Lecture

6 ACCOUNTING FOR
MERCHANDISING
ACTIVITIES
 Merchandising Companies
A merchandising business is one that buys and
sells goods in order to make a

Inventory - The goods that a company buys in

order to resell to customers

Inventory is a relatively “liquid” asset

Operating Cycle of a Merchandising
Company

1. er
s he

Pu ch
Cash

m
le f t

rc an
ab o

ha di
iv on

se se
ce ti
re lec

of
C ol
3.

Accounts
Inventory
Receivable 2. Sale of merchandise
on account
 Comparing Merchandising Activities with
Manufacturing Activities
Manufacture
Purchase inventory and
inventory in have a longer
ready-to-sell and more
condition. complex
operating cycle

Merchandising Manufacturing
Company Company
 Retailers and Wholesalers

Wholesalers buy
merchandise from
several different
manufacturers and
then sell this Retailers sell
merchandise to merchandise directly
several retailers. to the public.
 Income Statement of a Merchandising
Company
Computer Barn Cost of
Condensed Income Statement goods sold
For the Year Ended December 31, 2002 represents
Revenue from sales $ 900,000 the expense
Less: Cost of goods sold 540,000 of goods
Gross profit $ 360,000 that are
Less: Expenses 270,000
sold to
Net income $ 90,000
customers.
Gross profit is a useful means of measuring
the profitability of sales transactions.
 General Ledger Accounts
Although general ledger accounts provide
useful information, they do not provide
much of the detailed information needed in
the daily business operations.

General Ledger
Accounts Receivable Who
Date Debit Credit Balance
Who
2001
owes
owes us
us
June 1 10,000 10,000 money?
money?
15 3,000 7,000
 Subsidiary Ledgers: A Source of
Needed Details
General Ledger
Controlling Account Accounts Receivable
Date Debit Credit Balance
2001
June 1 10,000 10,000
Subsidiary Ledger 15 3,000 7,000
Jake Sparks
Date Debit Credit Balance
2001
June 1 3,000 3,000
15 1,000 2,000
Subsidiary Ledger
Heather Jacobs
Date Debit Credit Balance
2001
June 1 7,000 7,000
15 2,000 5,000
 Two Approaches Used in Accounting for
Merchandise Transactions

Perpetual Periodic
Inventory Inventory
System System
 Perpetual Inventory System
The inventory account is continuously
updated to reflect items on hand.

Let’s look
at some
entries!
 Perpetual Inventory System
On September 5, Worley Co. purchased 100
laser lights for resale for $30 per unit from
Electronic City on account .
 Perpetual Inventory System
On September 10, Worley Co. sold 10 laser
lights for $50 per unit on account to ABC
Radios.
10  $30
10 $30 == $300
$300
 Perpetual Inventory System
On September 10, Worley Co. sold 10 laser
lights for $50 per unit on account to ABC
Radios.
Retail

Cost
 Perpetual Inventory System
On September 15, Worley Co. paid Electronic
City $3,000 for the September 5 purchase.
 Perpetual Inventory System
On September 22, Worley Co. received $500
from ABC Radios as payment in full for their
purchase on September 10.
 The Inventory Subsidiary Ledger

At the end of the period, management

compares the physical inventory count with
the inventory ledger to determine inventory
shrinkage.
Taking a Physical Inventory
In order to ensure
the accuracy of
their perpetual
records, most
businesses take a
complete physical
count of the
merchandise on
hand at least once
a year.
 Taking a Physical Inventory
Reasonable amounts of inventory shrinkage are viewed as
a normal cost of doing business. Examples include
breakage, spoilage and theft.
On December 31, Worley Co. counts its inventory.
An inventory shortage of $2,000 is discovered.
 Periodic Inventory System
No effort is made to keep up-to-date
records of either inventory or cost of
goods sold.

Let’s look
at some
entries!
 Periodic Inventory System
On September 5, Worley Co. purchased 100
laser lights for resale for $30 per unit from
Electronic City on account .
Notice
Notice that
that no
no entry
entry is
is
made
made toto Inventory.
Inventory.
 Periodic Inventory System
On September 10, Worley Co. sold 10 laser
lights for $50 per unit on account to ABC
Radios.

