2 Merchandising Activities A merchandising company is an enterprise that buys and sells goods to earn a profit.1. Wholesalers sell to retailers.2. Retailers sell to consumers.A merchandiser’s primary source of revenue is sales, whereas a service company’s primary source of revenue is service revenue.
3 Financial Performance of a Merchandising Company SalesRevenueCost ofGoods SoldLessGrossProfitEqualsOperatingExpensesLessNetIncome(Loss)Equals
4 Merchandising Cash Flow Beginning InventoryEnding Inventory (Balance Sheet)Cost of Goods Available for SaleNot SoldSoldGoods Purchased during periodCost of Goods Sold (Income Statement)
5 Inventory SystemsMerchandising entities may use either (or both) of the following inventory systems:1. Perpetual – where detailed records of each inventory purchase and sale are maintained. Cost of goods sold is calculated at the time of each sale.2. Periodic – detailed records are not maintained. Cost of goods sold is calculated only at the end of the accounting period.
6 Recording PurchasesFor purchases on account, Merchandise Inventory is debited and Accounts Payable is credited. For cash purchases, Merchandise Inventory is debited and Cash is credited.
7 Accounting for Merchandise Purchases To determine the inventory value, we must adjust the invoice cost for:Discounts given to a purchaser by a supplier.Any returns and allowances for unsatisfactory items received from a supplier.Any required freight costs paid by a purchaser.
8 Trade Discounts vs. Purchase/Sales Discounts Trade Discounts: Used by manufacturers and wholesalers to change selling prices without republishing their catalogues.Already deducted from the purchase price before the transaction is recordedSales and Purchase Discounts: A deduction from the invoice price granted to induce early payment of the amount due. Example – 2/10, n30Deducted after the initial journal entry that recorded the purchase
9 Number of Days Discount is Available Otherwise, Net (or All) is Due Purchase Discounts2/10,n/30Discount PercentNumber of Days Discount is AvailableOtherwise, Net (or All) is DueWithin Credit Period
10 Account Titles and Explanation ExamplePurchased $900 of merchandise on credit on March 1st. Discount terms 2/10 n/30Company paid the bill on March 10th.DateAccount Titles and ExplanationPRDebitCreditMar. 1Mar. 10Merchandise InventoryAccounts PayablePurchased merchandise on accountCashPaid for Mar. 1 purchase within the discount period90018882
11 Purchase Returns and Allowances Purchase returns are merchandise received by a purchaser but returned to the supplier.A purchase allowance is a reduction in the cost of defective merchandise received by a purchaser from a supplier.A debit memorandum is a form issued by the purchaser to inform the supplier of a debit made to the supplier's account, including the reason for a return or allowance. Memorandum gets its name from the issuer.Entry (On the books of the purchaser) Debit Accounts Payable or Cash (if refund given) and Credit Inventory
12 Transportation Costs FOB shipping point—buyer pays shipping costs. Title transfers at shipping pointIncreases cost of merchandiseDebit Inventory, Credit Cash or Accounts Payable (if to be paid for with merchandise later)FOB destination—seller pays shipping costs.Title transfers at destination.Operating expense for sellerDebit Delivery Expense (if you are the seller), Credit Cash.
13 Accounting for Merchandise Sales Sales transactions—Recording has two parts:Recognize revenue—Debit Accounts Receivable (or cash), Credit Sales (both for the invoice amount)Recognize cost—Debit Cost of Goods Sold, Credit Inventory (both for the cost of the inventory sold)
14 Account Titles and Explanation ExampleA company sold $500 worth of merchandise for $800 on credit on March 1st. Credit terms 3/10 n/EOM.DateAccount Titles and ExplanationPRDebitCreditMar. 1Accounts ReceivableRevenueSold merchandise on accountCost of Goods SoldMerchandise InventoryTo record the cost of merchandise800500
15 Sales DiscountsDiscounts awarded to customers for payment within the discount period. Recorded upon collection for sale.Sales Discount is a contra-revenue account—subtraction from Sales.Collection after discount period—Debit Cash, Credit Accounts Receivable (full invoice amount).Collection within discount period—Debit Cash (invoice amount less discount), Debit Sales Discount (discount amount), Credit Accounts Receivable (invoice amount).
16 Account Titles and Explanation ExampleCustomer paid for March 1st purchase on March 8th.DateAccount Titles and ExplanationPRDebitCreditMar. 8CashSales DiscountsAccounts ReceivableSold merchandise on account77624800
17 Sales Returns and Allowances Sales returns—merchandise customers return to the seller after a sale.Sales allowances—reductions in the selling price of merchandise sold to customers (usually for damaged merchandise that a customer is willing to keep at a reduced price).Sales Returns and Allowances is a contra-revenue account—subtraction from Sales
18 Sales Returns and Allowances Entry: Debit Sales Returns and Allowances and a Credit Accounts Receivable. Additional entry if returned merchandise is saleable: Debit Inventory, Credit Cost of Goods SoldSales Returns and Allowances is a contra-revenue account—subtraction from Sales.
19 ExampleMarch 15: Customer purchased 100 items for $12 per item. Each item has a cost of $5.March 18: Customer returned 5 items that were damaged. Items were destroyed.March 20: Customer returned 3 items that were the wrong colour. Items were returned to inventory.
20 Account Titles and Explanation Example ContinuedDateAccount Titles and ExplanationPRDebitCreditMar. 15Mar. 18Mar. 20Accounts ReceivableRevenueCost of Goods SoldMerchandise InventorySales Returns and Allowances1200500603615
21 ShrinkageAn adjusting entry is required to account for any inventory loss.Shrinkage is determined by comparing a physical count of the inventory with recorded quantities.Entry: Debit Cost of Goods Sold, Credit Inventory
22 Gross Margin RatioShows the relation between sales and cost of goods sold by showing the percentage of net sales available after deducting COGS.The higher the value, the better.Gross Margin (Profit)Net SalesGross Margin =