Topic 6:

Accounting for
Merchandising Business
Reporting Income for a Merchandiser

Service organizations sell time to earn revenue.

Examples: Accounting firms, law firms, and
plumbing services

© McGraw-Hill Education. 4-2

Reporting Income for a Merchandiser

Merchandising Companies

© McGraw-Hill Education. 4-3

Reporting Income for a Merchandiser

Merchandising companies sell products to earn

revenue.
Examples: sporting goods, clothing, and auto
parts stores
Merchandiser

© McGraw-Hill Education. 4-4

Reporting Income for a Merchandiser

Exhibit 4.2

© McGraw-Hill Education. 4-5

Operating Cycle for a Merchandiser

Begins with the purchase of merchandise and

ends with the collection of cash from the sale of
merchandise.
• Cash
a) Purchases
b) Merchandise Inventory
c) Credit sales
d) Accounts receivable
e) Cash collection
© McGraw-Hill Education. 4-6
 Inventory Systems

• Beginning inventory + Net purchases =

Merchandise available for sale
• Merchandise available for sale = Ending
inventory + Cost of goods sold

© McGraw-Hill Education. 4-7

 Inventory Systems

• Perpetual systems
– updates accounting records for each purchase
and sale of merchandising
• Periodic systems
– Updates records for purchase and sale of
merchandise only at the end of the accounting
period

© McGraw-Hill Education. 4-8

 NEED-TO-KNOW 4-1 (1 of 2)

Use the following information (in random order)

from a merchandising company and from a service
company.
Hint: Not all information may be necessary for the
solutions.
1. For the merchandiser only, compute:
a. Goods available for sale.
b. Cost of goods sold.
c. Gross profit.

© McGraw-Hill Education. 4-9

 NEED-TO-KNOW 5-1 (2 of 2)

2. Compute net income for each company.

SaveCo Merchandiser Hi-Tech Services
Supplies P10 Expenses P170
Beginning inventory 100 Revenues 200
Ending inventory 50 Cash 10
Expenses 20 Prepaid rent 25
Net purchases 80 Accounts payable 35
Net sales 190 Supplies 65

© McGraw-Hill Education. 4-10

 NEED-TO-KNOW 5-1 SOLUTION
(1 of 3)

1a. Computation of goods available for sale:

Beginning inventory P100
Plus: Net purchases 80
Goods available for sale P XXX

1b. Computation of cost of goods sold:

Beginning inventory P100
Plus: Net purchases 80
Goods available for sale 180
Less: Ending inventory 50
Cost of goods sold P XXX
© McGraw-Hill Education. 4-11
 NEED-TO-KNOW 5-1 SOLUTION
(2 of 3)

1c. Computation of gross profit:

Net sales P190
Less: Cost of goods sold 130

Gross profit P XX

© McGraw-Hill Education. 4-12

 NEED-TO-KNOW 5-1 SOLUTION
(3 of 3)

2. Compute net income for each company.

SaveCo Merchandiser
Net sales P190 Hi-Tech Services

Less: Cost of goods sold 130 Revenues P200

Gross profit P60 Less: Expenses 170

Less: Expenses 20 Net income P XX

Net income P XX

© McGraw-Hill Education. 4-13

 Purchases without Cash Discounts

On November 2, Z-Mart purchased P500 of

merchandise inventory for cash.

© McGraw-Hill Education. 4-14

 Exhibit 4.5 Credit Terms

A deduction from the invoice price granted to

induce early payment of the amount due.

© McGraw-Hill Education. 4-15

 Purchase Discounts

2/10, n/30
Discount Percent  2
Number of Days Discount Is Available  10
Otherwise, Net (or All) Is Due in 30 Days  n
Credit Period  30

© McGraw-Hill Education. 4-16

 Purchases with Cash Discounts

On November 2, Z-Mart purchased P500 of

merchandise inventory on account, credit terms
are 2/10, n/30.

