CHAPTER 5
ACCOUNTING FOR
MERCHANDISING
OPERATIONS
Chapter
5-1
Merchandising Operations
Merchandising Companies
Buy and Sell Goods
Wholesaler Retailer Consumer
The primary source of revenues is referred to as sales
revenue or sales.
Chapter
5-2
Merchandising Operations
Income Measurement
Not used in a Service
Sales Less
business.
Revenue
Cost of Equals Gross Less
Goods Sold Profit
Operating Equals Net
Cost of goods sold is the total cost Income
of merchandise sold during the Expenses
(Loss)
period.
Chapter
5-3
Operating Cycles
Illustration 5-2
The operating
cycle of a
merchandising
company
ordinarily is longer
than that of a
service company.
Chapter
5-4
Inventory Systems
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 Inventory balance.
The perpetual inventory system provides a continuous record of
Inventory and Cost of Goods Sold.
Chapter
5-5
Inventory Systems
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
Chapter
5-6
Recording Purchases of Merchandise
Made using cash or credit (on account).
Normally recorded when goods are received.
Purchase invoice should support each
credit purchase.
Chapter
5-7
Recording Purchases of Merchandise
E5-2 Information related to Steffens Co. is presented below.
Prepare the journal entry to record the transaction under a perpetual
inventory system.
1. On April 5, purchased merchandise from Bryant Company
for $25,000 terms 2/10, net/30, FOB shipping point.
April 5 Merchandise inventory 25,000
Accounts payable 25,000
Chapter
5-8
Recording Purchases of Merchandise
Not all purchases increase Merchandise Inventory.
E5-2 Prepare the journal entry to record the transaction under a
perpetual inventory system.
3. On April 7, purchased equipment on account for $26,000.
April 7 Equipment 26,000
Accounts payable 26,000
Chapter
5-9
Recording Purchases of Merchandise
Freight Costs
Terms
FOB shipping point - seller places goods Free On Board
the carrier, and buyer pays freight costs.
FOB destination - seller places the goods Free On Board
to the buyer’s place of business, and seller pays freight
costs.
Freight costs incurred by the seller on outgoing merchandise are an operating
expense to the seller (Freight-out or Delivery Expense).
Chapter
5-10
Recording Purchases of Merchandise
E5-2 Continued Prepare the journal entry to record the transaction
under a perpetual inventory system.
2. On April 6, paid freight costs of $900 on merchandise
purchased from Bryant.
April 6 Merchandise inventory 900
Cash 900
Chapter
5-11
Recording Purchases of Merchandise
Purchase Returns and Allowances
Purchaser may be dissatisfied because goods damaged or
defective, of inferior quality, or do not meet specifications.
Purchase Return Purchase Allowance
Return goods for credit if the May choose to keep the
sale was made on credit, or merchandise if the seller will
for a cash refund if the grant an allowance
purchase was for cash. (deduction) from the purchase
price.
Chapter
5-12
Recording Purchases of Merchandise
Review Question
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. Merchandise Inventory
Chapter
5-13
Recording Purchases of Merchandise
E5-2 Continued Prepare the journal entry to record the
transaction under a perpetual inventory system.
4. On April 8, returned damaged merchandise to Bryant
Company and was granted a $4,000 credit for returned
merchandise.
April 8 Accounts payable 4,000
Merchandise inventory 4,000
Chapter
5-14
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.
Chapter
5-15
Recording Purchases of Merchandise
Purchase Discounts Terms
N/30, m/60, or
2/10, n/30 1/10 EOM
n/10 EOM
2% discount if 1% discount if Net amount due
paid within 10 paid within first in 30 days, 60
days. 10 days of next days, or within
month. the first 10 days
of the next month.
Chapter
5-16
Recording Purchases of Merchandise
E5-2 Continued Prepare the journal entry to record the
transaction under a perpetual inventory system.
5. On April 15, paid the amount due to Bryant Company in
full.
(Discount = $25,000 x 2% = $500)
April 15 Accounts payable 25,000
Merchandise inventory 500
Cash 24,500
Chapter
5-17
Recording Purchases of Merchandise
E5-2 Continued Prepare the journal entry to record the
transaction under a perpetual inventory system.
5. On April 15, paid the amount due to Bryant Company in
full.
What entry would be made if the company failed to pay
within 10 days?
April 16 or Accounts payable 25,000
later Cash 25,000
Chapter
5-18
Recording Purchases of Merchandise
Summary of Purchasing Transactions
Merchandise I nventory
Debit Credit
5th - Purchase $25,000 $4,000 8th - Return
6th – Freight-in 900 500 15th - Discount
Balance $21,400
Chapter
5-19
Recording Sales of Merchandise
Made for cash or credit
(on account).
Normally recorded when
earned, usually when
goods transfer from
seller to buyer.
Sales invoice should
support each credit
Chapter
sale.
5-20
Recording Sales of Merchandise
Two Journal Entries to Record a Sale
1 Cash or Accounts receivable XXX Selling
Sales XXX Price
2 Cost of goods sold XXX
Cost
Merchandise inventory XXX
Chapter
5-21
Recording Sales of Merchandise
E5-5 Presented are transactions related to Wheeler Company.
1. On December 3,Wheeler Company sold $500,000 of merchandise to
Hashmi Co., terms 2/10, n/30, FOB shipping point. The cost of the
merchandise sold was $350,000.
2. On December 8, Hashmi Co. was granted an allowance of $27,000 for
merchandise purchased on December 3.
3. On December 13,Wheeler Company received the balance due from
Hashmi Co.
Instructions: Prepare the journal entries to record these transactions on
the books of Wheeler Company using a perpetual inventory system.
Chapter
5-22
Recording Sales of Merchandise
E5-5 Prepare the journal entries for Wheeler Company .
