Chapter 5
Accounting for Merchandising
Operations
ACCT 100
Objectives:
1.
2.
3.
To distinguish a service company from
a merchandising company.
To learn how to account for inventory
purchase and inventory sale under a
perpetual inventory system.
To learn how to account for inventory
purchase, inventory sale under a
periodic inventory system.
Accounting for Merchandising operations
2
Defining Inventory
1. Assets held for resale purpose in a normal
course of business.
2. Assets used to produce products for resale
purpose.
Examples of Inventory:
Merchandising Firms: merchandise or
goods
Manufacturing Firms: raw materials
work-in-process
finished
Goods
Accounting for Merchandise Inventory, Cost of Goods Sold and the Gross Profit
3
Service Companies




Providing services (i.e., transportation
companies, banks, etc.)
Main Revenues: service revenues.
Income measurement:
Service Revenues
- Operating Expenses
Operating Income
Operating cycle: Cash Providing Service
Accounts receivables
Cash
Accounting for Merchandise Inventory, Cost of Goods Sold and the Gross Profit
4
Merchandising Companies



Buy and sell goods (i.e., retail companies
such as Wal-Mart, Macy’s, etc.).
Main revenues: Sales revenues.
Income measurement:
Sales Revenues
- Cost of Goods Sold (cost of total merchandise sold during the period)
Gross Profit
- Operating Expenses
Operating Income
 Operating cycle: Cash
Buy Inventory Sell
Inventory
Accounts Receivable
Cash
Accounting for Merchandise Inventory, Cost of Goods Sold and the Gross Profit
5
Perpetual vs. Periodic Inventory
System- An Example
 On February 10, inventory Costing $1,000
was purchased on credit, terms, 2/10 and
n/30.
 On March 2, Inventory costing $250 was
sold for $500 on credit.
Accounting for Merchandising Operations
6
Accounting for Inventory – A Perpetual
Inventory System (Example on p6)
At Purchase:
Inventory
1,000
Accounts Payable
1,000
(to record goods purchased on account)
At Sale:
Accounts Receivable 500
Sales Revenue
500
(to record credit sale)
Cost of Goods Sold
Inventory
250
250
(to record cost of merchandise sold)
Accounting for Merchandising Operations
7
T-Accounts of Inventory and CGS
Inventory
1,000 250
750
Accounts Rec.
500
CGS
250
Sales
500
Accounting for Merchandising Operations
8
Perpetual Inventory System




The inventory account is used for the
purchase and sale of inventory.
The balances of inventory is available at
all time.
A physical count of inventory is still
needed at the end of a period.
Any discrepancy of inventory book
balance with physical count should be
adjusted to a loss or gain account.
Accounting for Merchandise Inventory, Cost of Goods Sold and the Gross Profit
9
Perpetual Inventory System (contd.)



The cost of goods sold (CGS) account is
used to record the CGS of a sale.
Therefore, the CGS is known at all time.
The CGS is determined by selecting a
cost flow assumption (will be discussed in
Chapter 6).
Accounting for Merchandise Inventory, Cost of Goods Sold and the Gross Profit 10
Accounting for Inventory – A Periodic
Inventory System (Example on P6)
At Purchase:
Purchases
1,000
Accounts Payable 1,000
(to record goods purchased on account)
At Sale:
Accounts Receivable 500
Sales Revenue
500
(to record credit sale)
Accounting for Merchandise Inventory, Cost of Goods Sold and the Gross Profit 11
Accounting for Inventory – A Periodic Inventory
System (Contd.)