© McGraw-Hill Education. 4-17

Exhibit 4.6 Trade Discounts

© McGraw-Hill Education. 4-18

 Payment within Discount Period
(1 of 2)

On November 12, Z-Mart paid the amount due

on the purchase of November 2.

© McGraw-Hill Education. 4-19

 Payment within Discount Period
(2 of 2)

After we post these entries, the accounts

involved look like these:

© McGraw-Hill Education. 4-20

 Payment after Discount Period

On December 2, Z-Mart paid the amount due on

the purchase of November 2.

© McGraw-Hill Education. 4-21

 Purchases with Returns and
Allowances

Purchase Return:
Merchandise returned by the purchaser to the
supplier.
Purchase Allowance:
A price reduction to the buyer of defective or
unacceptable merchandise.

© McGraw-Hill Education. 4-22

 Purchases Allowances

On November 5, Z-Mart (buyer) issues a P30

debit memorandum for an allowance from Trex
for defective merchandise.

© McGraw-Hill Education. 4-23

 Purchases Returns

Z-Mart purchases P250 of merchandise on June 1

with terms 2/10, n/60. On June 3, Z-Mart returns
P50 of goods before paying the invoice. When Z-
Mart pays on June 11, it takes the 2% discount only
on the P200 remaining balance.

© McGraw-Hill Education. 4-24

 Exhibit 4.7 Purchases and
Transportation Costs

Seller (Shipping point)  Goods in transit  Buyer

(Destination)

Goods in
Ownership
Shipping Terms Transit Transportation Costs Paid by
Transfer at
Owned by

Shipping Buyer Merchandiser Inventory . . . #

FOB shipping point Buyer
point Cash. . . . . . . . . . . . . . #

Seller Delivery Expense . . . . . . . .#

FOB destination Destination Seller
Cash . . . . . . . . . . . . . . #

© McGraw-Hill Education. 4-25

 Transportation Costs

Z-Mart purchased merchandise on terms of FOB

shipping point. The transportation charge is P75.

© McGraw-Hill Education. 4-26

Exhibit 4.8 Purchases and Itemized
Costs

© McGraw-Hill Education. 4-27

 NEED-TO-KNOW 4-2 (1 of 2)

Prepare journal entries to record each of the

following purchases transactions of a merchandising
company. Assume a perpetual inventory system
using the gross method for recording purchases.
Oct. 1 Purchased P1,000 of goods. Terms of the
sale are 4/10, n/30, and FOB shipping
point; the invoice is dated October 1.
Oct. 3 Paid P30 cash for freight charges from UPS
for the October 1 purchase.

© McGraw-Hill Education. 4-28

 NEED-TO-KNOW 4-2 (2 of 2)

Oct. 7 Returned P50 of the P1,000 of goods from

the October 1 purchase and received full
credit.
Oct. 11 Paid the amount due from the October 1
purchase, less the return on October 7.
Oct. 31 Assume the October 11 payment was
never made and, instead, payment of the
amount due on the October 1 purchase,
less the return on October 7, occurred on
October 31.

© McGraw-Hill Education. 4-29

 NEED-TO-KNOW 4-2 SOLUTION
(1 of 6)

Oct. 1 Purchased P1,000 of goods. Terms of the

sale are 4/10, n/30, and FOB shipping point;
the invoice is dated October 1.
Oct. 3 Paid P30 cash for freight charges from UPS
for the October 1 purchase.
Oct. 7 Returned P50 of the P1,000 of goods from
the October 1 purchase and received full
credit.
Oct. 11 Paid the amount due from the October 1
purchase, less the return on October 7.
© McGraw-Hill Education. 4-30
NEED-TO-KNOW 4-2 SOLUTION
(2 of 6)

© McGraw-Hill Education. 4-31

 NEED-TO-KNOW 4-2 SOLUTION
(3 of 6)

