6-1

Chapter

6
Merchandising
Activities

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Operating Cycle of a Merchandising
Company

Cash

Accounts
Inventory
Receivable 2. Sale of merchandise
on account

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Comparing Merchandising Activities with

Manufacturing Activities

Manufacture
Purchase inventory and
inventory in have a longer and
ready-to-sell more complex
condition. operating cycle.

Merchandising Manufacturing
Company Company
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Income Statement of a
Merchandising Company

Computer City Cost of

Condensed Income Statement goods sold
For the Year Ended December 31, 2007 represents
Revenue from sales $ 900,000 the expense
Less: Cost of goods sold 540,000 of goods
Gross profit $ 360,000 that are
Less: Expenses 270,000
sold to
Net income $ 90,000
customers.
Gross profit is a useful means of measuring
the profitability of sales transactions.
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Two Approaches Used in Accounting for

Merchandise Inventories

Perpetual Periodic
Inventory Inventory
System System

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Perpetual vs. Periodic Inventory

Systems
09/05, Worley Co. purchased 100 laser lights for resale for $30 per unit from
Electronic City on account.
09/10, Worley Co. sold 10 laser lights for $50/unit on account to ABC Radios.
09/15, Worley Co. paid Electronic City $3,000 for the September 5 purchase.
09/22, Worley Co. received $500 from ABC Radios as payment in full for their
purchase on September 10.
GENERAL JOURNAL
In the perpetual system In the periodic system
Date Account Titles and Explanation Debit Credit Account Titles and Explanation Debit Credit
Sept. 5 Inventory 3,000 Purchases 3,000
Accounts Payable (Electronic City) 3,000 Accounts Payable (Electronic City) 3,000
Sept. 10 Accounts Receivable (ABC Radios) 500 Accounts Receivable (ABC Radios) 500
Sales 500 Sales 500
10 Cost of Goods Sold 300
Inventory 300
Sept. 15 Accounts Payable (Electronic City) 3,000 Accounts Payable (Electronic City) 3,000
Cash 3,000 Cash 3,000
Sept. 22 Cash 500 Cash 500
Accounts Receivable (ABC Radios) 500 Accounts Receivable (ABC Radios) 500

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Perpetual Inventory Systems

Taking a Physical Inventory

In order to ensure
the accuracy of
their perpetual
records, most
businesses take a
complete physical
count of the
merchandise on
hand at least once
a year.
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Taking a Physical Inventory

Reasonable amounts of inventory shrinkage are viewed as
a normal cost of doing business. Examples include
breakage, spoilage and theft.
On December 31, Worley Co. counts its inventory.
An inventory shortage of $2,000 is discovered.

GENERAL JOURNAL

Date Account Titles and Explanation Debit Credit

Dec. 31 Cost of Goods Sold 2,000
Inventory 2,000

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Periodic Inventory system

Computing Cost of Goods Sold

The accounting records of Party Supply show the following:

Inventory, Jan. 1, $ 14,000; Purchases (during year) 130,000; At
December 31, Party Supply counted the merchandise on hand at
$12,000.

Inventory (beginning of the year) $ 14,000

Add: Purchases 130,000
Cost of goods available for sale 144,000
Less: Inventory (end of year) 12,000
Cost of goods sold $ 132,000

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Creating a Cost of Goods Sold
Account

Now, Party Supply must

create the Cost of Goods
Sold account.

GENERAL JOURNAL

Date Account Titles and Explanation Debit Credit

Dec. 31 Cost of Goods Sold 144,000
Inventory (beginning of year) 14,000
Purchases 130,000
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Creating a Cost of Goods Sold
Account

Now, Party Supply must

record the ending inventory
amount.