The inventory account is not updated
under the periodic inventory system.
The balance of CGS is unknown as CGS
was not determined and recorded at sale.
Under the periodic inventory system, the
cost of ending inventory will be
determined after a physical inventory
count and the CGS will be derived at the
end of a period.
The details of this process will be
discussed in chapter 6.
Accounting for Merchandise Inventory, Cost of Goods Sold and the Gross Profit 12
An Example of Perpetual Vs. Periodic at Purchase with Freight, Purchase Returns and Discounts
 On February 10, inventory Costing $1,000
was purchased on credit, terms, 2/10 and
n/30.
 Freight Terms: FOB Shipping Point—Buyers
are responsible for freight charges.
 $100 Freight was paid on Feb. 10.
 $200 inv. was returned on Feb. 15.
 The payment for the bal. of accounts
payable was made on Feb, 17.
Accounting for Merchandising Operations
13
An Example of Perpetual Vs. Periodic at Purchase
- with Freight, Purchase Returns and Discounts
(Contd.)
Perpetual Inventory Sys.
2/10
Inventory 1,000
A/P
1,000
(Freight)Inventory
100
Cash
100
2/15
A/P
200
(Pur. Ret)
Inventory
200
2/17. A/P
800
Cash
784
Inventory 16
Periodic Inventory Sys.
Purchases
1,000
A/P
1,000
Freight-in
100
Cash
100
A/P
200
Pur. R&A
200
A/P
800
Cash
784
Pur. Dis.
16
Inv. = 1,000+100-200-16=884.
Net Pur.= 1,000+100-200-16 = 884.
Accounting for Merchandise Inventory, Cost of Goods Sold and the Gross Profit 14
An Example of Perpetual Vs. Periodic at Sale - with
Sales Returns, Sales Discounts and Freights
 On March 2, Inventory costing $250 was
sold for $500 on credit.
 On March 5, $50 of inventory sold was
returned.
 Collection of the remaining balance of A/R
on Mar. 7.
 Sale terms: FOB Destination - Seller are
responsible for the freight. The seller paid
$30 for the shipping.
Accounting for Merchandising Operations
15
An Example of Perpetual Vs. Periodic at Sale with Sales Returns, Sales Discounts and Freights
(contd.)
Perpetual Inventory Sys.
3/2 A/R
500
Sales
500
CGS
250
Inventory 250
3/5 Sales R&A 50
(S. Ret.)
A/R
50
Inventory
25
CGS
25
3/7 Cash
441
Sales Dis.
9
A/R
450
Freight Freight-out 30
Cash
30
Periodic Inventory Sys.
A/R
500
Sales
500
None
Sales R&A
A/R
50
50
None
Cash
Sales Dis.
A/R
441
9
Freight-out
450
30
Cash
30
16
Perpetual Inventory System with Purchase, Purchase
Returns and Allowance and Purchase Discounts (skip
pp17-25)
On Feb. 10, $1,000 inventory was purchased on credit.
$200 inv. was returned on Feb. 15. The payment was
made on Feb, 17.
Feb. 10 Inventory
1,000
Accounts Payable
1,000
(To record goods purchased, terms 2/10, n/30)
Feb. 15 Accounts Payable
Inventory
200
200
(To record return of goods purchased)
Feb. 17 Accounts Payable
Cash
Inventory
800
784
16
(To record payment with discount taken)
Accounting for Merchandising Operations
17
Purchase Discounts Not Taken
March 3 Accounts Payable
Cash
800
800
(To record payment on account without discounts
taken)
Accounting for Merchandising Operations
18
Purchase of Inventory –Freight
Costs
 Freight Terms: FOB Shipping Point—Buyers
are responsible for freight charges.
Feb. 10
Inventory
100
Cash
100
(To record freight charges of $100, terms: FOB
shipping point)
Note: If freight terms were FOB destination, the
seller will be responsible for the payment of the
freights.
Accounting for Merchandising Operations
19
Purchase Invoice/Sales Invoice (see
Illustration 5-4 of textbook for an example)




