Accounting for Merchandising Operations
Merchandising Operations:
1- Purchases
2- Purchase returns and allowances
3- Transpiration Cost (Freight costs)
4- Purchase discounts
5- Sales
6- Sales returns and allowance
7- Sales discounts
8- Income statement & Closing Entries
Inventory systems
1- Periodic inventory system
2- Perpetual inventory system
The Operating Cycle of a Merchandising Company:
1
The journal Entries
The Periodic inventory system
Transactions
Journal entries
1- Purchases ….Dr
Dr
x
Purchase
Cash
A/ P
2- Purchases Discounts
(Payments )
Dr
x
A/P
Cash
Purchase Discount
3- Purchases Returns &
Allowances
4- Freight- in costs on
purchase
(Transpiration Cost)
FOB Shipping point….
Buyer Paid
FOB Destination…..
Seller Paid
4- Sales…..Cr
Dr
A/P
x
Purchase Returns & Allowances
Buyer FOB Shipping point
Dr
Freight- in
x
Cash
Dr
x
x
Cash
A/ R
Sales
5- Sales Returns &
Allowances
6- Sales Discounts
Dr
Sales Returns & Allowances x
A/R
Dr
Cash
x
Sales Discount
x
A/R
2
Cr
x
x
Cr
x
x
Cr
x
Cr
x
Cr
x
Cr
x
Cr
x
4/ 10 – n.30 days
Credit Terms - DISCOUNT
4% Discount If collected Or Paid within 10 days , No discount if
paid or collected within 30 days
2/15- 30
3/20-40 days
-30 days
Example (periodic inventory system):
Scruffy Brothers Supply uses a periodic inventory system. During May, the
following transactions and events occurred.
May 13 Purchased 6 motors at a cost of $45 each from Charlie Company, terms
4/10, n/30. The motors cost Charlie Company $26 each.
May 16 Returned 1 defective motor to Charlie.
May 23 Paid Charlie Company in full.
Instructions
Journalize the May transactions for Scruffy Brothers. You may omit explanations.
Solution
May 13
May 16
May 23
Purchases(6*45)............................................
Accounts Payable ...................................
270
Accounts Payable..........................................
Purchase Returns and Allowances .........
45
Accounts Payable ($270 – $45).....................
Purchase Discounts ($225 × .04) ...........
Cash .......................................................
225
270
45
9
216
Purchases May.13...................270
Returns May.16.....................45
Paid May .23....( 270 -45)= 225
Discount = 225 *4% = 9
Example (Periodic inventory system):
Reineman Supply Company uses a periodic inventory system. During September,
the following transactions and events occurred.
Sept. 3 Purchased 80 backpacks at $25 each from Zuzu Company, terms 2/10,
n/30.
Sept. 6
Received credit of $150 for the return of 6 backpacks purchased on
Sept. 3 that were defective.
Sept. 9
Sold 15 backpacks for $42 each to Bailey Books, terms 2/10, n/30.
Sept.13 Paid Zuzu Company in full.
Instructions
3
Journalize the September transactions for Reineman Supply Company.
Solution
Sept. 3
Sept. 6
Sept. 9
Sept.13
Purchases(80*25)..........................................
Accounts Payable ...................................
2,000
Accounts Payable..........................................
Purchase Returns and Allowances .........
150
Accounts Receivable(15*42) .........................
Sales Revenue .......................................
630
Accounts Payable ($2,000 – $150)................
Purchase Discounts ($1,850 × 0.02).......
Cash .......................................................
1,850
2,000
150
630
37
1,813
************************************************************************
************************************************************************
Example( Periodic Inventory System) :
Newell Company completed the following transactions in October:
Credit Sales
Sales Returns
Date of
Date
Amount Terms
Date
Amount
Collection
Oct. 3
$ 600
2/10, n/30
Oct. 8
Oct.11
1,200
3/10, n/30
Oct. 14 $ 400
Oct.16
Oct.17
5,000
1/10, n/30
Oct. 20 1,000
Oct.29
Oct.21
1,400
2/10, n/60
Oct. 23
200
Oct.27
Oct.23
1,800
2/10, n/30
Oct. 27
400
Oct.28
Instructions
Indicate the cash received for each collection. Show your calculations.
