Chapter 2

ACCOUNTING FOR TRADING

ORGANIZATIONS
Presented by: Waqas Shinwari
Operating Cycle of a Trading (Merchandising)
Company

1. er
s he Cash

Pu ch
m
le f t

rc an
ab o

ha di
iv on

se se
c e ti
re lec

of
C ol
3.

Accounts
Inventory
Receivable 2. Sale of merchandise
on account
 Comparing Merchandising Activities with
Manufacturing Activities

Merchandising Manufacturing
Company Company

Purchase Manufacture
inventory in inventory and have
a longer and more
ready-to-sell complex operating
condition. cycle.
Retailers and Wholesalers

Wholesalers buy
merchandise from
several different Retailers sell
manufacturers and merchandise directly
then sell this to the public.
merchandise to
several retailers.
Income Statement of a Merchandising
Company
Cost of
goods sold
represents
the expense
of goods
that are
sold to
customers.
Gross profit is a useful means of measuring
the profitability of sales transactions.
 Two Approaches Used in Accounting for
Merchandise Transactions

Perpetual Periodic
Inventory Inventory
System System
Perpetual Inventory
Perpetual System
Inventory System
The inventory account is continuously
updated after each and every
transaction to reflect items on hand.

Let’s look
at some
entries!
Perpetual Inventory System
On September 5, Worley Co. purchased 100 laser lights for $30
per unit from Electronic City on account .
Perpetual Inventory System
On September 10, Worley Co. sold 10 laser lights
for $50 per unit on account to ABC Radios.

10 ´ $30 = $300
The Flow
The of Inventory
Flow Cost Cost
of Inventory
BALANCE SHEET
Current assets:
Purchase cost (or Inventory
manufacturing as
costs) incurred
INCOME STATEMENT as goods
are sold
Revenue
Cost of goods sold
Gross profit
Expenses
Net income
Perpetual Inventory System
On September 10, Worley Co. sold 10 laser lights
for $50 per unit on account to ABC Radios.

Retail

Cost
Perpetual Inventory System
On September 15, Worley Co. paid Electronic City $3,000 for the
September 5 purchase.
Perpetual Inventory System
On September 22, Worley Co. received $500 from ABC Radios
as payment in full for their purchase on September 10.
Inventory Subsidiary Ledger
Next is the
periodic
inventory
system!
Periodic Inventory System

No effort is made to keep up-to-date

records of either inventory or cost of
goods sold.

Let’s look
at some
entries!
Periodic Inventory System
On September 5, Worley Co. purchased 100 laser lights for $30
per unit from Electronic City on account .

No entry is made to increase Inventory.

Periodic Inventory System
On September 10, Worley Co. sold 10 laser lights for $50 per
unit on account to ABC Radios.

Retail

No entry is made to decrease Inventory.

Periodic Inventory System
On September 15, Worley Co. paid Electronic City $3,000 for the
September 5 purchase.
Periodic Inventory System
On September 22, Worley Co. received $500 from ABC Radios
as payment in full for their purchase on September 10.
 Computing Cost of Goods Sold in a Periodic
Inventory System

The accounting records of Party

Supply show the following:
Inventory, Jan. 1, 2018 $ 14,000
Purchases (during 2018) 130,000

At December 31, 2018, Party

Supply counted the merchandise
on hand at $12,000.

Calculate Party Supply’s cost of goods sold

for 2018.
Computing Cost of Goods Sold in a Periodic
Inventory System

Cost of Goods Sold can be

calculated as follows:
 Comparison of Perpetual and Periodic
Inventory Systems
Perpetual Inventory Periodic Inventory
System System

Large Department Small Shop

Stores
Credit Terms and Cash Discounts

When manufacturers and wholesalers

sell their products on account, the
credit terms are stated in the invoice.

2/10, n/30
Read as: “Two ten, net thirty”
Credit Terms and Cash Discounts

2/10, n/30
Percentage # of Days Otherwise, # of Days
of Discount Discount Is the Full when Full
Available Amount Is Amount Is
Due Due
End of Chapter 2