ch 5 - accounting for merchandising operations

CH 5: ACCOUNTING FOR MERCHANDISING OPERATIONS

I. Merchandising activities
 Buying and selling of merchandise
 Reporting income for a merchandiser

Net sales xxx
Less: Cost of goods sold (xx)
Gross profit xxx
Less: Expenses (xx)
Net income xxx

 Reporting inventory for a merchandiser
Merchandise inventory or inventory – refers to products that a company owns and intends
to sell

Perpetual Inventory System – continually updates accounting records for merchandising
transactions – inventory available for sale and inventory sold

II. Merchandising Purchases
a. Source Documents – sales invoice or purchase invoice

b. Terms of Transactions
 Trade discounts - are deductions from list price to arrive at the selling price
- encourage bulk discounts

Example: Bilbo Baggins Trading bought bags with a catalog price of P150,000.
Bilbo was granted trade discount of 30%, 25% and 10%. How much was the
selling price of the bags?

List or catalog price 150,000
Trade disc. (150,000 x 30%) (45,000)
105,000
Trade disc.(105,000 x 25%) (26,250)
78,750
Trade disc. (78,750 x 10%) (7,875)
Selling/invoice price 70,875

Inventory 70,875
Accounts payable 70,875

To record purchases at selling price.

 Cash discounts - Encourage prompt payments

Credit terms - Include the amount and timing of payment
- Discount period
- Credit period
- Example: 2/10, n/60 (2% discount in ten days; otherwise, full
payment due in sixty days)

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Example: On 1 March 2006, Bilbo Baggins Trading bought P45,900 bags, 2/10,
n/25. Bilbo paid on March 8.

March 1 Inventory 45,900
Accounts payable 45,900

To record purchases.

March 8 Accounts payable 45,900

Inventory 918

Cash 44,982

To record payment of purchases within the discount period.

 Transportation costs and ownership transfer
Free on Board (FOB) point - point of transfer which determines who owns the
goods and who pays the transportation costs

FOB shipping point Ownership Transfers Transportation Costs
FOB destination when Goods Passed to Paid By
Buyer
Carrier Seller
Buyer

Example: Bilbo Baggins bought bags worth P96,000 from a supplier in Nigeria,
FOB shipping point. The bags were shipped on June 14. Transportation costs of
P11,250 were paid in cash.

June 14 Inventory 11,250

Cash 11,250

To record transportation costs/transportation in.

III. Merchandising sales

Gross sales xxx
Less: Sales discounts (xx)
(xx)
Sales returns and allowances xxx
Net sales

Sales returns – refer to merchandise that customers return to the seller after a sale
Sales allowances – refer to reductions in the selling price of merchandise sold to

customers

Accounting entries:

 Sale of P50,000 inventory. Inventory cost is P24,500.

Accounts receivable 50,000

Sales revenue 50,000

Cost of goods sold 24,500
Inventory 24,500

 Credit term is 2/10, n/30. Buyer pays half of the inventory within the discount

period.

Sales discount 500

2

Accounts receivable 500
(25,000 x 2%)

 Buyer later returns P25,000 inventory. 25,000
Sales returns and allowances 25,000
Accounts receivable

Inventory 12,250
Cost of goods sold 12,250

 Seller allows P1,500 reduction in sales due to defect.

Sales returns and allowances 1,500

Accounts receivable 1,500

IV. Completing the Accounting cycle
a. End-of-period physical count – to determine inventory shrinkage/loss

b. Adjusting entry – generally the same for merchandising and service companies, except
for the shrinkage in merchandising companies

Example: At the end of its calendar year, Bilbo Baggins performed inventory count,
which resulted in P128,900 of inventory. However, its accounting books showed
inventory of P126,500.

Dec 31 Cost of goods sold 2,400
Inventory 2,400

c. Closing entries xxx
 Sales xxx
Income summary
 Income summary xxx
Sales discounts xxx
Sales returns and allowances xxx
Cost of goods sold xxx
Salaries expense xxx
Other expenses xxx

 Income summary xxx
Owner, capital xxx

 Owner, capital xxx
Owner, withdrawals xxx

V. Financial Statement Formats
 Preparation of Income Statement
o Single-step – two main parts: revenues and expenses
o Multiple-Step – three main parts:
 gross profit
 operating income
• selling expenses – include the expenses of promoting sales, making
sales and delivering goods to customers

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• general and administrative expenses – support a company’s overall
operations, which include expenses relating to accounting, human
resources, etc.

 net income

Bilbo Baggins Trading

Income Statement

For the year ended December 31, 2006

Sales P 300,000
(6,300)
Less: Sales discounts P 4,300 293,700

Sales returns and allowances 2,000 (220,500)
73,200
Net sales
Cost of goods sold (38,800)
34,400
Gross profit
(1,000)
Operating expenses P 3,500 22,700 P 35,500
Selling expenses 8,700 16,100
Advertising expense 10,500
Commissions expense
Rent expense – store 2,500
1,300
Total selling expenses 12,300
General and administrative expense

Depreciation expense
Insurance expense
Office salaries expense

Total general and admin expense

Total operating expenses

Income from operations

Other revenues and gains 1,000 4,000
Interest revenue 3,000
Gain on sale of machines
(3,000)
Other expenses and losses
Interest expense

Total other revenues and gains

Net income

 Classified Balance Sheet – inventory as part of current asset

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