The retailer, the wholesaler, the
manufacturer and you
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A business that buys goods from a supplier
and sells them back at a higher price
Two types of merchandise business:
A wholesaler is the business that buys goods
from manufacturers and sells them to retailers
A retailer is the business that buys goods from
wholesalers and manufactures and sells it back
to the public at a higher price
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Businesses that buy goods and sell them at a
higher price are dealing with a merchandise
business
The number of merchandise on hand is known
as merchandise inventory
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The merchandise inventory goes on the Balance
Sheet
The cost of goods sold goes on Income
Statement
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Most commonly used
The periodic inventory system is where the cost
of goods sold is determined at the end of the
fiscal period
Businesses use this inventory system because,
businesses do not have to keep-up-to-date on
everything
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There is inventory at the beginning of the
accounting period
Merchandise is sold during accounting period
Merchandise is replaced by purchased new
stock from time to time
The inventory at the end of the accounting
period is almost the same as at the beginning
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The formula for calculating the cost of ending
inventory is:
Cost of beginning inventory + cost of
merchandise purchased – cost of merchandise
sold = cost of ending inventory
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The physical inventory is used to create
financial statements
It is a procedure where the unsold merchandise
goods are accounted for
An important current asset
Needed to calculate the costs of goods sold
figure on the income statement
Will be used as the beginning inventory for the
next accounting period
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Merchandise inventory is a current asset under
accounts receivable because it will be normally
sold and turned into cash within that fiscal
period
It is listed as its cost price and not its selling
price (GAAP: The Cost Principle)
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The total cost of all the items sold is usually the
biggest expense figure for a merchandising
business
The formula for finding the cost of goods sold
is as follows:
Cost of beginning inventory + cost of
merchandise purchased - cost of ending
inventory
= cost of merchandise sold
There are now six new headings on the income
statement
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The inventory, the purchases, the cost of good
available for sale (after adding both the purchases
and the inventor) , the less inventory and the cost
of goods sold
After subtracting the cost of goods available for
sale from the less inventory (the ending inventory)
you will get your cost of goods sold which is
subtracted from the sales and you will get your
gross profit
Most companies try to reach a specific target gross
profit percentage (try to reach a percentage
divided from sales)
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Physical inventory check is a time-consuming
procedure
Good for small businesses but not accurate and
convenient for other larger businesses
•Merchandise
inventory of a business is kept in
two accounts
One is the merchandise inventory account, it
shows inventory figure as of the beginning of the
accounting period
•At the fiscal year-end inventory is counted and
valued at cost price at to arrive at merchandise
inventory grand total
•Merchandise inventory will now appear in the
assets section of most of your trail balance.
•Purchases
is the other account where
merchandise inventory of a business is kept
•Purchases is a short version of “Purchases of
Merchandise for Resale”
•Found in the assets section of the ledger.
Merchandise for Resale Purchased for
Cash
Dr
Purchase
$$$
Hst Recoverable $$$
Bank
Cr
$$$
If Merchandise for Resale purchased
on Account
Dr Cr
Purchases
$$$
Hst Recoverable $$$
A/P
$$$
•Revenue
account for a merchandising business is
called “Sales”
If Goods sold for Cash
Dr Cr
Bank $$$
Hst Payable
Sales
$$$
$$$
If Goods sold on Account
Dr
Accounts Receivable $$$
Hst Payable
Sales
•When
Cr
$$$
$$$
a business sells its goods, the inventory is reduced.
No accounting entries are made to show this when the
Periodic System is used.
You must know how to put the merchandising inventory,
purchase and freight-in.
The 3 steps to enter the new accounts
The beginning inventory is extended to the debit column of the
income statement.
• Ending inventory was entered in both the credit column of the
income statement and in the debut column of the balance sheet
• The amounts for the freight-in and purchases were transferred to
the debit column of the income statement.
•
The beginning inventory, purchases and freight-in are
represents cost and they are all shown as debits on the
worksheet.
The ending inventory is shown as a credit because it’s
a deduction in the calculation, Ending inventory
represents goods purchased but not sold.
The higher the ending inventory the lower the cost of
goods sold.
Closing Entries
The closing entry process now automatically updates the
inventory account at the end of the fiscal period.
Section 11.4
In the books of a seller, a sales invoice would be
recorded as follows:
DR
CR
Accounts Receivable
$565
Sales
$500
HST Payable
$65
Sometimes the seller will issue the customer a
Credit Invoice. Such as defective merchandise or
goods that the customer keeps but is not happy
with, and or to correct an invoice that is not
correct.