4
Solution
Oct. 8 $588 [Sales $600 – Sales discount $12 ($600 × .02)]
Oct.16 $776 [Sales $1,200 – Sales return $400 = $800;
$800 – Sales discount $24 ($800 × .03)]
Oct.29 $4,000 [Sales $5,000 – Sales return $1,000 = $4,000;
(Discount lapsed)]
Oct.27 $1,176 [Sales $1,400 – Sales return $200 = $1,200;
$1,200 – Sales discount $24 ($1,200 × .02)]
Oct.28 $1,372 [Sales $1,800 – Sales return $400 = $1,400;
$1,400 – Sales discount $28 ($1,400 × .02)]
5
The journal Entries
The Perpetual Inventory System
Transactions
Journal entries
1- Purchases
Merchandise inventory
Cash
A/ P
2- Purchases Discounts
Dr
x
A/P
3- Purchases Returns &
Allowances
3- Freight- In costs on
purchase (Transpiration
Cost)
4- Sales
A/P
Dr
x
Cash
Merchandise inventory
Dr
x
Merchandise inventory
Merchandise inventory
Cash
Entry (1) …. Sales
Dr
x
x
x
Cr
x
Dr
x
x
Dr
Cost of goods sold
x
Merchandise inventory
Dr
Cash
x
Sales Discount
x
A/R
Entry (1) …. Sales
Dr
Sales Returns & Allowances x
A/R
Entry (2) …. Cost
Dr
Merchandise inventory
x
Cost of goods sold
Note :
Sales & Sales R&A……………. 2 Entries
6
Cr
x
Sales
Entry (2) …. Cost
6- Sales Returns &
Allowances
x
x
Cr
Buyer
Cash
A/ R
5- Sales Discounts
Cr
Cr
x
Cr
x
Cr
x
Cr
x
Cr
x
Merchandising Operations
Transactions
1- Purchases
2- Purchases
Returns &
Allowances
3- Purchases
Discounts
4- Freight- In
costs
4- Sales
Summary of Inventory Systems
Periodic inventory
Perpetual Inventory
system
System
Dr
x
Purchases
Cash
A/ P
Cr
x
x
Cr
Dr
x
A/P
Purchase R & A
A/P
x
Dr
x
A/P
x
x
Cr
Dr
x
Dr
x
x
Cash
A/R
Sales
Dr
x
Inventory
Cr
x
Dr
x
A/P
Inventory
Cash
Cr
x
x
Dr
x
Cr
x
Inventory
Cash
Cr
Entry 1..Selling price
x
Cr
x
x
Cr
Purchase Discount
Cash
Freight- In costs
Cash
Dr
x
Inventory
Cash
A/ P
x
Dr
x
x
Cash
A/R
Sales
Cr
x
Entry 2…Cost
Dr
x
COGS
Inventory
5- Sales R & A
Sales R &A
A/R
Dr
x
Cr
x
Cr
x
Entry 1… Selling Price
Sales R &A
A/R
Dr
x
Cr
x
Entry 2 …. Cost
Inventory
COGS
6- Sales
Discount
Cash
Sales Discount
A/R
Dr
x
x
Cr
x
Cash
Sales Discount
A/R
Dr
x
Cr
Dr
x
x
x
Cr
x
COGS…. Cost Of Goods Sold
Goods cost 100…………..Selling price 120 or 150
Example (Periodic inventory system):
Prepare the necessary journal entries on the books of Kelly Carpet Company to
record the following transactions, assuming a Periodic inventory system
(a) Kelly purchased $40,000 of merchandise, terms 2/10, n/30.
(b) Returned $3,000 of damaged merchandise for credit.
(c) Paid for the merchandise purchased within 10 days.
Solution
7
(a) Purchases ............................................................. 40,000
Accounts Payable..........................................
(b) Accounts Payable ...................................................
Purchases R &A ............................................
