Professor Eric Carstensen Merchandising Part 1 Professor Eric Carstensen MiraCosta College http://www.miracosta.edu/instruction/accounting/index.html

Merchandising Revenue is recognized when an exchange of Assets takes place, rather than when a service is provided Merchandise is purchased and resold to customers Unsold merchandise is held in Inventory Two types of merchandising businesses: Wholesalers buy from manufacturers and sell merchandise to retailers Retailers buy from wholesalers and sell merchandise to consumers

Two Types of Inventory Systems Periodic Inventory System Inventory valued periodically (monthly, quarterly, yearly at a minimum) Not used as much these days due to technology Perpetual Inventory System Inventory continuously valued and monitored (think of how scanners work at large grocery stores) This is the system we will be working with

Comparison of Income Statements Service Company Merchandising Company Service Revenue $890,000 Sales Revenue $950,000 Op. Expenses 620,000 less: Sales Discounts (1,000) Op. Income 270,000 less: Sales Returns & Allowances (2,000) Other Income(Expense) (20,000) Net Sales 947,000 Income Before Taxes 250,000 COGS 450,000 Taxes 85,000 Gross Margin 497,000 Net Income $165,000 247,000 5,000 252,000 88,000 $164,000

Credit Terms 2/10, n/30 means there is a 2% discount for paying within 10 days, otherwise the entire amount is due in 30 days This is the most common of terms, however, there are many other options that can be negotiated The discount serves as an incentive for the purchaser to send cash early The discount is deducted from Gross Sales in the computation of Net Sales Sales discounts are contra revenue accounts

Example - Purchase debit Inventory 10,000 credit A/P - XYZ Company On May 1st, ABC Company purchases $10,000 worth of merchandise on credit from XYZ Company. The terms are 2/10, n/30 and the invoice is dated May 1st: debit Inventory 10,000 credit A/P - XYZ Company On May 9th, ABC Company paid the bill: debit A/P credit Cash 9,800 credit Inventory 200 Inventory   05-01 05-09

Sales Returns and Allowances This is another contra revenue account used to record both purchase returns and allowances. When merchandise is returned to the seller, this is a purchase return. This is generally for defective merchandise. Sometimes merchandise is not totally defective, but not totally perfect. The purchaser may request a reduction in price, known as an allowance.

Example – Purchase Return On May 21st, ABC Company purchased $20,000 more merchandise on credit from XYZ Company. The terms are 2/10, n/30 and the invoice is dated May 21st: debit Inventory 20,000 credit A/P - XYZ Company On May 22nd, ABC Company determined that $5,000 of merchandise was defective and returned it to XYZ Company: debit A/P 5,000 credit Inventory On May 31st, ABC Company paid the bill: 15,000 credit Cash 14,700 300

Example – Purchase Allowance On June 7th, ABC Company purchased $12,000 more merchandise on credit from XYZ Company. The terms are 2/10, n/30 and the invoice is dated June 7th: debit Inventory 12,000 credit A/P - XYZ Company On June 9th, ABC Company determined that $3,000 of merchandise did not exactly meet design specifications and requested a price reduction: debit A/P 3,000 credit Inventory On June 16th, ABC Company paid the bill: 9,000 credit Cash 8,820 180

Merchandising Part 1 - Concluded This time we looked at merchandise purchases and related transactions. In Merchandising Part 2, we will look at sales of merchandise and related transactions. Since merchandise needs to be shipped from business to business, we will look at shipping terms as well.