Merchandising Accounting

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 Contents

Merchandising Activities:
Operating Cycle of Merchandising Companies
Income statement of Merchandising Companies
Perpetual and Periodic Inventory Systems

Inventories And The Cost Of Goods Sold:

Specific Identification
Average Cost Method
FIFO
LIFO
 MERCHANDISING ACTIVITIES
What is Inventory?
Goods that are purchased for the purpose to resale
to customers
Operating cycle of a Merchandising Company:
The series of transactions through which a
business generate its revenue and its
cash receipts from consumer.
What is Cost of Goods Sold?
It is the cost which a company pays for making
a product or for inventory purchased
What is Goods Available for sale?
It is the total goods which you could have
sold in your interim period
of company
THE OPERATING CYCLE OF MERCHANDISING
COMPANY

Cash

Account
Inventory
Receivables

Sale of Merchandise on
Account
 TYPES OF MERCHANDISE
COMPANY

Whole Seller & Retailer:

Wholesaler buy large quantity of merchandise from several different

manufactures and then resell this merchandise to many different retailers.

A retailer is a business that sells merchandise directly to the public.

INCOME STATEMENT OF MERCHANDISING
COMPANY

Sales
Revenue
minus

Cost of
minus
goods sold
Other Company Merchandising Company
equals
Expenses
Gross Profit

minus
equals
Other
Expenses
equals
Net Income
Net Income
INCOME STATEMENT
Sales - Cost of goods sold =
CONTD..
Gross profit
Gross Profit - Other Expenses = Net Income

Example
Sales $15,000
Less : Cost of goods sold (3500)
Gross profit $11,500
Operating Expenses:
Wages Exp 620
Adv Exp 150
Depreciation Exp 430 (1200)
Net Income $10,300
APPROACHES USED IN
ACCOUNTING FOR
MERCHANDISING INVENTORIES
Perpetual System:
All Transaction including Costs of merchandise are
recorded immediately as they occur. Record is up-to-
date all the time.
Periodic System:
No effort is made to keep records up-to-date neither
inventory nor Cost of goods sold and are only updated
at the end of interim period.
The following example contains several journal entries used to
PERPETUAL INVENTORY
account for transactions SYSTEM
in a perpetual inventory system:

Purchase of Merchandise:
Purchase of inventory is recorded at cost.
To record a purchase of $5,000 of 5 items that are stored in
inventory each item has cost $1,000.

Account Title Debit Credit

Inventory $5000
Cash $5000
PERPETUAL INVENTORY SYSTEM

Debit Credit
Cash $3600
$3600
Revenue
Sales of Merchandise:
Cost
Sold of Goods
3 items $1200 each, for$3000
$3,600. for which the cost is 3,000.
Sold
$3000
Inventory
Gross Profit: 3600 3000 = $600
Let Expenses are $200. Then,
Net Income = 600 200 = $400
If inventory is purchased and sold on account, Then entries will be:
Account Title Debit Credit
Purchase of Inventory: (On Account)
Inventory $5000
A/C Payable $5000
Selling of Inventory: (On Account)
Debit Credit
A/C Receivables $3600
$3600
Revenue
Inventory Record:
Debit Credit
Cost of Goods Sold $3000
Inventory $3000
Payment of A/C Payables to Suppliers:

Debit
Credit
A/C Payables $5000
$5000
Cash
Collection of Accounts Receivable from Customers:

Debit Credit
Cash $3600
A/C $3600
Receivable
Its an alternative to a perpetual inventory system

When merchandise is purchased, its cost is debited

to an account entitled Purchases.

PERIODIC INVENTORY SYSTEM:

 The inventory on hand at the end of 2011 cost
$20000.

During 2012, purchases of merchandise for resale

of customers totaled $100000

Inventory on hand at the end of 2012 cost

$15000.

EXAMPLE
Recording Purchases of Merchandises:
Suppose from total purchases of $100,000 the first
purchase was of $10,000 so purchase entry will be:

Debit Credit

Purchases 10000
CONT
Cash 10000
Computing the cost of goods sold:

Inventory(beginning of the year 2012) $20000

Add : Purchases....................100000
Cost of goods available for sale..$120000
CONT
Less : Inventory (end of the year 2012).15000
Cost of goods sold.$105000
INVENTORIES & COST OF GOODS SOLD
The Cost of Goods Sold is determined using 4 methods

1. Specific Identification
2. Average Cost
3. FIFO (First-in-First-out)
4. LIFO (Last-in-First-out)
Specific Identification Method:
This method can only be used if the actual costs of individual
units of inventory are known.