Retail
 Periodic Inventory System
On September 15, Worley Co. paid Electronic
City $3,000 for the September 5 purchase.
 Periodic Inventory System
On September 22, Worley Co. received $500
from ABC Radios as payment in full for their
purchase on September 10.
 Computing Cost of Goods Sold in a
Periodic Inventory System
The
The accounting
accounting records
records of
of Party
Party
Supply
Supply show
show the
the following:
following:
Inventory,
Inventory, Jan.
Jan. 1,
1, 2003
2003 $$ 14,000
14,000
Purchases
Purchases (during
(during 2003)
2003) 130,000
130,000

At
At December
December 31,
31, 2003,
2003, Party
Party
Supply
Supply counted
counted the
the merchandise
merchandise
on
on hand
hand at
at $12,000.
$12,000.

Calculate Party Supply’s cost of goods sold

for 2003.
 Computing Cost of Goods Sold in a
Periodic Inventory System
Cost of Goods Sold can be
calculated as follows:
Inventory (beginning of the year) $ 14,000
Add: Purchases 130,000
Cost of goods available for sale 144,000
Less: Inventory (end of year) 12,000
Cost of goods sold $ 132,000
 Creating Cost of Goods Sold in a
Periodic Inventory System
Now, Party Supply must
create the Cost of Goods
Sold account.
 Creating Cost of Goods Sold in a
Periodic Inventory System
Now, Party Supply must
record the ending inventory
amount.
Comparison of Perpetual and Periodic
Inventory Systems
Perpetual Inventory Periodic Inventory
System System

Large Department Jo’s Dress Shop

Stores
Credit Terms and Cash Discounts
When manufacturers and wholesalers
sell their products on account, the
credit terms are stated in the invoice.

2/10, n/30
Read as: “Two ten, net thirty”
 Credit Terms and Cash Discounts

2/10, n/30
Percentage # of Days Otherwise, # of Days
of Discount Discount Is the Full when Full
Available Amount Is Amount Is
Due Due
Credit Terms and Cash Discounts

Purchases are
recorded at their
net amounts.
Net Purchase
Method discounts lost
are recorded
when payment is
made outside
the discount
period.
Credit Terms and Cash Discounts
On July 6, Play Clothes purchased $4,000 of
merchandise on credit with terms of
2/10, n/30 from Kid’s Clothes.
Prepare the journal entry for Play Clothes.
Credit Terms and Cash Discounts
On July 6, Play Clothes purchased $4,000 of
merchandise on credit with terms of
2/10, n/30 from Kid’s Clothes.
Prepare the journal entry for Play Clothes.

$4,000  98%
$4,000 98% == $3,920
$3,920
Credit Terms and Cash Discounts
On July 15, Play Clothes pays the full amount
due to Kid’s Clothes.
Prepare the journal entry for Play Clothes.
 Credit Terms and Cash Discounts
On July 15, Play Clothes pays the full amount
due to Kid’s Clothes.
Prepare the journal entry for Play Clothes.
 Credit Terms and Cash Discounts
Now, assume that Play Clothes waited until
July 20 to pay the amount due in full to
Kid’s Clothes.
Prepare the journal entry for Play Clothes.
 Credit Terms and Cash Discounts
Now, assume that Play Clothes waited until
July 20 to pay the amount due in full to
Kid’s Clothes.
Prepare the journal entry for Play Clothes.

Expense
Recording Purchases at Gross Invoice
Price
Purchases are
recorded at their
gross amounts.
Gross Purchase
Method discounts taken
are recorded
when payment is
made inside the
discount period.
 Recording Purchases at Gross Invoice
Price
On July 6, Play Clothes purchased $4,000 of
merchandise on credit with terms of
2/10, n/30 from Kid’s Clothes.
Prepare the journal entry for Play Clothes.
 Recording Purchases at Gross Invoice
Price
On July 6, Play Clothes purchased $4,000 of
merchandise on credit with terms of
2/10, n/30 from Kid’s Clothes.
Prepare the journal entry for Play Clothes.
 Recording Purchases at Gross Invoice
Price
On July 15, Play Clothes pays the full amount
due to Kid’s Clothes.
Prepare the journal entry for Play Clothes.
 Recording Purchases at Gross Invoice
Price
On July 15, Play Clothes pays the full amount
due to Kid’s Clothes.
Prepare the journal entry for Play Clothes.

