ACCOUNTING FOR MERCHANDISING OPERATIONS Unit 5 ACCOUNTING FOR MERCHANDISING OPERATIONS

MERCHANDISING COMPANY A merchandising company is an enterprise that buys and sells goods to earn a profit. 1. Wholesalers sell to retailers. 2. Retailers sell to consumers. A merchandiser’s primary source of revenue is sales, whereas a service company’s primary source of revenue is service revenue.

OPERATING CYCLES FOR A SERVICE COMPANY AND A MERCHANDISING COMPANY Cash Receive Cash Perform Services Accounts Receivable Cash Merchandising Company Accounts Receivable Receive Cash Buy Inventory Merchandise Inventory Sell Inventory

ILLUSTRATION 5-1 INCOME MEASUREMENT PROCESS FOR A MERCHANDISING COMPANY Cost of Goods Sold Less Sales Revenue Gross Profit Equals Operating Expenses Less Net Income (Loss) Equals

INVENTORY SYSTEMS Merchandising entities may use either (or both) of the following inventory systems: 1. Perpetual – where detailed records of each inventory purchase and sale are maintained. Cost of goods sold is calculated at the time of each sale. 2. Periodic – detailed records are not maintained. Cost of goods sold is calculated only at the end of the accounting period. Computers now allow most companies to use the perpetual method. This unit covers the perpetual method.

ACCOUNTING FOR PURCHASES Unit 5 ACCOUNTING FOR PURCHASES

RECORDING COST OF GOODS PURCHASED When merchandise is purchased for resale to customers, the account, Merchandise Inventory, is debited for the cost of the goods. Purchases may be made for cash or on account (credit). The purchase is normally recorded by the purchaser when the goods are received from the seller.

PURCHASES OF MERCHANDISE For purchases on account, Merchandise Inventory is debited and Accounts Payable is credited. For cash purchases, Merchandise Inventory is debited and Cash is credited.

FREIGHT COSTS The sales agreement should indicate whether the seller or the buyer is to pay the cost of transporting the goods to the buyer’s place of business. FOB Shipping Point 1. Goods delivered to shipping point by seller 2. Buyer pays freight costs from shipping point to destination FOB Destination 1. Goods delivered to destination by seller 2. Seller pays freight costs

ACCOUNTING FOR FREIGHT COSTS Merchandise Inventory is debited by the buyer, if the buyer pays the freight bill (FOB shipping point). Shipping costs add to the cost of goods Freight Out (or Delivery Expense) is debited by the seller, if the seller pays the freight bill (FOB destination). * FOB=Freight On Board

ACCOUNTING FOR FREIGHT COSTS When the purchaser directly incurs the freight costs, the account Merchandise Inventory is debited and Cash is credited.

PURCHASE RETURNS AND ALLOWANCES A purchaser may be dissatisfied with merchandise received because the goods 1. are damaged or defective, 2. are of inferior quality, or 3. are not in accord with the purchaser’s specifications.

PURCHASE RETURNS AND ALLOWANCES For purchases returns and allowances that were originally made on account, Accounts Payable is debited and Merchandise Inventory is credited. For cash returns and allowances, Cash is debited and Merchandise Inventory is credited.

QUANTITY DISCOUNTS Volume purchase terms may permit the buyer to claim a quantity discount. For example a supplier may offer a 2% discount if 25 or more units are purchased The merchandise inventory is simply recorded at the discounted cost.

PURCHASE DISCOUNTS Credit terms may permit the buyer to claim a cash discount for the prompt payment of a balance due. For example a 1% discount if the invoice is paid within 10 days or the net if paid in 30 days. This may be expressed as 1/10, n/30. The buyer calls this discount a purchase discount. A purchase discount is based on the invoice cost less any returns and allowances granted.