Chapter 5

Accounting for
Merchandising
Operations
Financial Accounting, IFRS Edition
Weygandt Kimmel Kieso
Slide
5-1
 Accounting for Merchandising Operations

Completing
Recording Recording Forms of
Merchandising the
Purchases of Sales of Financial
Operations Accounting
Merchandise Merchandise Statements
Cycle

Operating Freight costs Sales returns Adjusting Income

cycles Purchase and entries statement
Flow of returns and allowances Closing entries Classified
costs— allowances Sales Summary of statement of
perpetual and Purchase discounts merchandising financial
periodic discounts entries position
inventory
Summary of
systems
purchasing
transactions

Slide
5-2
 Merchandising Operations

Merchandising Companies
Buy and Sell Goods

Wholesaler Retailer Consumer

The primary source of revenues is referred to as

sales revenue or sales.
Slide
5-3
SO 1 Identify the differences between service and merchandising companies.
 Merchandising Operations

Income Measurement
Not used in a
Sales Less
Service business.
Revenue
Illustration 5-1

Cost of = Gross Less

Goods Sold Profit

Operating = Net
Cost of goods sold is the total Income
cost of merchandise sold during Expenses
(Loss)
the period.

Slide
5-4
SO 1 Identify the differences between service and merchandising companies.
 Merchandising Operations
Illustration 5-2
Operating
Cycle
The operating
cycle of a
merchandising
company
ordinarily is longer
than that of a
service company.

Slide
5-5
SO 1 Identify the differences between service and merchandising companies.
 Merchandising Operations

Flow of Costs
Illustration 5-3

Slide
5-6
SO 1 Identify the differences between service and merchandising companies.
 Merchandising Operations

Flow of Costs
Perpetual System
1. Purchases increase Merchandise Inventory.
2. Freight costs, Purchase Returns and Allowances and
Purchase Discounts are included in Merchandise Inventory.
3. Cost of Goods Sold is increased and Merchandise Inventory
is decreased for each sale.
4. Physical count done to verify Merchandise Inventory balance.

The perpetual inventory system provides a continuous record of

Merchandise Inventory and Cost of Goods Sold.

Slide
5-7
SO 1 Identify the differences between service and merchandising companies.
 Merchandising Operations

Flow of Costs
Periodic System
1. Purchases of merchandise increase Purchases.
2. Ending Inventory determined by physical count.
3. Calculation of Cost of Goods Sold:

Beginning inventory $ 100,000

Add: Purchases, net + 800,000
Goods available for sale 900,000
Less: Ending inventory - 125,000
Cost of goods sold $ 775,000

Slide
5-8
SO 1 Identify the differences between service and merchandising companies.
 Recording Purchases of Merchandise
Illustration 5-5

Made using cash or credit

(on account).
Normally recorded when
goods are received.
Purchase invoice should
support each credit
purchase.

Slide
5-9
SO 2 Explain the recording of purchases under a perpetual inventory system.
 Recording Purchases of Merchandise

Under the perpetual inventory system, companies record in the

Merchandise Inventory account the purchase of goods they intend
to sell.

Illustration: From INVOICE NO. 731 (Illustration 5-5) record the

journal entry Sauk Stereo would make to record its purchase from
PW Audio Supply.

May 4 Merchandise inventory 3,800

Accounts payable 3,800

Slide
5-10
SO 2 Explain the recording of purchases under a perpetual inventory system.
 Recording Purchases of Merchandise

Freight Costs – Terms of Sale

Illustration 5-6

Seller places goods Free On

Board the carrier, and buyer
pays freight costs.

Seller places goods Free On

Board to the buyer’s place
of business, and seller pays
freight costs.

Slide Freight costs incurred by the seller are an operating expense. SO 2

5-11
 Recording Purchases of Merchandise

Illustration: Assume upon delivery of the goods on May 6, Sauk

Stereo pays Acme Freight Company €150 for freight charges, the
entry on Sauk Stereo’s books is:

May 6 Merchandise inventory 150

Cash 150

Assume the freight terms on the invoice in Illustration 5-5 had

required PW Audio Supply to pay the freight charges, the entry by
PW Audio Supply would have been:

May 4 Freight-out (or Delivery Expense) 150

Cash 150
Slide
5-12
SO 2 Explain the recording of purchases under a perpetual inventory system.
 Recording Purchases of Merchandise

Purchase Returns and Allowances

Purchaser may be dissatisfied because goods are
damaged or defective, of inferior quality, or do not meet
specifications.

Purchase Return Purchase Allowance

Return goods for credit if May choose to keep the
the sale was made on merchandise if the seller
credit, or for a cash refund will grant an allowance
if the purchase was for (deduction) from the
cash. purchase price.