Date General Journal Debit Credit

Oct. 1 Merchandise inventory  1,000  
  Accounts payable   1,000
Oct. 3 Merchandise inventory 30  
  Cash   30
Oct. 7 Accounts payable 50  
  Merchandise inventory   50
Oct. 11 Accounts payable (P1,000 - P50) 950  
  Merchandise inventory (P950 x .04)   38
    Cash   912 

© McGraw-Hill
Copyright © 201 McGraw-Hill Education. All rights reserved. No reproduction Education.
or distribution without the prior written consent of McGraw-Hill 4-32
Education.
 NEED-TO-KNOW 4-2 SOLUTION
(4 of 6)

Oct. 1 Purchased P1,000 of goods. Terms of the sale

are 4/10, n/30, and FOB shipping point; the
invoice is dated October 1.
Oct. 3 Paid P30 cash for freight charges from UPS for
the October 1 purchase.
Oct. 7 Returned P50 of the P1,000 of goods from the
October 1 purchase and received full credit
Oct. 31 Assume the October 11 payment was never
made and, instead, payment of the amount
due on the October 1 purchase, less the return
on October 7, occurred on October 31.

© McGraw-Hill Education. 4-33

NEED-TO-KNOW 4-2 SOLUTION
(5 of 6)

© McGraw-Hill Education. 4-34

 NEED-TO-KNOW 4-2 SOLUTION
(6 of 6)

Date General Journal Debit Credit

Oct. 1 Merchandise inventory  1,000  

  Accounts payable   1,000
Oct. 3 Merchandise inventory 30  
  Cash   30
Oct. 7 Accounts payable 50  
  Merchandise inventory   50
Oct. 31 Accounts payable 950  
  Cash   950

© McGraw-Hill
Copyright © 201 McGraw-Hill Education. All rights reserved. No reproduction Education.
or distribution without the prior written consent of McGraw-Hill 4-35
Education. 3-35
Exhibit 4.9 Accounting for
Merchandise Sales

© McGraw-Hill Education. 4-36

 Sales of Merchandise

• Each sales transaction for a seller of

merchandise involves two parts:
– Revenue received in the form of an asset from a
customer.
– Recognition of the cost of merchandise sold to a
customer.

© McGraw-Hill Education. 4-37

Sales without Cash Discounts (1 of 2)

Z-Mart sold P1,000 of merchandise on credit.

The merchandise has a cost basis to Z-Mart of
P300.
Revenue side journal entry:

© McGraw-Hill Education. 4-38

Sales without Cash Discounts (2 of 2)

Cost side journal entry:

© McGraw-Hill Education. 4-39

 Sales Discounts

Sales discounts on credit sales can benefit a

seller by decreasing the delay in receiving cash
and reducing future collection efforts.

© McGraw-Hill Education. 4-40

 Sales with Cash Discounts (1 of 2)

Z-Mart completes a P1,000 credit sale with terms

of 2/10, n/45.

Buyer pays within discount period:

© McGraw-Hill Education. 4-41

Sales with Cash Discounts (2 of 2)

Buyer pays after discount period:

© McGraw-Hill Education. 4-42

 Sales Returns and Allowances

Sales returns and allowances usually involve

dissatisfied customers and the possibility of lost
future sales.
• Sales returns refer to merchandise that
customers return to the seller after a sale.
• Sales allowances refer to reductions in the
selling price of merchandise sold to
customers.

© McGraw-Hill Education. 4-43

Sales with Returns and Allowances
(1 of 2)

Customer returns merchandise which sold for

P15 and cost P9.

Returned Goods - Not Defective:

© McGraw-Hill Education. 4-44

Sales with Returns and Allowances
(2 of 2)

Returned Goods - Are Defective:

© McGraw-Hill Education. 4-45

 Sales Allowances

Assume that P40 of the merchandise Z-Mart

sold on November 12 is defective but the
buyer decides to keep it because Z-Mart offers
a P10 price reduction.

