5 Accounting for

Merchandising Operations
Learning Objectives
Describe merchandising operations and inventory
1 systems.

2 Record purchases under a perpetual inventory system.

3 Record sales under a perpetual inventory system.

Apply the steps in the accounting cycle to a

4 merchandising company.

Compare a multiple-step with a single-step income

5 statement.
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 LEARNING Describe merchandising operations and
1
OBJECTIVE inventory systems.

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LEARNING Describe merchandising operations and
1
OBJECTIVE inventory systems.

Merchandising Companies
Buy and Sell Goods
Retailer

Wholesaler Consumer

The primary source of revenues is referred to as

sales revenue or sales.
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 Merchandising Operations

Income Measurement
Not used in a
Sales Less
Illustration 5-1
Service business.
Revenue Income measurement process for a
merchandising company

Equals
Cost of Gross Less
Goods Sold Profit

Operating Equals Net

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

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 Operating Cycles
Illustration 5-2
The operating
cycle of a
4
1
merchandising
company
ordinarily is longer 3 2
than that of a
service
company. 5 1

4 3
Illustration 5-3

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 Inventory System

 Perpetual system
 Periodic system

5-6
 Flow of Cost

Beginning inventory Cost of goods Ending inventory Cost of goods

+ = +
at cost purchased at cost sold

Giá thực tế HTK tồn Giá thực tế HTK Giá thực tế HTK xuất Giá thực tế
+ = +
ĐK nhập trong kỳ trong kỳ HTK tồn CK

5-7
 Flow of Cost
(Merchandising Companies)

Cost of
Beginning goods sold
inventory

Cost of
goods
Perpetual
available for system
sale

Cost of Ending
goods inventory
purchased

5-8
 Flow of Cost
(Merchandising Companies)

Cost of
Beginning goods sold
inventory

Cost of
Periodic
goods system
available for
sale

Cost of Ending
goods inventory
purchased

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 PERPETUAL SYSTEM

 Maintain detailed records of the cost of each inventory

purchase and sale.
 Records continuously show inventory that should be on
hand for every item.
 Company determines cost of goods sold each time a
sale occurs.

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 Flow of Costs

ADVANTAGES OF THE PERPETUAL SYSTEM

 Traditionally used for merchandise with high unit
values.
 Shows the quantity and cost of the inventory that
should be on hand at any time.
 Provides better control over inventories than a periodic
system.

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 Beginning inventory (product P) in July: 3.000$
1. Purchased $2,000 on account
2. Sold $2,500 worth of P at a selling price of $3,300,
payment received in cash.
3. Sold $700 worth of product P, payment not yet received.
4. Purchased $2,700 worth of P, paid in cash.

TK “Inventory” Cost of goods sold

Bal. 3.000
(1) 2.000 2.500 (2) 2.500
(4) 2.700 700 (3) 700

4.700 3.200

Bal. 4.500
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 PERIODIC SYSTEM

 Do not keep detailed records of the goods on hand.

 Cost of goods sold determined by count at the end of
the accounting period.
 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

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 Beginning inventory (product P) in July: 3.000$
1. Purchased $2,000 on account
2. Purchased $2,700 worth of P, paid in cash.
3. At the end of the period, the inventory count shows that the value
of product P in stock is $4,500.

“Inventory” Income Summary

Cost of goods sold

ĐK: 3.000 “Purchases”

3.000 3.200 3.200
4.500 3.000
(1) 2.000 4.700 4.700 4.500

4.500 3.000 (2) 2.700

7.700 7.700
CK: 4.500 4.700 4.700

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 2 Record purchases under a perpetual inventory system.

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LEARNING Record purchases under a perpetual
2
OBJECTIVE inventory system.

 Made using cash or credit (on account).

 Normally record when

goods are received from
the seller.
 Purchase invoice should
support each credit
purchase.

Illustration 5-6
Sales invoice used as purchase
invoice by Sauk Stereo

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LEARNING Record purchases under a perpetual
2
OBJECTIVE inventory system.

Illustration: On May 4, Sauk Stereo (the buyer) uses as a purchase invoice the
sales invoice prepared by PW Audio Supply, Inc. (the seller).

