Accounting for

Merchandising
Business
ACG 2021: Chapter 5
 Merchandising Business
Service Business Merchandising
Revenue Business
activities of a Fees earned Sales
merchandising
business involve Less Operating Less Cost of
expenses merchandise
the buying and sold
selling of =Net income =Gross Profit
merchandise
Less Operating
Comparison to expenses
service business
=Net Income
New Accounts on the Income
Statement
SALES revenues collected from the sale of
merchandise

COST OF MERCHANDISE SOLD the purchase price

plus incidentals of merchandise available for resale

GROSS PROFIT Sales Cost of merchandise sold

 Income Statement
INCOME STATEMENT
Gem City Music
Income Statement
For the Year Ended December 31, 20
Revenue from sales:
Sales $189,300
Less:: Sales returns and allowances $1,700
Sales discounts 500 2,200
Net sales $187,100
Cost of merchandise sold XXXX 100,000
Gross profit $ 87,100
Operating expenses:
Selling expenses:
Sales salaries expense $17,700
Administrative expenses:
Rent expense 7,800
Office salaries expense 22,550
Depreciation expenseoffice equipment 2,800 33,150
Total operating expenses 50,850
Income from operations $36,250
Other expense:
Interest expense 2,000
Net income $ 34,250
Computation of Costs
Computation of Cost of Merchandise Sold
Purchases
Less merchandise inventory, December 31
=Cost of merchandise sold
Computation of Cost of Merchandise
Purchased
Purchases
Less: purchases returns and allowances
Less: purchases discount
=Net purchases
Add: transportation in
=Cost of merchandise purchased
Balance Sheet Accounts
Merchandise inventory merchandise on
hand at the end of an accounting period.
 Merchandising Terms
Sales total amount
charged to customers
for merchandise sold
Sales returns and
allowances are
granted by the seller
to customers for
damaged or defective
merchandise
Sales discount are
granted by the seller
to customers for early
Net sales = Sales
returns - discount
Merchandising Terms
Cost of goods sold
Cost of merchandise sold to customers
Purchases discounts
Offered by the seller to buyer
For early payment
Purchases allowances and returns
Buyer may receive a reduction in the intial
price at which the merchandise is purchased.
Merchandising Terms
Merchandise available for sale =
Beginning merchandise inventory + net
purchases
Net purchases =
Purchases minus discounts returns and
allowances
Accounting for Sales
Under the perpetual inventory system, all
sales require the reporting of the removal
of inventory from the books at the same
time.
 Accounting for Sales
CASH SALES
Example 1: Sold merchandise for cash
$5,000. Cost of merchandise sold $3,200

Date Account PR Debit Credit

Cash $5,000

Sales $5,000

Cost of merchandise sold 3,200

Merchandise inventory 3,200

Credit sales
Bank cards
Master card
Visa
Monies directly
deposited in
business account
Requires a debit to
CASH
Service charge
must be later
recorded as
expense
 Bank cards
Example 9: Sold merchandise on VISA
$10,000. Cost of merchandise sold is
$4,000. Credit card expense is 3% of sales.
Date Account PR Debit Credit
Cash $10,000
Sales $10,000

Cost of merchandise sold 4,000

Merchandise inventory 4,000

Credit card expense 300

Cash 300
Bank cards
Example 3: Sold merchandise on VISA
$6,000. Cost of merchandise sold is
$3,000. Credit card expense is 3% of
sales.
Example 10
Cash 6,000
Sales 6,000

Cost of merchandise 3,000

Merchandise inventory 3,000
Credit card expense 180
Cash 180
 Credit sales
Two types:
American express
On account
Results in debit to
ACCOUNTS
RECEIVABLE
 Sales of Account
Example 4: Sold merchandise on account
$6,000. Cost of merchandise sold is $3,000.
Date Account PR Debit Credit

Accounts receivable $6,000

Sales 6,000

Cost of merchandise 3,000

Merchandise inventory 3,000

Recap
Under the perpetual inventory system, all
sales transactions consist of at least two
entries.
The first entry records the sale at the selling
price with a debit to how it will be paid and
credit to sales.
The second entry records the merchandise
leaving the business with a debit to cost of
merchandise sold and credit to
merchandise inventory for the cost of the
merchandise.
Sales discounts
A reduction in the price of the good for early payment.
This account is a contra SALES
Upon payment of the account receivable, if the
payment is within the discount period, we record the
discount.
Credit terms terms of when payments for
merchandise are to be made.
Net 30 days full amount due in 30 days
2/10 2% discount if paid within 10 days

Example on Sales Discount

Example 5: Sold merchandise on account
$5,000, terms 2/10, n/30. Cost of merchandise
sold is $4,000.

Sales $5,000
Discount 2%
Discount $ $100

Sales $5,000
Less discount 100
Net amount 4,900
 Sales discount
Date Account PR Debit Credit

Cash 4900

Sales discount 100

Accounts receivable 5000

Sales Returns and
Allowances
Merchandise sold may be returned to the
seller
Merchandise sold may be reduced in
price due to defects
This account is CONTRA sales
Increases with a debit
 Sales returns & allowances
Example 6: Sold merchandise on account $7,000,
terms 1/15, n/30. Cost of merchandise sold is
$3,800
Date Account PR Debit Credit

Accounts receivable $7,000

Sales 7,000

Cost of merchandise 3,800

Merchandise inventory 3,800

 Sales returns & allowances
Return merchandise with sales
price of $2,000 and cost of $1,000.
Date Account PR Debit Credit

