44:: Close
Close Withdrawals
Withdrawals Account
Account to
to Owners
Owners Capital.
Capital.

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Income
Income Statement
Statement Formats
Formats

Multiple-Step
Single-Step

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Multiple-Step
Multiple-Step Income
Income Statement
Statement

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Single-Step
Single-Step Income
Income Statement
Statement

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Classified
Classified Balance
Balance Sheet
Sheet

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End of Chapter 5

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