Accounting Principles

Thirteenth Edition
Weygandt ● Kimmel ● Kieso

Chapter 5, Part 2
Accounting for Merchandising Operations
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Chapter Outline
Learning Objectives
LO 1 Describe merchandising operations and inventory
systems.
LO 2 Record purchases under a perpetual inventory system.
LO 3 Record sales under a perpetual inventory system.
LO 4 Apply the steps in the accounting cycle to a
merchandising company.
LO 5 Prepare a multiple-step income statement and a
comprehensive income statement.

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Recording Sales Perpetual System (1 of 3)
• Made using cash or credit (on account)
• Sales revenue, like service revenue, is recorded when
performance obligation is satisfied
• Performance obligation is satisfied when goods are
transferred from seller to buyer
• Sales invoice should support each credit sale

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Recording Sales Perpetual System (2 of 3)
Journal Entries to Record a Sale

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Recording Sales Perpetual System (3 of 3)
Illustration: PW Audio Supply records its May 4 sale of $3,800 to
Sauk Stereo (Illustration 5.6) as follows (assume merchandise cost
PW Audio Supply $2,400).

May 4 Accounts Receivable 3,800

Sales Revenue 3,800
(To record credit sale to Sauk
Stereo per invoice #731)

4 Cost of Goods Sold 2,400

Inventory 2,400
(To record cost of merchandise sold
on invoice #731 to Sauk Stereo)

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Sales Returns and Allowances (1 of 5)
• “Flip side” of purchase returns and allowances
• Contra-revenue account to Sales Revenue (debit)
• Sales not reduced (debited) because:
o Would obscure importance of sales returns and allowances
as a percentage of sales
o Could distort comparisons between total sales in different
accounting periods.

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Sales Returns and Allowances (2 of 5)
Illustration: Prepare the entry PW Audio Supply would make to
record the credit for returned goods that had a $300 selling price
(assume a $140 cost). Assume the goods were not defective.

May 8 Sales Returns and Allowances 300

Accounts Receivable 300
(To record credit granted to Sauk
Stereo for returned goods)

8 Inventory 140
Cost of Goods Sold 140
(To record cost of goods returned)

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Sales Returns and Allowances (3 of 5)
Illustration: Assume the returned goods were defective and had a
scrap value of $50, PW Audio would make the following entries.

May 8 Sales Returns and Allowances 300

Accounts Receivable 300
(To record credit granted to Sauk
Stereo for returned goods)

8 Inventory 50
Cost of Goods Sold 50
(To record fair value of goods
returned)
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Sales Returns and Allowances (4 of 5)
(ANSWER IN NEXT SLIDE)

The cost of goods sold is determined and recorded each time

a sale occurs in:
a. periodic inventory system only.
b. a perpetual inventory system only.
c. both a periodic and perpetual inventory system.
d. neither a periodic nor perpetual inventory system.

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Sales Returns and Allowances (5 of 5)
(ANSWER TO PREVIOUS SLIDE)

The cost of goods sold is determined and recorded each time

a sale occurs in:
a. periodic inventory system only.
b. Answer: a perpetual inventory system only.
c. both a periodic and perpetual inventory system.
d. neither a periodic nor perpetual inventory system.

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Sales Discounts (1 of 2)
• Offered to customers to promote prompt payment
of balance due
• Contra-revenue account (debit) to Sales Revenue

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Sales Discounts (2 of 2)
Illustration: Assume Sauk Stereo pays the balance due of $3,500
(gross invoice price of $3,800 less purchase returns and allowances
of $300) on May 14, the last day of the discount period. Prepare
the journal entry PW Audio Supply makes to record the receipt on
May 14.
Cash 3,430
Sales Discounts 70
Accounts Receivable 3,500
(To record collection within 2/10, n/30
discount period from Sauk Stereo)
[($3,800 − $300) × 2%]

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Exercise 3: Sales Transactions (1 of 2)
(answer in next slide)