1. On May 6, Assume upon delivery of the goods, Sauk Stereo pays Public
Freight Company $150 for freight charges.
2. On May 8, Assume Sauk Stereo returned goods costing $300 to PW Audio
Supply on May 8.
3. On May 14, the last day of the discount period, assume Sauk Stereo pays the
balance due of $3,500 (gross invoice price of $3,800 less purchase returns
and allowances of $300).

Prepare the journal entry for Sauk Stereo for all the transactions above.

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 Recording Purchases of Merchandise
Illustration 5-6

Illustration: On May
4, Sauk Stereo (the
buyer) uses as a
purchase invoice the
sales invoice
prepared by PW
Audio Supply, Inc.
(the seller). Prepare
the journal entry for
Sauk Stereo for the
invoice from PW
Audio Supply.

May 4
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 Freight Costs

Ownership of the goods

passes to the buyer when
the public carrier accepts the
goods from the seller.

Ownership of the goods

remains with the seller until
the goods reach the buyer.

Illustration 5-7
Shipping terms
Freight costs incurred by the seller are an
operating expense.
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 Freight Costs

1. On May 6, assume upon delivery of the goods, Sauk Stereo

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

May 6

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 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 the sale May choose to keep the
was made on credit, or for a cash merchandise if the seller will grant
refund if the purchase was for a reduction of the purchase price.
cash.

2. Assume Sauk Stereo returned goods costing $300 to PW Audio Supply on

May 8.

May 8

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 Purchase Discounts
Credit terms may permit buyer to claim a cash discount for
prompt payment.
Example: Credit terms
Advantages: may read 2/10, n/30.
 Purchaser saves money.
 Seller shortens the operating cycle by converting the
accounts receivable into cash earlier.

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

2% discount if paid 1% discount if paid Net amount due

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

3. 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 Stereo
makes on May 14 to record the payment.

May 14

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

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 Purchase Discounts

Should discounts be taken when offered?

Discount of 2% on $3,500 $ 70.00

$3,500 invested at 10% for 20 days 19.18
Savings by taking the discount $ 50.82

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

$3,500 x 36.5% x 20 ÷ 365 = $70

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 Summary of Purchasing Transactions

Inventory
Debit Credit

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

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

Balance 3,580

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 DO IT! 2 Purchase Transactions

On September 5, De La Hoya Company buys merchandise on

account from Junot Diaz Company. The selling price of the
goods is $1,500, and the cost to Diaz Company was $800. On
September 8, De La Hoya returns defective goods with a selling
price of $200. Record the transactions on the books of De La
Hoya Company.

Sept. 5

Sept. 8

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LEARNING Record sales under a perpetual
3
OBJECTIVE inventory system.

 Made using cash or credit (on account).

Illustration 5-6

 Sales revenue, like service

revenue, is recorded when
the performance obligation
is satisfied.
 Performance obligation is
satisfied when the goods
are transferred from the
seller to the buyer.
 Sales invoice should
support each credit sale.
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LEARNING Record purchases under a perpetual
2
OBJECTIVE inventory system.

Illustration: On May 4, PW Audio Supply records the sale of $3,800 to Sauk

Stereo on account (Illustration 5-6) as follows (assume the merchandise cost PW
Audio Supply $2,400).

1. On May 4, assume the freight terms on the invoice in Illustration 5-6 had
required PW Audio Supply to pay the freight charges
2. On May 8, Assume Sauk Stereo returned goods costing $300 to PW Audio
Supply (assume the returned goods cost PW $140).
3. On May 14, the last day of the discount period, Assume Sauk Stereo pays the
balance due of $3,500 (gross invoice price of $3,800 less purchase returns
and allowances of $300).

Prepare the journal entry for PW Audio Supply for all the transactions above.

5-28
 Recording Sales of Merchandise

Journal Entries to Record a Sale

#1 Cash or Accounts receivable XXX Selling

Sales revenue XXX Price

#2 Cost of goods sold XXX

Cost
Inventory XXX

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 Recording Sales of Merchandise

Illustration: PW Audio Supply records the sale of $3,800

on May 4 to Sauk Stereo on account (Illustration 5-6) as
follows (assume the merchandise cost PW Audio Supply
$2,400).

