lecture (2)

Dr. Mohiy Samy El-Shabasy, Associate Professor, Helwan University.

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Accounting for Merchandising Operations

The operations of merchandising firms are characterized by the purchase

of products at a price and selling these products to customers at a higher price.
The difference between the cost and selling price is the gross margin or gross
profit. The gross profit is used to pay operating expenses; any remaining
amount represents net income.

Purchases Sales

inventory

Perpetual Inventory Periodic Inventory

System System

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The Firstly: Perpetual Inventory System:
In a perpetual inventory system, companies keep detailed records of the
cost of each inventory purchase and sale. These records continuously—
perpetually— show the inventory that should be on hand for every item.

The Secondly: Periodic Inventory System

In many companies dealing with many items, the periodic inventory system is
used because it is impossible to keep track of ending inventory and cost of
goods sold. Instead, these items are determined only periodically, at the end of
each month, each year, or any other accounting period.

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 (1) Accounting for purchases:

Inventory System
Perpetual Periodic
A) Recording Inventory Purchases

purchases. Cash OR Accounts Payable Cash OR Accounts Payable

B) Purchase Cash OR Accounts Payable Cash OR Accounts Payable

Returns and Inventory Purchase returns & allowances

Allowances.
C) Freight Or Transportation
1- FOB (Free on Not recording Not recording
Board)
2- FOB Inventory Transportation-In OR (Freight-In)

"SP"(Shipping point Cash Cash

D) Purchase Discount
1- Trade and Inventory (Net value) Purchases (Net value)
Quantity Cash OR Accounts Payable Cash OR Accounts Payable
Discounts
Cash Discounts (Gross method) Depends on ''Condition'' (Discount
Percentage/discount Period/maximum Repayment) For Ex. "10/6, n30".
1/2: The date of Inventory (Total value) Purchases (Total value)
purchase Accounts Payable Accounts Payable
2/2: Payment within Accounts Payable Accounts Payable
the discount period Inventory (Discount) Purchase discount.
Cash (Net value) Cash (Net value)
3/2: Payment after Accounts Payable Accounts Payable
the discount period Cash (Total value) Cash (Total value)

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Example (1):
The following transactions in ABC company occurred during May 2023:

1- On May 1, the company purchased $4,000 goods from WS company

paid in Cash.
2- On May 2, the company purchased $6,000 goods from SM company
on Credit.
3- On May 3, the company purchased 10 units at the purchase price of
$500 per unit from LD Company on Credit, and the company obtained
a 2% Trade discount.
4- On May 4, the company purchased $10,000 goods from BT company
the terms 2/10, n/30, the freight charges were $30 FOB-Shipping
point paid in cash.
5- On May 5, A company found $2,000 defective goods and returned
them to BT company.
6- On May 11, A company paid the amount due to BT company.
7- On May 16, the company purchased $12,000 worth of goods from GL
company the terms 5/6, n/28.
8- On May 27, A company paid the amount due to GL company.
9- On May 29, A company paid the amount due to SM company.

Required:
1- Record the above transaction According to:
- Perpetual inventory system.
- Periodic Inventory System.
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2- Prepare the accounts the following (Ledger Account):
- Inventory account According to perpetual inventory system.
- purchases account According to Periodic inventory system.

3- What Is the Cost of goods purchased According to Periodic

inventory system.

4- What Is the Cost of goods Sold According to Periodic inventory

system Assuming that Beginning Inventory $3230 and Ending
Inventory $1000.

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 Solution
Journal Entry (ABC company) "Perpetual Inventory System"

No date DR CR
Inventory 4000
1 1/5/2023 4000
Cash
Inventory 6000
2 2/5/2023 6000
Accounts Payable
Inventory 4900
3 3/5/2023 Accounts Payable 4900
(10 units × $500) × 98%
Inventory 10000
4 10000
Accounts Payable
4/5/2023
Inventory 30
5 30
Cash
Accounts Payable 2000
6 5/5/2023 2000
Inventory
Accounts Payable 8000
7 11/5/2023 Inventory ($8000 × 2%) 160
Cash ($8000 × 98%) 7840
Inventory 12000
8 16/5/2023 12000
Accounts Payable
Accounts Payable 12000
9 27/5/2023 12000
Cash
Accounts Payable 6000
10 29/5/2023 6000
Cash

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 Inventory
1/5 $4000 5/5 $2000
2/5 6000 11/5 160
3/5 4900
4/5 10030
16/5 12000 Balance $34770
36930 36930
31/5 Balance $34770

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 Journal Entry (ABC company) " Periodic Inventory System"

No date DR CR
Purchases 4000
1 1/5/2023 4000
Cash
Purchases 6000
2 2/5/2023 6000
Accounts Payable
Purchases 4900
3 3/5/2023 Accounts Payable 4900
(10 units × $500) × 98%
Purchases 10000
4 10000
Accounts Payable
4/5/2023 30
Transportation-In OR (Freight-In)
5 30
Cash
Accounts Payable 2000
6 5/5/2023 2000
Purchase returns & allowances
Accounts Payable 8000
7 11/5/2023 Purchase discount ($8000 × 2%) 160
Cash ($8000 × 98%) 7840
Purchases 12000
8 16/5/2023 12000
Accounts Payable
Accounts Payable 12000
9 27/5/2023 12000
Cash
Accounts Payable 6000
10 29/5/2023 6000
Cash

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 Purchases
1/5 $4000
2/5 6000
3/5 4900
4/5 10000
16/5 12000 Balance $36900
36900 36900
31/5 Balance $36900

3- The Cost of goods purchased According to Periodic inventory

system.

Purchases $36900

Less:

Purchase returns and allowances ($2000)

Purchase discounts ($160)

= Net Purchases $34740

Add:

Transportation-in $30

= Cost of good purchased $34770

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4- The Cost of goods Sold According to Periodic inventory system.

Beginning Inventory $3230

(+) Cost of goods purchased. $34770
= Cost of Goods available for sale $38000
(-) Ending Inventory ($1000)
= Cost of goods sold $37000

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