8/5/2023

LOGO Learning Objectives

1. Describe and illustrate merchandising operations and
the two types of inventory systems
2. Account for the purchase of inventory using a perpetual
system
Chapter 4
3. Account for the sale of inventory using a perpetual
system
4. Adjust and close the accounts of a merchandising
business
5. Prepare a merchandiser’s financial statements
6. Use gross profit percentage, inventory turnover, and
days in inventory to evaluate a business
7. Account for the sale of inventory using a periodic system
8. Prepare worksheets for a merchandiser
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Chapter ‘s content 4.1 What Are Merchandising Operations?

4.1 What Are Merchandising Operations?
4.2 Accounting for Inventory in the
Perpetual System
4.3 Adjusting and Closing the Accounts of a
Merchandiser
4.4 Preparing a Merchandiser’s Financial
Statements
4.5 Three Ratios for Decision Making

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4.1 What Are Merchandising Operations? 4.1 What Are Merchandising Operations?

The operating cycle of a merchandiser is as follows : Inventory Systems:

1. It begins when the company purchases inventory There are two main types of inventory accounting
from a vendor. systems:
2. The company then sells the inventory to a customer. ● Periodic system
3. Finally, the company collects cash from customers. ● Perpetual system

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4.2 Accounting for Inventory in the Perpetual

4.1 What Are Merchandising Operations?
System
Inventory Systems: 4.2.1 Purchase of Inventory
There are two main types of inventory accounting Purchase inventory (goods)
systems: Journalize
● Periodic system - the business Dr Inventory
physically counts its inventory periodically to Cr Account payable
determine the quantities on hand (or) Cash
● Perpetual system - the number of inventory units
and the dollar amounts are perpetually
(constantly) updated.

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4.2 Accounting for Inventory in the Perpetual 4.2 Accounting for Inventory in the Perpetual
System System
4.2.1 Purchase of Inventory 4.2.1 Purchase of Inventory
Purchase Discounts Purchase Returns and Allowances
Many businesses offer customers a discount for early payment. Businesses allow customers to return merchandise that is
This is called a purchase discount. defective, damaged, or otherwise unsuitable. This is called a purchase
RCA’s credit terms of “3/15, NET 30 DAYS” mean that Smart return
Touch can deduct 3% from the total bill (excluding freight charges, if Journalize
any) if the company pays within 15 days of the invoice date. Otherwise,
the full amount— NET—is due in 30 days. Dr Accounts Payable
These credit terms can also be expressed as “3/15, n/30.”
Cr Cash
Journalize
Cr purchase returns and allowances
Dr Accounts Payable 100
Cr Cash 97
Cr purchases discounts 3
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4.2 Accounting for Inventory in the 4.2 Accounting for Inventory in the
Perpetual System Perpetual System
4.2.1 Purchase of Inventory
Suppose Smart Touch buys $35,000 of
inventory, returns $700 of the goods, and
takes a 2% early payment discount. Smart
Touch also pays $2,100 of freight in. The
following summary shows Smart Touch’s
net cost of this inventory. All amounts are
assumed for this illustration.

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4.2 Accounting for Inventory in the 4.2 Accounting for Inventory in the
Perpetual System Perpetual System
4.2.2 Sale of Inventory
4.2.2 Sale of Inventory
A sales return: The customer may return goods to
Sales revenue (Sales): The amount a business earns Smart Touch, asking for a refund or credit to the
from selling merchandise inventory. customer’s account.
Dr Cash ( Accounts Receivable) A sales allowance: Smart Touch may grant a sales
Cr Sales Revenue allowance to entice the customer to accept non-
Cost of goods sold (COGS) (also known as Cost standard goods. This allowance will reduce the future
of sales or COS)is the cost of inventory that has cash collected from the customer.
been sold to customers.  the merchandiser’s A sales discount: If the customer pays within the
major expense discount period—under terms such as 2/10, n/30—
Dr Cost of goods sold Smart Touch collects the discounted amount.
Cr Inventory Freight out: Smart Touch may have to pay delivery
expense to transport the
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4.2 Accounting for Inventory in the 4.2 Accounting for Inventory in the
Perpetual System Perpetual System
4.2.2 Sale of Inventory 4.2.2 Sale of Inventory
A sales return: The customer may return goods A sales allowance : Smart Touch may grant a
to Smart Touch, asking for a refund or credit to sales allowance to entice the customer to accept
the customer’s account. non-standard goods. This allowance will reduce
Journalize: the future cash collected from the customer.
(a) Dr Sales return and allowances Journalize:
Cr Accounts receivable Dr Sales return and allowances
Cr Accounts receivable
(or)Cr Cash A sales discount:
Dr Cash
(b) Dr Inventory Dr Sales discount
Cr Cost of goods sold Cr Accounts receivable
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4.2 Accounting for Inventory in the 4.2 Accounting for Inventory in the
Perpetual System Perpetual System
4.2.2 Sale of Inventory 4.2.3 Transportation Costs
FOB shipping point: Means the buyer takes
Freight out: Smart Touch may have to pay ownership (title) to the goods at the shipping
delivery expense to transport the point. In this case, the buyer (owner of the goods
goods to the buyer. at the shipping point) also pays the
Journalize: FOB destination: Means the buyer takes ownership
Dr Delivery expense (title) to the goods at the delivery destination point. In
Cr Cash this case, the seller (owner of the goods while in
(or) Cr Accounts payable transit) usually pays the freight

