Accounting Principles

Thirteenth Edition
Weygandt Kimmel Kieso

Chapter 5 part (3)

Accounting for
Merchandising Operations
Prepared by
Coby Harmon
University of California, Santa Barbara
Westmont College
 Periodic Inventory System
Determining Cost of Goods Sold Under a
Periodic System
• No running account of changes in inventory
• Ending inventory determined by physical count
• Cost of goods sold not determined until end of
period.

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Recording Merchandise Transactions
• Record revenues when sales are made
• Do not record cost of merchandise sold on date of
sale.
• Physical inventory count determines:
 Cost of merchandise on hand and
 Cost of merchandise sold during the period
• Record purchases in Purchases account (Exp)
• Purchase returns and allowances, Purchase
discounts, and Freight costs are recorded in separate
accounts ( not included in inventory account as
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perpetual system) .
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 Example : On the basis of the sales invoice (Illustration 5.6)
and receipt of the merchandise ordered from PW Audio
Supply, Sauk Stereo records the $3,800 purchase as follows.
May 4 Purchases 3,800
Accounts Payable 3,800

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 Recording Purchases of Merchandise
Freight Costs ( delivery cost ):
Example: If Sauk Stereo pays Public Carrier Co. $150 for freight
charges on its purchase from PW Audio Supply on May 6, the
entry on Sauk Stereo’s books is:
May 6 Freight-In (Transportation-In) 150
Cash 150

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 Purchase Returns and Allowances
Example : Sauk Stereo returns goods costing $300 to PW
Audio Supply and prepares the following entry to recognize
the return.
May 8 Accounts Payable 300
Purchase Returns and Allowances 300

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 Purchase Discounts
Example : On May 14, Sauk Stereo pays the balance due on
account to PW Audio Supply, taking the 2% cash discount
allowed by PW Audio Supply for payment within 10 days. Sauk
Stereo records the payment and discount as follows.
May 14 Accounts Payable ($3,800 – $300) 3,500
Purchase Discounts ($3,500 × .02) 70
Cash 3,430

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 Recording Sales of Merchandise
Example : The seller, PW Audio Supply, records the sale of
$3,800 of merchandise to Sauk Stereo on May 4 (sales invoice
No. 731, Illustration 5.6) as follows.
May 4 Accounts Receivable 3,800
Sales Revenue 3,800

No entry is recorded for cost of goods sold at time of sale

under a periodic system.

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(FOB destination ) under periodic assume 150$ pid bu
seller :
Fright out exp 150
cash 150

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 Sales Returns and Allowances
Example: To record the returned goods received from Sauk
Stereo on May 8, PW Audio Supply records the $300 sales
return as follows.
May 8 Sales Returns and Allowance 300
Accounts Receivable 300

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Example: 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.
If payment within discount period:
Discount = 2% x 3500 =70
Cash received = 3500-(3500 x 2% ) = 3,430

May 14.

Cash 3,430
Sales Discounts 70
Accounts Receivable 3,500
[($3,800 – $300) X 2%]

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 Periodic Inventory System( determining COGS ):
ILLUSTRATION 5B.2
PW Audio Supply
Cost of Goods Sold
For the Year Ended December 31, 2020
Cost of goods sold
Inventory, January 1 $ 36,000
Purchases $325,000
Less: Purchase returns and allowances $10,400
Purchase discounts 6,800 17,200
Net purchases 307,800
Add: Freight-in 12,200
Cost of goods purchased 320,000
Cost of goods available for sale 356,000
Less: Inventory, December 31 40,000
Cost of goods sold $316,000

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 PW Audio Supply
Income Statement
For the Year Ended December 31, 2020

Multiple- Sales
Sales revenue $480,000

Step Less: Sales returns and allowances

Sales discounts
Net sales
$12,000
8,000 20,000
460,000
Cost of goods sold 316,000
Key Items: Gross profit 144,000
Operating expenses
• Net sales Salaries and wages expense 64,000
Utilities expense 17,000
• Gross profit Advertising expense
Depreciation expense
16,000
8,000
Freight-out 7,000
• Operating Insurance expense 2,000
expenses Total operating expenses
Income from operations (operating
114,000

income) 30,000
• Nonoperating Other revenues and gains
activities Interest revenue
Gain on disposal of plant assets
3,000
600 3,600
Other expenses and losses
• Net income Interest expense 1,800
Casualty loss from vandalism 200 2,000
Net income $ 31,600
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 Classified Balance Sheet
ILLUSTRATION 5.17
PW Audio Supply
Balance Sheet (Partial)
December 31, 2020
Assets
Current assets
Cash $ 9,500
Accounts receivable 2,300
Inventory 40,000
Prepaid insurance 1,800
Total current assets 67,400
Property, plant, and equipment
Equipment $80,000
Less: Accumulated depreciation 24,000 56,000
Total assets $123,400

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