1|Chapter 6
Chapter 6 Accounting for Merchandising Businesses
Learning Objective 1  Distinguish between the activities and financial statements of
service and merchandising businesses.
Nature of Merchandising Businesses

Service Business  Provide services rather than products to customers.

Merchandising Business  Sell products they purchase from other business to
customers.

Manufacturing Business  Change basic input into products that are sold to
customers.
Learning Objective 2  Describe and illustrate the financial statements of a
merchandising business.
 Sales is the total amount charged to customers for merchandise sold, including cash
sales and sales on account.
 Sales returns and allowances are granted by the seller to customers for damaged or
defective merchandise.
 Trade Discount is granted by the seller to government agencies or business that
order large quantities.
 Sales discounts are granted by the seller to customers for early payment of amounts
owed.
 The buyer may return damaged or defective merchandise to the seller (purchase
return).
 Sellers may offer customers sales discounts for early payment of their bills. From the
buyer’s perspective, such discounts are referred to as purchase discounts.
Learning Objective 3  Describe and illustrate the accounting for merchandising
transactions including: sale of merchandise; purchase of merchandise; freight; sales
taxes and trade discounts; dual nature of merchandising transactions.
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 On January 3, NetSolutions sold $1,800 of merchandise for cash.
 The cost of merchandise sold and the decrease in merchandise inventory are also
recorded. The cost of merchandise sold on January 3 is $1,200.
 On January 12, NetSolutions sold merchandise on account for $510. The cost of
merchandise sold was $280.
Date
Jan. 3
Jan. 3
Jan. 12
Jan. 12
Description
Cash
Sales
Cost of merchandise sold
Merchandise inventory
Account receivable
Sales
Cost of merchandise sold
Merchandise inventory
Debit
1,800
Credit
1,800
1,200
1,200
510
510
280
280
Sales Discounts
 The terms for when payments for merchandise are to be made are called credit
terms.
 If payment is required on delivery, the terms are cash or net cash. Otherwise, the
buyer is allowed an amount of time, known as the credit period, in which to pay.
Credit Terms
 To encourage the buyer to pay before the end of the credit period, the seller may
offer a discount, such as 2/10, n/30. These terms indicate that a two percent discount
can be taken if the invoice is paid within ten days. After ten days the full amount is
due by the thirtieth day from the invoice date.
Receipts on Account
On January 7, Netsolutions sold merchandise on account $1,500 to Kool Co. terms 2/10,
n/30. The cost of merchandise sold is $400.
On January 17, NetSolutions receives the amount due within ten days, so the buyer deducted
$30 ($1,500 x 2%) from the invoice amount.
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Date
Jan. 7
Description
Accounts Receivable
Sales
Cost of Merchandise sold
Merchandise inventory
Cash
Sales discounts
Account receivable
Jan. 7
Jan. 17
Debit
1,500
Credit
1,500
400
400
1,470
30
1,500
Credit Memo (sales Retunes and allowance)
 A credit memorandum, often called a credit memo, authorizes a credit to (decreases)
the buyer’s account receivable.
 On January 13, Netsolution issued Credit Memo No. 32 to Krier Company for
merchandise returned. Selling price, $225; cost to NetSolutions, $140.
Date
Jan. 13
Jan. 13
Description
Sales returns and allowances
Account receivable – Krier Co.
Merchandise inventory
Cost of merchandise sold
Debit
225
Credit
225
140
140
Purchase Transactions
On January 3, NetSolutions purchased merchandise for cash.
On January 4, NetSolutions purchased merchandise on account from Thomas Corporation
Date
Jan. 3
Jan. 4
Description
Merchandise inventory
Cash
Merchandise inventory
Account payable - Thomas Corporation
Debit
2,510
Credit
2,510
9,250
9,250
Purchases Discounts
 A buyer may receive a discount from the seller (sales discount) for early payment of
the amount owed. From the buyer’s perspective, such discounts are called purchases
discounts.
Purchase Transactions
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
Alpha Technologies issued an invoice for $3,000 to NetSolutions dated March 12, with
terms 2/10, n/30.
