Accounting for Merchandising

Business
ACG 2021: Chapter 5

Merchandising Business
Revenue activities of
a merchandising
business involve the
buying and selling of
merchandise
Comparison to
service business

Service Business

Merchandising
Business

Fees earned

Sales

Less Operating
expenses

Less Cost of
merchandise
sold

=Net income

=Gross Profit
Less Operating
expenses
=Net Income

New Accounts on the Income

Statement
SALES revenues collected from the sale of merchandise
COST OF MERCHANDISE SOLD the purchase price plus
incidentals of merchandise available for resale
GROSS PROFIT Sales Cost of merchandise sold

Income Statement
INCOME STATEMENT
Gem City Music
Income Statement
For the Year Ended December 31, 20
Revenue from sales:
Sales
Less:: Sales returns and allowances
Sales discounts
Net sales
Cost of merchandise sold XXXX
Gross profit
Operating expenses:
Selling expenses:
Sales salaries expense
Administrative expenses:
Rent expense
7,800
Office salaries expense
Depreciation expenseoffice equipment
Total operating expenses
Income from operations
Other expense:
Interest expense
Net income

$189,300
$1,700
500

2,200
$187,100
100,000
$

$17,700
22,550
2,800

33,150
50,850
$36,250
2,000
$ 34,250

87,100

Computation of Costs
Computation of Cost of Merchandise Sold
Purchases
Less merchandise inventory, December 31
=Cost of merchandise sold
Computation of Cost of Merchandise Purchased
Purchases
Less: purchases returns and allowances
Less: purchases discount
=Net purchases
Add: transportation in
=Cost of merchandise purchased

Balance Sheet Accounts

Merchandise inventory merchandise on hand
at the end of an accounting period.

Merchandising Terms
Sales total amount charged
to customers for
merchandise sold
Sales returns and allowances
are granted by the seller to
customers for damaged or
defective merchandise
Sales discount are granted
by the seller to customers for
early
Net sales = Sales returns discount

Merchandising Terms
Cost of goods sold
Cost of merchandise sold to customers

Purchases discounts
Offered by the seller to buyer
For early payment

Purchases allowances and returns

Buyer may receive a reduction in the intial price at
which the merchandise is purchased.

Merchandising Terms
Merchandise available for sale =
Beginning merchandise inventory + net purchases

Net purchases =
Purchases minus discounts returns and
allowances

Accounting for Sales

Under the perpetual inventory system, all sales
require the reporting of the removal of inventory
from the books at the same time.

Accounting for Sales

CASH SALES
Example 1: Sold merchandise for cash $5,000.
Cost of merchandise sold $3,200
Date

Account

Cash

PR

Debit

$5,000

Sales

Cost of merchandise sold

Merchandise inventory

Credit

$5,000

3,200
3,200

Credit sales
Bank cards
Master card
Visa
Monies directly deposited
in business account
Requires a debit to CASH

Service charge must be

later recorded as
expense

Bank cards
Example 9: Sold merchandise on VISA $10,000. Cost of
merchandise sold is $4,000. Credit card expense is 3% of
sales.
Date

Account

Cash

PR

Debit

$10,000

Sales
Cost of merchandise sold

$10,000
4,000

Merchandise inventory
Credit card expense
Cash

Credit

4,000
300
300

Bank cards
Example 3: Sold merchandise on VISA $6,000.
Cost of merchandise sold is $3,000. Credit card
expense is 3% of sales.

Example 10
Cash 6,000
Sales

6,000

Cost of merchandise 3,000

Merchandise inventory 3,000
Credit card expense
180
Cash
180

Credit sales
Two types:
American express
On account

Results in debit to
ACCOUNTS
RECEIVABLE

Sales of Account
Example 4: Sold merchandise on account $6,000. Cost of
merchandise sold is $3,000.
Date

Account

Accounts receivable

PR

Debit

$6,000

Sales

Cost of merchandise
Merchandise inventory

Credit

6,000

3,000
3,000

Recap
Under the perpetual inventory system, all sales
transactions consist of at least two entries.
The first entry records the sale at the selling price with a
debit to how it will be paid and credit to sales.
The second entry records the merchandise leaving the
business with a debit to cost of merchandise sold and
credit to merchandise inventory for the cost of the
merchandise.

