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

2. 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

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

4. 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

5. 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

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

7. 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

8. 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

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

10. 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

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

12. 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

13. 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

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

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

16. 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

17. 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

18. 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

19. 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

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

21. 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

22. 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