1. The Merchandising Business
The retailer, the wholesaler, the manufacturer and you

2. What is a Merchandising Business
A business that buys goods from a supplier and sells them back at a higher price
Two types of merchandise business:
A wholesaler is the business that buys goods from manufacturers and sells them to retailers
A retailer is the business that buys goods from wholesalers and manufactures and sells it back to the public at a higher price

3. What is a Merchandising Inventory
Businesses that buy goods and sell them at a higher price are dealing with a merchandise business
The number of merchandise on hand is known as merchandise inventory

4. Two Aspects of Merchandising Inventory
The merchandise inventory goes on the Balance Sheet
The cost of goods sold goes on Income Statement

5. The Periodic Inventory
Most commonly used
The periodic inventory system is where the cost of goods sold is determined at the end of the fiscal period
Businesses use this inventory system because, businesses do not have to keep-up-to-date on everything

6. The Inventory Cycle
There is inventory at the beginning of the accounting period
Merchandise is sold during accounting period
Merchandise is replaced by purchased new stock from time to time
The inventory at the end of the accounting period is almost the same as at the beginning

7. The Cost of Ending Inventory
The formula for calculating the cost of ending inventory is:
Cost of beginning inventory + cost of merchandise purchased – cost of merchandise sold = cost of ending inventory

8. Physical Inventory
The physical inventory is used to create financial statements
It is a procedure where the unsold merchandise goods are accounted for
An important current asset
Needed to calculate the costs of goods sold figure on the income statement
Will be used as the beginning inventory for the next accounting period

9. Merchandise Inventory
Merchandise inventory is a current asset under accounts receivable because it will be normally sold and turned into cash within that fiscal period
It is listed as its cost price and not its selling price (GAAP: The Cost Principle)

10. Cost of Goods Sold on the Income Statement
The total cost of all the items sold is usually the biggest expense figure for a merchandising business
The formula for finding the cost of goods sold is as follows:
Cost of beginning inventory + cost of merchandise purchased - cost of ending inventory
= cost of merchandise sold
There are now six new headings on the income statement

11. Cost of Goods Sold on the Income Statement
The inventory, the purchases, the cost of good available for sale (after adding both the purchases and the inventor) , the less inventory and the cost of goods sold
After subtracting the cost of goods available for sale from the less inventory (the ending inventory) you will get your cost of goods sold which is subtracted from the sales and you will get your gross profit
Most companies try to reach a specific target gross profit percentage (try to reach a percentage divided from sales)

12. Limitations of the Periodic Inventory System
Physical inventory check is a time-consuming procedure
Good for small businesses but not accurate and convenient for other larger businesses

13. Merchandise Inventory Account
Merchandise inventory of a business is kept in two accounts
One is the merchandise inventory account, it shows inventory figure as of the beginning of the accounting period
At the fiscal year-end inventory is counted and valued at cost price at to arrive at merchandise inventory grand total
Merchandise inventory will now appear in the assets section of most of your trail balance.

14. The Purchase Account
Purchases is the other account where merchandise inventory of a business is kept
Purchases is a short version of “Purchases of Merchandise for Resale”
Found in the assets section of the ledger.

15. Merchandise for Resale Purchased for Cash
Dr Cr
Purchase $$$
Hst Recoverable $$$
Bank $$$

16. If Merchandise for Resale purchased on Account
Dr Cr
Purchases $$$
Hst Recoverable $$$
A/P $$$

17. The Sales Account
Revenue account for a merchandising business is called “Sales”

18. If Goods sold for Cash
Dr Cr
Bank $$$
Hst Payable $$$
Sales $$$

19. If Goods sold on Account
Dr Cr
Accounts Receivable $$$
Hst Payable $$$
Sales $$$
When a business sells its goods, the inventory is reduced. No accounting entries are made to show this when the Periodic System is used.

20. Worksheet for merchandising business
You must know how to put the merchandising inventory, purchase and freight-in.
The 3 steps to enter the new accounts
The beginning inventory is extended to the debit column of the income statement.
Ending inventory was entered in both the credit column of the income statement and in the debut column of the balance sheet
The amounts for the freight-in and purchases were transferred to the debit column of the income statement.

22. Income Statement
The beginning inventory, purchases and freight-in are represents cost and they are all shown as debits on the worksheet.
The ending inventory is shown as a credit because it’s a deduction in the calculation, Ending inventory represents goods purchased but not sold.
The higher the ending inventory the lower the cost of goods sold.

24. Closing Entries Closing Entries
Closing Entries
The closing entry process now automatically updates the inventory account at the end of the fiscal period.