Date
Mar. 12

Description
Merchandise inventory
Account payable - Alpha Technologies
Debit
3,000
Credit
3,000
March 22, NetSolutions pays the amount due, less the discount, on March 22.
Date
Mar. 22
Description
Account payable - Alpha Technologies
Cash
Merchandise Inventory
Debit
3,000
Credit
2,940
60
Discount Not Taken
Assume that, instead of paying the invoice within the discount period, NetSolutions pays the
invoice on April 11.
Date
Apr. 11
Description
Account payable - Alpha Technologies
Cash
Debit
3,000
Credit
3,000
Purchases Returns and Allowances
 A purchases return involves actually returning merchandise that is damaged or does
not meet the specifications of the order. From a buyer’s perspective, such returns are
called purchases returns and allowances.
 A debit memorandum, often called a debit memo, informs the seller of the amount
the buyer proposes to debit to the account payable due the seller.
Debit Memo
NetSolutions receives a delivery from Maxim Systems and determines that $900 of the
items are not the merchandise ordered. Debit memorandum #18 is issued to Maxim Systems.
NetSolutions records the return of the merchandise as follows:
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Date
Mar. 7
Description
Account payable - Maxim Systems
Merchandise inventory
Debit
900
Credit
900
Merchandise Purchased
On May 2, NetSolutions purchased $5,000 of merchandise on account from Delta Data Link,
terms 2/10, n/30.
On May 4, NetSolutions returned $3,000 of the merchandise purchased from Delta Data
Link.
Date
May. 2
May. 4
Description
Merchandise inventory
Account payable - Delta Data Link
Account payable - Delta Data Link
Merchandise inventory
Debit
5,000
Credit
5,000
3,000
3,000
Invoice Paid
On May 12, NetSolutions paid for the purchase of May 2 less the return and discount.
Date
May. 12
Freight
Description
Account payable - Delta Data Link
Cash
Merchandise inventory
Debit
2,000
Credit
1,960
40
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 If ownership of the merchandise passes to the buyer when the seller delivers the
merchandise to the freight carrier, the terms are said to be FOB (free on board)
shipping point.
 If ownership of the merchandise passes to the buyer when the buyer receives the
merchandise, the terms are said to be FOB (free on board) destination.
 On June 10, NetSolutions buys merchandise from Magna Data on account, $900, terms
FOB shipping point and pays the shipping cost of $50.
Date
June. 10
Jan. 10
Description
Merchandise inventory
Account payable - Magna Data
Merchandise inventory
Cash
Debit
900
Credit
900
50
50
Sale Plus Freight Cost
On June 15, NetSolutions sells merchandise to Kranz Company on account, $700, terms FOB
destination. The cost of the merchandise sold is $480.
On June 15, NetSolutions pays freight of $40 on the sale of June 15.
Date
June. 15
Jun. 15
June. 15
Description
Account receivable - Kranz Company
Sales
Cost of Merchandise Sold
Merchandise inventory
Delivery expense
Cash
Debit
700
Credit
700
480
480
40
40
Trade Discounts
 When wholesalers offer special discounts to certain classes of buyers who order large
quantities, these discounts are called trade discounts.
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Homework:
Dual Nature of Merchandise Transactions
 Each merchandising transaction affects a buyer and a seller. In the following
illustrations, we show how the same transactions would be recorded by both the seller
and the buyer.
July 1. Scully Company sold merchandise on account to Burton Co., $7,500, terms FOB
shipping point, n/45. The cost of the merchandise sold was $4,500.
July 2. Burton Company paid transportation charges of $150 on the July 1 purchase from
Scully Company.
July 5. Scully Company sold merchandise on account to Burton Co., $5,000, terms FOB
destination, n/30. The cost of the merchandise sold was $3,500.
July 7. Scully Company paid transportation costs of $250 for delivery of merchandise sold
to Burton Company on July 5.
July 13. Scully Company issued Burton Company a credit memorandum for merchandise
returned, $1,000. The cost of the merchandise returned was $700.
July 15. Scully Company received payment from Burton Company for purchase of July 5.
July 18. Scully Company sold merchandise on account to Burton Company, $12,000, terms
FOB shipping point, 2/10, n/eom. The cost of the merchandise sold was $7,200.