40,000
3,000
3,000
(c) Accounts Payable ($40,000 – $3,000) .................... 37,000
Purchase Discount ($37,000 × .02) ...............
Cash ($37,000 – $740) ..................................
Purchase Discount = (40,000 – 3,000 ) x 2%= 740
740
36,260
Example (perpetual inventory system)
Garth Company sold goods on account to Kyle Enterprises with terms of 2/10,
n/30. The goods had a cost of $600 and a selling price of $1,000. Both Garth and
Kyle use a perpetual inventory system.
Record the sale on the books of Garth and the purchase on the books of Kyle.
Solution
Journal entry on Garth’s books
Accounts Receivable.... ...........................................
Sales. ...............................................................
Cost of Goods Sold….. ............................................ .
Inventory………….............................................
Journal entry on Kyle’s books
Inventory……………... .............................................
Accounts Payable .............................................
1,000
1,000
600
600
1,000
1,000
Example (perpetual inventory system) :
Charlie Company uses a perpetual inventory system. During May, the following
transactions and events occurred.
May 13 Sold 6 motors at a cost of $45 each to Scruffy Brothers Supply
Company, terms 4/10, n/30. The motors cost Charlie $26 each.
May 16 One defective motor was returned to Charlie.
May 23 Received payment in full from Scruffy Brothers.
Instructions
Journalize the May transactions for Charlie Company (seller) assuming that
Charlie uses a perpetual inventory system.
Solution
May 13
Accounts Receivable(6*45) ...........................
Sales Revenue .......................................
Cost of Goods Sold(6*26)..............................
Inventory ................................................
8
270
270
156
156
May 16
May 23
Sales Returns and Allowances ......................
Accounts Receivable ..............................
Inventory .......................................................
Cost of Goods Sold ................................
45
Cash..............................................................
Sales Discounts ($225 × .04) ........................
Accounts Receivable ($270 – $45) .........
216
9
45
26
26
225
Example (perpetual inventory system) :
On October 1, Benji’s Bicycle Store had an inventory of 20 ten speed bicycles at a
cost of $200 each. During the month of October, the following transactions
occurred.
Oct. 4
Purchased 30 bicycles at a cost of $200 each from Monrue Bicycle
Company, terms 1/10, n/30.
6
Sold 18 bicycles to Team Wisconsin for $330 each, terms 2/10, n/30.
7
Received credit from Monrue Bicycle Company for the return of 2
defective bicycles.
13
Issued a credit memo to Team Wisconsin for the return of a defective
bicycle.
14 Paid Monroe Bicycle Company in full, less discount.
Instructions
Prepare the journal entries to record the transactions assuming the company uses
a perpetual inventory system.
Oct. 4
6
7
13
14
Solution
Inventory..........................................................
Accounts Payable .....................................
Accounts Receivable(18*330)..........................
Sales Revenue .........................................
Cost of Goods Sold(18*200) ............................
Inventory ...................................................
Accounts Payable(2*200) ................................
Inventory ...................................................
Sales Returns and Allowances ........................
Accounts Receivable ................................
Inventory..........................................................
Cost of Goods Sold ...................................
Accounts Payable ($6,000 – $400) ..................
Cash .........................................................
........................
Example (perpetual inventory system) :
9
6,000
6,000
5,940
5,940
3,600
3,600
400
400
330
330
200
200
5,600
5,544
56
On September 1, Reid Supply had an inventory of 15 backpacks at a cost of $25
each. The company uses a perpetual inventory system. During September, the
following transactions and events occurred.
Sept. 4 Purchased 70 backpacks at $25 each from Hunter, terms 2/10, n/30.
Sept. 6 Received credit of $150 for the return of 6 backpacks purchased on Sept.
4 that were defective.
Sept. 9 Sold 40 backpacks for $35 each to Oliver Books, terms 2/10, n/30.
Sept.13 Sold 15 backpacks for $35 each to Heller Office Supply, terms n/30.
Sept.14 Paid Hunter in full, less discount.
Instructions
Journalize the September transactions for Reid Supply.
