CH 5: ACCOUNTING FOR MERCHANDISING OPERATIONS
I.
Merchandising activities
 Buying and selling of merchandise
 Reporting income for a merchandiser
Net sales
Less: Cost of goods sold
Gross profit
Less: Expenses
Net income
 Reporting inventory for a merchandiser xxx
(xx) xxx
(xx) xxx
Merchandise inventory or inventory – refers to products that a company owns and intends to sell
Perpetual Inventory System – continually updates accounting records for merchandising transactions – inventory available for sale and inventory sold
II.
Merchandising Purchases a.
Source Documents – sales invoice or purchase invoice b.
Terms of Transactions
 Trade discounts - are deductions from list price to arrive at the selling price
encourage bulk discounts
Example: Bilbo Baggins Trading bought bags with a catalog price of P150,000.
Bilbo was granted trade discount of 30%, 25% and 10%. How much was the selling price of the bags?
List or catalog price
Trade disc. (150,000 x 30%)
150,000
(45,000)
105,000
Trade disc.(105,000 x 25%)
Trade disc. (78,750 x 10%)
Selling/invoice price
(26,250)
78,750
(7,875)
70,875
Inventory
Accounts payable
To record purchases at selling price.
70,875
70,875
 Cash discounts - Encourage prompt payments
Credit terms - Include the amount and timing of payment
Discount period
Credit period
Example: 2/10, n/60 (2% discount in ten days; otherwise, full payment due in sixty days)
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Example: On 1 March 2006, Bilbo Baggins Trading bought P45,900 bags, 2/10, n/25. Bilbo paid on March 8.
March 1
March 8
Inventory
Accounts payable
To record purchases.
Accounts payable
Inventory
Cash
45,900
45,900
45,900
918
44,982
To record payment of purchases within the discount period.
 Transportation costs and ownership transfer
Free on Board (FOB) point - point of transfer which determines who owns the goods and who pays the transportation costs
Ownership Transfers when Goods Passed to
Transportation Costs
Paid By
Example: Bilbo Baggins bought bags worth P96,000 from a supplier in Nigeria,
FOB shipping point. The bags were shipped on June 14. Transportation costs of
P11,250 were paid in cash.
June 14 Inventory 11,250
Cash 11,250
To record transportation costs/transportation in.
III.
Merchandising sales
Gross sales
Less: Sales discounts
Sales returns and allowances
Net sales xxx
(xx)
(xx) xxx
FOB shipping point
FOB destination
Carrier
Buyer
Buyer
Seller
Sales returns – refer to merchandise that customers return to the seller after a sale
Sales allowances – refer to reductions in the selling price of merchandise sold to customers
Accounting entries:
 Sale of P50,000 inventory. Inventory cost is P24,500.
Accounts receivable 50,000
Sales revenue 50,000
Cost of goods sold
Inventory
24,500
24,500
 Credit term is 2/10, n/30. Buyer pays half of the inventory within the discount period.
Sales discount 500
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Accounts receivable
(25,000 x 2%)
 Buyer later returns P25,000 inventory.
Sales returns and allowances
Accounts receivable
500
25,000
25,000
Inventory
Cost of goods sold
12,250
12,250
 Seller allows P1,500 reduction in sales due to defect.
Sales returns and allowances 1,500
Accounts receivable
IV.
Completing the Accounting cycle
1,500 a.
End-of-period physical count – to determine inventory shrinkage/loss b.
Adjusting entry – generally the same for merchandising and service companies, except for the shrinkage in merchandising companies
Example: At the end of its calendar year, Bilbo Baggins performed inventory count, which resulted in P128,900 of inventory. However, its accounting books showed inventory of P126,500.
Dec 31 Cost of goods sold
Inventory c.
Closing entries
 Sales

Income summary
Income summary
Sales discounts
Sales returns and allowances
Cost of goods sold
Salaries expense
Other expenses
2,400 xxx xxx
2,400 xxx xxx xxx xxx xxx xxx
 Income summary
Owner, capital
 Owner, capital
Owner, withdrawals xxx xxx xxx xxx
V.
Financial Statement Formats
 Preparation of Income Statement o Single-step – two main parts: revenues and expenses o Multiple-Step – three main parts:
 gross profit
 operating income
• selling expenses – include the expenses of promoting sales, making sales and delivering goods to customers
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• general and administrative expenses – support a company’s overall operations, which include expenses relating to accounting, human resources, etc.
 net income
Bilbo Baggins Trading
Income Statement
For the year ended December 31, 2006
Sales
Less: Sales discounts
Sales returns and allowances
P 4,300
2,000
P 300,000
(6,300)
Net sales
Cost of goods sold
293,700
(220,500)
Gross profit
Operating expenses
Selling expenses
Advertising expense
Commissions expense
Rent expense – store
Total selling expenses
General and administrative expense
Depreciation expense
Insurance expense
Office salaries expense
P 3,500
8,700
10,500
2,500
1,300
12,300
22,700
73,200
Total general and admin expense
Total operating expenses
Income from operations
Other revenues and gains
Interest revenue
Gain on sale of machines
Other expenses and losses
Interest expense
Total other revenues and gains
Net income
1,000
3,000 4,000
(3,000)
16,100
(38,800)
34,400
(1,000)
P 35,500
 Classified Balance Sheet – inventory as part of current asset
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