© McGraw-Hill Education. 4-46

 NEED-TO-KNOW 4-3 (1 of 2)

Prepare journal entries to record each of the following

sales transactions of a merchandising company. Assume
a perpetual inventory system.
Jun. 1 Sold 50 units of merchandise to a customer for
P150 per unit under credit terms of 2/10, n/30,
FOB shipping point, and the invoice is dated June
1. The 50 units of merchandise had cost P100 per
unit.
Jun. 7 The customer returns 2 units because those units
did not fit the customer’s needs. The seller
restores those units to its inventory and sends
the buyer a P300 credit memo.
© McGraw-Hill Education. 4-47
 NEED-TO-KNOW 4-3 (2 of 2)

Jun. 11 The seller receives the balance due from

the June 1 sale to the customer less returns
and allowances.
Jun. 14 The customer discovers that 10 units have
minor damage but keeps them because the
seller sends a P50 cash payment allowance
to compensate.

© McGraw-Hill Education. 4-48

 NEED-TO-KNOW 4-3 SOLUTION
(1 of 5)

Jun. 1 Sold 50 units of merchandise to a customer

for P150 per unit under credit terms of 2/10,
n/30, FOB shipping point, and the invoice is
dated June 1. The 50 units of merchandise
had cost P100 per unit.
Jun. 7 The customer returns 2 units because those
units did not fit the customer’s needs. The
seller restores those units to its inventory
and sends the buyer a P300 credit memo.

© McGraw-Hill Education. 4-49

 NEED-TO-KNOW 4-3 SOLUTION
(2 of 5)

Date General Journal Debit Credit

Jun. 1 Accounts receivable 7,500
Sales (50 @ P150) 7,500
Jun. 1 Cost of goods sold (50 @ P100) 5,000
Merchandise inventory 5,000
Jun. 7 Sales returns and allowances (2 @ P150) 300
Accounts receivable 300
Jun. 7 Merchandise inventory (2 @ P100) 200
Cost of goods sold 200

© McGraw-Hill
Copyright © 201 McGraw-Hill Education. All rights reserved. No reproduction Education.
or distribution without the prior written consent of McGraw-Hill 4-50
Education.
 NEED-TO-KNOW 4-3 SOLUTION
(3 of 5)

Jun. 11 The seller receives the balance due from

the June 1 sale to the customer less
returns and allowances.
Jun. 14 The customer discovers that 10 units have
minor damage but keeps them because the
seller sends a P50 cash payment allowance
to compensate.

© McGraw-Hill Education. 4-51

 NEED-TO-KNOW 4-3 SOLUTION
(4 of 5)

Date General Journal Debit Credit

Jun. 01 Accounts receivable 7,500
Sales (50 @ P150) 7,500
Jun. 01 Cost of goods sold (50 @ P100) 5,000
Merchandise inventory 5,000
Jun. 07 Sales returns and allowances (2 @ P150) 300
Accounts receivable 300
Jun. 07 Merchandise inventory (2 @ P100) 200
Cost of goods sold 200
Jun. 11 Cash 7,056
Sales Discounts (P7,200 x .02) 144
Accounts receivable (P7,500 - P300) 7,200
Jun. 14 Sales returns and allowances 50
Cash 50

© McGraw-Hill Education. 4-52

3-52
NEED-TO-KNOW 4-3 SOLUTION
(5 of 5)

Sales P 7,500
Sales returns and allowance P 350
Sales discounts 144 (494)
Net sales 7,006
Cost of goods sold 4,800
Gross margin on sales P 2,206

© McGraw-Hill Education. 4-53

3-53
Merchandising Cost Flow in the
Accounting Cycle

© McGraw-Hill Education. 4-54

Adjusting Entries for Merchandisers
(1 of 2)

Shrinkage: adjustment to reflect loss of

merchandise:

© McGraw-Hill Education. 4-55

Adjusting Entries for Merchandisers
(2 of 2)

Sales Discounts, Returns and Allowances:

New revenue recognition rules require reporting of
sales at net amount expected. Adjusting entries
required for:
1. Expected sales discounts
2. Expected returns and allowances (revenue side)
3. Expected returns and allowances (cost side)

© McGraw-Hill Education. 4-56

 Closing Entries for Merchandisers

Step 1: Close Credit Balances in Temporary

Accounts to Income Summary.