Solution
Sept. 4
Sept. 6
Sept. 9
Sept.13
Sept.14
Inventory(70*25) ............................................
Accounts Payable ...................................
Accounts Payable..........................................
Inventory ................................................
Accounts Receivable .....................................
Sales Revenue .......................................
1,750
Cost of Goods Sold .......................................
Inventory ................................................
Accounts Receivable .....................................
Sales Revenue .......................................
1,000
Cost of Goods Sold .......................................
Inventory ................................................
Accounts Payable ($1,750 – $150)................
Cash ($1,600 × .98) ................................
Inventory ($1,600 × .02) .........................
375
1,750
150
150
1,400
1,400
1,000
525
525
375
1,600
1,568
32
Example (perpetual inventory system) :
Karns Company purchased merchandise on account from Bailey Office Suppliers
for $87,000, with terms of 2/10, n/30. During the discount period, Karns returned
some merchandise and paid $78,400 as payment in full. Karns uses a perpetual
inventory system. Prepare the journal entries that Karns Company made to record:
(1)
The purchase of merchandise.
(2)
The return of merchandise.
(3)
The payment on account.
Solution
To compute the amount due after returns but before the discount, divide $78,400
by .98 (100% – 2%).
$78,400 ÷ .98 = $80,000.
Subtract $80,000 from $87,000 to determine that $7,000 of merchandise was
returned.
(1) Inventory.......................................................... 87,000
10
Accounts Payable .....................................
87,000
(2) Accounts Payable ............................................ 7,000
Inventory ...................................................
7,000
(3) Accounts Payable ............................................ 80,000
Inventory ...................................................
1,600
Cash .........................................................
78,400
11
Multiple-Step Income Statement
Steps :
1- Net Sales = Sales – Sales Returns and Allowances – Sales Discount
= 120,000 – 10,000 – 5,000 = 105,000
2- Cost of goods available for sale
= Beg.Inv + Net Purchases
3- Net Purchase
= Purchases – Purchases Returns and Allowances – Purchases Discount
= 40,000 – 5,000 – 5,000 =30,000
Cost of goods available for sale = 10,000 + 30,000 = 40,000
4-Cost of goods sold
= Cost of goods available for sale - End.Inv
= 40,000 – 5,000 = 35,000
Gross profits = 105,000 – 35,000 =70,000
5- Gross Profit or Loss = Net Sales – Cost of goods sold (C.O.G.S)
- Gross Profits …. Net Sales > Cost of goods sold
- Gross Loss ……… Cost of goods sold > Net Sales
6- Net Income or Loss = Gross Profit – Operating expenses + Other revenues
– Other expenses
Note :
1- Operating expenses include, Selling and administrative expenses , such as
Sales salaries , Sales commissions , Advertising , Rent , Insurance , office
salaries , Depreciation expense
2- Other revenues such as Gain on sale of assets , Interest revenue
3- Other expenses such as Loss on sale of assets , Interest expense
Example:*********************************************************
Presented below is information for Annie Company for the month of March 2018.
Cost of goods sold
$235,000
Rent expense
$ 30,000
Freight-out
7,000
Sales discounts
8,000
Insurance expense
5,000
Sales returns and allowances11,000
Salary expense
63,000
Sales
410,000
Instructions
Prepare a multiple -step income statement.
12
Solution
ANNIE COMPANY
Income Statement
For the Month Ended March 31, 2014
____________________________________________________
Sales revenues
Sales ...............................................................
$410,000
Less: Sales returns and allowances ................ $11,000
Sales discounts ......................................
8,000
19,000
Net sales .......................................................
391,000
Minus Cost of goods sold ...............................
235,000
Gross profit .....................................................
156,000
Minus Operating expenses
Salary expense ......................................
63,000
Rent expense .........................................
30,000
Insurance expense .................................
5,000
Freight-out .............................................
7,000
Total operating expenses .......................
105,000
Net income .....................................................
$ 51,000
Example:
During October, 2018, Red’s Catering Company generated revenues of $13,000.
Sales discounts $200 for the month. Expenses were as follows: Cost of goods
sold of $7,700 and operating expenses of $2,000.
