7. [NEW] Accounting for Merchandising Operations

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Accounting for Merchandising

Operations
MNA-2021
Merchandising Operations

Merchandising Companies
Buy and Sell Goods

Wholesaler Retailer Consumer

The primary source of revenues is referred to as


sales revenue or sales.
Merchandising Operations

Income Measurement
Not used in a
Sales Less
Service business.
Revenue
Illustration 5-1

Cost of = Gross Less


Goods Sold Profit

Operating = Net
Cost of goods sold is the total cost
Expenses Income
of merchandise sold during the
(Loss)
period.
Merchandising Operations
Illustration 5-2
Operating
Cycle
The operating
cycle of a
merchandising
company
ordinarily is longer
than that of a
service company.
INVENTORY SYSTEMS

1. Perpetual – where detailed records of each


inventory purchase and sale are maintained.
Cost of goods sold is calculated at the time of
each sale.
2. Periodic – detailed records are not maintained.
Cost of goods sold is calculated only at the end
of the accounting period.
Merchandising Operations

Flow of Costs
Perpetual System
1. Purchases increase Inventory.
2. Freight costs, Purchase Returns and Allowances and
Purchase Discounts are included in Inventory.
3. Cost of Goods Sold is increased and Inventory is decreased
for each sale.
4. Physical count done to verify Inventory balance.

The perpetual inventory system provides a continuous record of


Inventory and Cost of Goods Sold.
Merchandising Operations

Flow of Costs
Periodic System
1. Purchases of merchandise increase Purchases.
2. Ending Inventory determined by physical count.
3. Calculation of Cost of Goods Sold:

Beginning inventory xxx


Add: Cost of goods Purchased* xxx
Goods available for sale xxx
Less: Ending inventory (xxx)
Cost of goods sold xxx
PERPETUAL INVENTORY
SYSTEM
Recording Purchases of Merchandise
Illustration 5-5

Made using cash or credit


(on account).
Normally recorded when
goods are received.
Purchase invoice should
support each credit
purchase
.
Recording Purchases of Merchandise

Under the perpetual inventory system, companies record in the


Inventory account the purchase of goods they intend to sell.

Illustration: From INVOICE NO. 731 (Illustration 5-5) record the


journal entry Sauk Stereo would make to record its purchase from
PW Audio Supply.

May 4 Inventory 3,800


Accounts payable 3,800
Recording Purchases of Merchandise

Freight Costs – Terms of Sale


Illustration 5-6

Seller places goods Free On


Board the carrier, and buyer
pays freight costs.

Seller places goods Free On


Board to the buyer’s place
of business, and seller pays
freight costs.

SO 2
Recording Purchases of Merchandise

Illustration: Assume upon delivery of the goods on May 6, Sauk


Stereo pays Acme Freight Company €150 for freight charges, the
entry on Sauk Stereo’s books is:
May 6 Inventory 150
Cash 150

Assume the freight terms on the invoice in Illustration 5-5 had


required PW Audio Supply to pay the freight charges, the entry by
PW Audio Supply would have been:

May 4 Freight-out (or Delivery Expense) 150


Cash 150
Recording Purchases of Merchandise

Purchase Returns and Allowances


Purchaser may be dissatisfied because goods are
damaged or defective, of inferior quality, or do not meet
specifications.

Purchase Return Purchase Allowance


Return goods for credit if May choose to keep the
the sale was made on merchandise if the seller
credit, or for a cash refund will grant an allowance
if the purchase was for (deduction) from the
cash. purchase price.
Recording Purchases of Merchandise

Illustration: Assume that on May 8 Sauk Stereo returned


to PW Audio Supply goods costing €300.

May 8 Accounts payable 300


Inventory 300
Recording Purchases of Merchandise

Purchase Discounts
Credit terms may permit buyer to claim a cash discount
for prompt payment.
Advantages:
Purchaser saves money.
Seller shortens the operating cycle.

Example: Credit terms of 2/10, n/30, is read “two-ten, net thirty.”


2% cash discount if payment is made within 10 days.
Recording Purchases of Merchandise

Purchase Discount Terms

2/10, n/30 1/10 EOM n/10 EOM

2% discount if 1% discount if Net amount due


paid within 10 paid within first 10 within the first 10
days, otherwise days of next days of the next
net amount due month. month.
within 30 days.
Recording Purchases of Merchandise

Illustration: Assume Sauk Stereo pays the balance due of


€3,500 (gross invoice price of €3,800 less purchase returns and
allowances of €300) on May 14, the last day of the discount
period. Prepare the journal entry Sauk makes to record its May
14 payment.

