Accounting for
Merchandising
Activities
CHAPTER 5
Part 1
Learning Objectives
1.
2.
3.
6-2
Describe merchandising and identify and
explain the important income statement
and balance sheet components for a
merchandising company. (LO1)
Describe both periodic and perpetual
merchandise inventory systems. (LO2)
Analyze and record transactions for
merchandise purchases and sales using
a perpetual system. (LO3)
Learning Objectives
4.
5.
6.
6-3
Prepare adjustments for a merchandising
company. (LO4)
Define, prepare, and use merchandising
income statements. (LO5)
Prepare closing entries for a
merchandising company. (LO6)
Learning Objectives
7.
8.
6-4
Record and compare merchandising
transactions using both periodic and
perpetual inventory systems.
(Appendix 5A) (LO7)
Explain and record Provincial Sales Tax
(PST) , Goods and Services Tax (GST)
and Harmonized Sales Tax (HST).
(Appendix 5B) (LO8)
Merchandising Activities
Merchandiser: A company that earns net
income by buying and selling
merchandise.
Wholesaler: A company that buys
products from manufacturers or other
wholesalers and sells them to retailers or
other wholesalers.
LO 1
6-5
Inventory
Products a company owns for the
purpose of selling to customers.
• It is often referred to as
Merchandise Inventory.
• Is classified as a current asset.
LO 1
6-6
Merchandise inventory is:
A) Reported on the balance sheet under
plant and equipment.
B) Products a company owns for resale to
customers.
C) Reported on the income statement as
an expense.
D) Includes supplies.
E) Included on a service company's
balance sheet.
Computing Net Income
Service Company
Revenues
Merchandiser
Net Sales
Cost of Goods
Sold
Gross Profit
Operating
Expenses
Operating
Expenses
Net Income
Net Income
LO 1
6-8
Cost of Inventory?
Cost of the goods
But also:
 Shipping costs (Freight In)
 Any other costs required to make
goods ready for sale
LO 1
6-9
Merchandising Cost Flow
Beginning
Merchandise
Inventory
Net cost of
Purchases
Merchandise
available for
sale
Ending
Merchandise
inventory
Cost of goods
sold
LO 1
6-10
Practice
Exercise 5-1
Flashcards
6-11
Merchandise Inventory Systems
Perpetual
Provides a continuous record of:
• The amount of inventory on hand
• Cost of goods sold to date
Periodic
Requires a physical count of goods to determine:
• The amount of merchandise inventory on hand
• Cost of goods sold
LO 2
6-12
Perpetual System – Example
Purchases
Nov. 2
Merchandise Inventory 1,200
Accounts Payable
1,200
Purchased merchandise inv. on account
Purchase Returns and Allowances
Nov.5
Accounts Payable
300
Merchandise Inventory
300
Purchase return re: debit memo
Merchandise
Inventory
1,200
300
900
Accounts
Payable
1,200
300
900
LO 3
6-13
Prompt Payment Discounts
A deduction from the invoice price granted to
induce early payment of the amount due.
Example – 2/10, n30
Credit Period = 30 days
Terms
Discount Period
= 10 days
Time
Nov.12
Nov.2
Due
(Full amount minus 2%
discount) due between
Nov.2 and Nov.12
Purchase or Sale
6-14
Dec.2
Full amount due
anytime between
Nov.13 and Dec.2
LO 3
Perpetual System–Example
Purchase Discounts- Assume the purchase on
November 2 was on the terms 2/10,n30.
Case 1-Discount taken
How much will we have to pay?
Accounts
Payable
1,200
300
900
LO 3
6-15
Perpetual System–Example
Purchase Discounts- Assume the purchase on
November 2 was on the terms 2/10,n30. Now being
paid on November 12.
Case 1-Discount taken
Nov.12
Accounts Payable
900
Cash
Merchandise Inventory
2% x (1,200 - 300) = 18
882
18
Case 2-Discount not taken
Nov.12
Accounts Payable
Cash
Accounts
Payable
1,200
300
900
900
900
900
LO 3
6-16
Z-Mart uses the perpetual inventory system and
recorded the following journal entry:
Accounts Payable
2,500
Merchandise Inventory
50
Cash
2,450
The transaction was:
A) A purchase
B) A return
C) A return and payment of the account payable.
D) A payment of the account payable and
recognition of a cash discount taken
E) A purchase and recognition of a cash
discount taken
Perpetual System–Example
Transportation
Nov.24 Merchandise Inventory
Cash
75
75
Paid freight charges on purchased merchandise.
$75
Our
Supplier
Us
Our
Customer
LO 3
6-18
Transportation Charges:
Who Pays?
Seller
Goods
FOB “Shipping Point”
(Buyer pays shipping
charges)
Carrier
(shipping company)
Buyer
FOB “Destination”
(Seller pays for shipping
charges)
LO 3
6-19
This entry:
Nov.24 Merchandise Inventory
Cash
75
75
Paid freight charges on purchased merchandise.
Is a/an:
A) Adjusting entry
B) Reversing entry
C) Closing entry
D) Regular journal entry
E) Cannot be determined
Perpetual System–Example
Sale of Merchandise
Nov.12
Accounts Receivable
1,000
Sales
1,000
Sold merchandise on terms 2/10,n60
Cost of goods sold
600
Merchandise Inventory
600
To record cost of merchandise sold
Merchandise
Inventory
1,200
300
900
600
LO 3
6-21
Perpetual System–Example
Customer Payment
Case 1-Customer pays in 60 days
Jan.11
Cash
1,000
Accounts receivable
1,000
Received payment for Nov. 12 sale
Case 2-Customer pays in 10 days
Nov.22
Cash
980
Sales discounts
20
Accounts receivable
1,000
Received payment less the discount
LO 3
6-22
Perpetual System–Example
Sales Returns and Allowances
Nov.6
Sales Returns & Allowance
800
Accounts Receivable
800
Customer returned merchandise
Merchandise Inventory
600
Cost of Goods Sold
600
Returned goods to merchandise inventory
LO 3
6-23