Calculate
(1) gross profit and
(2) income from operations for the month.
Solution
(1) Gross profit: $5,100 ($13,000 - $200 - $7,700)
Net sales = 13,000 -200 = 12,800
Gross profits = 12,800 – COGS 7,700 = 5,100
(2) Income from operations: $3,100 ($5,100 - $2,000)
Example:
For each of the following, Determine the missing amounts.
Beginning
Inventory
1.
$10,000
Inv____
2.
___?___
Goods Available
Purchases
for Sale
Cost of
Goods Sold
Ending
Inventory
__?______
$ 40,000
$25,000
___End
$220,000
$245,000
___?____
$40,000
13
Answer
Cost of goods available for sale = Beg.Inv + Net purchases
40,000 = 10,000+ ?
Cost of goods sold
= Cost of goods available for sale - End.Inv
25,000 = 40,000 - ?
Cost of goods available for sale = Beg.Inv + Net purchases
245,000 = ? +220,000
Cost of goods sold
= Cost of goods available for sale - End.Inv
245,000 – 40,000
Solution
1. Purchases $30,000 ($40,000 – $10,000), Ending inventory $15,000
($40,000 – $25,000)
2. Beginning inventory $25,000 ($245,000 – $220,000), Cost of Goods Sold
$205,000 ($245,000 – $40,000)
Example:
Swann Company uses a periodic inventory system and has these account
balances: Purchases $500,000; Purchase Returns and Allowances $14,000;
Purchase Discounts $9,000; and Freight-in $15,000.
Determine : The net purchases and The cost of goods purchased.
Solution
Calculation of Net Purchases and Cost of Goods Purchased
Purchases .......................................................
$500,000
Less: Purchase returns and Allowances .......... $14,000
Purchase discounts ...............................
9,000 23,000
Net Purchases.................................................
477,000
Add: Freight-in.................................................
15,000
Cost of Goods Purchased ...............................
$492,000
Example:**
Swann Company uses a periodic inventory system and has these account
balances: Purchases $600,000; Purchase Returns and Allowances $25,000;
Purchase Discounts $11,000; and Freight-in $19,000; beginning inventory of
$45,000; ending inventory of $55,000; and net sales of $750,000.
Determine the cost of goods sold.
Solution
Inventory, beginning ........................................
$ 45,000
Purchases .......................................................
$600,000
Less: Purchase returns and allowances .......... $25,000
Purchase discounts ................................ 11,000 36,000
14
Net purchases .................................................
Add: Freight-in.................................................
Cost of goods purchased ................................
Cost of goods available for sale ......................
Inventory, ending.............................................
Cost of goods sold ..........................................
564,000
19,000
583,000
628,000
(55,000)
$573,000
Example:**
Financial information is presented below for two different companies.
Gower
Martini
Sales Revenue
$90,000 $
(e)
Sales returns and allowances
?(a)
3,000
Net sales
88,000
97,000
Cost of goods sold
56,000
(f)
Gross profit
(b)
36,000
Operating expenses
22,000
(g)
Income from operations
(c)
(h)
Other expenses and losses
4,000
7,000
Net income
(d)
13,000
Instructions
Determine the missing amounts.
Solution
(*Missing amount)
(a) Sales ......................................................................
Sales returns and allowances .................................
Net Sales................................................................
(b) Net Sales................................................................
Cost of goods sold ..................................................
Gross profit .............................................................
(c) and (d)
Gross profit .............................................................
Operating expenses ...............................................
Income from operations (c) .....................................
Other expenses and losses ....................................
Net income (d) ........................................................
(e) Sales ......................................................................
Sales returns and allowances .................................
Net sales ................................................................
(f) Net sales ................................................................
Cost of goods sold ..................................................
Gross profit .............................................................
$ 32,000
22,000
$ 10,000*
4,000
$ 6,000*
$ 100,000*
3,000
$ 97,000
$ 97,000
61,000*
$ 36,000
(g) and (h)
Gross profit .............................................................