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4.2 Accounting for Inventory in the

Perpetual System
Freight costs are either freight in or freight out. 4.2.2 Sale of Inventory
 Freight in: is the transportation cost to ship
goods INTO the purchaser’s warehouse; thus,
it is freight on purchased goods.
 Freight out: is the transportation cost to ship
goods OUT of the warehouse and to the
Net Sales Revenue, Cost of Goods
customer; thus, it is freight on goods sold.
Sold, and Gross Profit
Net sales revenue – Cost of goods sold
= Gross profit

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4.2 Accounting for Inventory in the

Perpetual System
4.2.2 Sale of Inventory Example:
1. Purchased inventory on account $2000
2. Purchased goods for $6000. Credit term of 2/10 net 30
3. Paid a $360 freight bill on goods purchased.
4. Returned 30% purchase on transaction 1. It was
defective
5. Sold goods for cash $1600 (Cost,$800)
6. Received returned goods from the customer of the
sale, $800 (cost, $400)
7. Sold inventory for $2,000 on credit terms of 2/10,
n/30 (cost, $1,180).

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4.3 Adjusting and Closing the Accounts of a

Merchandiser
Example (cont): A merchandiser adjusts and closes accounts the same
8. Borrowed money from the bank to take way a service entity does. If a worksheet is used, the trial
advantage of the discount offered on the balance is entered, and the worksheet is completed to
determine net income or net loss
transaction 2. Signed a note payable to the
bank for the net amount
9. Received cash in full settlement of the account
from the customer who purchased inventory
on transaction 7
Requirements:
1) Journalize the preceding transaction.
Explanation are not required
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4.3 Adjusting and Closing the Accounts 4.3 Adjusting and Closing the Accounts
of a Merchandiser of a Merchandiser
The Inventory account should stay current at all Closing the account of a Merchandiser
times in a perpetual inventory system. However,
the actual amount of inventory on hand may
differ from what the books show. Theft, damage,
and errors occur

Inventory balance before adjustment - Actual

inventory on hand = Adjusting entry to inventory

Dr Cost of goods sold

Cr Inventory
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4.3 Adjusting and Closing the Accounts 4.3 Adjusting and Closing the Accounts
of a Merchandiser of a Merchandiser
Closing the account of a Merchandiser Closing the account of a Merchandiser
Closing entries Closing entries
1) Dr Sales Revenues 2) Dr Income summary
Cr Sales discount Cr Cost of goods sold
Cr Sales returns and allowances Cr Wage expense
Cr Income summary Cr Rent expense
Cr Depreciation expense
Cr Insurance expense
Cr Supplies expense
Cr Interest expense
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4.3 Adjusting and Closing the Accounts 4.3 Adjusting and Closing the Accounts of a
of a Merchandiser Merchandiser
Closing still means to zero out all accounts that aren’t on
Closing the account of a Merchandiser the balance sheet. All amounts are assumed for this
Closing entries illustration.
3) Dr Income summary
Cr ….., capital

4) Dr ….., capital
Cr drawing, capital

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4.4 Preparing a Merchandiser’s Financial 4.4 Preparing a Merchandiser’s Financial

Statements
Income Statement:
The income statement begins with Sales,
Cost of goods sold, and Gross profit. Then
come the operating expenses, which are
those expenses other than Cost of goods sold
Statements
Balance sheet:
For a merchandiser, the balance sheet is the
same as for a service business, except
merchandisers have an additional current
asset, Inventory. Service businesses have no
inventory.

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4.5 Three Ratios for Decision Making 4.5 Three Ratios for Decision Making
The Gross Profit Percentage  The Rate of Inventory Turnover

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4.5 Three Ratios for Decision Making LOGO

 Days in Inventory

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