ACCT1000_Sam Ieng_Ch.06
Merchandising Activities
Operating cycle of a merchandising company:
1. Purchase of goods  Inventory (in ready-to-sell condition) & Accounts Payable
2. Sale of goods on account  Accounts Receivable
3. Collection of the receivables  Cash
Statement of financial position:
- Inventory (current asset)
Income statement:
Sales (or Sales revenue)
Less: Sales returns and allowances*
Sales discounts*
Net sales
Less: Cost of goods sold
Gross profit (or Gross margin)
Less: Operating expenses
Profit
$9,120,000
$ 80,000
40,000
(120,000)
9,000,000
(5,400,000)
3,600,000
(2,700,000)
$ 900,000
* Contra-sales accounts
Inventory Systems:
- Perpetual system—inventory account is updated with every single transaction
affecting it
- Periodic system—inventory account is updated only once every accounting period
Credit terms:
e.g. 2/10, n/30
discount credit period
10
20
Days
Control account & Subsidiary ledger—Accounts Receivable/Payable:
- General Ledger  control account  one a/c for all customers/suppliers together
- Subsidiary Ledger  subsidiary accounts  one account for each customer/supplier
Returns and allowances:
- Returns—buyer returns goods not satisfactory to seller
- Allowances—buyer is willing to keep unsatisfactory goods and is allowed to pay less
FOB (Free-on-board) term:
- Determines when title to the goods is transferred from the seller to the buyer.
 FOB destination
Seller
Buyer
 FOB shipping point
Sh. pt.
D
Transportation costs on:
- Purchase—Transportation costs related to the acquisition of inventory are part of the
cost of the inventory being acquired
 Debit to the asset account “Inventory”
 Debit to an expense account “Transportation-in” (part of COGS)
- Sale
 Debit to an operating expense, “Delivery Expense”
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ACCT1000_Sam Ieng_Ch.06
PERPETUAL SYSTEM
PURCHASES transactions
SALES transactions
Purchase of merchandise inventory:
Sale of merchandise inventory:
DR Inventory
CR
Accounts Payable—XX
DR Cash / Accounts Receivable—XX
CR
Sales (Revenue)
* At gross price OR at net cost (net of discount)
DR Cost of Goods Sold
CR
Inventory
Pay on account (takes cash discounts):
Collect on account (Sales discounts):
DR Accounts Payable—XX
CR
Cash
CR
Purchase Discounts Taken (if Gross Price)
DR Cash
DR Sales Discounts
CR
Accounts Receivable—XX
Pay on account (without taking cash discount):
Collect on account (No Sales discounts):
DR Accounts Payable—XX
DR Purchase Discounts Lost (if Net Cost)
CR
Cash
DR Cash
CR
Accounts Receivable—XX
Purchase returns and allowances:
Sales returns:
DR Accounts Payable—XX
CR
Inventory
DR Sales Returns and Allowances
CR
Accounts Receivable—XX
DR Inventory
CR
COGS
Sales allowances:
DR Sales Returns and Allowances
CR
Accounts Receivable—XX
Transportation-in (Freight-in) costs:
DR Inventory OR Transportation-in
Cr
Cash
Transportation-out (Freight-out) costs:
DR Delivery Expense
Cr
Cash
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ACCT1000_Sam Ieng_Ch.06
Illustration:
Kid’s Clothes (seller)
Jack’s Co. (buyer)
At Gross Invoice Price
At Net Cost
July 6 Kid’s Clothes sold $4,000 of goods to Jack’s Co. on credit terms of 2/10, n/30. The goods originally cost Kid’s Clothes $2,000.
Jul. 6 A/R—Jack’s Co.