Any purchase should be supported by a
purchase invoice.
Companies usually record purchases when
receiving goods from the seller.
A purchaser uses the sales invoice of the
seller as its purchase invoice.
In addition to the names of the seller and the
buyer, the goods sold and the total amount,
credit terms and freight terms are also
included in the sales invoice.
Accounting for Merchandising Operations
20
Perpetual Inventory System with Sales, Sales
Returns and Allowances, Sales Discounts
On March 2, Inventory costing $250 was sold for $500 on
credit. On March 5, $50 of inventory sold was returned:
Mar. 2
A/R
500
Sales
500
(To record credit sale, terms 2/10,n/30)
CGS
250
Inventory
250
(To record cost of merchandise sold)
Mar. 5
Sales Return and Allowance 50
A/R
50
Inventory
25
CGS
25
(To record sales return)
21
Collection of A/R and Sales
Discounts
 Collection of A/R on Mar. 7:
Cash
441
Sales Discount
9
A/R
450
(To record collection of A/R within discount period)
If the discount is not taken (i.e., collection after
discount period:
Cash
A/R
450
450
Accounting for Merchandising Operations
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Net Sales

Net Sales = Sales – Sales Returns and
Allowances – Sales Discount
Accounting for Merchandising Operations
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Sale of Inventory – Freight Costs
 FOB Shipping Point:
Buyers are responsible for the freight.
 FOB Destination:
Seller are responsible for the freight.
The seller paid $30 for the shipping:
Freight-out
30
Cash
30
(Note: Freight-out is an expense account)
Accounting for Merchandising Operations
24
Closing Entries (Perpetual Inventory System)
Sale Revenue
Income Summary
Income Summary
Cost of Goods Sold
Sales ret. and Allow.
Sales Discount
Freight-out
500
500
314
225
50
9
30
Accounting for Merchandising Operations
25
Income Statement Formats

Multiple -Step Income Statement (see
illustration 5-11 of textbook for an Example) :
Net sales revenue
Cost of good sold
Gross margin
Operating expenses
Selling, Administration and Depreciation
Income form operations
Other icome (expense):
Interest revenue
Interest expense
Gain on sale of equipment
Income before income tax
Income tax expense
Net income
$150,000
(80,000)
70,000
(40,000)
30,000
$2,000
(9,000)
3,000
Accrual Accounting and the Financial Statements
(4,000)
26,000
(10,000)
$16,000
26
26
Income Statement Formats (contd.)

Single-Step Income Statement (See Illus.5-12 of
textbook)
Revenues:
Net sales
Interest revenue
Gain on sale of equipment
Total revenue
Expenses:
Cost of goods sold
Selling, administrative and depr.
Interest expense
Income tax expense
Total expenses
Net Income
$150,000
2,000
3,000
$155,000
80.000
40,000
9,000
10,000
139,000
$ 16,000
Accounting for Merchandising Operations
27
Income Statement Formats (Contd.)
 Selling expenses include: salaries
expense (sales related), advertising
expense, freight-out.
 Administrative expenses include:
salaries expense (administration
related), utility expense, insurance
expense.
Accounting for Merchandising Operations
28
Periodic Inv. System at Purchase with Purchase,
Purchase Returns and Allowance and Purchase
Discounts (Skip pp29-31)

On Feb. 10, $1,000 inventory was purchased on credit.
$200 inv. was returned on Feb. 15. The payment was made
on Feb, 17. The buyer paid freight charge $100 on 2/10.
2/10 Purchases
1,000
Accounts Payable
2/10 Freight-in
100
Cash
2/15 A/P
200
Purchase R&A
2/17 A/P
800
Cash
Purchase Discounts
Accounting for Merchandising Operations
1,000
100
200
784
16
29
Net Purchases of a Periodic
Inventory System

Net purchases = Purchases – Purchases
Returns and Allowances – Purchases
Returns + Freight-in
Accounting for Merchandising Operations
30
Periodic Inv. System at Sale with Sales, Sales Returns
and Allowances and Sales Discounts
On March 2, Inventory costing $250 was sold for $500 on
credit with terms, 2/10, n/30 and FOB destination. Shipping
cost is $30. On March 5, $50 of inventory sold was returned
and the remaining bal. of A/R was collected on March 7.
3/2
A/R
500
Sales
500
Freight-out
30
Cash
30
3/5 Sales Ret. and Allow. 50
A/R
50
3/7 Cash
441
Sales Discount
9
A/R
450
Accounting for Merchandising Operations
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