Accounting for

Chapter
Merchandising

5 Operations

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 Merchandising
Merchandising Activities
Activities
Merchandising Companies

Manufacturer Retailer Customer

Manufacturer
Wholesaler Retailer

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 Service
Service Organizations
Organizations
Previously
Previously we
we studied
studied Service
Service organizations
organizations sell
sell
services
services to
to earn
earn revenue.
revenue.
Examples:
Examples: accounting
accounting firms,
firms, law
law firms,
firms, and
and
plumbing
plumbing services
services

Minus Equals Net

Revenues Expenses
income

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 Reporting
Reporting Income
Income for
for aa Merchandiser
Merchandiser
Now Merchandising companies sell products to earn
revenue.
Examples: sporting goods, clothing, and auto parts
stores
Net Minus Cost of Equals Gross Minus Equals Net
Expenses
Sales Goods Sold Profit Income

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 Operating
Operating Cycle
Cycle for
for aa Merchandiser
Merchandiser
Begins with the purchase of merchandise and ends
with the collection of cash from the sale of
merchandise.
Cash Sale Credit Sale
Cash
Purchases collection Purchases

Merchandise
Cash Account
inventory
sales receivable

Merchandise
inventory Credit sales
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 Purchase
Purchase Discounts
Discounts
A deduction from the invoice price granted to
induce early payment of the amount due.

Terms
Discount Period Credit Period
Time
Full amount Full amount due
Due less discount

Purchase or Sale

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 Purchase
Purchase Discounts
Discounts

2/10,n/30
Number
Number ofof
Days
Days Otherwise,
Otherwise,
Discount
Discount Discount
Discount Is
Is Net
Net (or
(or All)
All) Credit
Credit
Percent
Percent Available
Available Is
Is Due
Due Period
Period

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 Purchase
Purchase Discounts
Discounts
On
On May
May 7,
7, Jason,
Jason, Inc.
Inc. purchased
purchased $27,000
$27,000 of
of
Merchandise
Merchandise Inventory
Inventory onon account,
account, credit
credit
terms
terms are
are 2/10,
2/10, n/30.
n/30.

May 7 Inventory 27,000

Accounts Payable 27,000
Purchase merchandise on account

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 Purchase
Purchase Discounts
Discounts
On
On May
May 15,
15, Jason,
Jason, Inc.
Inc. paid
paid the
the amount
amount due
due on
on
the
the purchase
purchase of
of May
May 7.
7.

$27,000 × 2% = $540 discount

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 Purchase
Purchase Discounts
Discounts
After we post these entries, the accounts
involved look like this:

Inventory Accounts Payable

7/5 27,000 15/5 540 15/5 27,000 7/5 27,000
Bal. 26,460

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 Purchase
Purchase Returns
Returns and
and Allowances
Allowances
Purchase Return . . .
Merchandise
Merchandise returned
returned by
by the
the purchaser
purchaser to
to
the
the supplier.
supplier.
Purchase Allowance . . .
A
A reduction
reduction in
in the
the cost
cost of
of defective
defective
merchandise
merchandise received
received by
by aa purchaser
purchaser from
from aa
supplier.
supplier.

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 Purchase
Purchase Returns
Returns and
and Allowances
Allowances
On
On May
May 9,
9, Matrix,
Matrix, Inc.
Inc. purchased
purchased $20,000
$20,000 of
of
Merchandise
Merchandise Inventory
Inventory onon account,
account, credit
credit
terms
terms are
are 2/10,
2/10, n/30.
n/30.

May 9 Inventory 20,000

Accounts Payable 20,000
Purchased merchandise on account

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 Purchase
Purchase Returns
Returns and
and Allowances
Allowances
On
On May
May 10,
10, Matrix,
Matrix, Inc.
Inc. returned
returned $500
$500 of
of
defective
defective merchandise
merchandise to to the
the supplier.
supplier.

May 10 Accounts Payable 500

Inventory 500
Returned defective merchandise

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 Purchase
Purchase Returns
Returns and
and Allowances
Allowances
On May 18, Matrix, Inc. paid the amount owed
for the purchase of May 9.

May 18 Accounts Payable 19,500

Cash 19,110
Inventory 390
Paid account in full

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 Transportation
Transportation Costs
Costs (FOB
(FOB == Free
Free On
On
Board)
Board)
Seller Buyer

FOB shipping point Carrier FOB destination

(buyer pays) (seller pays)

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 Transportation
Transportation Costs
Costs
On May 12, Jason, Inc. purchased $8,000 of
Merchandise Inventory for cash and also paid
$100 transportation costs.