4,000
Inventory
4,000
Inventory
3,920
Sales (Revenue)
4,000
A/P—Kid’s Clothes
4,000
A/P—Kid’s Clothes
3,920
($4,000 x 0.98)
6 COGS
2,000
Inventory
2,000
15 Jack’s Co. paid the full amount due to Kid’s Clothes. (within discount period)
15 Cash ($4,000 x 0.98)
3,920
A/P—Kid’s Clothes
4,000
Sales Discounts
80
Cash
A/R—Jack’s Co.
4,000
Purchase Disc. Taken
3,920
80
A/P—Kid’s Clothes
Cash
3,920
20 Now assume that Jack’s Co. waited until July 20 to pay the amount due in full to Kid’s Clothes. (after discount period)
20 Cash
4,000
A/P—Kid’s Clothes
4,000
A/P—Kid’s Clothes
3,920
A/R—Jack’s Co.
4,000
Cash
4,000 Purchase Disc. Lost
80
Cash
3,920
4,000
Aug. 2 Kid’s Clothes sold $2,000 of goods to Jack’s Co. on credit terms 2/10, n/30. Kids’ Clothes originally paid $1,000 for the goods.
Aug. 2 A/R—Jack’s Co.
2,000
Inventory
2,000
Inventory
1,960
Sales (Revenue)
2,000
A/P—Kid’s Clothes
2,000
A/P—Kid’s Clothes
1,960
($2,000 x 0.98)
2 COGS
1,000
Inventory
1,000
5 Jack’s Co. returned $500 of unsatisfactory goods to Kid’s Clothes from the August 2 sale. Kid’s Clothes cost for this goods was
$250.
5 Sales Returns & Allow.
500
A/P—Kid’s Clothes
500
A/P—Kid’s Clothes
490
A/R—Jack’s Co.
500
Inventory
500
Inventory
490
($500 x 0.98)
5 Inventory
250
COGS
250
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ACCT1000_Sam Ieng_Ch.06
Sales Taxes:
Businesses collect sales tax at the point of sale. Then, they remit the tax to the appropriate
governmental agency at times specified by law.
e.g. Sales=$10,000 / Sales tax rate=7%
DR Cash
CR
Sales
CR
Sales Tax Payable
10,700
10,000
700
Stock-take:
Taking a physical inventory = Taking a complete physical count of the inventory on hand
e.g. Counted inventory on August 31 and discovered a shortage of $2,000.
DR COGS
CR
Inventory
Aug. 31
Aug. 31
Inventory
98,000 Aug. 31
96,000
2,000
2,000
2,000
Aug. 31
31
Aug. 31
COGS
104,000
2,000
106,000
Closing entries
- Revenues (including __________)  Income Summary
- Expenses (including ______) + __________________  Income Summary
- Income Summary  R/E
- Dividends  R/E
[Practice exercise]
These are selected transactions completed during June between Schnaps Co. and Brandy Co.:
June 2 Schnaps Co. sold merchandise on account to Brandy Co., $24,000, terms FOB shipping
point, 2/10, n/30. Schnaps Co. paid transportation costs of $530, which were added to the
invoice. The cost of the merchandise sold was $13,000.
8 Schnaps Co. sold merchandise on account to Brandy Co., $12,500, terms FOB
destination, 1/15, n/eom. The cost of the merchandise sold was $7,500.
8 Schnaps Co. paid transportation costs of $550 for delivery of merchandise sold to Brandy
Co. on June 8.
12 Brandy Co. returned $3,000 of merchandise purchased on account on June 8 from
Schnaps Co. The cost of the merchandise returned was $1,800.
12 Brandy Co. paid Schnaps Co. for purchase of June 2, less discount.
23 Brandy Co. paid Schnaps Co. for purchase of June 8, less discount and less return of June
12.
24 Schnaps Co. sold merchandise on account to Brandy Co., $10,000, terms FOB shipping
point, n/eom. The cost of the merchandise sold was $6,000.
26 Brandy Co. paid transportation charges of $310 on June 24 purchase from Schnaps Co.
30 Brandy Co. paid Schnaps Co. on account for purchase of June 24.
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