Accounting for

Merchandising
Activities

CHAPTER

5
Electronic Presentations in Microsoft®
PowerPoint® to accompany
Fundamental Accounting Principles, 16ce
Prepared by
© 2019 McGraw-Hill Education Lise Wall, Red River College
 Learning Objectives
1. Describe merchandising.
2. Describe both perpetual and periodic
merchandise inventory systems.
3. Analyze and record transactions for
merchandise purchases and sales using a
perpetual system.
4. Calculate net sales, COGS & gross profit.

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5-2
 Inventory

Products a company owns for the purpose of

selling to customers.
• It is often referred to as Merchandise
Inventory.
• Is classified as a current asset.

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 Merchandising Activities

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 Wholesaler & Retailers
Wholesaler Retailer
 A company that buys products  An intermediary that buys
from manufacturers or other products from manufacturers
wholesalers and sells them to or wholesalers and sells them
retailers or other wholesalers. to consumers
 Ex: General Mills Inc.  Ex: Gap

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 Calculating Profit for Both a Service
Company & Merchandising Company
Merchandiser Service Company
Net Sales Revenues

Cost of Goods
Sold

Gross Profit

Operating Operating
Expenses Expenses

Profit Profit

6 © 2013 McGraw-Hill Ryerson Limited. LO 1

 Merchandise Inventory

Cost of merchandise inventory includes:

• Costs incurred to purchase the goods.
• Shipping costs.
• Other costs required to make goods ready
for sale.

© 2019 McGraw-Hill Education 5-7

Merchandise Inventory Systems
Perpetual
Provides an up to date record of:
• The amount of merchandise inventory on hand.

• Cost of goods sold to date.

Periodic
Requires a physical count of goods to determine:
• The amount of merchandise inventory on hand.

• Cost of goods sold.

© 2019 McGraw-Hill Education 5-8

 Recording Merchandise Inventory
PURCHASES SALES

Returns & allowances: MI ↓ (Cr) Ret. & Allow.: Sales returns & allowances (Dr)
Transportation charges: MI ↑ (Dr) Transportation charges: Shipping expense (Dr)
Early payment discount: MI ↓ (Cr) Early payment discount: Sales discount (Dr)
Perpetual Inventory System

PURCHASING INVENTORY

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 Purchase Invoice - Example

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 Purchase of Merchandise
Purchases
Nov. 2 Merchandise Inventory 1,200
Accounts Payable 1,200
Purchased merchandise on credit
LEC purchases $1,200 of inventory on credit
Purchase Returns and Allowances
Nov.5 Accounts Payable 300 Debit Memo:
Merchandise Inventory 300 Dr: A/P
Purchase allowance re debit memo dated
November 5

Some of the inventory is defective so LEC requests an allowance of $300.

© 2019 McGraw-Hill Education 5-12
 Purchase/Sales Discounts
Credit period = 30 days
A deduction Terms
from the Discount period = 10 days

invoice price Purchase

(or Sale)
granted to
induce early
payment of Time
the amount
due. Example Due = Full amount less
Due = Full amount.
– 2/10, n30 discount.
If paid within this 10 day If paid within this period,
period, the amount due is the full amount due.
$882, calculated as the full
amount of $900 (=$1,200 - EXHIBIT 5.7
$300 allowance ) minus the
2% discount of $18 (=$900 x
2%).

© 2019 McGraw-Hill Education 5-13

 Payment for a Purchase
Purchase Discounts- Assume the purchase of merchandise
inventory on November 2 was on the terms 2/10,n30.
Case 1-Discount taken

Nov.12 Accounts Payable 900

Merchandise Inventory 18
Cash 882
2% x (1,200 - 300) = 18

Case 2-Discount not taken

Nov.13 Accounts Payable 900
Cash 900

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Account balances after recording Journal
Entries
Merchandise Inventory

Nov. 2 1,200 300 Nov. 5

    18 Nov. 12

Balance 882    

Accounts Payable

Nov. 5 300 1,200 Nov. 2

Nov. 12 900    

-0- Balance

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 Mini-Quiz
Prepare journal entries for each of the following
transactions. Assume a perpetual merchandise inventory
system.

October 6: Purchased 650 units of merchandise inventory at $5

per unit. The seller offered a cash discount of 2/10, n/30.

October 8: Returned 25 defective units and received full

credit.

October 10:Paid the amount in full, less the returned items.

© 2019 McGraw-Hill Education 5-16

 Mini-Quiz
Oct.6 Merchandise Inventory 3,250
Accounts Payable 3,250
(650 x 5)

8 Accounts Payable 125

Merchandise Inventory 125
(25 x 5)

11 Accounts Payable 3,125

Merchandise Inventory 62.50
Cash 3,062.50
(3,250-125) x 2%

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Identifying Transfer of Ownership

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 Transportation Costs
Shipping costs on purchases are called
transportation-in or freight-in costs. When a
company pays for the shipping, the cost
principle requires it to be part of the cost of
inventory.

Nov.24 Merchandise Inventory 75

Cash 75
Paid freight charges on purchased merchandise.
LEC has a $75 freight charge for merchandise purchased FOB

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Perpetual Inventory System

SELLING INVENTORY

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 Sale of Merchandise

Sales of Merchandise
Nov.12 Accounts Receivable 1,000
Sales 1,000
Sold merchandise on terms 2/10,n60

Cost of goods sold 600

Merchandise Inventory 600
To record cost of Nov. 12 sale

LEC completed a credit sale for $1000 on November 12, subject to terms of
2/10, n/60. The cost of the inventory sold was $600.

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 Payment from a Sale
Customer Payment
Case 1-Customer pays in 60 days
Jan 11 Cash 1,000
Accounts receivable 1,000
Received payment for Nov. 12 sale

Case 2-Customer pays in 10 days

Nov. 22 Cash 980
Sales discounts 20
Accounts receivable 1,000
Received payment for Nov 12 sale less the
discount

© 2019 McGraw-Hill Education 5-23

 Sales Returns & Allowances -
Resold
Sales Returns and Allowances:
Inventory returned is not defective and can be resold (two entries).
Nov.15 Sales Returns & Allowance 800
Accounts Receivable 800
Customer returned merchandise
Credit Memo:
Merchandise Inventory 600 Cr: A/R
Cost of Goods Sold 600
Returned goods to merchandise inventory

A customer returns his merchandise to LEC. The item sold for $800 and
cost $600. The merchandise is not defective and can be resold.

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Sales Returns & Allowances – Not
resold
Sales Returns and Allowances
Inventory returned is defective and cannot be resold (only one
entry).

Nov.15 Sales Returns & Allowance 800

Accounts Receivable 800
Customer returned merchandise

The merchandise is defective and the customer either returns his

merchandise to LEC or can keep it. LEC grants the customer a price
reduction.

© 2019 McGraw-Hill Education 5-25

 Debit & Credit Memos
Inventory Adjustment for Purchaser – Vendor Sales Adjustment – Credit
Debit Memo Memo
 Document prepared by the  Document prepared by the
purchaser to: seller to:
 Debit: ↓A/P  Credit: ↓A/R
 Credit: MI  Debit: Sales Returns &
 Why? Allowances
 Returns  Why?
 Allowance  Returns
 Error  Allowance
 Error

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