Chapter 10 Accounting for a Merchandising Business Chapter 10 – Accounting for a Merchandising Business | Accounting 1, 7th Edition

Accounting for a Merchandising Business This tutorial guides you through some of the key points you need to know when you do the accounting for a merchandising business. For more detailed instructions, refer to Sections 10.1 through 10.8 of the Accounting 1 textbook. Chapter 10 – Accounting for a Merchandising Business | Accounting 1, 7th Edition

Inventory on the Balance Sheet Chapter 10 – Accounting for a Merchandising Business | Accounting 1, 7th Edition

Inventory on the Balance Sheet Merchandise Inventory is a current asset because it should soon turn into cash. Chapter 10 – Accounting for a Merchandising Business | Accounting 1, 7th Edition

Inventory on the Income Statement • Appears twice in an important formula • The COST OF GOODS SOLD formula Chapter 10 – Accounting for a Merchandising Business | Accounting 1, 7th Edition

Cost of Goods Sold Formula rearranged or Chapter 10 – Accounting for a Merchandising Business | Accounting 1, 7th Edition

COGS on the Income Statement From a count From the ledger From addition From a count From subtraction • Calculating COGS this way requires a periodic count of inventory (The Periodic System) • Purchases is a ledger account for the purchase of inventory • Sales — Cost of Goods Sold = Gross Profit (Margin) Chapter 10 – Accounting for a Merchandising Business | Accounting 1, 7th Edition

Cost of Goods Sold Formula—Expanded Sometimes, there is a separate transportation cost for incoming inventory purchases (Freight-in). Chapter 10 – Accounting for a Merchandising Business | Accounting 1, 7th Edition

Inventory Items on the Worksheet—Steps Chapter 10 – Accounting for a Merchandising Business | Accounting 1, 7th Edition

Inventory Items on the Worksheet—Summary • Note: Ending Inventory is on the Cr side of the Income Statement because it is a “Contra-Cost”; it is the cost of inventory NOT sold. Chapter 10 – Accounting for a Merchandising Business | Accounting 1, 7th Edition

Closing Entries for Inventory Chapter 10 – Accounting for a Merchandising Business | Accounting 1, 7th Edition

Sales Returns and Allowances Sometimes, merchandise is returned—or a partial allowance is given—after the sale. • Returns and Allowances are debited to the Sales account • Returns and Allowances are debited a separate account Chapter 10 – Accounting for a Merchandising Business | Accounting 1, 7th Edition

Purchase Returns and Allowances Purchase Returns and Allowances are treated in the same manner as Sales R & A. or Chapter 10 – Accounting for a Merchandising Business | Accounting 1, 7th Edition

Sales/Purchase Discounts on the Income Statement Chapter 10 – Accounting for a Merchandising Business | Accounting 1, 7th Edition

Revised Cost of Goods Formula Chapter 10 – Accounting for a Merchandising Business | Accounting 1, 7th Edition

Periodic vs. Perpetual Inventory System • Inventory is counted from time to time (periodically) • the result is used to calculate Cost of Goods Sold Perpetual • Inventory changes are recorded in an account on an ongoing (perpetual) basis • A ledger account is used for Cost of Goods Sold Chapter 10 – Accounting for a Merchandising Business | Accounting 1, 7th Edition

Perpetual Inventory System—Selling Goods Sales have two aspects or portions Example Merchandise that is purchased for $100 is sold for $150, generating a $50 gross profit • The cost of selling merchandise is recorded with each sale. • The reduction of the inventory value is also recorded with each sale Chapter 10 – Accounting for a Merchandising Business | Accounting 1, 7th Edition

Basic Periodic/Perpetual Entries Compared Sale Example Merchandise is sold for $4500, twice the price it cost • The cost of the sale and the asset reduction are ignored for now Chapter 10 – Accounting for a Merchandising Business | Accounting 1, 7th Edition

Basic Periodic/Perpetual Entries Compared Purchase Example Merchandise is bought for $4500 • Transaction details are recorded directly in the Merchandise Inventory account. The Purchases account is eliminated. Chapter 10 – Accounting for a Merchandising Business | Accounting 1, 7th Edition

Comparing Merchandising Income Statements Chapter 10 – Accounting for a Merchandising Business | Accounting 1, 7th Edition

Comparing COGS—Merchandising and Manufacturing • A merchandising firm purchases inventory for re-sale • A manufacturing firm makes inventory for re-sale Chapter 10 – Accounting for a Merchandising Business | Accounting 1, 7th Edition

Comparing COGS—Merchandising and Manufacturing • The cost of goods manufactured is a complex calculation that requires its own separate financial statement Chapter 10 – Accounting for a Merchandising Business | Accounting 1, 7th Edition