May 14 Accounts payable 3,500


Cash 3,430
Inventory 70
Recording Purchases of Merchandise

Illustration: If Sauk Stereo failed to take the discount, and


instead made full payment of €3,500 on June 3, the journal entry
would be:

June 3 Accounts payable 3,500


Cash 3,500
Recording Sales of Merchandise
Illustration 5-5

Made for cash or credit


(on account).
Normally recorded when
earned, usually when
goods transfer from
seller to buyer.
Sales invoice should
support each credit
sale.
Recording Sales of Merchandise

Two Journal Entries to Record a Sale

#1 Cash or Accounts receivable XXX Selling


Sales XXX Price

#2 Cost of goods sold XXX Cost


Inventory XXX
Recording Sales of Merchandise

Illustration: Assume PW Audio Supply records its May 4 sale of


€3,800 to Sauk Stereo (Illustration 5-5) as follows. Assume the
merchandise cost PW Audio Supply €2,400.

May 4 Accounts receivable 3,800


Sales 3,800

4 Cost of goods sold 2,400


Inventory 2,400
Recording Sales of Merchandise

Sales Returns and Allowances


“Flipside” of purchase returns and allowances.
Contra-revenue account (debit).
Recording Sales of Merchandise

Illustration: Prepare the entry PW Audio Supply would make to


record the credit for returned goods that had a €300 selling price
(assume a €140 cost). Assume the goods were not defective.

May 8 Sales returns and allowances 300


Accounts receivable 300

8 Inventory 140
Cost of goods sold 140
Recording Sales of Merchandise

Sales Discount
Offered to customers to promote prompt payment.
“Flipside” of purchase discount.
Contra-revenue account (debit).
Recording Sales of Merchandise

Illustration: Assume Sauk Stereo pays the balance due of €3,500


(gross invoice price of €3,800 less purchase returns and
allowances of €300) on May 14, the last day of the discount period.
Prepare the journal entry PW Audio Supply makes to record the
receipt on May 14.

May 14 Cash 3,430


Sales discounts 70 *
Accounts receivable 3,500

* [(€3,800 – €300) X 2%]


Exercise 7.1
1. On June 10, Spinner Company purchased $10,000 of merchandise from Lawrence
Company, FOB shipping point, terms 2/10, n/30.
2. Spinner pays the freight costs of $600 on June 11.
3. Damaged goods totalling $700 are returned to Lawrence for credit on June 12. The
fair value of these goods is $300.
4. On June 19, Spinner pays Lawrence in full, less the purchase discount.

Both companies use a perpetual inventory system.

Instructions:
(a) Prepare separate entries for each transaction on the books of Spinner Company.
(b) Prepare separate entries for each transaction for Lawrence Company. The
merchandise purchased by Spinner on June 10 had cost Lawrence $6,400
Exercise 7.2
Information related to Kerber Co. is presented below.
1. On April 5, purchased merchandise from Wilkes Company for $23,000, terms 2/10,
net/30, FOB shipping point.
2. On April 6, paid freight costs of $900 on merchandise purchased from Wilkes.
3. On April 7, purchased equipment on account for $26,000.
4. On April 8, returned damaged merchandise to Wilkes Company and was granted a
$3,000 credit for returned merchandise.
5. On April 15, paid the amount due to Wilkes Company in full.

Instructions
(a) Prepare the journal entries to record these transactions on the books of Kerber
Co. under a perpetual inventory system.
(b) Assume that Kerber Co. paid the balance due to Wilkes Company on May 4
instead of April 15. Prepare the journal entry to record this payment.
Worksheet
• Perpetual inventory system – p.228
Adjusting Entry – Perpetual
Financial Statement
• Income Statement
Multiple Step Income Statement – p.180
Single Step Income Statement – p. 180
• Owners Equity Statement
• Balance Sheet
Multiple Step Income Statement

Single Step Income Statement


Closing Entry
• Perpetual
Exercise 7.3
Yolanda Hagen, a former disc golf star, operates Yolanda’s Discorama. At the
beginning of the current season on April 1, the ledger of Yolanda’s Discorama
showed Cash $1,800, Inventory $2,500, and Owner’s Capital $4,300. The
following transactions were completed during April:
Apr. 5 Purchased golf discs, bags, and other inventory on account from
Mumford Co. $1,200, FOB shipping point, terms 2/10, n/60.
7 Paid freight on the Mumford purchase $50.
9 Received credit from Mumford Co. for merchandise returned $100.
10 Sold merchandise on account for $900, terms n/30. The
merchandise sold had a cost of $540.
12 Purchased disc golf shirts and other accessories on account from
Saucer Sportswear $670, terms 1/10, n/30.
14 Paid Mumford Co. in full, less discount.
17 Received credit from Saucer Sportswear for merchandise
returned $70.
20 Made sales on account for $610, terms n/30. The cost of the
merchandise sold was $370.
21 Paid Saucer Sportswear in full, less discount.
27 Granted an allowance to customers for clothing that was flawed
$20.
30 Received payments on account from customers $900.

