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CHAPTER 5: ACCOUNTING FOR

MERCHANDISING OPERATIONS

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 Merchandising Operations

Merchandising Companies
Buy and Sell Goods

Retailer

Wholesaler Consumer

The primary source of revenues is referred to as

sales revenue or sales.
LO 1
Merchandising Operations

Income Measurement
Not used in a
Sales Less
Illustration 5-1
Service business.
Revenue Income measurement process for a
merchandising company

Cost of Equals Gross Less

Goods Sold Profit

Operating Equals Net

Cost of goods sold is the total Income
Expenses
cost of merchandise sold during (Loss)
the period.

LO 1
 Operating Cycles
Illustration 5-2
The operating
cycle of a
merchandising
company
ordinarily is longer
than that of a
service
company.

Illustration 5-3

LO 1
Flow of Costs
Illustration 5-4

Companies use either a perpetual inventory system or a periodic

inventory system to account for inventory.
LO 1
 Learning objectives

1. Documents used in sales cycle and

purchasing cycle
2. Accounting treatment for merchandising
operations under Perpetual inventory
system and Periodic inventory system.
 Agenda

1 Documents used

2 Accounting treatment

PURCHASING
SALES CYCLE
CYCLE
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PART I: Sales cycle

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Operating Depts involved in Sales cycle

1. Sales
2. Credit control
3. Distribution (dispatch and receiving)
4. Stores
5. Production control
6. Purchasing
7. Accounting
Documents used in Sales Transactions

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1. Customer Sales Order
2. Internal Sales Order
3. Credit Approval (Phê duyệt tín dụng)
4. Purchase Order/Production Order
5. Dispatch Advice/ Delivery Docket/Shipping
Advices
6. Cartage Manifest/ Cargo List (List of contents of
a shipment)
7. Bill of Lading
8. Invoice
9. Credit/ Debit Note
(memorandum)
PART II: Purchasing cycle

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Operating Depts involved in Purchasing cycle

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1. Purchasing
2. Distribution (dispatch and receiving)
3. Quality control
4. Stores
5. Production or Stock control
6. Accounting
Documents used in Purchasing Transactions

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1. Purchase Requisition
2. Purchase Order
3. Goods Received Report/ Goods Receipt Notes/
Goods Receipts Docket
4. Inspection Report
5. Remittance Advice (Thu xac nhan da thanh toan
tien)
6. Cheque
7. Supplier’s Invoice
8. Supplier’s Statement
9. Debit/Credit Memorandum
(note)(ct điều chỉnh hđ)
Invoice

14 Invoice
Main Source, Inc. Invoice
Seller
614 Tech Avenue
Nashville, TN 37651   Date
5/4/07
Number
358-BI
 Invoice date
S Purchaser
o
l
Name: Barbee, Inc. Order number
 d Attn: Tom Bell
Address: One Willow Plaza
điều khoản tính dụng Credit terms
điều khoản thanh toán (define goods)
T
o
Cookeville, Tennessee
38501
Freight terms
Goods
P.O. 167 Sales: 25 Terms 2/10,n/30  Ship: FedEx Prepaid
Item Description Quanity Price Invoice amount
Amount
AC417 250 Backup System 500 $ 54.00 $ 27,000


Sub Total 27,000

We appreciate your business! Ship Chg. -
Tax
Total $
-
27,000 
Debit Notes (Memos/ Memorandum)

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Invoices and debit/credit notes are closed

friends, always side by side!
Debit Notes (Memos/ Memorandum)

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 Who issue Debit notes? 

BUYER/PURCHASER
 Reasons for issuing Debit notes:
‐ Buyer wants a return of goods;
‐ he has been overcharged by the supplier;
or
‐ he wants a settlement for damaged
goods sent by the supplier
Credit Notes (Memos/ Memorandum)

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Invoices and debit/credit notes are closed

friends, always side by side!
Credit Notes (Memos/ Memorandum)

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 Who issue Credit notes?

 SELLER/SUPPLIER
 Reasons for issuing Credit notes:

‐ Seller wants to acknowledge the receipt

of the returned goods;

‐ A customer a has been overcharged; or is
given an allowance for damaged goods
Types of Discounts

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1. Trade discounts
2. Cash/ settlement discounts
Trade discounts

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Results from:
- Buying goods in bulk
- Important customer or a regular (royal) customer
Trade discounts

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 Offered at the time of trade so called
“Trade discount”
 Selling price (invoice amount) = list
price/quoted price/catalog price – trade
discount
 No accounting treatment for Trade
discounts
Cash discounts

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 Result from:
- Quick payment in cash
 To purchasers: Purchases discounts
 To suppliers: Sales discounts
 Identified by: Credit Terms
Cash discounts

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Example: a supplier might charge $1,000 for

goods, but offer a cash discount of 10% if the
goods are paid in cash immediately, 5% if paid
within 7 days of the invoice date, or in full within 30
days.
 Invoice appears what so called Credit terms:
10/0, 5/7, n/30
Some typical Credit terms

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 n/10 EOM: net 10 days after end of month (EOM)
 n/30: net 30 days after the invoice date
 2/10, n/60: 2% discount within 10 days of the
invoice date, otherwise pay in full in 60 days.
 2/15, n/30 ROG: 2% discount within 15 days of the
invoice date, otherwise pay in full within 30 days of
receipts of goods
Ownership and Transportation Costs – FOB term

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- FOB shipping point

- FOB destination
Ownership and Transportation Costs – FOB term

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ACCOUNTING TREATMENT

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PERPETUAL SYSTEM PERIODIC SYSTEM

 Updates accounting  Updates Inventory and

records for Merchadising
transactions during the determines COGS only
period, esp. for Inventory at the end of the
Available for Sale and accounting period by
Inventory Sold. physical count.
 Records COGS
immediately right after  During the period,
each sales Inventory account
 Used for merchandise remains unchanged.
with high unit values  Used for merchandise
 Better control than with low unit values
periodic system
28 Perpetual inventory system
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Notes: Sales returns vs Sales Allowances
(perpetual inventory system)
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 Sales returns: reduce Revenues through a Contra-sales

account (together with reducing AR), then receive Goods
back to warehouse, 2 entries needed:
a/Dr Sales returns & allowances
Cr AR/Cash
b/ Dr Inventory
Cr COGS
 Sales Allowances: reduce Revenues through a Contra-sales
account (together with reducing AR), but do not receive
Goods back to warehouse, only 1 entry needed:
Dr Sales returns & allowances
Cr AR/Cash
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32
 Textbook illustration
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34
35 Periodic inventory system
PERIODIC SYSTEM

 Calculation of Cost of Goods Sold:

Beginning inventory € 100,000

Add: Purchases, net 800,000
Goods available for sale 900,000
Less: Ending inventory 125,000
Cost of goods sold € 775,000

LO 1
37
Notes: Sales returns vs Sales Allowances
(periodic inventory system)
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 Sales returns: reduce Revenues through a Contra-sales account

(together with reducing AR), then receive Goods back to
warehouse, but only 1 entry needed (b/c we don’t record
Inventory account during the accounting period in Periodic
system):
Dr Sales returns & allowances
Cr AR/Cash
 Sales Allowances: reduce Revenues through a Contra-sales
account (together with reducing AR), but do not receive Goods
back to warehouse, only 1 entry needed:
Dr Sales returns & allowances
Cr AR/Cash
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ACCOUNTING TREATMENT – PERIODIC SYSTEM

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THE END!