CHAPTER 5-PURCHASE & SALES OF MERCHANDISE
MERCHANDISE
 Goods acquired for resale to customers
COST OF GOODS SOLD
 The cost to the company of the merchandise it sells to customers

Net Income of Merchandising CO. =
Revenue (Net Sales)
-Cost of Goods Sold
=Gross Profit
-Operating Expenses
=Net Income
Revenue – Expense = Net Income
REVENUE FROM SALES


Revenue Account is called SALES
(Gross) Sales
-Sales Returns & Allowances
-Sales Discounts
Net Sales
 Sales revenue is earned in the period in which merchandise is delivered to the
customer
 Sales transactions (cash & credit) pg. 210
SALES RETURNS AND ALLOWANCES pg. 210



Return-Complete Refund
Allowance-A decrease in sales price due to minor defect
To record a sales return and allowance:
DR Sales R & A
CR Cash or A/R
100
100
Sales R & A pg. 221
 A contra-revenue account is shown on the I/S as a deduction from sales
 We could just debit sales rather than using sales R & A but keeping a separate
contra-account enables management to see 1) Total Sales and 2) Total Sales
R&A. The relationship between these 2 amounts gives management an indication
of customer satisfaction with merchandise.
CREDIT TERMS (Terms of Payment) pg. 211

Net 30 days or n/30 → Amount due in 30 days
1

10 E.O.M. → Payment due in 10 days after end of month in which sale occurred
SALES DISCOUNTS (or Cash Discount) pg. 211


Goods are often sold on credit terms of 30 to 60 says
Sometimes a discount is offered for earlier payment

Ex. 2/10, n/30 → Payment due in 30 days, but can take a 2% discount if – say
(2,10 net 30) paid within 10 days
→10 day period is called the DISCOUNT PERIOD


Example: A sells to B $1000 merchandise. Terms 2/10, n/30 on Dec. 1
Dec. 1 “A” records:
Dr A/R 1000
Cr Sales 1000

Dec. 10 “B” makes payment of $980 & “A” records
DR Cash 980
DR Sales Discount 20
CR A/R 1000
SALES DISCOUNTS → Contra-revenue account shown on I/S as a deduction from
gross sales
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COST OF GOODS SOLD (COGS)
Cogs= an Expense
-Shown on I/S as a deduction from net sales
Inventory=Merchandise available for sale during the period but not sold
-on B/S at year end
There are two alternative approaches to determining the value of these two items.
1. PERPETUAL INVENTORY SYSTEM pg. 227
-Units added to inventory and units removed for delivery to customers are recorded
on a daily basis → providing Inventory Figure
-Records are kept showing the cost of each item in stock. As units are sold the cost of
the items are added to COGS.
-Used mostly in companies that makes a relatively small number of sales each day of
high unit value
I.e. TV Stores, Auto Dealership
2. PERIODIC INVENTORY SYSTEM pg. 213
-Suitable for businesses which sell a variety of merchandise with low-unit prices.
Inventory – Determined by a physical count.
COGS=BEG. INV. + PURCHASES – END INV.
Cog Available for Sale
is beg. Inv. of the following year.
Using this system, the Inventory Account is not debited or credited as goods are
purchased or sold. During the year, the balance in the Inv. Acct. is equal to the Beg.
Inv. and is not changed.
PURCHASING MERCHANDISE FOR RESALE
The purchases account is only used for merchandise acquired for resale
(Not for other items purchased)
DR Purchases 1000
CR A/P/Cash 1000
To a purchaser, a Sales Discount is called a Purchase Discount
3
Ex. $1000. - Purchase, terms 2/10, n/30, Jan. 1
JAN 1.
10.
DR Purchases 1000
CR A/P
1000
DR A/P
1000
CR Purchase Discounts 20
CR Cash
980
Purchase Discounts will be shown on the I/S as a deduction from purchases
PURCHASE RETURNS & ALLOWANCES
pg. 215
Ex. Return $500. – Worth of Goods
DR A/P 500
CR Purchase R&A 500
TRANSPORTATION- IN (FREIGHT IN)
For transportation charges on merchandising purchased.
DR Transpo. In (Freight In) 100
CR Cash/A/P 100
Transpo- In is combined with purchases on the I/S to determine Cogs available for sale.
Transpo- In not to be confused with trans charges on outbound goods to customers →
Selling Expense DR to delivery expense and not included in cogs.
SHOPLIFTING & INVENTORY “SHRINKAGE” LOSS
Read pg. 216
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INCOME STATEMENT FOR A MERCHANDISING COMPANY
See page 217 for a good reference
CLASSIFIED INCOME STATEMENT
3 Sections
1. Revenue
2. COGS
3. Operating Expenses
GROSS PROFIT IRATE
Net Sales – COGS = Gross Profit
GROSS PROFIT = Gross Profit Rate
NET SALES
EX: 240,000 = 40%
600,000

Good to compare gross profit rate from year to year, a measurement of
financial strength.
 In most merchandising companies, the rate of gross profit usually varies
between 30-50% of net sales.
OPERATING EXPENSES (CLASSIFICATION)
1. SELLING – Includes all expenses of storing and displaying merchandise. For
sales, advertising, sales salaries and delivering goods to the customers.
2. GENERAL & ADMINISTRATIVE – Expenses of the general offices, accounting
dept, personnel office, credit and collections dept.
 Some expenses (ex. Depreciation) are sometimes allocated partly to each
one.
NON-OPERATING ITEMS

Listed separately after income from operations
Examples: Interest Expense, Interest Income, Income/Loss from Investments, Income
Tax Expense. They do not relate to the daily operating activities of the business.
EVALUATING THE ADEQUACY OF NET INCOME

Net income of an unincorporated business must compensate the owner for 3
factors.
1. Personal services rendered to the business
2. Amount of capital invested
3. Degree of risk taken
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