The chart of accounts for the store includes the following: No. 101 Cash, No.
112 Accounts Receivable, No. 120 Inventory, No. 201 Accounts Payable, No.
301 Owner’s Capital, No. 401 Sales Revenue, No. 412 Sales Returns and
Allowances, and No. 505 Cost of Goods Sold.

Instructions:
(a) Journalize the April transactions using a perpetual inventory system.
(b) Enter the beginning balances in the ledger accounts and post the April
transactions.
(c) Prepare a trial balance on April 30, 2019.
PERIODIC
INVENTORY SYSTEM
Periodic Inventory System

Periodic System
Separate accounts used to record purchases, freight
costs, returns, and discounts.
Company does not maintain a running account of
changes in inventory.
Ending inventory determined by physical count.
Periodic Inventory System

Calculation of Cost of Goods Sold


Illustration 5A-1
Recording Purchases under Periodic System

Illustration: On the basis of the sales invoice (Illustration 5-5) and


receipt of the merchandise ordered from PW Audio Supply, Sauk
Stereo records the €3,800 purchase as follows.

May 4 Purchases 3,800


Accounts payable 3,800
Recording Purchases under Periodic System

Freight Costs

Illustration: If Sauk pays Acme Freight Company €150 for freight


charges on its purchase from PW Audio Supply on May 6, the
entry on Sauk’s books is:

May 6 Freight-in (Transportation-in) 150


Cash 150
Recording Purchases under Periodic System

Purchase Returns and Allowances


Illustration: Sauk Stereo returns €300 of goods to PW Audio
Supply and prepares the following entry to recognize the return.

May 8 Accounts payable 300


Purchase returns and allowances 300
Recording Purchases under Periodic System

Purchase Discounts
Illustration: On May 14 Sauk Stereo pays the balance due on
account to PW Audio Supply, taking the 2% cash discount allowed
by PW Audio for payment within 10 days. Sauk Stereo records the
payment and discount as follows.

May 14 Accounts payable 3,500


Purchase discounts 70
Cash 3,430
Recording Sales under Periodic System

Illustration: PW Audio Supply, records the sale of €3,800 of


merchandise to Sauk Stereo on May 4 (sales invoice No. 731,
Illustration 5-5) as follows.

May 4 Accounts receivable 3,800


Sales 3,800

No entry is recorded for cost of goods sold at the time of the sale
under a periodic system.
Recording Sales under Periodic System

Sales Returns and Allowances


Illustration: To record the returned goods received from Sauk
Stereo on May 8, PW Audio Supply records the €300 sales return
as follows.

May 4 Sales returns and allowances 300


Accounts receivable 300
Recording Sales under Periodic System

Sales Discounts
Illustration: On May 14, PW Audio Supply receives payment of
€3,430 on account from Sauk Stereo. PW Audio honors the 2%
cash discount and records the payment of Sauk’s account
receivable in full as follows.

May 14 Cash 3,430


Sales discounts 70
Accounts receivable 3,500
Comparison of Entries-Perpetual vs. Periodic

Illustration 5A-2
Comparison of Entries-Perpetual vs. Periodic

Illustration 5A-2
Excercise 7.4
Prepare the journal entries to record these transactions on
Shabani Company’s books using a periodic inventory system.
(a) On March 2, Shabani Company purchased $900,000 of
merchandise from Ballas Company, terms 2/10, n/30.
(b) On March 6, Shabani Company returned $110,000 of the
merchandise purchased on March 2.
(c) On March 12, Shabani Company paid the balance due to
Ballas Company
Exercise 7.5
This information relates to Shanaya Co.
1. On April 5, purchased merchandise from Dion Company for $25,000,
terms 2/10, net/30, FOB shipping point.
2. On April 6, paid freight costs of $900 on merchandise purchased from
Dion Company.
3. On April 7, purchased equipment on account for $30,000.
4. On April 8, returned some of April 5 merchandise, which cost $2,800, to
Dion Company.
5. On April 15, paid the amount due to Dion Company in full.
Instructions:
(a) Prepare the journal entries to record these transactions on the books of
Shanaya Co. using a periodic inventory system.
(b) Assume that Shanaya Co. paid the balance due to Dion Company on May 4
instead of April 15. Prepare the journal entry to record this payment.
Thank You

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