1. On December 3, Wheeler Company sold $500,000 of merchandise
to Hashmi Co., terms 2/10, n/30, FOB shipping point. Cost of
merchandise sold was $350,000.
Dec. 3 Accounts receivable 500,000
Sales 500,000
Cost of goods sold 350,000
Merchandise inventory 350,000
Chapter
5-23
Recording Sales of Merchandise
Sales Returns and Allowances
“Flipside” of purchase returns and allowances.
Contra-revenue account (debit).
Sales not reduced (debited) because:
would obscure importance of sales returns and
allowances as a percentage of sales.
could distort comparisons between total sales in
different accounting periods.
Chapter
5-24
Recording Sales of Merchandise
E5-5 Prepare the journal entries for Wheeler Company.
2. On December 8, Hashmi Co. was granted an allowance of
$27,000 for merchandise purchased on December 3.
Dec. 8 Sales returns and allowances 27,000
Accounts receivable 27,000
Chapter
5-25
Recording Sales of Merchandise
E5-5 Prepare the journal entries for Wheeler Company.
2. Variation On Dec. 8, Hashmi Co. returned merchandise for
credit of $27,000. The original cost of the merchandise to
Wheeler was $19,800.
Dec. 8 Sales returns and allowances 27,000
Accounts receivable 27,000
Merchandise inventory 19,800
Cost of goods sold 19,800
Chapter
5-26
Recording Sales of Merchandise
Review Question
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.
Chapter
5-27
Recording Sales of Merchandise
Sales Discount
Offered to customers to promote prompt payment.
“Flipside” of purchase discount.
Contra-revenue account (debit).
Chapter
5-28
Recording Sales of Merchandise
E5-5 Prepare the journal entries for Wheeler Company .
3. On December 13, Wheeler Company received the balance due
from Hashmi Co.
Dec. 13 Cash 463,540 *
Sales discounts 9,460 **
Accounts receivable 473,000 ***
* ($473,000 – $9,460)
** [($500,000 – $27,000) X 2%]
*** ($500,000 – $27,000)
Chapter
5-29
Recording Sales of Merchandise
E5-5 Variation Prepare the sales revenue section of the income
statement for Wheeler Company.
Wheeler Company
I ncome Statement (Partial)
For the Month Ended Dec. 31,
Sales revenue
Sales $ 500,000
Less: Sales returns and allowances (27,000)
Sales discounts (9,460)
Net sales 463,540
Chapter
5-30
Recording Sales of Merchandise
Discussion Question
Q5-9 Joan Roland believes revenues from credit sales
may be earned before they are collected in cash.
Do you agree? Explain.
See notes page for discussion
Chapter
5-31
Completing the Accounting Cycle
Adjusting Entries
Generally the same as a service company.
One additional adjustment to make the records agree with
the actual inventory on hand.
Involves adjusting Merchandise Inventory and Cost of
Goods Sold.
Chapter
5-32
Completing the Accounting Cycle
Closing Entries
Close all accounts that affect net income.
E5-8 Presented is information related to Rogers Co. for the month of January
2008.
Ending inventory per books $ 21,600 Rent expense $ 20,000
Ending inventory per count 21,000 Salary expense 61,000
Cost of goods sold 218,000 Sales discount 10,000
Freight-out 7,000 Sales returns 13,000
I nsurance expense 12,000 Sales 350,000
Required: (a) Prepare the necessary adjusting entry for inventory.
(b) Prepare the necessary closing entries.
Chapter
5-33
Completing the Accounting Cycle
E5-8 (a) Prepare the necessary adjusting entry for inventory.
Cost of goods sold 600
Merchandise inventory 600
Ending inventory per books $ 21,600
Ending inventory per count 21,000
Overstatement of inventory $ 600
Chapter
5-34
Completing the Accounting Cycle
E5-8 (b) Prepare the necessary closing entries.
Sales 350,000
Income summary 350,000
Income summary 341,600
Cost of goods sold 218,600
Freight-out 7,000
Insurance expense 12,000
Rent expense 20,000
Salary expense 61,000
Sales discounts 10,000
Sales returns 13,000
Income summary 8,400
Rogers, Capital 8,400
Chapter
5-35
Forms of Financial Statements
Multiple-Step Income Statement
Shows several steps in determining net income.
Two steps relate to principal operating activities.
Distinguishes between operating and non-operating
activities.
Chapter
5-36
Illustration 5-
Forms of
11
Financial
Statements
Key Items:
Net sales
Gross profit
Gross profit rate
Chapter
5-37
Illustration 5-
Forms of
11
Financial
Statements
Key Items:
Net sales
Gross profit
Gross profit rate
Operating
expenses
Chapter
5-38
Illustration 5-
Forms of
11
Financial
Statements
Key Items:
Net sales
Gross profit
Gross profit rate
Operating
expenses
Nonoperating
activities
Net income
Chapter
5-39
Forms of Financial Statements
Review Question
The multiple-step income statement for a merchandiser
shows each of the following features except:
a. gross profit.
b. cost of goods sold.
c. a sales revenue section.
d. investing activities section.
Chapter
5-40
Forms of Financial Statements
Single-Step Income Statement
Subtract total expenses from total revenues
Two reasons for using the single-step format:
1) Company does not realize any type of profit until total
revenues exceed total expenses.
2) Format is simpler and easier to read.
Chapter
5-41
Forms of Financial Statements
Illustration 5-12
Single-
Step
Chapter
5-42
Forms of Financial Statements
Classified Balance Sheet
Illustration 5-13
Chapter
5-43
Determining Cost of Goods Sold Under a Periodic
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.
Chapter
5-44
Determining Cost of Goods Sold Under a Periodic
System
Calculation of Cost of Goods Sold
$316,000
Chapter
5-45