26. Merchandise Returns and Allowances
Section 11.4

27. Sales
In the books of a seller, a sales invoice would be recorded as follows:
DR CR
Accounts Receivable $565
Sales $500
HST Payable $65
Sometimes the seller will issue the customer a Credit Invoice. Such as defective merchandise or goods that the customer keeps but is not happy with, and or to correct an invoice that is not correct.

28. Sales
Example of an adjustment: The seller would then make the following adjustment DR CR
Sales $150
HST Payable $19.50
Accounts Receivable $169.50
A/R Customer HST Payable Sales

29. Sales
Some businesses may want to know part of their sales is being returned. Businesses use a special account called Sales Returns and Allowances.
DR CR
Sales Returns and Allowance $150
HST Payable $ 19.50
Accounts Receivable $169.50

30. Purchases In the books of a purchaser, a purchase invoice: DR CR
HST Recoverable $65
Accounts Payable - Vendor $565
If the customers get a credit invoice because they found a flaw or that some of the merchandise they purchased was defective. The seller is going to reduce their payment by debiting accounts payable.

31. Purchases DR CR Accounts Payable $169.50 Purchases $150
HST Recoverable $19.50
A/P HST Recoverable Purchases

32. Purchases
Some businesses may want to know part of their sales is being returned. Businesses use a special account called Purchase Returns and Allowances.
DR CR
Accounts Payable $169.50
Purchase Returns and Allowances $150
HST Recoverable $19.50

33. Purchases
Revenue – The business needs to subtract all of the credit that they gave to customers:
Sales – Sales Returns and Allowances = Net Sales
Cost of Goods Sold – The business needs to subtract all of the merchandise that they purchased but returned because it was not satisfactory to them:
Purchases – Purchase Returns and Allowances = Net Purchases

34. Sales Discounts
How to use sales discounts and put them in accounting entries

35. Terms of Sale
The arrangements made with the customers (when the goods or services are paid for and a cash discount is offered)
Standards Terms of Sale
C.O.D- Cash on delivery. The goods or merchandise must be paid right when the delivery is made
On Account or Charge. The full amount of the invoice is due at the time the invoice is received but is usually given a set of days to pay it off, such as 30 days

36. Terms of Sale cont.
30 Days or Net 30. The full amount of the invoice is due 30 days after the date of the invoice
2/10, n/30. Two percent discount when paid in ten days or full amount due in 30 days

37. Accounting for Cash Discounts
In the Books of the Buyer
When the invoice is received the purchases is debited, the HST recoverable is debited and the Accounts Payable is credited
If the buyer pays the amount but is offered a cash discount then the accounts payable is debited, the discounts earned is credited and the bank is credited

38. Accounting for Cash Discounts
In the Books of the Seller
It is switched with the buyer
The accounts receivable is deducted, the sales is credited and the HST recoverable is credited because you made a sell
When the buyer pays the amount with the discount offered then the
Debit bank
Debit discounts allowed
Credit accounts receivable

39. It’s easier, better and lazier
Perpetual Inventory
It’s easier, better and lazier

40. How does it work?
In bigger companies they use perpetual inventory system as faster alternative compared to the Periodic Inventory System.
Example
50 portable stereo units were sold by sound wave electronics, a wholesaler. The purchaser is Fidelity sound, a retailer. The units cost sound wave electronics $45 each, they were sold on account to Fidelity Sound for $90.

41. Journal Entries from Seller View
Sales Invoice
50 portable stereos costing $45 each are sold to Fidelity Sound for $90; terms 2/10, net 30. Total $4, plus Hst.
Dr Cr
Accounts Receivable
Cost of Goods Sold
Merchandise Inventory
Sales
Hst Payable
Credit Invoice
Fidelity Sounds finds 10 of the portable stereos to be defective and returns them to sound wave electronics.
Sales Returns & Allow
Hst Payable
Merchandise Inventory
Cost of Goods Sold
Accounts Receivable

42. Remittance Slip
Fidelity sound pays the amount owned ($5085 less the return of $1017 equals $4068). Also, prompt payment earned a 2% discount.
DR CR
Bank
Sales Discount
A/R

43. Journal Entries Purchaser View
Purchase Invoice
50 stereos are bought from sound wave electronics for $90; terms 2/10, net 30, total $4500, plus Hst
DR CR
Merchandise Inventory
Hst Recoverable
Accounts Payable

44. Purchaser View Cont. Credit Invoice
Fidelity sounds finds 10 of the portable stereos to be defective and returns them to sound wave electronics
Dr Cr
Accounts Payable
Merchandise Inventory
Hst Recoverable

45. Cheque Copy Cheque Copy
Fidelity Sound pays the amount owned ($5085 less the return of $1117 equals $4068). Also, prompt payment earns a 2% discount.
Dr Cr
Accounts Payable
Bank
Discounts Earned

46. Thanks for listening 