Jul. 20 Burton Co. Paid fright of $ 400.
July 28. Scully Company received payment from Burton Company for purchase of July 18,
less discount (2% × $12,000).
PR 6-5A: Sales-related and purchase-related transactions
The following were selected from among the transactions completed by Sandusky Co. during
December of the current year.
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Dec.
3
5
6
7
13
15
16
19
22
23
28
Purchased merchandise on account from Hillsboro Co., list price $38,000, trade
discount 25%, terms FOB shipping point, 2/10, n/30, and paid the fright of
$340.
Purchased merchandise on account from Deepwater Co., $18,750, terms FOB
destination, 2/10, n/30.
Sold merchandise on account to Zion Co. list price $27,000, trade discount
35%, terms 2/10, n/30. The cost of the merchandise sold was $14,000.
Returned $3,000 of merchandise purchased on Dec. 5 from Deepwater Co.
Paid Hillsboro Co. on account for purchase of Dec. 3, less discount.
Paid Deepwater Co. on account for purchase of Dec. 5, less return of Dec. 7 and
discount.
Received cash on account from sale of Dec. 6 to Zion Co., less discount.
Sold merchandise cash $58,000. The cost of merchandise sold was $43,800.
Sold merchandise on account to Smith River Co., $15,400, terms 2/10, n/30.
The cost of the merchandise sold was $9,000
Sold merchandise for cash, $33,600. The cost of the merchandise sold was
$20,000.
Received merchandise returned by Smith River Co. from sale on Dec. 22,
$2,400. The cost of the returned merchandise was $1,400.
PR 6-6A: Sales-related and purchase-related transactions for seller and buyer.
The following selected transactions were completed during November between Sycamore Co.
and Bonita Co.
Nov.
2
5
8
8
12
12
23
24
26
30
Sycamore Co. sold merchandise on account to Bonita Co., $16,000, terms FOB
shipping point, 2/10, n/30. The cost of the merchandise sold was $10,000.
Bonita paid fright of $375.
Sycamore Co. sold merchandise on account to Bonita Co., $24,750, terms FOB
destination, 1/15, n/eom. The cost of the merchandise sold was $14,850.
Sycamore Co. paid freight of $640 for delivery of merchandise sold to Bonita
Co. on Nov. 8
Bonita Co. returned $5,750 of merchandise purchased on account on Nov. 8
from Sycamore Co. the cost of the merchandise returned was $3,000.
Bonita Co. paid Sycamore Co. for purchase of Nov. 2, less discount.
Bonita Co. paid Sycamore Co. for purchase of Nov. 8, less discount and less
return of Nov. 12.
Sycamore Co. sold merchandise on account to Bonita Co., $13,200, terms FOB
shipping point, n/eom. The cost of the merchandise sold was $8,000.
Bonita Co. paid freight of $290 on Nov. 24 purchase from Sycamore Co.
Bonita Co. paid Sycamore Co. on account for purchase of Nov. 24
9|Chapter 6
Sales Transactions
Cash Sales
Cash
Sales on Account
xxx
Sales
Account receivable
xxx
xxx
Sales
xxx
Cost of merchandise sold
Cost of merchandise sold
xxx
Merchandise inventory
No Sales discount
xxx
Sales Discounts (Receipts on Account)
Cash
xxx
Sales Discounts
xxx
Account Receivables
xxx
Sales Returns and allowances
Sales Returns and allowances
xxx
Cash
Sales Returns and allowances
xxx
xxx
Account Receivables
Merchandise Inventory
xxx
xxx
Cost of merchandise sold
xxx
Purchase Transactions
Cash Purchase
Merchandise Inventory
Cash
Purchased on Account
xxx
Merchandise Inventory
xxx
No Cash Discount
xxx
Account Payable
xxx
Purchases Discounts
Account payable
xxx
Cash
xxx
Merchandise inventory
xxx
Discount Not Taken
Account payable
xxx
Cash
xxx
Purchases Returns and Allowances
Account payable
Cash
xxx
Account payable
xxx
Merchandise inventory
xxx
xxx