May 12 Inventory 8,000

Cash 8,000
Paid for merchandise

May 12 Inventory 100

Cash 100
Paid for transportation

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 Quick
Quick Check
Check 

On
On July
July 6,
6, 2013
2013 Seller
Seller Co.
Co. sold
sold $7,500
$7,500 of
of
merchandise
merchandise to to Buyer,
Buyer, Co.;
Co.; terms
terms of of 2/10,n/30.
2/10,n/30. The
The
shipping
shipping terms
terms were
were FOB
FOB shipping
shipping point.
point. The
The
shipping
shipping cost
cost was
was $100.
$100. Which
Which of of the
the following
following will
will
be
be part
part of
of Buyer’s
Buyer’s July
July 66 journal
journal entry?
entry?

a.
a. Credit
Credit Sales
Sales $7,500
$7,500
b.
b. Credit
Credit Purchase
Purchase Discounts
Discounts $150
$150
c.
c. Debit
Debit Merchandise
Merchandise Inventory
Inventory $100
$100
d.
d. Debit
Debit Accounts
Accounts Payable
Payable $7,450
$7,450
FOB shipping point indicates the buyer
ultimately pays the freight. This is recorded with
a debit to Merchandise Inventory.
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 Sale
Sale of
of Inventory
Inventory
On June 12, Barton Co. sold merchandise
costing $4,000 for $7,500 on account The
credit terms were 2/10, n/30.

Jun. 12 Accounts Receivable 7,500

Sales 7,500
Sales of merchandise on credit

Cost of Goods Sold 4,000

Inventory 4,000
To record cost of sales

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 Sales
Sales Returns
Returns and
and Allowances
Allowances
On June 14, merchandise with a sales price of $800 and
a cost of $470 was returned to Barton. The return is
related to the June 12 sale.

Jun. 14 Sales Returns and Allowances 800

Accounts Receivable 800
Customer returned merchandise

Inventory 470
Cost of Goods Sold 470
Returned goods placed in inventory

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 Cash
Cash Received
Received and
and Discount
Discount
On June 20, Barton received the amount owed
to it from the sale of June 12.
Jun. 20 Cash 6,566
Sales Discount 134
Accounts Receivable 6,700
Received payment less discount

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 Income
Income Statement
Statement

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 Classified
Classified Balance
Balance Sheet
Sheet

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 Comparison
Comparison of
of Entries
Entries
 Perpetual System  Periodic System
Dr Cr Dr Cr
Inventory 800 Purchases 800
Account Payable 800 Account Payable 800
Purchase of inventory Purchase of
on credit merchandise on credit
Inventory 80 Freght In 80
Cash 80 Cash 80
Freight costs on Freight costs on
purchases purchases
Account Payable 20 Account Payable 20
Inventory 20 Purchase Return 20
Purchase returns Purchase returns
Account Payable 780 Account Payable 780
Cash 750 Cash 750
Inventory 30 Purchase Discount 30
Payment with discount Payment with discount

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 Perpetual
Perpetual System
System vs
vs Periodic
Periodic System
System
Dr Cr Dr Cr
Account Receivable 1560 Account Receivable 1560
Sales 1560 Sales 1560
Sale of merchandise on Sale of merchandise on
credit credit
Cost of goods sold 780 -
Inventory 780 No Entry for Cost of
-
Sale of merchandise on goods sold
credit
Sales Return 60
Sales Return 60
Account Receivable 60
Account Receivable 60
Sales returns
Sales returns
Inventory 30 -
No Entry for Cost of
Cost of goods sold 30 -
goods sold
Sales returns
Cash 1480 Cash 1480
Sales Discount 20 Sales Discount 20
Accounts Receivable 1500 Accounts Receivable 1500
Cash received Cash received

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 Practice
Practice Question
Question

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 Itemized
Itemized Cost
Cost of
of Merchandise
Merchandise Purchased
Purchased
Matrix
Matrix Inc.
Inc.
Total
Total Cost
Cost of
of Merchandise
Merchandise Purchases
Purchases
For
For Year
Year Ended
Ended May
May 31,
31, 2013
2013
Invoice
Invoice cost
cost ofof merchandise
merchandise purchases
purchases $$ 692,500
692,500
Less:
Less:
Purchase
Purchase returns
returns and
and allowances
allowances (4,275)
(4,275)
Purchase
Purchase discounts
discounts (10,388)
(10,388)
Add:
Add:
Freight
Freight in
in 4,895
4,895
Total
Total cost
cost of
of merchandise
merchandise purchases
purchases $$ 682,732
682,732

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 Periodic
Periodic Inventory
Inventory Systems
Systems

Beginning Net cost of

inventory + purchases

= Merchandise
available for sale

Cost of Goods
Ending Inventory
+ Sold

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 Periodic
Periodic Inventory
Inventory Systems
Systems

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 Practice
Practice Question
Question

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 End of Chapter 5

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