Chapter 5:
Accounting for Merchandising Business
Nature of Merchandising Business
 Revenue activities of a merchandising business involve the
buying and selling of merchandise.
 They purchase merchandise to resell to customers
o Cost of merchandise sold – an expense account
 SALES – COST OF MERCHANDISE SOLD = Gross Profit
 Merchandise inventory – merchandise on hand at the end of an
accounting period.
 Assume – perpetual inventory systems
o Each purchase and sale of merchandise is recorded as it
occurs.
Accounting for Purchases:
Example 1: Purchase merchandise for resale $4,000 on account.
Date
Mar 1
Account
Merchandise inventory
Accounts payable
PR
Debit
$4,000
Credit
$4,000
Purchases Discounts
Credit terms – terms of when payments for merchandise are to be
made.
Net 30 days – full amount due in 30 days
2/10 – 2% discount if paid within 10 days
Called purchases discounts
Purchases discounts are discounts taken by the buyer for early
Payment of an invoice.
These discounts reduce the cost of the merchandise purchased.
Should be taken when offered if not it is a LOSS to the business.
Winter, 2000
Prof. M. Mari
Page 1
Chapter 5:
Accounting for Merchandising Business
Example 2: Purchase merchandise for resale $4,000, terms 2/10, n/30 on
account.
Invoice:
Discount (2% x $4,000)
Net of discount
Date
Mar 1
Account
Merchandise inventory
Accounts payable
$4,000
80
3,920
PR
Debit
$3,920
Credit
$3,920
Record all entries with the amount net of the discount.
Example 3: Purchase merchandise for resale $6,000, terms 1/15, n/30 on
account.
Date
Account
PR
Debit
Credit
Example 4: Purchase merchandise for resale $4,000, terms 2/10, n/30 on
account.
Date
Mar 1
Winter, 2000
Prof. M. Mari
Page 2
Account
Merchandise inventory
Accounts payable
PR
Debit
$4,000
Credit
$4,000
Chapter 5:
Accounting for Merchandising Business
Paid within the discount period.
Invoice:
$4,000
Discount (2% x $4,000)
80
Net of discount
3,920
Date
Account
Mar 09
Accounts payable
Cash
Merchandise inventory
PR
Debit
$4,000
Credit
3,920
80
We reduce the merchandise inventory by the amount of the discount to show
the correct cost of the merchandise.
If not paid within the discount period.
Date
Account
Mar 15
Accounts payable
Cash
PR
Debit
$4,000
Credit
4,000
Example 5: Purchase merchandise for resale $6,000, terms 1/15, n/30 on
account.
Date
Winter, 2000
Prof. M. Mari
Page 3
Account
PR
Debit
Credit
Chapter 5:
Accounting for Merchandising Business
Paid within the discount period.
Date
Account
PR
Debit
Credit
PR
Debit
Credit
If not paid within the discount period.
Date
Account
Purchases Returns and Allowances
o Purchase returns – merchandise is returned to the seller
o Purchase allowances – price adjustment
o Debit memorandum – notification of the return or allowance by seller
Example 6: Returned merchandise on account $2,500.
Date
Account
Mar 09
Accounts payable
Cash
Winter, 2000
Prof. M. Mari
Page 4
PR
Debit
$2,500
Credit
$2,500
Chapter 5:
Accounting for Merchandising Business
Example 7: Purchased merchandise of $8,000 on terms 2/10,n/30. Ennis
pays the original invoice less a return of $2,500 within the discount period.
Record the above entries.
Date
Account
PR
Debit
Credit
Accounting for Sales
Under the perpetual inventory system, all sales require the reporting
of the removal of inventory from the books at the same time.
1. CASH SALES
Example 8: Sold merchandise for cash $5,000. Cost of
merchandise sold $3,200
Date
Account
PR
Debit
Credit
Cash
$5,000
Sales
$5,000
Cost of merchandise sold
Merchandise inventory
3,200
3,200
Note: that sales are credited for the sales price and merchandise
inventory is credited for the COST.
Winter, 2000
Prof. M. Mari
Page 5
Chapter 5:
Accounting for Merchandising Business
2. MASTERCARD OR VISA
The transaction requires a debit to CASH since the money is
deposited in the vendor’s account overnight.
But a reduction of the cash account must be made for the
service charge from the credit card company, which is directly
taken out of the account.
Example 9: Sold merchandise on VISA $10,000. Cost of
merchandise sold is $4,000. Credit card expense is 3% of sales.
Date
Account
PR
Cash
Sales
Debit
$10,000
Credit
$10,000
Cost of merchandise sold
Merchandise inventory
4,000
Credit card expense
Cash
300
4,000
300
Example 10: Sold merchandise on VISA $6,000. Cost of
merchandise sold is $3,000. Credit card expense is 3% of sales.
Date
Winter, 2000
Prof. M. Mari
Page 6
Account
PR
Debit
Credit
Chapter 5:
Accounting for Merchandising Business
3. SALES ON ACCOUNT
Includes sales to nonblank credit cards such as AMERICAN
EXPRESS
Example 11: Sold merchandise on account $6,000. Cost of
merchandise sold is $3,000.
Date
Account
Accounts receivable
Sales
PR
Debit
$6,000
Credit
6,000
Cost of merchandise
Merchandise inventory
3,000
3,000
Sales Discounts – reduction in the price of the good for early payment.
Example 12: Sold merchandise on account $5,000, terms 2/10,
n/30. Cost of merchandise sold is $4,000.
Date
Account
Accounts receivable
Sales
Cost of merchandise
Merchandise inventory
Winter, 2000
Prof. M. Mari
Page 7
PR
Debit
$5,000
Credit
5,000
4,000
4,000
Chapter 5:
Accounting for Merchandising Business
Paid within the discount period
Date
Account
PR
Cash
Sales discounts
Accounts receivable
Debit
4,900
100
Credit
5,000
Sales discount – expense account, which increases with a debit.
Sales Returns and Allowances
An expense account, which increases with a debit.
Example 13: Sold merchandise on account $7,000, terms 1/15,
n/30. Cost of merchandise sold is $3,800.
Date
Account
Accounts receivable
Sales
PR
Debit
$7,000
Credit
7,000
Cost of merchandise
Merchandise inventory
3,800
3,800
Return merchandise with sales price of $2,000 and cost of
$1,000.
Date
Account
Sales returns
Accounts receivable
Merchandise inventory
Cost of merchandise sold
Winter, 2000
Prof. M. Mari
Page 8
PR
Debit
2,000
Credit
2,000
1,000
1,000
Chapter 5:
Accounting for Merchandising Business
Sales Taxes
Liability to the business
Create a SALES TAX PAYABLE account
Example 14: Sold merchandise on account $7,000, plus 5% sales tax.
Cost of merchandise sold is $3,800.
Date
Account
Accounts receivable
Sales
Sales tax payable
Cost of merchandise
Merchandise inventory
PR
Debit
$7,350
7,000
350
3,800
Transportation Costs
F.O.B. – Free on board
Shipping point – buyers pays the transportation costs
Destination - seller pays the transportation costs
Homework: EX 5-1, 5-5, 5-8, 5-9, 5-13, 5-14, 5-16, 5-17
Turn in: P5-2A and P5-1A
Extra Credit : P5-3A
Winter, 2000
Prof. M. Mari
Page 9
Credit
3,800