Chapter 5


Businesses that sell a product to customers
Inventory
◦ Merchandise held for sale
◦ Asset account
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2
Describe and illustrate merchandising operations
and the two types of inventory systems
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Balance Sheet

Inventory
◦ Asset
Income Statement


Sales revenue
Cost of goods sold
◦ Expense
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Cash
Purchase
inventory
Collect
cash from
customers
Accounts
receivable
Sell
inventory
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Inventory
5
PERIODIC



Goods counted
periodically to determine
quantity
Used by small
businesses
Less popular now
because of computerized
inventory systems
PERPETUAL



Record of quantity of
goods is constantly
updated
Better control of inventory
Popular now due to bar
codes and computer
scanning
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Account for the purchase of inventory using a
perpetual system
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


The inventory account is increased each time
merchandise is purchased
The vendor provides an invoice showing the
quantity and cost of the items
Inventory cost is also impacted by:
◦ Shipping costs
◦ Return of purchased items
◦ Discounts for early payment
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GENERAL JOURNAL
DATE
REF
DESCRIPTION
Inventory
Accounts payable
DEBIT
CREDIT
$$$$
Purchased inventory on account
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$$$$


Discount for early payment
Expressed as follows:
2/10 , n/30
2% discount if paid
within 10 days
Full amount due
within 30 days
Other terms:
n/30
No discount, full
amount due in 30 days
eom
Full amount due by
the end of month
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GENERAL JOURNAL
DATE
REF
DESCRIPTION
Accounts payable
Cash
Inventory
Paid within discount period
DEBIT
CREDIT
$$$$
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$$$$
$$$

Purchase return
◦ Merchandise returned by the purchaser to the supplier

Purchase allowance
◦ Seller reduces amount owed
◦ Incentive for purchaser to keep goods
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GENERAL JOURNAL
DATE
REF
DESCRIPTION
Accounts payable
Inventory
Returned damaged goods
DEBIT
CREDIT
$$$$
$$$$
Reverse of purchase entry
Decreases both accounts
payable and inventory
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
FOB Shipping Point
◦ Buyer takes ownership
of inventory when goods
leave seller’s place of
business
◦ Purchaser normally pays
freight charges
 Freight-in
 Increases cost of
inventory

FOB Destination
◦ Buyer takes ownership
of inventory when goods
arrive
◦ Seller normally pays
freight
 Freight-out
 Selling expense
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Seller
Buyer
Goods
Title
transfers
to buyer
Buyer pays
freight charges
Increases cost of
inventory
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Seller
Buyer
Goods
Seller pays
freight charges
Title
transfers
to buyer
Increases expenses
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16
Account for the sale of inventory using a perpetual
system
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
Sales revenue
◦ Amount earned from selling inventory
◦ Revenue account

Cost of goods sold
◦ Cost of inventory that has been sold to customers
◦ Expense account
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GENERAL JOURNAL
DATE
REF
DESCRIPTION
DEBIT
Accounts receivable (or Cash)
Sales revenue
To record sales on account
$$$$$
Cost of goods sold
$$$$$
CREDIT
$$$$$
Inventory
To record cost of sales
$$$$$
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
Sales returns & allowances
◦ When customer returns goods or the seller grants a
reduction in price to customer
◦ Contra-revenue account (debit balance)

Sales discounts
◦ If customer pays within the discount period allowed by
the seller
◦ Contra-revenue account (debit balance)

Freight out
◦ Delivery expense
◦ If terms are FOB shipping point
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GENERAL JOURNAL
DATE
REF
DESCRIPTION
Sales returns and allowances
Accounts receivable
Inventory
DEBIT
CREDIT
$$$$
$$$$
$$$$
$$$$
Cost of goods sold
Customer returned merchandise
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GENERAL JOURNAL
DATE
REF
DESCRIPTION
Cash
Sales discounts
Accounts receivable
DEBIT
CREDIT
$$$$$
$$$$
$$$$$
Collected on account within discount period
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Sales
minus
Sales returns & allowances
minus
Sales discounts
equals
Net Sales
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Net Sales
minus
Cost of Goods Sold
equals
Gross Profit
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24
Adjust and close the accounts of a merchandising
business
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

Businesses take actual count of inventory at least
once per year
Actual count of inventory may differ from amount
on the books due to:
◦ Theft or Damage – Inventory Shrinkage
◦ Errors
GENERAL JOURNAL
DATE
REF
DESCRIPTION
DEBIT
CREDIT
Cost of goods sold
Inventory
To adjust for shrinkage
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
1. Close revenues
GENERAL JOURNAL
Post
Ref Debit
Date Accounts
Credit
Sales
62,500
Income summary
62,500

2. Close expenses & contra-revenues
GENERAL JOURNAL
Post
Ref Debit
Date Accounts
Credit
Income summary
32,900
Cost of goods sold
21,000
Sales discounts
3,500
Sales returns & all.
5,000
Utilities expense
3,400
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
3. Close Income summary
GENERAL JOURNAL
Post
Ref Debit
Date Accounts
Credit
Income summary
29,600
Retained earnings
29,600

4. Close Dividends
GENERAL JOURNAL
Post
Ref Debit
Date Accounts
Credit
Retained earnings
1,000
Dividends
1,000
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28
Prepare a merchandiser’s financial statements
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Any Company
Income Statement
Year Ended December 31, 2011
Sales revenue
Less: Sales returns and allowances
Sales discounts
$ 75,000
$ (5,000)
(3,500)
(8,500)
Net sales revenue
Cost of goods sold
66,500
32,000
Gross profit
Operating expenses
Salary expense
Supplies expense
Depreciation expense
34,500
Utilities expense
Operating income
Other revenue and (expense)
Interest expense
Net Income
$ 12,000
1,500
2,000
1,200
16,700
17,800
$ (8,500)
9,300
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
Selling Expenses
◦ Related to marketing
the company’s products
◦ Include:




Advertising
Sales’ salaries
Store rent
Freight out

General Expenses
◦ NOT related to
marketing products
◦ Include:




Insurance
Office salaries
Office rent
Depreciation
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
Statement of Retained Earnings
◦ Exactly the same as service company

Balance Sheet
◦ Inventory account
 Current asset
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Multi-step

Lists several important
subtotals
◦ Gross profit
◦ Operating income

More popular
Single-step

Groups all revenue and
all expenses together
◦ No subtotals

Works well for service
companies
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33
Use gross profit percentage and inventory turnover
to evaluate a business
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Gross Profit
Net Sales
Carefully watched measure
Small increase may
indicate rise in income
Small decrease may
indicate trouble
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Cost of goods sold
Average inventory
Measures how rapidly inventory is sold
The higher the turnover, the more
quickly inventory is sold
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36