1. Chapter 11 – Accounting for a Merchandising Business
BAF3M Accounting
Chapter 11 – Accounting for a Merchandising Business
Idea: do the payment systems (cash, check, credit, debit, direct) as a group “prepare and present” activity

2. Merchandising Video

3. So far, we’ve only studied service businesses, now we move on to merchandising businesses
Major difference is inventory “stuff to sell”
Two major categories
Wholesaler – buys from manufacturers and sells to retailers
Retailers – buys from wholesalers and sells to final consumers

4. 11.1 Merchandise Inventory
Merchandise is the name given to items bought by a business in order to be sold to consumers
Merchandising businesses have the extra cost of inventory compared to service businesses
This is an I/S amount called “Cost of Goods Sold” aka “COGS”

5. A SIMPLIFIED PARTIAL BALANCE SHEET SHOWING MERCHANDINSE INVENTORY AS A CURRENT ASSET

6. 11.1 Merchandise Inventory
INVENTORY CYCLE
The goal is to sell inventory quickly thus inventory moves in and out of the business frequently
SO…
There is inventory to begin the accounting period with.
Merchandise is sold and moves out throughout the inventory period.
Merchandise is replaced by the purchase of new stock from time to time.
The ending inventory should be more or less the same as the beginning inventory.

7. 11.1 Merchandise Inventory
COGS on the I/S p.
formula to calculate the COGS figure
Cost of Beg. Inv
+ Cost of Merch Purchases
- Cost of Ending inventory
= Cost of Merch sold

8. A SIMPLE INCOME STATEMENT FOR A MERCHANDISING BUSINESS

9. OBSERVE THE FOLLOWING ABOUT THE PRECEEDING INCOME STATMENT
The C.O.G.S. is considered to be so significant that the statement is prepared in 2 stages.
The first stage determines the gross profit. Gross profit is the difference between the selling price and the cost price of the goods sold. It can also been seen as the profit figure before deducting expenses.
The C.O.G.S. is shown on the income statement.
The expense section is now called OPERATING EXPENSES.

10. CLOSING ENTRIES FOR A MERCHANDISING COMPANY
The process is the exact same as in a service company
The steps go:
Close revenue/sales to income summary
Close expenses to income summary
Close income summary to capital
Close drawings to capital
The process neatly cancels out the old inventory figure and sets up the new one, so that you will have the correct opening balances

11. SOME NEW TERMS
PURCHASE RETURNS & ALLOWANCES – used to record the value of merchandise returned (damaged goods, mistaken deliveries, etc.) to the supplier
PURCHASE DISCOUNTS – used to record discounts given for early payment
SALES DISCOUNTS – the seller may give discounts to credit customers if they pay within a specified time period

12. FREIGHT IN VS. DELIVERY EXPENSE
FREIGHT IN - the cost incurred to ship the merchandise to the store or warehouse
DELIVERY EXPENSE – this account is used to record the cost of shipping the sold merchandise to the customer

13. JOURNAL ENTRIES
The merchandise purchased during the fiscal period is collected in the Purchases account.
This account if found in the expense section of the ledger.
HMV purchased 600 CD’s for resale at a cost of $10/cd.

14. JOURNAL ENTRIES
If a customer returns a good because it is damaged, not what they expected etc. The entry is as follows.
A customer returned 20 CDs to HMV that were purchased for $20 each.