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Merchandising Notes - JFGC

Bachelor of Science in Accountancy (Polytechnic University of the Philippines)

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SOURCE 1: ACCOUNTING FOR MERCHANDISING PPT

 A merchandising business is one that buys and sells goods in order to make a profit.
 Merchandise - goods that a company buys in order to resell are known as merchandise.
 Accounting for Merchandise
Merchandise may be accounted for under one of two inventory methods:

INVENTORY SYSTEMS
Merchandising entities may use either (or both) of the
following inventory systems:

Perpetual
where detailed records of each inventory purchase and
sale are maintained.

Cost of goods sold is calculated at the time of each sale.

Periodic
detailed records are not maintained.

Cost of goods sold is calculated only at the end of the

accounting period.

This chapter covers the perpetual method.

CHART OF ACCOUNTS

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MERCHANDISE TRANSACTIONS
Several types of transactions are common for merchandising companies:

1 PURCHASE OF MERCHANDISE
 Before it can be sold, merchandise must be purchased.
 The seller of merchandise is more commonly known as the vendor.
 The source document for a purchase
of merchandise is the
purchase invoice.

2 PURCHASE RETURNS & ALLOWANCES

 Sometimes merchandise must be returned to the vendor or an adjustment is made to the amount due for the
merchandise (allowance).

 The source document for a purchase return or allowance is the debit memorandum.
 A purchaser may be dissatisfied because the goods: damaged or defective, of inferior quality, or not in accord
with the purchaser’s specifications.

 Effect of Purchase Returns & Allowances

When a return is made or an allowance is granted for merchandise bought on account, the effect of the transaction is
to reduce the amount due to the Vendor (Accounts Payable) and to reduce the value of Merchandise Inventory

 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originally made on account, Accounts Payable is debited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.

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3 PURCHASE DISCOUNTS
 Merchandise is often purchased on account. When
this occurs, the business and the vendor must agree
on the credit terms. The credit terms determine
when the invoice must be paid.

 Many vendors offer a discount if the invoice is paid

within a specified period of time that is less than
the full credit term.

 Discount terms are stated in the following way: 2/10,

n/30
 This term is read “Two ten, net thirty” and means that the
buyer will receive a 2 percent discount on the purchase
price if the invoice is paid within ten days of the invoice
date, else the total (net) is due within thirty days.
 Other discount terms include: 1/15, n/30 and 3/10,
n/45

Journal Entry for Payment with a Purchase Discount

 Discount taken, no purchase return & allowance (paid on June 22)

Accounts Payable 265

Cash 260
Merchandise Inventory 5

Effect of Discount on Accounts Payable

 Notice that Accounts Payable is debited for $265 even though the company was paid only $260. If Accounts
Payable were not debited for the full amount of the invoice, a balance of $5 would remain in this account.
When a discount is granted, the purchaser pays the amount of the invoice less the discount but is given credit by the creditor
for the full amount.

Effect of Discount on Merchandise Inventory

Notice that the purchase discount is deducted directly from the Merchandise Inventory account. The effect of a
purchase discount is to reduce the cost of the merchandise purchased. This is accomplished in the journal entry by
crediting Merchandise Inventory.

Journal Entry for Payment with a Purchase Discount

 Discount taken, but with allowance
Now examine the journal entry when the allowance for the
four books is taken into account.
Notice that the discount cannot be calculated on the
amount of the returned merchandise, and the balance of
Accounts Payable has been reduced by the amount of the
return. (See the slide for Journal Entry for a Purchase
Allowance if you need a reminder.)
Accounts Payable 215
Cash 211
Merchandise Inventory 4

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4 SALE OF MERCHANDISE
 The purpose of buying merchandise is to resell it,
generally at a profit.
 The source document for a sale of merchandise is the
sales invoice.
 Recording the Sale of Merchandise
Two journal entries are required to record the sale of
merchandise in a perpetual inventory system:

The first entry records the sale of the merchandise and

either the receipt of cash or the account receivable.
The amount used in this transaction is the sales price of
the merchandise.

The second entry records the reduction in merchandise

and the recognition of an expense for the cost of
merchandise sold. The amount used in this transaction
is the cost of the merchandise.

5 SALES RETURNS & ALLOWANCES

 Just as merchandise is sometimes returned to the vendor or an adjustment is made to the amount due for
the merchandise (allowance), the seller must sometimes account for a sales return or allowance.
 The source document for a salesreturn or allowance is the credit memorandum.

Recording a Sales Return or Allowance

Recall that two journal entries are required to record the sale of merchandise in a perpetual inventory
system. Two journal entries are also required to record a sales return or allowance.

The first entry recognizes the sales return or allowance and

either the payment of cash or the reduction of the account
receivable. The amount used in this transaction is the sales
price of the merchandise returned or adjusted.