On September 5, De La Hoya Company buys merchandise on

account from Junot Diaz Company. The selling price of the goods is
$1,500, and the cost to Diaz Company was $800. On September 8,
De La Hoya returns defective goods with a selling price of $200 and
a fair value of $30. Record the transactions on the books of Junot
Diaz Company.
Sept. 5 Accounts Receivable 1,500
Sales Revenue 1,500
(To record credit sale)
5 Cost of Goods Sold 800
Inventory 800
(To record cost of goods sold on account)
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Exercise 3: Sales Transactions (2 of 2)
On September 5, De La Hoya Company buys merchandise on
account from Junot Diaz Company. The selling price of the goods is
$1,500, and the cost to Diaz Company was $800. On September 8,
De La Hoya returns defective goods with a selling price of $200 and
a fair value of $30. Record the transactions on the books of Junot
Diaz Company.
Sept. 8 Sales Returns and Allowances 200
Accounts Receivable 200
(To record credit granted for receipt of
returned goods)
8 Inventory 30
Cost of Goods Sold 30
(To record fair value of goods returned)
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The Accounting Cycle for a Merchandising
Company
Adjusting Entries
• Generally same as a service company
• One additional adjustment to make records agree with
actual inventory on hand
• Involves adjusting Inventory and Cost of Goods Sold

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Adjusting Entries
Illustration: Suppose that PW Audio Supply has an unadjusted
balance of $40,500 in Inventory. Through a physical count, PW
Audio Supply determines that its actual merchandise inventory at
December 31 is $40,000. The company would make an adjusting
entry as follows.
Cost of Goods Sold 500
Inventory ($40,500 − $40,000) 500
(To adjust inventory to physical count)

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Closing Entries (1 of 3)
Closing entries include:
• Closing income statement accounts with credit
balances
• Closing income statement accounts with debit balances
• Closing net income or net loss to capital
• Closing drawings to capital

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Closing Entries (2 of 3)
Dec. 31 Service Revenue 480,000
Income Summary 480,000
(To close income statement accounts
with credit balances)
31 Income Summary 450,000
Sales Returns and Allowances 12,000
Sales Discounts 8,000
Cost of Goods Sold 316,000
Salaries and Wages Expense 64,000
Freight-Out 7,000
Advertising Expense 16,000
Utilities Expense 17,000
Depreciation Expense 8,000
Insurance Expense 2,000
(To close income statement accounts
with debit balances)

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Closing Entries (3 of 3)
Dec. 31 Income Summary 30,000
Owner’s Capital 30,000
(To close net income to capital)
31 Owner’s Capital 15,000
Owner’s Drawings 15,000
(To close drawings to capital)

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Exercise 4: Sales Transactions (1 of 2)
The trial balance of Celine’s Sports Wear Shop at December 31
shows Inventory $25,000, Sales Revenue $162,400, Sales Returns
and Allowances $4,800, Sales Discounts $3,600, Cost of Goods Sold
$110,000, Rent Revenue $6,000, Freight-Out $1,800, Rent Expense
$8,800, and Salaries and Wages Expense $22,000. Prepare the
closing entries for the above accounts.
Dec. 31 Sales Revenue 162,400
Rent Revenue 6,000
Income Summary 168,400
(To close accounts with
credit balances)

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Exercise 4: Sales Transactions (2 of 2)
The trial balance at December 31 shows Inventory $25,000, Sales
Revenue $162,400, Sales Returns and Allowances $4,800, Sales Discounts
$3,600, Cost of Goods Sold $110,000, Rent Revenue $6,000, Freight-Out
$1,800, Rent Expense $8,800, and Salaries and Wages Expense $22,000.
Prepare the closing entries for the above accounts.
Dec. 31 Income Summary 151,000
Cost of Goods Sold 110,000
Sales Returns and Allowances 4,800
Sales Discounts 3,600
Freight-Out 1,800
Rent Expense 8,800
Salaries and Wages Expense 22,000
(To close accounts with debit balances)
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Take Home Assignment: (50 pts.)

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END OF PART 2

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