May 4

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 Freight Costs

1. Assume the freight terms on the invoice in Illustration 5-6 had

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

May 4

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 Sales Returns and Allowances

 “Flip side” of purchase returns and allowances.

 Contra-revenue account to Sales Revenue (debit).
 Sales not reduced (debited) because:
► Would obscure importance of sales returns and
allowances as a percentage of sales.

► Could distort comparisons.

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 Sales Returns and Allowances

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

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 Sales Returns and Allowances

Illustration: Assume the returned goods were defective

and had a scrap value of $50, PW Audio would make the
following entries:

May 8

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 Sales Returns and Allowances

Question
The cost of goods sold is determined and recorded each
time a sale occurs in:
a. periodic inventory system only.
b. a perpetual inventory system only.
c. both a periodic and perpetual inventory system.
d. neither a periodic nor perpetual inventory system.

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 Sales Discount

 Offered to customers to promote prompt payment of

the balance due.
 Contra-revenue account (debit) to Sales Revenue.

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 Sales Discount

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 PW Audio Supply
makes to record the receipt on May 14.

May 14

* [($3,800 – $300) X 2%]

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 DO IT! 3 Sales Transactions

On September 5, De La Hoya Company buys merchandise on

account from Junot Diaz Company. The selling price of the
goods is $1,500, and the cost to Diaz Company was $800. On
September 8, De La Hoya returns defective goods with a selling
price of $200 and a fair value of $30. Record the transactions
on the books of Junot Diaz Company.

Sept. 5

Sept. 5

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 DO IT! 3 Sales Transactions

On September 5, De La Hoya Company buys merchandise on

account from Junot Diaz Company. The selling price of the
goods is $1,500, and the cost to Diaz Company was $800. On
September 8, De La Hoya returns defective goods with a selling
price of $200 and a fair value of $30. Record the transactions
on the books of Junot Diaz Company.

Sept. 8

Sept. 8

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LEARNING Apply the steps in the accounting cycle
4
OBJECTIVE to a merchandising company.

Adjusting Entries
 Generally the same as a service company.
 One additional adjustment to make the records agree with
the actual inventory on hand.
 Involves adjusting Inventory and Cost of Goods Sold.

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 Adjusting Entries

Illustration: Suppose that PW Audio Supply has an unadjusted

balance of $40,500 in Merchandise Inventory. Through a physical
count, PW Audio determines that its actual merchandise inventory
at year-end is $40,000. The company would make an adjusting
entry as follows.

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 Closing Entries

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 Closing Entries

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 DO IT! 4 Closing Entries

The trial balance of Celine’s Sports Wear Shop at December 31

shows Inventory $25,000, Sales Revenue $162,400, Sales
Returns and Allowances $4,800, Sales Discounts $3,600, Cost
of Goods Sold $110,000, Rent Revenue $6,000, Freight-Out
$1,800, Rent Expense $8,800, and Salaries and Wages
Expense $22,000. Prepare the closing entries for the above
accounts.

Dec. 31

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 The trial balance of Celine’s Sports Wear Shop at December 31
shows Inventory $25,000, Sales Revenue $162,400, Sales
Returns and Allowances $4,800, Sales Discounts $3,600, Cost
of Goods Sold $110,000, Rent Revenue $6,000, Freight-Out
$1,800, Rent Expense $8,800, and Salaries and Wages
Expense $22,000. Prepare the closing entries for the above
accounts.

Dec. 31

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LEARNING Compare a multiple-step with a single-
5
OBJECTIVE step income statement.

Multiple-Step Income Statement

 Shows several steps in determining net income.
 Two steps relate to principal operating activities.
 Distinguishes between operating and non-operating
activities.

5-46 LO 5
 Multiple-
Step

Key Items:
 Net sales
 Gross profit
 Operating
expenses
 Nonoperating
activities
 Net income

Illustration 5-14
5-47
LO 5
 Multiple-Step Income Statement

Question
The multiple-step income statement for a merchandiser
shows each of the following features except:
a. gross profit.
b. cost of goods sold.
c. a sales revenue section.
d. investing activities section.

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 Single-Step Income Statement

 Subtract total expenses from total revenues

 Two reasons for using the single-step format:

1. Company does not realize any profit until total

revenues exceed total expenses.