Sales returns 2,000

Accounts receivable 2,000

Merchandise inventory 1,000

Cost of merchandise sold 1,000

Recap of Sales Example
Example 7: ABC Merchandising had the following
transactions:
Sold merchandise and received payment by VISA
at $6,000, cost of merchandise sold is $4,000.
Sold merchandise on account for $7,500 with credit
terms 1/10, n/30. Cost of the merchandise is
$4,500.
Sold merchandise on account for $4,000, cost of
merchandise is $2,500.
Received a return of the merchandise in (c ) of
sales price of $2,000 and cost of $1,750.
Received payment within the discount period for
merchandise in (b).
Received payment for merchandise in (c ).
 Accounting for Purchases
Assume a perpetual inventory system
Each purchase and sale of merchandise is
recorded as it occurs
Example 1: purchase merchandise for resale
$4,000 on account
Date Account PR Debit Credit
Mar 1 Merchandise inventory $4,000
Accounts payable $4,000
 Purchases Discount

Credit terms
Purchases discounts are
discounts taken by the
buyer for early payment of
an invoice.
These discounts reduce the
cost of the merchandise
purchased.
Should be taken when
offered if not it is a LOSS to
the business.
Purchase discount
Example 9: Purchase merchandise for
resale $4,000, terms 2/10, n/30 on
account.
Invoice:
$4,000
Discount (2% x $4,000) 80
Net of discount 3,920
Purchase discount

Date Account PR Debit Credit

Mar 1 Merchandise inventory $4,000

Accounts payable $4,000

Mar 10 Accounts payable $4,000

Cash $3,920

Merchandise 80
inventory
Purchase Discount
Reduction of the cost of the merchandise
is reflected in the merchandise inventory
account.

Example 10: Purchase merchandise for

resale $6,000, terms 1/15, n/30 on
account.
Purchases Returns and
Allowances
Purchase returns merchandise is
returned to the seller
Purchase allowances price adjustment
Debit memorandum notification of the
return or allowance by seller
 Purchases Returns and
Allowances
Example 11:
Returned
merchandise on
account $2,500.
Date Account PR Debit Credit

Mar 09 Accounts payable $2,500

Cash $2,500
Example
Example 12: Purchased
merchandise of $8,000 on terms
2/10,n/30. Ennis pays the
original invoice less a return of
$2,500 within the discount
period. Record the above
entries
Recap of Purchases
Example
Example 7: ABC Merchandising had the following
transactions:
Purchased merchandise and received payment by
VISA at $6,000.
Purchased merchandise on account for $7,500 with
credit terms 1/10, n/30.
Purchased merchandise on account for $4,000.
Return of the merchandise in (c ) of sales price of
$2,000.
Paid within the discount period for merchandise in (b).
Paid for merchandise in (c ).
 Transportation Costs
The terms of a sale should indicate
when the ownership of the merchandise
passes to the buyer.
This point determines which party, the buyer or
the seller must pay the transportation costs.
Transportation Costs
FOB shipping point
The ownership of the merchandise passes to the
buyer when the seller delivers the merchandise to
the transportation company.
Buyer pays the transportation costs
Example 13: Purchased merchandise for
$4,000 with shipping costs of $50 FOB
shipping point.
 FOB shipping point
Date Account PR Debit Credit

Merchandise inventory $4,000

Accounts payable $4,000

Merchandise Inventory $50

Cash $50
Transportation Costs
FOB destination point
The ownership of the merchandise passes to the
buyer when the seller delivers the merchandise to
the buyer.
Seller pays the transportation costs
Example 14: Sold merchandise for
$4,000 with shipping costs of $50 FOB
destination. Cost of merchandise sold is
$2,000.
 FOB destination point

Date Account PR Debit Credit

Accounts receivable $4,000
Sales $4,000

Cost of merchandise sold 2000

Merchandise inventory 2000

Delivery expense 50
Cash 50
Transportation costs
FREIGHT TERMS
FOB FOB
Shipping PointDestination
Ownership (title)
passes to buyer
when merchandise Delivered to Received
is freight carrier by buyer

Transportation
costs are paid
by Buyer Seller

Risk of loss during

transportation
belongs to Buyer Seller
Sales Taxes
Liability to the business
Create a SALES TAX PAYABLE account

Example 15: Sold merchandise on

account $7,000, plus 5% sales tax. Cost
of merchandise sold is $3,800.
 Sales Taxes
Date Account PR Debit Credit
Accounts receivable $7,350
Sales 7,000
Sales tax payable 350

Cost of merchandise 3,800

Merchandise inventory 3,800
Recap of Transactions
Seller Buyer
Sold merchandise on account: Purchased merchandise on account:
Accounts receivable DR Merchandise Inventory DR
Sales CR Accounts Payable CR
Cost of merchandise sold DR
Merchandise inventory CR

Transportation costs Shipping point Transportation costs Shipping point:

Merchandise Inventory DR
Cash CR
Transportation costs Destination: Transportation costs - Destination
Delivery Expense DR
Cash CR
Merchandise returned: Merchandise returned:
Sales Returns & Allowances DR Merchandise inventory DR
Accounts receivable CR Accounts payable CR
Merchandise inventory DR
Cost of merchandise sold CR

Payment : Payment:
Cash DR Accounts payable DR
Accounts receivable CR Cash CR
Payment with discount: Payment with discount:
Cash DR Merchandise inventory DR
Sales discount DR Cash CR
Accounts receivable CR
 Adjusting Entries
Inventory Shrinkage
Difference between physical count and books

Example 16: Suppose that physical inventory

shows balance of $20,000 and books show
balance of $23,000. Record the shrinkage.
Date Account PR Debit Credit
Cost of merchandise sold 3,000
Merchandise inventory 3,000
Closing Entries
Accounts that must be closed
Sales
Rent revenue
Sales returns and allowances
Sales discounts
Cost of merchandise sold
All expenses and revenues
Dividends