Principles of Accounting (2)

College of Management and Techology in Alexandria

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Lecture Week 3
Accounting for Merchandising Transactions (Cont’d.)

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 Learning Objectives

1. Recording Sales transactions for a merchandising business

2. Discussing Sales discounts and Sales returns and allowances
for a merchandising business
3. Illustrating transportation terms and the effect on Sales
transactions for a merchandising business

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Recording Sales under Perpetual System
Journal Entries to Record a Sale

#1 Cash or Accounts receivable XXX Selling

Sales revenue Price
XXX

#2 Cost of goods sold XXX

Cost
Inventory
XXX

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Sales of Merchandise
On November 3, Z-Mart sold $2,400 of merchandise on
credit. The merchandise has a cost basis to Z-Mart of
$1,600.

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Recording Sales Perpetual System
Illustration: PW Audio Supply records its May 4 sale
of €3,800 on account to Sauk Stereo as follows
(assume merchandise cost PW Audio Supply €2,400).
May 4 Accounts Receivable 3,800
Sales Revenue 3,800
4 Cost of Goods Sold 2,400
Inventory 2,400

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Sales Returns and Allowances

Sales returns and allowances usually involve

dissatisfied customers and the possibility of lost
future sales.

Sales returns refer Sales allowances

to merchandise that refer to reductions in
customers return to the selling price of
the seller after a merchandise sold to
sale. customers.

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Sales Returns and Allowances
Recall Z-Mart’s sale for $2,400 that had a cost of
$1,600. Assume the customer returns part of the
merchandise. The returned items sell for $800 and
cost $600.

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Sales Returns and Allowances
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 Allowances300
Accounts Receivable 300
8 Inventory 140
Cost of Goods Sold 140
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Sales Returns and Allowances
Assume that $800 of the merchandise Z-Mart sold
on November 3 is defective but the buyer decides
to keep it because Z-Mart offers a $100 price
reduction.

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Sales Discounts
Sales discounts on credit sales can benefit a seller by
decreasing the delay in receiving cash and reducing future
collection efforts.

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Sales Discounts
Z-Mart completes a $1,000 credit sale with terms of 2/10, n/60.

Ignoring the second journal entry to record Inventory and COGS, as it has no effect on the
discount entry.

Now assume that the account was paid in full within the 60-day period.

Alternatively, assume that the account was paid in full within the 10-day discount period.

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Sales Discounts
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 (Discount is 2%). Prepare the journal entry PW Audio
Supply makes to record the receipt on May 14.
Cash 3,430
Sales Discounts 70
Accounts Receivable 3,500
[(€3,800 – €300) X 2%]

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DO IT! Sales Transactions
On September 5, Z Company buys merchandise on account
from G Company. The selling price of the goods is $15,000,
and the cost to G Company was $8,000. On September 8, Z
returns defective goods with a selling price of $2,000 and a
fair value of $300. Record the transactions on the books of G
Company.
Sept. 5 Accounts Receivable 15,000
Sales Revenue 15,000
5 Cost of Goods Sold 8,000
Inventory 8,000
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DO IT! Sales Transactions
On September 5, Z Company buys merchandise on account
from G Company. The selling price of the goods is $15,000,
and the cost to G Company was $8,000. On September 8, Z
returns defective goods with a selling price of $2,000 and a
fair value of $300. Record the transactions on the books of G
Company.
Sept. 8 Sales Returns and Allowances 2,000
Accounts Receivable 2,000
8 Inventory 300
Cost of Goods Sold 300
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Calculating Gross Profit for Merchandising Businesses

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Freight Costs

Ownership of goods
passes to buyer when
public carrier accepts
goods from seller.

Ownership of goods
remains with seller until
the goods reach buyer.

Freight costs incurred by the seller are an operating expense.

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Payment of freight charges by the seller

November 29; Z-Mart sold merchandise on terms of FOB

destination. The transportation charge is $100 which was
paid in cash.

Nov. 29 Dr. Freight out (delivery expense) 100

Cr. Cash 100

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Adjusting Entries for a Merchandising Company
Adjusting Entries
• Generally same as a service company
• One additional adjustment to make records agree
with actual inventory on hand
• Involves adjusting Inventory and Cost of Goods Sold

LO 4 19
Adjusting for Inventory Shrinkage
• A merchandiser using a perpetual inventory system is usually
required to make an adjustment to update the Merchandise
Inventory account to reflect any loss of merchandise, including
theft and deterioration.
• Shrinkage is the term used to refer to the loss of inventory and
it is computed by comparing a physical count of inventory with
recorded amounts. A physical count is usually performed at
least once annually.

LO 4 20
Adjusting for Inventory Shrinkage
Illustration: Suppose that PW Audio Supply has an unadjusted
balance of €40,500 in Inventory. Through a physical count, PW
Audio Supply determines that its actual merchandise inventory at
December 31 is €40,000. The company would make an adjusting
entry as follows.
Cost of Goods Sold 500
Inventory (€40,500 – €40,000) 500

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Adjusting for Inventory Shrinkage
Illustration: Z-Mart’s Merchandise Inventory account at the end
of year 2011 has a balance of $21,250, but a physical count
reveals that only $21,000 of inventory exists.
Cost of Goods Sold 250
Inventory ($21,250 – $21,000) 250

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References
• Wild, J., Shaw, K., Chiappetta, B. and Samaha, K., 2017. Fundamental
Accounting Principles. 2nd ed. McGraw-Hill Education.
• Weygandt, J., Kimmel, P. and Kieso, D., 2019. Accounting Principles
IFRS Version. Global Edition. Wiley.

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