2. Format is simpler and easier to read.

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 Single-Step Income Statement

Illustration 5-15

5-50 LO 5
 Classified Balance Sheet

Illustration 5-16

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 DO IT! 5 Financial Statement Classifications

Indicate in which financial statement and under what

classification each of the following accounts would be reported.

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5-53 LO 5
5-54 LO 5
LEARNING APPENDIX 5A: Prepare a worksheet for
6
OBJECTIVE a merchandising company.

Using a Worksheet
As indicated in Chapter 4, a worksheet enables companies to
prepare financial statements before they journalize and post
adjusting entries. The steps in preparing a worksheet for a
merchandising company are the same as for a service
company. Illustration 5A-1 shows the worksheet for PW Audio
Supply, Inc. (excluding nonoperating items). The unique
accounts for a merchandiser using a perpetual inventory
system are in red.

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 Illustration 5A-1

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LEARNING APPENDIX 5B: Record purchases and
7
OBJECTIVE sales under a periodic inventory system.

Determining Cost of Goods Sold Under a

Periodic System
 No running account of changes in inventory.
 Ending inventory determined by physical count.
 Cost of goods sold not determined until the end of the
period.

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 Determining Cost of Goods Sold
Under a Periodic System Illustration 5B-2
Cost of goods sold for a
merchandiser using a periodic
inventory system

Illustration 5B-2

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 Recording Merchandise Transactions

 Record revenues when sales are made.

 Do not record cost of merchandise sold on the date of
sale.
 Physical inventory count determines:
► Cost of merchandise on hand and
► Cost of merchandise sold during the period.
 Record purchases in Purchases account.
 Purchase returns and allowances, Purchase discounts,
and Freight costs are recorded in separate accounts.

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 Recording Purchases of Merchandise

Illustration: On the basis of the sales invoice (Illustration 5-6)

and receipt of the merchandise ordered from PW Audio Supply,
Sauk Stereo records the $3,800 purchase as follows.

May 4 Purchases 3,800

Accounts Payable
3,800

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 Recording Purchases of Merchandise

FREIGHT COSTS
Illustration: If Sauk pays Public Freight Company $150
for freight charges on its purchase from PW Audio Supply on
May 6, the entry on Sauk’s books is:

May 6 Freight-In (Transportation-In) 150

Cash
150

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 Recording Purchases of Merchandise

PURCHASE RETURNS AND ALLOWANCES

Illustration: Sauk Stereo returns $300 of goods to PW Audio
Supply and prepares the following entry to recognize the
return.

May 8 Accounts payable 300

Purchase Returns and Allowances 300

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 Recording Purchases of Merchandise

PURCHASE DISCOUNTS
Illustration: On May 14 Sauk Stereo pays the balance due
on account to PW Audio Supply, taking the 2% cash discount
allowed by PW Audio for payment within 10 days. Sauk
Stereo records the payment and discount as follows.

May 14 Accounts Payable 3,500

Purchase Discounts
70
Cash
3,430

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 Recording Sales of Merchandise

Illustration: PW Audio Supply, records the sale of $3,800 of

merchandise to Sauk Stereo on May 4 (sales invoice No. 731,
Illustration 5-6) as follows.

May 4 Accounts Receivable 3,800

Sales Revenue
3,800
No entry is recorded for cost of goods sold at the time of the
sale under a periodic system.

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 Recording Sales of Merchandise

SALES RETURNS AND ALLOWANCES

Illustration: To record the returned goods received from Sauk
Stereo on May 8, PW Audio Supply records the $300 sales
return as follows.

May 8 Sales Returns and Allowances 300

Accounts Receivable
300

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 Recording Sales of Merchandise

SALES DISCOUNTS
Illustration: On May 14, PW Audio Supply receives payment
of $3,430 on account from Sauk Stereo. PW Audio honors the
2% cash discount and records the payment of Sauk’s account
receivable in full as follows.

May 14 Cash 3,430

Sales Discounts 70
Accounts Receivable 3,500

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 Recording Sales of Merchandise

COMPARISON OF ENTRIES
Illustration 5B-3

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 Recording Sales of Merchandise

COMPARISON OF ENTRIES
Illustration 5B-3

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Illustration 5B-5
Worksheet for
merchandising
company—periodic
inventory system

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