Accounting For
Merchandising
By Rachelle Agatha, CPA, MBA
Slides by Rachelle Agatha, CPA,
with excerpts from Warren, Reeve,
Duchac
After studying this chapter, you
should be able to:
1. Distinguish between the
activities and financial
statements of service and
merchandising businesses.
2. Describe and illustrate the
financial statements of a
merchandising business.
2
After studying this chapter, you
should be able to:
3. Describe and illustrate the accounting
for merchandise transactions
including:
 sale of merchandise
 purchase of merchandise
 transportation costs, sales taxes, trade
discounts
 dual nature of merchandising
transactions.
4. Describe the adjusting and closing
process for a merchandising business.
3
5-2
Objective 1
Distinguish between
the activities and
financial statements of
service and
merchandising
businesses.
4
6-1
Service Business
Fees earned
Operating expenses
Net income
$XXX
–XXX
$XXX
5
Merchandising Business
Sales
Cost of Merchandise Sold
Gross Profit
Operating Expenses
Net Income
6-1
$XXX
–XXX
$XXX
–XXX
$XXX
6
Sales
Gross
Profit
-
Cost
Merch
Sold
-
Operating
Expenses
=
Gross
Profit
=
Net
Income
6-1
When merchandise is sold,
the revenue is reported as
sales, and its cost is
recognized as an expense
called cost of merchandise
sold or Cost of Goods Sold.
8
The cost of merchandise
sold is subtracted from sales
to arrive at gross profit. This
amount is called gross profit
because it is the profit
before deducting the
operating expenses.
6-1
9
6-1
Merchandise on hand
(not sold) at the end of
an accounting period is
called merchandise
inventory.
10
6-2
Objective 2
Describe and illustrate
the financial statements
of a merchandising
business.
12
Multiple-Step Income Statement
6-2
The multiple-step
income statement
contains several
sections,
subsections, and
subtotals.
13
6-2
The Sales account
provides the total
amount charged to
customers for
merchandise sold,
including cash sales
and sales on
account.
14
6-2
Sales returns and
allowances are
granted by the seller
to customers for
damaged or
defective
merchandise.
15
6-2
Sales discounts are
granted by the seller
to customers for early
payment of amounts
owed.
16
6-2
Net sales is determined
by subtracting sales
returns and allowances
and sales discounts from
sales.
17
Revenue from sales:
Sales
Less: Sales returns and
allowances
Sales discounts
Net sales
$ 750,000
$ 15,000
6,000
21,000
$ 729,000
6-2
Cost of merchandise
sold was discussed
earlier. It is the cost of
the merchandise sold
to customers.
19
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.
6-2
20
6-2
The buyer may return
merchandise to the seller (a
purchase return), or the
buyer may receive a
reduction in the initial price
at which the merchandise
was purchased (a purchase
allowance).
21
Purchases
Purchases returns and
Less:
allowances
Purchases discounts
Net purchases
$ 481,400
$
8,500
1,500
(10,000)
471,400
Cost of merchandise sold:
Merchandise inventory, March 1
$
88,370
Purchases
$ 481,400
Purchases returns and
Less:
$ 8,500
allowances
Purchases discounts
1,500
(10,000)
Net purchases
471,400
Add transportation in
3,180
Cost of merchandise purchased
474,580
Merchandise available for sale
562,950
Less merchandise inventory, March 31
(125,550)
Cost of merchandise sold
$ 437,400
GROSS PROFIT
Revenue from sales:
Sales
Less:
Sales returns and
allowances
Sales discounts
Net sales
Cost of merchandise sold
Gross profit
$ 750,000
$ 15,000
6,000
21,000
$ 729,000
437,400
$ 291,600
Objective 3
6-3
Understand the accounting for
merchandise transactions
including: sale, purchase,
transportation costs, sales taxes,
and trade discounts.
25
Sale Transaction
DR
Accounts Receivable
Sales
Cost of Merchandise Sold
Merchandise Inventory
(record sale of inventory)
CR
12,250
12,250
7,400
7,400
Sales Discounts
6-3
The terms for when payments
for merchandise are to be
made, agreed on by the
buyer and the seller, are
called credit terms. If buyer is
allowed an amount of time to
pay, it is known as the credit
period.
28
Payment Transaction
Cash
12,005
Sales Discounts
245
Accounts Receivable
(record receipt of payment on account)
12,250
MERCHANDISE IS RETURNED: SOLD FOR
$225, COST WAS $140)
Sales Returns & Allowance
Accounts Receivable
225
225
(Record Credit Memo)
Merchandise Inventory
Cost of Merch Sold
(Return of Merch)
140
140
Purchase Inventory
(Perpetual System)
DR
CR
Merchandise Inventory
2,510
Cash
(Purchased Inventory for cash)
2,510
Merchandise Inventory
2,510
Accounts Payable
(Purchased Inventory on account)
2,510
Return & Payment on
Account
DR
CR
Accounts Payable
300
Merchandise Inventory
(Returned inventory - debit memo)
300
Accounts Payable
2,210
Cash
(Paid on account - $2,510 - 300))
2,210
Payment with Discount
DR
June 1
Merchandise Inventory
Acounts Payable
CR
4,500
4,500
(Purchased Inventory on account, terms 2/10 n 30)
June 4
Accounts Payable
Merchandise Inventory
2,000
2,000
(Returned inventory - debit memo)
June 9
Accounts Payable
Cash
Merchandise Inventory
2,500
(Paid Invoice ([$4,500 - $2,000]*2% ) = $50)
$2,500 - $50 = $2,450)
2,450
50
FOB (Free On Board) Shipping Point
The buyer bears the
transportation cost
Add cost to inventory
FOB (Free On Board) Shipping Point
DR
Merchandise Inventory
Accounts Payable
CR
900
900
(Purchased Inventory FOB Shipping Point)
Merchandise Inventory
Cash
45
(Paid shipping cost on inventory purchased)
45
FOB (Free On Board) Destination
The seller bears the
transportation cost
Cost is delivery expense
FOB (Free On Board) Destination
DR
Accounts Receivable
Sales
CR
700
700
(record sale of inventory)
Cost of Merchandise Sold
Merchandise Inventory
480
480
(Record cost of merch sold)
Delivery expense
Cash
(Paid shipping - FOB Destination)
40
40
Buyer vs. Seller
DR
CR
Seller. journal entries:
Cash ($5,250 - $650 - $92)
Sales Discounts [($5,250 - $650) × 2%]
Accounts Receivable-Buyer ($5,250 - $650)
4,508
92
4,600
Buyer. journal entries:
Accounts Payable-Seller ($5,250 - $650)
Merchandise Inventory [($5,250 - $650) × 2%]
Cash ($5,250 - $650 - $92)
4,600
92
4,508
Record Shrinkage
DR
Cost of Merch Inv Sold
Merchandise Inventory
CR
150
(Inventory shrinkage - physical inventory performed)
Perform physical inventory
and difference is
shrinkage
150
Periodic vs. Perpetual System
Periodic system:
 Revenues are recorded
when sales occur
No inventory is recorded or
cost of sales
Physical inventory taken
and inventory is adjusted
Summary
 Merchandising business
 Operating Cycle
 Sales Transactions
 Purchase Transactions
Financial Statements
.