$ 36,000
15
$ 90,000
2,000*
$ 88,000
$ 88,000
56,000
$ 32,000*
Operating expenses (g) ..........................................
Income from operations (h) ....................................
Other expenses and losses ....................................
Net income ............................................................
Example:
16,000*
$ 20,000*
7,000
$ 13,000
The following information is available for Sheldon Leonard Company:
Administrative expenses
$ 30,000
Cost of goods sold
200,000
Sales
350,000
Sales returns and allowances 16,000
Selling expenses
55,000
Instructions
Compute each of the following:
(a) Net sales
(b) Gross profit
(c) Income from operations
Solution
(a) Net sales = $334,000 ($350,000 – $16,000)
(b) Gross profit = $134,000 ($334,000 – $200,000)
(c) Income from operations = $49,000 ($134,000 – $30,000 – $55,000)
Example:
Three items are missing in each of the following columns and are identified by
letter.
Sales Revenue
Sales returns and allowances
Sales discounts
Net sales
Beginning inventory
Cost of goods purchased
Ending inventory
Cost of goods sold
Gross profit
$
(a)
15,000
10,000
420,000
(b)
220,000
170,000
252,000
(c)
$840,000
22,000
15,000
(d)
300,000
(e)
303,000
555,000
(f)
Instructions
Calculate the missing amounts and identify them by letter.
Solution
(a) $445,000
(b) $202,000
(c) $168,000
(d) $803,000
(e) $558,000
(f) $248,000
Closing Entries
16
1- Sales Revenue, other revenue
Sales Revenue .......................................................
x
Interest Revenue ....................................................
x
Income Summary......................................
2- Cost of goods sold , Operating expenses , Other expenses
Income Summary ..........................................................
x
Cost of Goods Sold ...................................
Salaries and Wages Expense ...................
Interest Expense .......................................
Example:
x
x
x
x
The income statement for Pepe Serna Company for the year ended December 31,
2016 :
PEPE SERNA COMPANY
Income Statement
For the Year Ended December 31, 2018
Revenues
Sales ....................................................................
$55,000
Interest revenue ...................................................
3,000
Total revenues .................................................
58,000
Expenses
Cost of goods sold ............................................... $33,000
Salaries and wages expense ............................... 13,000
Interest expense...................................................
1,000
Total expenses ................................................
47,000
Net income ....................................................................
$ 11,000
Prepare the entries to close the revenue and expense accounts at December 31,
2018.
Solution
Dec.
31 Sales Revenue ......................................... 55,000
Interest Revenue ............................................. 3,000
Income Summary......................................
31 Income Summary ............................................ 47,000
Cost of Goods Sold ...................................
Salaries and Wages Expense ...................
Interest Expense .......................................
Example:***
The following information is available for Moiz Company:
Debit
Credit
Owner’s Capital
$ 50,000
Owner’s Drawings
$ 35,000
Sales Revenue
510,000
Sales Returns and Allowances
20,000
Sales Discounts
7,000
Cost of Goods Sold
290,000
17
58,000
33,000
13,000
1,000
Freight-out
2,000
Advertising Expense
15,000
Interest Expense
19,000
Salaries and Wages Expense
55,000
Utilities Expense
18,000
Depreciation Expense
7,000
Interest Revenue
23,000
Instructions
Using the above information, prepare the closing entries for Moiz Company.
Solution
Dec. 31 Interest Revenue ............................................. 23,000
Sales Revenue ................................................ 510,000
Income Summary......................................
533,000
31 Income Summary ............................................ 433,000
Sales Returns and Allowances .................
20,000
Sales Discounts ........................................
7,000
Cost of Goods Sold ...................................
290,000
Freight-out ................................................
2,000
Advertising Expense .................................
15,000
Interest Expense .......................................
19,000
Salaries and Wages Expense ...................
55,000
Utilities Expense .......................................
18,000
Depreciation Expense ...............................
7,000
31 Income Summary ............................................ 100,000
Owner’s Capital ........................................
100,000
31 Owner’s Capital .............................................. 35,000
Owner’s Drawings ....................................
35,000
18