Example of an adjustment: The seller would then make the
following adjustment
DR
CR
Sales
$150
HST Payable $19.50
Accounts Receivable
$169.50
A/R Customer
565
169.50
HST Payable
19.50
65
Sales
150
500
Some businesses may want to know part of
their sales is being returned. Businesses use a
special account called Sales Returns and
Allowances.
Sales Returns and Allowance
HST Payable
Accounts Receivable
DR
$150
$ 19.50
CR
$169.50
In the books of a purchaser, a purchase invoice:
DR
CR
Purchases
$500
HST Recoverable
$65
Accounts Payable - Vendor
$565
If the customers get a credit invoice because they found a flaw
or that some of the merchandise they purchased was defective.
The seller is going to reduce their payment by debiting accounts
payable.
Accounts Payable
Purchases
HST Recoverable
A/P
169.50 565
DR
$169.50
CR
$150
$19.50
HST Recoverable
65
19.50
Purchases
500
150
Some businesses may want to know part of their sales is being
returned. Businesses use a special account called Purchase
Returns and Allowances.
Accounts Payable
Purchase Returns and Allowances
HST Recoverable
DR
$169.50
CR
$150
$19.50
Revenue – The business needs to subtract all of the
credit that they gave to customers:
Sales – Sales Returns and Allowances = Net Sales
Cost of Goods Sold – The business needs to subtract
all of the merchandise that they purchased but
returned because it was not satisfactory to them:
Purchases – Purchase Returns and Allowances = Net Purchases
How to use sales discounts and put them in accounting
entries
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The arrangements made with the customers
(when the goods or services are paid for and a
cash discount is offered)
Standards Terms of Sale
C.O.D- Cash on delivery. The goods or
merchandise must be paid right when the
delivery is made
On Account or Charge. The full amount of the
invoice is due at the time the invoice is received
but is usually given a set of days to pay it off,
such as 30 days
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30 Days or Net 30. The full amount of the
invoice is due 30 days after the date of the
invoice
2/10, n/30. Two percent discount when paid in
ten days or full amount due in 30 days
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In the Books of the Buyer
When the invoice is received the purchases is
debited, the HST recoverable is debited and the
Accounts Payable is credited
If the buyer pays the amount but is offered a
cash discount then the accounts payable is
debited, the discounts earned is credited and
the bank is credited
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In the Books of the Seller
It is switched with the buyer
The accounts receivable is deducted, the sales
is credited and the HST recoverable is credited
because you made a sell
When the buyer pays the amount with the
discount offered then the
Debit bank
Debit discounts allowed
Credit accounts receivable
It’s easier, better and lazier
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In bigger companies they use perpetual
inventory system as faster alternative
compared to the Periodic Inventory System.
Example
50 portable stereo units were sold by sound
wave electronics, a wholesaler. The purchaser
is Fidelity sound, a retailer. The units cost
sound wave electronics $45 each, they were
sold on account to Fidelity Sound for $90.
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Sales Invoice
50 portable stereos costing $45 each are sold to Fidelity Sound for $90; terms 2/10,
net 30. Total $4,500.00 plus Hst.
Dr
Cr
Accounts Receivable
5085
Cost of Goods Sold
2250
Merchandise Inventory
2250
Sales
4500
Hst Payable
585
Credit Invoice
Fidelity Sounds finds 10 of the portable stereos to be defective and returns them to
sound wave electronics.
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Sales Returns & Allow.
Hst Payable
Merchandise Inventory
Cost of Goods Sold
Accounts Receivable
Dr
900
117
450
Cr
450
1017
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Fidelity sound pays the amount owned ($5085
less the return of $1017 equals $4068). Also,
prompt payment earned a 2% discount.
DR
CR
Bank
3986.64
Sales Discount
81.36
A/R
4068
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Purchase Invoice
50 stereos are bought from sound wave
electronics for $90; terms 2/10, net 30, total
$4500, plus Hst
DR
CR
Merchandise Inventory
4500
Hst Recoverable
585
Accounts Payable
5085
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Credit Invoice
Fidelity sounds finds 10 of the portable
stereos to be defective and returns them to
sound wave electronics
Dr
Cr
Accounts Payable
1017
Merchandise Inventory
900
Hst Recoverable
117
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Cheque Copy
Fidelity Sound pays the amount owned
($5085 less the return of $1117 equals $4068).
Also, prompt payment earns a 2% discount.
Dr
Cr
Accounts Payable
4068
Bank
986.64
Discounts Earned
81.36
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