Chapter 5 Accounting for Merchandising Activities

Inventing  goods that t merchandising company sells to its customers -> relatively
liquid asset

Operating Cycle:

1. Purchases of merchandise
2. Sales of merchandise
3. Collection of receivables

Merchandising v manufacturing

Merchandisers – include retailers and wholesalers

Merchandiser Includes (p. 197

Revenue

Less: CGS  cost incurred to purchase merchandise

Gross Profit

Less: Expenses
Net Income

Subsidiary ledger – separate account for each of the items included in the balance of a
general ledger account e.g. account receivables sub-ledger shows receivables by
customer controlling account general ledger account which summarizes a sub-ledger
thus entries affecting sub-ledger must be posted twice 1. Sub-ledger 2. General ledger.

2 approaches may be used for merchandise transactions

1. Perpetual inventory system – big business

2. Periodic inventory system – small business

1. Perpetual Inventory
- Transactions are recorded as they occur
 a. Purchase merchandise
Inventory

Accounts payable

b. Sale of merchandise
Accounts receivable

Sales

Cost of goods sold

Inventory

c. Payment of accounts payable to suppliers

Accounts payable

Cash

d. Collection of accounts receivable

Cash

Accounts receivable

- Inventory sub-ledger for separate product inventory shrinkage –

unrecorded decreases in inventory from breakage, spoilage, employee
theft and shoplifting.
Thus  take a physical inventory at least once a year and any difference
from ledger:

Cost of goods sold

Inventory

2. Periodic Inventory
Inventory amounts are determined periodically (usually year end)

a. Purchase merchandise
Purchases
 Accounts payable

b. Sale of Merchandise\
Accounts receivable

Sales

c. Computer Cost of goods sold

Inventory – beginning

+ Purchases

CGAS

Less: Inventory-End

Cost of Goods Sold

d. During closing procedures inventory Cost of Goods Sold recorded:

Cost of goods Sold

Inventory – Beginning

Purchases

Inventory – End

Cost of Goods Sold

 Note: remainder of closing entries is same as chapter 3

Selecting an Inventory System – see page 209

Evaluating Performance of Merchandise Company

1. Net Sales = gross sales – refunds or discounts

2. Gross profit margin – amount of gross profit expressed as a % of net sales

 Can be computed overall, department, undivided products or per unit

Additional Merchandising Transactions = Purchases

 Assume perpetual inventory system here

1. Credit terms and cash discounts

- When products sold on account many offer discounts of payment made before
due

e.g. 2/10, n/30  full payment due in 30 days but 2% discount if payment within 10 days

a. Recorded purchases at net cost

Inventory

Accounts payable

Payment made on time

Accounts payable

Cash

Payment made after discount allowed

Accounts payable

Purchase discount lost  expense account

Cash

b. Record purchases at gross

Inventory

Accounts payable

If payment made in discount period

Accounts payable

Cash
 Purchase discounts taken  reduces Cost of goods sold

2. Returns of Unsatisfactory merchandise

Accounts payable

Inventory

3. Transportation Cost on Purchases

- Transportation costs to purchase inventor are part of cost of asset not current
expenses

- Transportation in  purchaser pays transportation

-If notable to assign transportation costs to each product then transportation in is

usually included in Cost of Goods Sold

4. Accenting for Sales Tax

Sales tax – imposed on consumer not seller but seller must collect and remit

Cash

Sales tax payable

Sales

Additional Sales Transactions

Sales shown on Income Statement: Sales

Less: R &A

Discounts

Net Sales
1. Sales R +A

Sales R + A  contra revenue account

Accounts Receivable (or Cash)

Inventory

Cost of Goods Sold

2. Sales Discounts

- Sales recorded at gross

Accounts Receivable

Sales

If payment made within discount period

Cash

Sales Discounts  contra revenue account

Accounts receivable

3. Delivery expense

Is seller incurs expense

Delivery expense  operation expense not Cost of Goods sold

Cash