© McGraw-Hill Education. 4-57

Closing Entries for Merchandisers (2 of
4)

Step 2: Close Debit Balances in Temporary

Accounts to Income Summary.

© McGraw-Hill Education. 4-58

Closing Entries for Merchandisers (3 of
4)

Step 3: Close Income Summary to Retained

Earnings.
The third closing entry is identical for a
merchandising company and a service company.
The P12,900 amount is net income reported on the
income statement.

© McGraw-Hill Education. 4-59

Closing Entries for Merchandisers (4 of
4)

Step 4: Close Dividends Account to Retained

Earnings.
The fourth closing entry is identical for a
merchandising company and a service company. It
closes the Dividends account and adjusts the
Retained Earnings account to the amount shown on
the balance sheet.

© McGraw-Hill Education. 4-60

 NEED-TO-KNOW 4-4 (1 of 3)

A merchandising company’s ledger on May 31, its

fiscal year-end, includes the following selected
accounts that have normal balances (it uses the
perpetual inventory system). A physical count of its
May 31 year-end inventory reveals that the cost of
the merchandise inventory still available is P656.
(a) Prepare the entry to record any inventory
shrinkage. (b) Prepare the four closing entries as of
May 31.

© McGraw-Hill Education. 4-61

NEED-TO-KNOW 4-4 (2 of 3)

Merchandise inventory P756

Common stock 1,000
Retained earnings 1,300
Dividends 150
Sales 4,300
Sales discounts 50

Other operating expenses P300

Cost of goods sold 2,100
Depreciation expense 400
Salaries expense 600
Sales returns and allowances 250

© McGraw-Hill Education. 4-62

 NEED-TO-KNOW 4-4 (3 of 3)

Debit Credit
Merchandise inventory P756
Common stock P1,000
Retained earnings 1,300
Dividends 150
Sales 4,300
Sales discounts 50
Sales returns and allowances 250
Cost of goods sold 2,100
Depreciation expense 400
Salaries expense 600
Other operating expenses 300

© McGraw-Hill
Copyright © 201 McGraw-Hill Education. All rights reserved. No reproduction Education.
or distribution without the prior written consent of McGraw-Hill 4-63
Education. 3-63
 NEED-TO-KNOW 4-4 SOLUTION
(1 of 3)

A merchandising company’s ledger on May 31,

its fiscal year-end, includes the following
accounts that have normal balances (it uses
the perpetual inventory system). A physical
count of its May 31 year-end inventory reveals
that the cost of the merchandise inventory still
available is P656. (a) Prepare the entry to
record any inventory shrinkage. (b) Prepare
the four closing entries as of May 31.

© McGraw-Hill
Copyright © 201 McGraw-Hill Education. All rights reserved. No reproduction Education.
or distribution without the prior written consent of McGraw-Hill 4-64
Education. 3-64
 NEED-TO-KNOW 4-4
SOLUTION (2 of 3)

Debit Credit
Merchandise inventory P656
Common stock P1,000
Retained earnings 1,300
Dividends 150
Sales 4,300
Sales discounts 50
Sales returns and allowances 250
Cost of goods sold 2,200
Depreciation expense 400
Salaries expense 600
Other operating expenses 300

© McGraw-Hill
Copyright © 201 McGraw-Hill Education. All rights reserved. No reproduction Education.
or distribution without the prior written consent of McGraw-Hill 4-65
Education. 3-65
 NEED-TO-KNOW 4-4 SOLUTION
(3 of 3)

Date General Journal Debit Credit

May 31 Cost of goods sold 100

Merchandise inventory (P756-P656) 100

© McGraw-Hill
Copyright © 201 McGraw-Hill Education. All rights reserved. No reproduction Education.
or distribution without the prior written consent of McGraw-Hill 4-66
Education. 3-66
 NEED-TO-KNOW 4-4 SOLUTION
(1 of 2)

b) Prepare the four closing entries as of May 31.