GENERAL JOURNAL

Date Account Titles and Explanation Debit Credit

Dec. 31 Inventory (end of year) 12,000
Cost of Goods Sold 12,000

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Selecting an Inventory System

Factors Suggesting a Factors Suggesting a
Perpetual Inventory System Periodic Inventory System
Large company with Small company, run by
professional management. owner.
Management and employees Accounting records of
wanting information about inventories and specific
items in inventory and the product sales not needed in
quantities of specific daily operations; such
products that are selling. information developed
primarily for use in annual
income tax returns.
Items in inventory with a high Inventory with many different
per-unit cost. kinds of low-cost items.
Low volume of sales High volume of sales
transactions or a transactions and a manual
computerized accounting accounting system.
system.
Merchandise stored at All merchandise stored at the
multiple locations or in sales site (for example, in the
warehouses separate from store).
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sales sites.
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Credit Terms and Cash Discounts

2/10, n/30
Percentage # of Days Otherwise, # of Days
of Discount Discount Is the Full when Full
Available Amount Is Amount Is
Due Due

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Recording Purchases at Net Cost

Purchases are
recorded at their
net amounts.
Net Purchase
Method Discounts Lost
are recorded
when payment
is made outside
the discount
period.
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 6-15

Recording Purchases at Net Cost

On July 6, Play Clothes purchased $4,000 of

merchandise on credit with terms of
2/10, n/30 from Kid’s Clothes.
Prepare the journal entry for Play Clothes.

GENERAL JOURNAL

Date Account Titles and Explanation Debit Credit

July 6 Inventory 3,920
Accounts Payable (Kid's Clothes) 3,920

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 6-16

Recording Purchases at Net Cost

On July 15, Play Clothes pays the full amount

due to Kid’s Clothes.
Prepare the journal entry for Play Clothes.

GENERAL JOURNAL

Date Account Titles and Explanation Debit Credit

July 15 Accounts Payable (Kid's Clothes) 3,920
Cash 3,920

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Recording Purchases at Net Cost

Now, assume that Play Clothes waited until
July 20 to pay the amount due in full to Kid’s
Clothes.
Prepare the journal entry for Play Clothes.

GENERAL JOURNAL Nonoperating Expense

Date Account Titles and Explanation Debit Credit

July 20 Accounts Payable (Kid's Clothes) 3,920
Purchase Discounts Lost 80
Cash 4,000
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Recording Purchases at Gross
Invoice Price

Purchases are
recorded at their
gross amounts.
Gross Purchase
Method discounts taken
are recorded
when payment
is made inside
the discount
period.
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 6-19
Recording Purchases at Gross
Invoice Price

On July 6, Play Clothes purchased $4,000 of

merchandise on credit with terms of
2/10, n/30 from Kid’s Clothes.
Prepare the journal entry for Play Clothes.

GENERAL JOURNAL

Date Account Titles and Explanation Debit Credit

July 6 Inventory 4,000
Accounts Payable (Kid's Clothes) 4,000

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 6-20
Recording Purchases at Gross
Invoice Price
On July 15, Play Clothes pays the full amount
due to Kid’s Clothes.
Prepare the journal entry for Play Clothes.

Reduces Cost of $4,000  98% = $3,920

GENERAL
Goods Sold JOURNAL

Date Account Titles and Explanation Debit Credit

July 15 Accounts Payable (Kid's Clothes) 4,000
Cash 3,920
Purchase Discounts Taken 80
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Recording Purchases at Gross
Invoice Price
Now, assume that Play Clothes waited until
July 20 to pay the full amount due to Kid’s
Clothes.
Prepare the journal entry for Play Clothes.

GENERAL JOURNAL

Date Account Titles and Explanation Debit Credit

July 20 Accounts Payable (Kid's Clothes) 4,000
Cash 4,000

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Returns of Unsatisfactory
Merchandise
On August 5, Play Clothes returned $500 of
unsatisfactory merchandise purchased from Kid’s
Clothes on credit terms of 2/10, n/30. The purchase
was originally recorded at net cost.
Prepare the journal entry for Play Clothes.

GENERAL JOURNAL

Date Account Titles and Explanation Debit Credit

Aug. 5 Accounts Payable (Kid's Clothes) 490
Inventory 490

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 6-23

Transportation Costs on Purchases

Transportation costs (freight-in) related to the
acquisition of assets are part of the cost of the asset
being acquired.