Sales discounts
A reduction in the price of the good for early payment.
This account is a contra SALES
Upon payment of the account receivable, if the payment is within the
discount period, we record the discount.
Credit terms terms of when payments for merchandise are to be
made.
Net 30 days full amount due in 30 days
2/10 2% discount if paid within 10 days

Example on Sales Discount

Example 5: Sold merchandise on account $5,000, terms 2/10,
n/30. Cost of merchandise sold is $4,000.
Sales
Discount
Discount $
Sales
Less discount
Net amount

$5,000
2%
$100
$5,000
100
4,900

Sales discount
Date

Account

PR

Debit

Cash

4900

Sales discount

100

Accounts receivable

Credit

5000

Sales Returns and Allowances

Merchandise sold may be returned to the seller
Merchandise sold may be reduced in price due
to defects
This account is CONTRA sales
Increases with a debit

Sales returns & allowances

Example 6: Sold merchandise on account $7,000,
terms 1/15, n/30. Cost of merchandise sold is
$3,800
Date

Account
Accounts receivable

PR

Debit
$7,000

Sales

Cost of merchandise
Merchandise inventory

Credit

7,000

3,800
3,800

Sales returns & allowances

Return merchandise with sales price of $2,000 and
cost of $1,000.
Date

Account
Sales returns

PR

Debit
2,000

Accounts receivable

Merchandise inventory
Cost of merchandise sold

Credit

2,000

1,000
1,000

Recap of Sales Example

Example 7: ABC Merchandising had the following transactions:
Sold merchandise and received payment by VISA at $6,000, cost
of merchandise sold is $4,000.
Sold merchandise on account for $7,500 with credit terms 1/10,
n/30. Cost of the merchandise is $4,500.
Sold merchandise on account for $4,000, cost of merchandise is
$2,500.
Received a return of the merchandise in (c ) of sales price of
$2,000 and cost of $1,750.
Received payment within the discount period for merchandise in
(b).
Received payment for merchandise in (c ).

Accounting for Purchases

Assume a perpetual inventory system
Each purchase and sale of merchandise is recorded as it occurs
Example 1: purchase merchandise for resale $4,000 on
account
Date

Account

Mar 1 Merchandise inventory

Accounts payable

PR

Debit

Credit

$4,000
$4,000

Purchases Discount
Credit terms
Purchases discounts are
discounts taken by the buyer for
early payment of an invoice.
These discounts reduce the cost
of the merchandise purchased.
Should be taken when offered if
not it is a LOSS to the business.

Purchase discount
Example 9: Purchase merchandise for resale
$4,000, terms 2/10, n/30 on account.
Invoice:
$4,000
Discount (2% x $4,000)
80
Net of discount
3,920

Purchase discount
Date

Account

Mar 1

Merchandise inventory

PR

Debit
$4,000

Accounts payable

Mar 10

Accounts payable
Cash
Merchandise
inventory

Credit

$4,000

$4,000
$3,920
80

Purchase Discount
Reduction of the cost of the merchandise is
reflected in the merchandise inventory account.
Example 10: Purchase merchandise for resale
$6,000, terms 1/15, n/30 on account.

