Accounting 4 merchandising operations

• Operating cycle for merchandising companies.

• Merchandising operations under Perpetual inventory system.

• Merchandising operations under Periodic inventory system.

• 5 important tips in this chapter.

Operating cycle for merchandising companies

• The operating cycle of

a merchandising
company ordinarily is
longer than that of a
service company.
 perpetual inventory system

• Maintain detailed records of the cost of each inventory purchase and sale.
• Records continuously show inventory that should be on hand for every item.
• Company determines cost of goods sold each time a sale occurs.

ADVANTAGES OF THE PERPETUAL SYSTEM

• Traditionally used for merchandise with high unit values.
• Shows the quantity and cost of the inventory that should be on hand at any time.
• Provides better control over inventories than a periodic system.

• Under perpetual system, one additional adjustment to make the records agree with the actual inventory on hand. By taking
physical inventory count to detect theft or shrinkage.
Cost of goods sold …………………………………………………………………………. XXXX
Merchandise Inventory ………………………………………………….. XXXX
Adjusting entry because book amount is higher than the inventory
amount determined to be on hand.
 Discount Terms

2/10 N/30: 2% cash discount N/10 EOM: the buyer must N/30: buyer must pay
if they pay within 10 days , if pay net amount within the first net amount within 30
not the price is due in 30 days. 10 days of next month. days.

Shipping Terms

FOB shipping point means that the FOB destination means that the seller
seller places the goods free on board places the goods free on board to the
the carrier, and the buyer pays the buyer’s place of business, and the
freight costs. seller pays the freight.
Purchase Transactions & Merchandise inventory …………………………………………………………….. XXXX
A/P or cash …………………………………………………………………. XXXX
Entries under Perpetual To record Purchasing merchandise for resale.
inventory system
A/P or cash XXXX
……………………………………………………………………………………. XXXX
Merchandise Inventory ……………………………………………………….
To record Receiving purchase returns or allowances from suppliers

Merchandise inventory …………………………………………………………….. XXXX

cash ……………………………………………………………………………. XXXX
To record Paying freight costs on merchandise purchased; FOB
shipping point.

A/P …………………………………………………………………………………………… XXXX

Merchandise Inventory ……………………………………………………… XXXX
Cash ………………………………………………………………………………….
To record Paying suppliers within discount period.

A/P …………………………………………………………………………………………… XXXX

Cash …………………………………………………………………………………… XXXX
To record Paying suppliers out of discount period.
 Sales Transactions & A/R or cash …………………………………………………………………………………….. XXXX
Sales revenue XXXX
Entries under Perpetual …………………………………………………………………….
inventory system Cost of goods sold
XXXX
…………………………………………………………………………… XXXX
Merchandise Inventory …………………………………………………….
To record Selling merchandise to customers.
Sales return and allowance ……………………………………………………………… XXXX
A/R or cash XXXX
…………………………………………………………………………..
XXXX
Merchandise Inventory ……………………………………………………………………
Cost of goods sold ……………………………………………………………….. XXXX
To record Granting sales returns or allowances .
Freight-Out ………………..……………………………………………………………………. XXXX
cash …………………………………………………………………………………… XXXX
To record Paying freight costs on merchandise sold; FOB destination.

Cash XXXX
…………………………………………………………………………………………………. XXXX
Sales discount ………………………………………………………………………………….
XXXX
A/R …………………………………………………………………………………………..
To record receiving payment from customers within discount period.
Cash XXXX
………………………………………………………………………………………………….. XXXX
A/R
………………………………………………………………………………………………
 Merchandising Operations

This operations are under Perpetual inventory system.

Buyer Return & Allowance Sale Seller
 A/P or cash & Dr  Entry 1
 inventory & Cr  A/R or cash & Dr
 Sales revenue & Cr Discount
Purchase Freight cost  Entry 2 Freight cost
 inventory & Dr  COGS & Dr If taken
 A/P or cash & Cr  Inventory & Cr
 When FOB shipping point.  Cash & Dr
 Merchandise inventory & Dr  When FOB destination.  Sales discount & Dr
 A/P or cash & Cr  Freight out & Dr  A/R & Cr
 A/P or cash &Cr
Discount If not taken
 Cash & Dr
 Entry 1
 A/R & Cr
If taken If not taken  Sales return & allow. & Dr
 A/R or cash & Cr
 A/P & Dr  Entry 2 Returns & Allowances
 Cash & Cr  A/P & Dr  Inventory & Dr
 Inventory & Cr ( with  Cash & Cr  COGS & Cr
discount amount ).
 periodic inventory system

• Do not keep detailed records of the goods on hand.

• Cost of goods sold determined by count at the end of the accounting period.

• Calculation of Cost of Goods Sold:

 Goods sold COGS / IS / under Expense.

 Goods not sold Asset / BS / Ending inventory.

Purchase Transactions & Purchases …………………..…………………………………………………………….. XXXX
A/P or cash …………………………………………………………………. XXXX
Entries under Periodic To record goods purchased for resale.
inventory system

Freight-In ………………………………………………………………………………….. XXXX

cash ……………………………………………………………………………. XXXX
To record Paying freight costs on merchandise purchased; FOB
shipping point.

A/P or cash XXXX

……………………………………………………………………………………. XXXX
Purchase return & allowances ……………………………………………
To record Receiving purchase returns or allowances from suppliers

A/P ……………………………………………………………………………………………. XXXX

Purchase discount ……. XXXX
………………………………………………………..
Cash
……………………………………………………………………………………
To record Paying suppliers within discount period.
 Sales Transactions &
Entries under Periodic A/R or cash …………………………………………………………………………………….. XXXX
inventory system Sales revenue XXXX
…………………………………………………………………….
To record Selling merchandise to customers.

Sales return and allowance ……………………………………………………………… XXXX

A/R or cash XXXX
…………………………………………………………………………..
To record Granting sales returns or allowances .

Cash XXXX
…………………………………………………………………………………………………. XXXX
Sales discount ………………………………………………………………………………….
XXXX
A/R …………………………………………………………………………………………..
To record receiving payment from customers within discount period.
 Merchandising Operations

This Operations are under Periodic inventory system.

Buyer Seller
Purchase Return & Allowance Sale
 Purchases & Dr  A/P & Dr  A/R or cash & Dr Returns & Allowances
 A/P or cash & Cr  Purchase return & allow. & Cr  Sales revenue & Cr
 No entry for COGS  Sales return & allow. & Dr
Freight cost  A/R & Cr

 Freight-In & Dr
 Cash & Cr Payment with discount Collection with discount
 A/P & Dr  Cash & Dr
 Cash & Cr  Sales discount & Cr
 Purchase discount & Cr  A/R & Cr
 5 important tips in this chapter.
1) Net Sales = Sales revenue – sales discount – sales returns & allowances
2) Sales return, sales allowance and sales discount are contra revenue accounts .
3) Income measurement process 5) Dr Inventory Cr
for a merchandising company
 Purchase  Sales

 Freight In  Purchase return

 Sales return  Purchase

allowance

 Purchase discount

4) Freight out , sales discount and sales allowances have no effect on inventory.