On July 6, Play Clothes paid $150 for the

shipping of merchandise from Kid’s Clothes.
Jul 6 Merchandise Inventory 150
Cash 150
To record payment of freight terms FOB
shipping point

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Transactions Relating to Sales

Computer City
Partial Income Statement
For the Year Ended December 31, 2007
Revenue
Sales $ 912,000
Less: Sales returns and allowances $ 8,000
Sales discounts 4,000 12,000
Net sales $ 900,000

Credit terms and merchandise returns

affect the amount of revenue earned by
the seller.
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Sales
On August 2, Kid’s Clothes sold $2,000 of
merchandise to Play Clothes on credit terms 2/10,
n/30. Kid’s Clothes originally paid $1,000 for the
merchandise.
Because Kid’s Clothes uses a perpetual inventory
system, they must make two entries.

Date Account Titles and Explanation Debit Credit

Aug. 2 Accounts Receivable (Play Clothes) 2,000
Sales 2,000
2 Cost of Goods Sold 1,000
Inventory 1,000

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Sales Returns and Allowances

On August 5, Play Clothes returned $500 of unsatisfactory
merchandise to Kid’s Clothes from the August 2 sale. Kid’s
Clothes cost for this merchandise was $250.
Because Kid’s Clothes uses a perpetual inventory system, they
must make two entries.

Contra-revenue

Date Account Titles and Explanation Debit Credit

Aug. 5 Sales Returns and Allowances 500
Accounts Receivable (Play Clothes) 500
Inventory 250
Cost of Goods Sold 250

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Sales
On July 6, Kid’s Clothes sold $4,000 of merchandise to
Play Clothes on credit with terms of 2/10, n/30. The
merchandise originally cost Kid’s Clothes $2,000.
Because Kid’s Clothes uses a perpetual inventory
system, they must make two entries.

Date Account Titles and Explanation Debit Credit

July 6 Accounts Receivable (Play Clothes) 4,000
Sales 4,000
Cost of Goods Sold 2,000
Inventory 2,000
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Sales Discounts
On July 15, Kid’s Clothes receives the full
amount due from Play Clothes from the
July 6 sale.
Prepare the journal entry for Kid’s Clothes.

Contra-revenue $4,000  98% = $3,920

GENERAL JOURNAL

Date Account Titles and Explanation Debit Credit

July 15 Cash 3,920
Sales Discounts 80
Accounts Receivable (Play Clothes) 4,000
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Sales Discounts
Now, assume that it wasn’t until July 20 that
Kid’s Clothes received the full amount due
from Play Clothes from the July 6 sale.
Prepare the journal entry for Kid’s Clothes.

GENERAL JOURNAL

Date Account Titles and Explanation Debit Credit

July 20 Cash 4,000
Accounts Receivable (Play Clothes) 4,000

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Delivery Expenses

Delivery costs incurred by sellers are

debited to Delivery Expense, an
operating expense.

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Accounting for Sales Taxes

Businesses collect sales tax at the point of sale.

Then, they remit the tax to the appropriate
governmental agency at times specified by law.

$1,000 sale  7% tax = $70 sales tax

GENERAL JOURNAL

Date Account Titles and Explanation Debit Credit

Cash 1,070
Sales Tax Payable 70
Sales 1,000
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Financial Analysis

Gross
Net Sales Profit
Margins

• Trends over time • Gross profit  Net sales

• Comparable store sales •Overall gross profit
margin
• Sales per square foot of
selling space •Gross profit margins by
department and
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Ethics, Fraud, and
Corporate Governance

Sales discounts and allowances are contra-revenue

accounts. Sales discounts and allowances reduce
gross sales. As such, net income will be incorrect if
discounts and allowances are not properly recorded.

The pressure brought to bear on subordinates to

implement fraudulent schemes developed by top
management can often be intense. Top
management can threaten employees with
termination if they fail to participate in the fraud.
Unfortunately, employees who acquiesce to such
pressure face tremendous legal risks.
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