In Perpetual System the cost of goods sold is determined by

calculating the cost of each merchandise from invoices

While in Periodic System we calculate the cost of each

merchandise which we have on hand and deduct it from
Cost of goods available for sale in that time period
EXAMPLE
A company bought 5 units of goods in which 2 @ $500 and 3@ $600. And
sold 2 units which costed us 1@ $500 and 1@ $600.
IF Beginning Inventory is zero. Then,
B.I= 0, Goods Available for Sale = $1000 + $1800
= $2800
Goods on Hand = $500 + $ 1200 = $1700
In Perpetual System:
Cost of Goods Sold = 500 + 600
= $1100
In Periodic System:
Cost of Goods Sold = 2800 1700
= $1100
AVERAGE COST METHOD
The average cost of all units is taken
Example:
A Company bought 5 identical generators at two different rates
2 @ $1000 per unit (10th March, 2010)
3 @ $1200 per unit (9th May, 2010)
Therefore, the generators in inventory, acquired at a total cost of (2000 +
3600)=$5600.
Thus the average cost of each generator is 5600/5 = $1120
The company sold a generator at $1800 on June 1
Let the Beginning entry level of Inventory is zero and
interim period of comp. is semi-annually starting from Jan.
In Perpetual Inventory System:
Entries will be of:
Purchase:
There will be two entries
Date A/C Title Debit Credit
10th Inventory $2000
Mar Cash $2000
2010
9th May Inventory $3600
2010 Cash $3600
Sale:
Debit Credit
Cash 1800
Revenue/Sale 1800
Cost of Goods Sold 1120
Inventory 1120
 Purchase Sold Balance

Date Units Unit Total Units Unit Total Units Unit Total
Cost Cost Cost

10th 2 $100 $200 2 $100 $200

Mar 0 0 0 0

9th 3 $120 $360 5 $112 $560

May 0 0 0 0

1st 1 $112 $112 4 $112 $448

June 0 0 0 0
In Periodic System:

Cost of Goods Sold= Goods Available for sale Cost of

goods on
hand

Cost of Goods on hand = Average cost x Remaining units goods

= 1120 x 4
= $4480
COGS = $5600 - $4480
= $1120
First-In, First-Out Method (FIFO):
First merchandise purchased is the first merchandise sold..

Last-In, First-Out Method (LIFO)

Most recently purchased merchandise (the last in) is assumed

to be sold first.
In Perpetual System:

Example:
A Company bought 5 identical generators at two different rates
2 @ $1000 per unit (10th March, 2010)
3 @ $1200 per unit (9th May, 2010)
Therefore, the generators in inventory, acquired at a total cost of
(2000 + 3600)=$5600.
The company sold a generator at $1800 on June 1
Let the Beginning entry level of Inventory is zero and
interim period of comp. is semi-annually starting from Jan.
 In FIFO:
We will assume generator which was sold was from
purchase
Date ofA/C
10thTitle
March. Debit Credit
10
ofCOGS
COGS will be: $1000
th
And Entry
Mar Inventory $1000

Date Purchase Sold Total

Units Units Total Units Unit Total Units Unit Total
Cost Cost Cost
10th Mar 2 $1000 $2000 2 $1000 $2000
9th May 3 $1200 $3600 2+3 2x
(5) $1000 $5600
3x
$1200
1st Jun 1 $100 $1000 1+3 1x
0 (4) $1000
 In LIFO:
We will assume generator which was sold was from purchase of
9th May.
Date A/C Title Debit Credit
And Entrythof COGS will be:
10 COGS $1200
Mar Inventory $1200

Date Purchase Sold Total

Units Units Total Units Unit Total Units Unit Total
Cost Cost Cost
10th Mar 2 $1000 $200 2 $1000 $2000
0
9th May 3 $1200 $360 2+3 2x
0 (5) $1000 $5600
3x
$1200
1st Jun 1 $1200 $1200 2+2 2x