Merchandise Accounting – Part 2 - Transactions

Terms to Know:
 Freight-In – an account used to accumulate any transportation charges on incoming goods
 Duty - same as Freight-In, except the government controls how much it costs.
 Freight-Out – an account used to accumulate any transportation charges on goods being sent to
customers (delivery charges or Delivery Expense)

Common Formulas to Remember:

Beginning Purchases Cost of Ending

Inventory + + __ Goods = Inventory
Freight-In Sold

Beginning Purchases Ending Cost of

Inventory + + ___ Inventory = Goods
Freight-In Sold

The Worksheet:
 See Pg. 410 for an example of how the Worksheet records these formulas
o Merchandise Inventory has the Beginning Inventory debited on the Trial Balance and the
Income Statement portion, while the Ending Inventory is credited on the Income
Statement and debited on the Balance Sheet portions.
o Freight-In and Purchases are listed in the Expenses for both the Trial Balance and
Income Statement portions.

Transaction Examples:
Transactions Daily Recurring Journal Entries Debit Credit
Sales Selling merchandise to customers Cash or Accounts Receivable XX
Sales XX
HST Payable XX

Granting sales returns or Sales Returns and Allowances XX

allowances to customers HST Payable XX
Cash or Accounts Receivable XX

Paying freight costs on sales, FOB XX

destination Freight Out XX
Cash
Receiving payment from XX
customers Cash XX
Accounts Receivable
 Purchases Purchasing merchandise for Purchases XX
resale HST Recoverable XX
Cash or Accounts Payable XX

Paying freight costs on Freight-In XX

merchandise purchased, FOB Cash XX
shipping point

Receiving purchase returns or Cash or Accounts Payable XX

allowances from suppliers Purchase Returns & Allowances XX
HST Recoverable XX
Paying suppliers
Accounts Payable XX
Cash XX
End of Closing Entries
Period Clear the Beginning Inventory Income Summary XX
Merchandise Inventory (Beginning) XX
Debit the Ending Inventory, so
that it becomes the new Merchandise Inventory (Ending) XX
Beginning Inventory Income Summary XX

Close temporary accounts with Sales XX

credit balances Purchase Returns and Allowances XX
Income Summary XX
Close temporary accounts with
debit balances (drawings closed Income Summary XX
separately) Sales Returns and Allowances XX
Purchases XX
Freight-In XX
Other expenses XX

Clear the temporary Income Income Summary XX

Summary into Capital Capital (if Net Income, not Net Loss) XX

(Don’t forget to close Drawings into

Capital)

New Formula to Remember:

Beginning Purchases Cost of Ending

Inventory - Goods
+ __ = Inventory
Purchase Returns
Sold
& Allowances
+
Freight-In

+ Purchases ___ =
Beginning Ending Cost of
-
Inventory Purchase Returns Inventory Goods
& Allowances Sold
+
Freight-In
Example of Merchandise Periodic Inventory System on the Income Statement:

Company Name
Income Statement
For the Year Ended December 31, 202-

Sales Revenue
Sales $ 480 000
Less: Sales Returns and Allowances 20 000
Net Sales 460 000
Cost of Goods Sold
Inventory, January 1 $ 36 000
Purchases $ 325 000
Less: Purchase Returns and Allowances 17 000
Net Purchases 307 800
Add: Freight In 12 200
Cost of Goods Purchased 320 000
Cost of Goods Available for Sale 356 000
Inventory, December 31 40 000
Cost of Goods Sold 316 000
Gross Profit 144 000
Operating Expenses
Salaries Expense $ 45 000
Rent Expense 19 000
Utilities Expense 17 000
Advertising Expense 16 000
Amortization Expense – Store Equipment 8 000
Freight Out 7 000
Insurance Expense 2 000
Total Operating Expenses 114 000
Net Income $ 30 000

Sales Discounts:
 Terms of Sale (some of the most common)
o COD or Cash on Delivery – The goods must be paid for at the time they are delivered
o Net 30 – The full amount of the invoice is due 30 days after the date of invoice
o Net 60 – Same, but due in 60 days
o 2/10, n/30 – If the bill is paid within 10 days of the invoice date, a cash discount of 2%
may be taken. Otherwise, the full amount is due in 30 days after the invoice date.
o 1/15,n/30 – Same thing, but within 15 days for a discount of 1%
 Discounts Earned vs. Discounts Allowed
o Example of Earned (buyer - Purchases):
Accounts Payable – Masthead Marine 465.45
Discounts Earned (Purchase Discounts) 8.24
Bank 457.21
o Example of Allowed (seller - Sales):
Bank 457.21
Discounts Allowed (Sales Discounts) 8.24
Accounts Receivable – Nanaimo Marina 465.45
o Discounts Allowed goes just under Sales Returns and Allowances (debit), which lowers
Net Sales
o Discounts Earned goes just under Purchase Returns and Allowances (credit), which
lowers Net Purchases.
o See pg. 431 for an example of the Income Statement with the Discounts on it.