Purchases Returns and Allowances

Purchase returns merchandise is returned to
the seller
Purchase allowances price adjustment
Debit memorandum notification of the return or
allowance by seller

Purchases Returns and Allowances

Example 11: Returned
merchandise on account
$2,500.
Date
Mar 09

Account
Accounts payable
Cash

PR

Debit

Credit

$2,500
$2,500

Example
Example 12: Purchased merchandise of
$8,000 on terms 2/10,n/30. Ennis pays the
original invoice less a return of $2,500
within the discount period. Record the
above entries

Recap of Purchases Example

Example 7: ABC Merchandising had the following transactions:
Purchased merchandise and received payment by VISA at
$6,000.
Purchased merchandise on account for $7,500 with credit terms
1/10, n/30.
Purchased merchandise on account for $4,000.
Return of the merchandise in (c ) of sales price of $2,000.
Paid within the discount period for merchandise in (b).
Paid for merchandise in (c ).

Transportation Costs
The terms of a sale should indicate when the
ownership of the merchandise passes to the buyer.
This point determines which party, the buyer or the seller must pay
the transportation costs.

Transportation Costs
FOB shipping point
The ownership of the merchandise passes to the buyer
when the seller delivers the merchandise to the
transportation company.
Buyer pays the transportation costs

Example 13: Purchased merchandise for $4,000

with shipping costs of $50 FOB shipping point.

FOB shipping point

Date

Account
Merchandise inventory

PR

Debit
$4,000

Accounts payable

Merchandise Inventory
Cash

Credit

$4,000

$50
$50

Transportation Costs
FOB destination point
The ownership of the merchandise passes to the buyer
when the seller delivers the merchandise to the buyer.
Seller pays the transportation costs

Example 14: Sold merchandise for $4,000 with

shipping costs of $50 FOB destination. Cost of
merchandise sold is $2,000.

FOB destination point

Date

Account
Accounts receivable

PR

Debit
$4,000

Sales
Cost of merchandise sold

$4,000
2000

Merchandise inventory
Delivery expense
Cash

Credit

2000
50
50

Transportation costs
FREIGHT TERMS
FOB
Shipping Point

FOB
Destination

Ownership (title)
passes to buyer
when merchandise
is freight

Delivered to
carrier

Received
by buyer

Transportation
costs are paid
by

Buyer

Seller

Risk of loss during

transportation
belongs to

Buyer

Seller

Sales Taxes
Liability to the business
Create a SALES TAX PAYABLE account
Example 15: Sold merchandise on account
$7,000, plus 5% sales tax. Cost of merchandise
sold is $3,800.

Sales Taxes
Date

Account
Accounts receivable

PR

Debit
$7,350

Sales

7,000

Sales tax payable

Cost of merchandise
Merchandise inventory

Credit

350
3,800
3,800

Recap of Transactions
Seller

Buyer

Sold merchandise on account:

Accounts receivable
DR
Sales
CR
Cost of merchandise sold DR
Merchandise inventory
CR

Purchased merchandise on account:

Merchandise Inventory DR
Accounts Payable
CR

Transportation costs Shipping point

Transportation costs Shipping point:

Merchandise Inventory DR
Cash
CR

Transportation costs Destination:

Delivery Expense
DR
Cash
CR

Transportation costs - Destination

Merchandise returned:
Sales Returns & Allowances
Accounts receivable
Merchandise inventory
Cost of merchandise sold

Merchandise returned:
Merchandise inventory DR
Accounts payable

Payment :
Cash
Accounts receivable
Payment with discount:
Cash
DR
Sales discount
DR
Accounts receivable

DR
CR

CR

DR
CR

DR
CR

Payment:
Accounts payable
Cash

DR
CR

Payment with discount:

Merchandise inventory DR
Cash
CR
CR

Adjusting Entries
Inventory Shrinkage
Difference between physical count and books

Example 16: Suppose that physical inventory shows balance of

$20,000 and books show balance of $23,000. Record the
shrinkage.
Date

Account
Cost of merchandise sold
Merchandise inventory

PR

Debit

Credit

3,000
3,000

Closing Entries
Accounts that must be closed

Sales
Rent revenue
Sales returns and allowances
Sales discounts
Cost of merchandise sold
All expenses and revenues
Dividends