Reduces
ReducesCost
Costof
Goods
of $4,000  98%
$4,000 98% == $3,920
$3,920
GoodsSold
Sold
Returns of Unsatisfactory Merchandise
On August 5, Play Clothes returned $500 of
unsatisfactory merchandise purchased from Kid’s
Clothes on credit terms of 2/10, n/30. The purchase
was originally recorded at net cost.
Prepare the journal entry for Play Clothes.
Returns of Unsatisfactory Merchandise
On August 5, Play Clothes returned $500 of
unsatisfactory merchandise purchased from Kid’s
Clothes on credit terms of 2/10, n/30. The purchase
was originally recorded at net cost.
Prepare the journal entry for Play Clothes.

$500  98%
$500 98% == $490
$490
 Transactions Relating to Sales
Computer Barn
Partial Income Statement
For the Year Ended December 31, 2002
Revenue
Sales $ 912,000
Less: Sales returns and allowances $ 8,000
Sales discounts 4,000 12,000
Net sales $ 900,000

Credit terms and merchandise returns

affect the amount of revenue earned by
the seller.
 Sales Returns and Allowances
On August 2, Kid’s Clothes sold $2,000 of merchandise
to Play Clothes on credit terms 2/10, n/30. Kid’s
Clothes originally paid $1,000 for the merchandise.
Because Kid’s Clothes uses a perpetual inventory
system, they must make two entries.
 Sales Returns and Allowances
On August 2, Kid’s Clothes sold $2,000 of merchandise
to Play Clothes on credit terms 2/10, n/30. Kid’s
Clothes originally paid $1,000 for the merchandise.
Because Kid’s Clothes uses a perpetual inventory
system, they must make two entries.
 Sales Returns and Allowances
On August 5, Play Clothes returned $500 of
unsatisfactory merchandise to Kid’s Clothes from the
August 2 sale. Kid’s Clothes cost for this
merchandise was $250.
Because Kid’s Clothes uses a perpetual inventory
system, they must make two entries.
Contra-revenue
Contra-revenue
 Sales Returns and Allowances
On August 5, Play Clothes returned $500 of
unsatisfactory merchandise to Kid’s Clothes from the
August 2 sale. Kid’s Clothes cost for this
merchandise was $250.
Because Kid’s Clothes uses a perpetual inventory
system, they must make two entries.
 Sales Discounts
On July 6, Kid’s Clothes sold $4,000 of merchandise to
Play Clothes on credit with terms of 2/10, n/30. The
merchandise originally cost Kid’s Clothes $2,000.
Because Kid’s Clothes uses a perpetual inventory
system, they must make two entries.
 Sales Discounts
On July 6, Kid’s Clothes sold $4,000 of merchandise to
Play Clothes on credit with terms of 2/10, n/30. The
merchandise originally cost Kid’s Clothes $2,000.
Because Kid’s Clothes uses a perpetual inventory
system, they must make two entries.
 Sales Discounts
On July 15, Kid’s Clothes receives the full
amount due from Play Clothes.
Prepare the journal entry for Kid’s Clothes.
 Sales Discounts
On July 15, Kid’s Clothes receives the full
amount due from Play Clothes.
Prepare the journal entry for Kid’s Clothes.

Contra-revenue
Contra-revenue $4,000  98%
$4,000 98% == $3,920
$3,920
 Sales Discounts
Now, assume that it wasn’t until July 20 that
Kid’s Clothes received the full amount due
from Play Clothes.
Prepare the journal entry for Kid’s Clothes.
 Sales Discounts
Now, assume that it wasn’t until July 20 that
Kid’s Clothes received the full amount due
from Play Clothes.
Prepare the journal entry for Kid’s Clothes.
 Delivery Expenses
Delivery
Delivery costs
costs incurred
incurred by
by sellers
sellers are
are
debited
debited to
to Delivery
Delivery Expense,
Expense, an
an
operating
operating expense.
expense.
 Accounting for Sales Taxes
Businesses collect sales tax at the point of sale.
Then, they remit the tax to the appropriate
governmental agency at times specified by law.

$1,000 sale  7%
$1,000 sale 7% tax
tax == $70
$70 sales
sales tax
tax
 Evaluating the Performance of a
Merchandising Company
Gross
Net Sales Profit
Margins

••Trends
Trendsovertime
overtime ••Gross Profit  Net
GrossProfit NetSales
Sales
••Comparable
Comparablestore
storesales
sales ••Overall
Overall Gross
GrossProfit
Profit
Margin
Margin
••Sales
Salesperpersquare
squarefoot
foot of
of
selling
selling space
space ••Gross
GrossProfit
ProfitMargins
Marginsby
by
Department
Departmentand
and
Products
Products