Debit Credit
Merchandise inventory (P756 – P100) P656
Common stock P1,000
Retained earnings 1,300
Dividends 150
Sales 4,300
Sales discounts 50
Sales returns and allowances 250
Cost of goods sold (P2,100 + P100) 2,200
Depreciation expense 400
Salaries expense 600
Other operating expenses 300
© McGraw-Hill Education. 4-67
 NEED-TO-KNOW 4-4 SOLUTION
(2 of 2)

© McGraw-Hill
Copyright © 201 McGraw-Hill Education. All rights reserved. No reproduction Education.
or distribution without the prior written consent of McGraw-Hill 4-68
Education. 3-68
Exhibit 4.13 Multiple-Step Income
Statement

© McGraw-Hill Education. 4-69

 Exhibit 4.14 Single-Step Income
Statement

© McGraw-Hill
Copyright © 201 McGraw-Hill Education. All rights reserved. No reproduction Education.
or distribution without the prior written consent of McGraw-Hill 4-70
Education. 3-70
 Exhibit 4.15 Classified Balance Sheet

© McGraw-Hill
Copyright © 201 McGraw-Hill Education. All rights reserved. No reproduction Education.
or distribution without the prior written consent of McGraw-Hill 4-71
Education. 3-71
 NEED-TO-KNOW 4-5 (1 of 2)

Assume Taret’s adjusted trial balance on April 30,

2016, its fiscal year-end, follows. (a) Prepare a
multiple-step income statement that begins with
gross sales, and includes separate categories for:
net sales, cost of goods sold, selling expenses and
general and administrative expenses. (b) Prepare a
single-step income statement that begins with net
sales and includes these expense categories: cost of
goods sold, selling expenses, and general and
administrative expenses.

© McGraw-Hill Education. 4-72

NEED-TO-KNOW 4-5 (2 of 2)

© McGraw-Hill Education. 4-73

3-73
NEED-TO-KNOW 4-5 SOLUTION
(1 of 2)

© McGraw-Hill Education. 4-74

NEED-TO-KNOW 4-5 SOLUTION
(2 of 2)

© McGraw-Hill Education. 4-75

 Periodic Inventory System –
Purchases (1 of 3)

Periodic inventory system updates inventory

only at the end of a period to reflect the
quantity and cost of goods available and goods
sold.

© McGraw-Hill Education. 4-76

Periodic Inventory System –
Purchases (2 of 3)

© McGraw-Hill Education. 4-77

Periodic Inventory System –
Purchases (3 of 3)

© McGraw-Hill Education. 4-78

Periodic Inventory System – Sales
(1 of 2)

Periodic inventory system updates inventory only at the

end of a period to reflect the quantity and cost of goods
available and goods sold.

© McGraw-Hill Education. 4-79

Periodic Inventory System – Sales
(2 of 2)

© McGraw-Hill Education. 4-80

Periodic Inventory – Adjusting &
Closing Entries

© McGraw-Hill Education. 4-81

Appendix 4B: Work Sheet—Perpetual
System
Learning Objective P5: Record and compare merchandising
transactions using both periodic and perpetual inventory system.

© McGraw-Hill Education. 4-82

 Perpetual System – Net versus
Gross Method Purchases

Net method records invoice at its amount net of any

discounts.

© McGraw-Hill Education. 4-83

Perpetual System – Net versus Gross
Method Sales (1 of 2)

Net method records invoice at its amount net of any

discounts.

© McGraw-Hill Education. 4-84

Perpetual System – Net versus Gross
Method Sales (2 of 2)

© McGraw-Hill Education. 4-85

Periodic System – Net versus Gross
Method Purchases

Net method records invoice at its amount net of any

discounts.

© McGraw-Hill Education. 4-86

 Acid Test Ratio Formula

© McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No
reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. 4-87
 End of Presentation

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reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. 4-88