Ch05: Accounting for Merchandising Operations

Study Objectives:
1. Identify the difference 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. Distinguish between a multiple-step and a single-step income statement.
6. Explain the computation and importance of gross profit.

WHAT IS A MERCHANDISING BUSINESS?

Merchandising business sometimes called: Trading Business is the one of the

most common types of the business we interact with daily.

It is the business that purchases finished products and resells them to the
customers e.g.: Auto dealers, clothing stores etc.
DIFFERENCE BETWEEN SERVICE BUSINESS AND MERCHANDISING COMPANIES.

1. Merchandising company must stock inventory, while services not.

2. Merchandising company earns its revenue by selling inventory, while a
service company gets its revenue by selling services to the customers.
3. Service is intangible where as inventory is tangible item.

TYPES OF MERCHANDISING BUSINESS

1. Retailers: sell products directly to the end user.

2. Wholesalers: buy products from manufacturers and other wholesalers
and sell them to other merchandising companies, usually Retailers.

INVENTORY ACCOUNTING SYSTEMS

PERIODIC VS PERPETUAL

1- Periodic inventory system: under this system the amount appearing in

the merchandise inventory account is not updated when purchases of
merchandise are made from suppliers. Purchases of merchandise are
recorded in purchase accounts.

Under the periodic system there is no cost of goods sold account to be

updated when a sale of merchandise occurs.

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 In short, under the periodic inventory system there is no way to tell from the
general ledger accounts the amount of inventory or the cost of goods sold.

2- Perpetual inventory system: under this system the merchandise

inventory account is continuously updated. The inventory account is
increased with the cost of merchandise purchased from suppliers and it is
reduced by the cost of merchandise that has been sold to customers. ( the
purchases account don’t exist)
Under the perpetual system there is a cost of goods sold account that is
debited at the time of each sale for the cost of the merchandise that was sold.