Slide
5-13
SO 2 Explain the recording of purchases under a perpetual inventory system.
 Recording Purchases of Merchandise

Illustration: Assume that on May 8 Sauk Stereo returned

to PW Audio Supply goods costing €300.

May 8 Accounts payable 300

Merchandise inventory 300

Slide
5-14
SO 2 Explain the recording of purchases under a perpetual inventory system.
 Recording Purchases of Merchandise

Purchase Discounts
Credit terms may permit buyer to claim a cash discount
for prompt payment.
Advantages:
Purchaser saves money.
Seller shortens the operating cycle.

Example: Credit terms of 2/10, n/30, is read “two-ten, net thirty.”

2% cash discount if payment is made within 10 days.

Slide
5-15
SO 2 Explain the recording of purchases under a perpetual inventory system.
 Recording Purchases of Merchandise

Purchase Discount Terms

2/10, n/30 1/10 EOM n/10 EOM

2% discount if 1% discount if Net amount due

paid within 10 paid within first 10 within the first 10
days, otherwise days of next days of the next
net amount due month. month.
within 30 days.

Slide
5-16
SO 2 Explain the recording of purchases under a perpetual inventory system.
 Recording Purchases of Merchandise

Illustration: Assume Sauk Stereo pays the balance due of

€3,500 (gross invoice price of €3,800 less purchase returns and
allowances of €300) on May 14, the last day of the discount
period. Prepare the journal entry Sauk makes to record its May
14 payment.

May 14 Accounts payable 3,500

Cash 3,430
Merchandise Inventory 70

Slide
5-17
SO 2 Explain the recording of purchases under a perpetual inventory system.
 Recording Purchases of Merchandise

Illustration: If Sauk Stereo failed to take the discount, and

instead made full payment of €3,500 on June 3, the journal entry
would be:

June 3 Accounts payable 3,500

Cash 3,500

Slide
5-18
SO 2 Explain the recording of purchases under a perpetual inventory system.
 Recording Purchases of Merchandise

Purchase Discounts
Should discounts be taken when offered?

Passing up the discount offered equates to paying an

interest rate of 2% on the use of $3,500 for 20 days.

Example: 2% for 20 days = Annual rate of 36.5%

(365/20 = 18.25 twenty-day periods x 2% = 36.5%)

Slide
5-19
SO 2 Explain the recording of purchases under a perpetual inventory system.
 Recording Purchases of Merchandise

Summary of Purchasing Transactions

Illustration Merchandise Inventory

Debit Credit

4th - Purchase €3,800 €300 8th - Return

6th – Freight-in 150 70 14th - Discount

Balance €3,580

Slide
5-20
SO 2 Explain the recording of purchases under a perpetual inventory system.
 Recording Sales of Merchandise
Illustration 5-5

Made for cash or credit

(on account).
Normally recorded when
earned, usually when
goods transfer from
seller to buyer.
Sales invoice should
support each credit
sale.

Slide SO 3 Explain the recording of sales revenues

5-21 under a perpetual inventory system.
 Recording Sales of Merchandise

Two Journal Entries to Record a Sale

#1 Cash or Accounts receivable XXX Selling

Sales XXX Price

#2 Cost of goods sold XXX Cost

Merchandise inventory XXX

Slide SO 3 Explain the recording of sales revenues

5-22 under a perpetual inventory system.
 Recording Sales of Merchandise

Illustration: Assume PW Audio Supply records its May 4 sale of

€3,800 to Sauk Stereo (Illustration 5-5) as follows. Assume the
merchandise cost PW Audio Supply €2,400.

May 4 Accounts receivable 3,800

Sales 3,800

4 Cost of goods sold 2,400

Merchandise inventory 2,400

Slide SO 3 Explain the recording of sales revenues

5-23 under a perpetual inventory system.
 Recording Sales of Merchandise

Sales Returns and Allowances

“Flipside” of purchase returns and allowances.
Contra-revenue account (debit).
Sales not reduced (debited) because:
 would obscure importance of sales returns and
allowances as a percentage of sales.

 could distort comparisons between total sales in

different accounting periods.

Slide SO 3 Explain the recording of sales revenues

5-24 under a perpetual inventory system.
 Recording Sales of Merchandise

Illustration: Prepare the entry PW Audio Supply would make to

record the credit for returned goods that had a €300 selling price
(assume a €140 cost). Assume the goods were not defective.

May 8 Sales returns and allowances 300

Accounts receivable 300

8 Merchandise inventory 140

Cost of goods sold 140

Slide SO 3 Explain the recording of sales revenues

5-25 under a perpetual inventory system.