The second entry records the replacement of the

merchandise in inventory and the reduction of the expense
for the cost of merchandise sold. The amount used in this
transaction is the cost of the merchandise.

The essential affect of the journal entries to record a sales

return or allowance is to reverse the original entry to
record the sale—it is as if the merchandise was never sold.

The only difference is that instead of reducing the Sales

account, the amount of returns and allowances are
kept up with in the Sales Returns & Allowances account.

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6 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

 Ownership of goods is transferred to buyer upon receipt

FOB Destination
 Ownership of goods is transferred to buyer upon shipment

ACCOUNTING FOR FREIGHT COSTS

Merchandise Inventory is debited by the buyer, if the buyer pays the

freight bill (FOB shipping point).

Freight Out (or Delivery Expense) is debited by the seller, if the seller pays the freight bill (FOB destination).

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OWNER OF
WHO SHOULDERS WHO PAYS
GOODS IN
COST COST
TRANSIT
FOB-DESTINATION
SELLER SELLER SELLER
FREIGHT PREPAID
FOB-DESTINATION
SELLER SELLER BUYER
FREIGHT COLLECT
FOB-SHIPPING POINT
BUYER BUYER SELLER
FREIGHT PREPAID
FOB-SHIPPING POINT
BUYER BUYER BUYER
FREIGHT COLLECT
Pag DESTINATION, seller ang owner at shoulderer ng cost
*SHIPPING POINT, buyer ang owner at shoulderer
*PREPAID, seller ang final payor
*COLLECT, buyer ang final payor

On May 11, York Company (BUYER) accepts delivery of 38,500 dollars of merchandise it purchases for resale
from Troy Corporation with the merchandise is an invoice dated May 11 with terms of 3/10, n/90 FOB Shipping
Point. The goods cost Troy 25,795 dollars. When the goods are delivered, York pays 350 dollars to Express
Shipping for delivery charges on the merchandise on May 12. York returns 1,400 dollars of goods to Troy who
receives them one day later and restores them to inventory. The returned goods had cost Troy 938 dollars. On May 20,
York mails a check to troy corporation for the amount owed. Troy receives it the following day. Both York and Troy
use a periodic inventory system

*PURCHASE: 38,500 *Invoice date: May 11, 3/10, n/90 FOB SHIPPING
*Purchase Returns: 1,400 (one day later) POINT.
*Sales returns: 938 *TRANSPORTATION COST: 350 May 12 delivery.
*For seller, 25975= cost of goods sold YORK PAID= FOB SP, Freight collect

ENTRIES FOR YORK COMPANY (buyer) ENTRIES FOR TROY CORPORATION (seller)
May 11 Purchases 38,500 May 11 Accounts Receivable 38,500
Accounts Payable 38,500 Sales 38,500
To record purchase of merch To record purchase

May 11 Transportation In 350 May 13 Sales Returns and Allowances 1,400

Cash 350 Accounts Receivable 1,400
To record transportation cost (FOB
To record return of merch
SP)

May 12 Accounts Payable 1,400 May 21 Cash 35,987

Purchase Returns &Allowances 1,400 Sales Discounts 1,113
To record return of merchandise Accounts Receivable 37,100
To record discounted
May 20 Accounts Payable 37,100
(100%-3%=97%) SO A/P*97%= 35,987
Cash 35,987
or simply, A/P*Discount
Purchase Discount 1,113
To record discounted on account
merch

7 COMPLETING THE ACCOUNTING CYCLE

 A merchandising company requires the same types of adjusting entries as a service company, with one
additional adjustment for inventory to ensure the recorded inventory amount agrees with the actual quantity on
hand.
 A physical count is an important control feature since a perpetual system indicates what should be there but a
count will determine what is actually there.
 A merchandising company also requires the same types of closing entries as a service company.
 The additional accounts that need to be closed out in a merchandising account include Sales, Sales Returns
and Allowances, Cost of Goods Sold, and Freight Out.
 Merchandise Inventory is an asset account and is not closed at the end of the period.

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SOURCE 3 https://www.slideshare.net/vjyaser/accounting-chapter-6?qid=01fb1d23-5875-4087-94c5-
0e0ed389ca6b&v=&b=&from_search=11

INVENTORY SYSTEMS

Perpetual Method

Gives a continual record of inventory on hand. When an item

is sold, it is recorded in the COGS account.

Periodic Method

Requires updating inventory only at the end of period.

Acquisition of merchandise is recorded through
PURCHASES account.

*BEG + NET = GAS

*BEG + NET = COGS + END

THE FOLLOWING FOCUSES ON PERPETUAL

INVENTORY METHOD.

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CLOSING ENTRIES FOR MERCH UNDER PERPETUAL METHOD

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