1. Financial Accounting, 5e California State University,
Weygandt, Kieso, & Kimmel
Prepared by
Kurt M. Hull, MBA CPA
California State University,
Los Angeles
John Wiley & Sons, Inc.

2. ACCOUNTING FOR MERCHANDISING OPERATIONS
CHAPTER 5
ACCOUNTING FOR MERCHANDISING OPERATIONS
STUDY OBJECTIVES
After studying this chapter, you should understand:
The differences between a service company and a merchandiser
Single & multiple step
income statements
Purchase entries—perpetual inventory
How to compute gross profit
Revenue entries--perpetual inventory
COGS -- periodic inventory
Completing the accounting cycle

3. MERCHANDISER VS. SERVICE COMPANY Wholesalers/Retailers
STUDY OBJECTIVE 1
MERCHANDISER VS. SERVICE COMPANY
A merchandiser
buys and sells goods
to earn a profit.
Wholesalers/Retailers
COGS
A service company
provides a service
to earn a profit.
No COGS -

4. INCOME MEASUREMENT MERCHANDISER
Less
Sales
Revenue
Equals
Cost of
Goods Sold
Gross
Profit
Less
Equals
Net
Income
(Loss)
Operating
Expenses

5. OPERATING CYCLE COMPARISON Merchandising Company
Service Company
Receive Cash
Cash
Perform Services
Accounts
Receivable
Merchandising Company
Receive Cash
Buy Inventory
Cash
Sell Inventory
Merchandise
Inventory
Accounts
Receivable

6. INVENTORY SYSTEMS SOLD SOLD
PERPETUAL INVENTORY
End of period
No entry
Inventory purchased
Item sold
SOLD
Record purchase
Record revenue & COGS
PERIODIC INVENTORY
Inventory purchased
Item sold
End of period
Compute
and record
COGS
SOLD
Record purchase
Record revenue only

7. PURCHASE ENTRIES – PERPETUAL INVENTORY
STUDY OBJECTIVE 2
PURCHASE ENTRIES – PERPETUAL INVENTORY
MERCHANDISE INVENTORY
CASH
Cash
purchase
COST
COST
A/P
Credit
purchase
MERCHANDISE INVENTORY
COST
COST
The purchase is normally recorded when the goods are received
Credit purchases are normally supported by a purchase invoice

8. PURCHASE ENTRIES – PERPETUAL INVENTORY
STUDY OBJECTIVE 2
PURCHASE ENTRIES – PERPETUAL INVENTORY
3800
Cash
purchase
3800
3 800
Credit
purchase

9. SHIPPING TERMS – FREE ON BOARD
FOB SHIPPING POINT
FOB DESTINATION
Title transfers to buyer at sellers shipping dock
Buyer pays freight costs
Title transfers to buyer at buyers receiving dock
Seller pays freight costs

10. ACCOUNTING FOR FREIGHT COSTS PAID BY BUYER
GENERAL JOURNAL
Date
Account Titles and Explanation
Dr.
Cr.
150
May 6
Merchandise Inventory
Cash
(To record payment of freight,
terms FOB shipping point)
Freight costs are part of the cost of inventory purchased.

11. ACCOUNTING FOR FREIGHT COSTS PAID BY SELLER
GENERAL JOURNAL
Date
Account Titles and Explanation
Dr.
Cr.
150
May 4
Freight-out (Delivery Expense)
Cash
(To record payment of freight on
goods sold FOB destination)
Freight costs incurred by the seller are
selling expenses called Freight-out.

12. PURCHASE RETURNS AND ALLOWANCES
GENERAL JOURNAL
Date
Account Titles and Explanation
Dr.
Cr.
May 8
Accounts Payable
300
Merchandise Inventory
(To record return of inoperable
goods received from Highpoint
Electronic, DM No. 126)
For purchases returns and allowances, Accounts Payable is debited and Merchandise Inventory is credited.
Buyer
Seller

13. PURCHASE DISCOUNTS PAYMENT WITHIN DISCOUNT PERIOD
Credit terms may permit the buyer to claim a cash discount
for the prompt payment of a balance due.
GENERAL JOURNAL
Date
Account Titles and Explanation
Dr.
Cr.
3,500
3,430 70
May 14
Accounts Payable
Cash
Merchandise Inventory
(To record payment within
discount period)
If payment is made within the discount period,
Merchandise inventory is credited for the discount taken.

14. PAYMENT AFTER DISCOUNT PERIOD
PURCHASE DISCOUNTS
PAYMENT AFTER DISCOUNT PERIOD
GENERAL JOURNAL
Date
Account Titles and Explanation
Debit
Credit
June 3
Accounts Payable
3,500
Cash
(To record payment with no
discount taken)
If payment is made after the discount period, Accounts Payable is debited and Cash is credited for the full amount.

15. REVENUE ENTRIES – PERPETUAL INVENTORY
STUDY OBJECTIVE 3
REVENUE ENTRIES – PERPETUAL INVENTORY
Revenues are reported when earned in
accordance with the revenue recognition principle.
In a merchandising company,
revenues are earned
when the goods are
transferred from seller to buyer.
All sales should be supported by a
cash register tape or sales invoice.

16. REVENUE ENTRIES – PERPETUAL INVENTORY
GENERAL JOURNAL
Date
Account Titles and Explanation
Dr.
Cr.
May 4
Accounts Receivable
3,800
2,400
Sales
(To record credit sales to Chelsea
Video per invoice #731) 4
Cost of Goods Sold
Merchandise Inventory
(To record cost of merchandise
sold on invoice #731 to Chelsea
Video)
For cash sales, simply replace the debit
to accounts receivable with a debit to cash.

17. SALES RETURNS & ALLOWANCES
Customer returns goods to the
seller for credit or a refund.
SALES ALLOWANCE
Seller allows a reduction in selling price.
Goods are not returned.
Seller prepares a CREDIT MEMORANDUM.

18. RECORDING SALES RETURNS & ALLOWANCES
GENERAL JOURNAL
Date
Account Titles and Explanation
Dr.
Cr.
May 8
Sales Returns and Allowances
Accounts Receivable
(To record
credit granted to
Beyer
Video,
for returned goods) 8
Merchandise Inventory
Cost of Goods Sold
300
140
(To record cost of goods returned )
Sales Returns and Allowances is a CONTRA-REVENUE account.
It’s normal balance is a DEBIT.

19. SALES DISCOUNTS Seller offers customer a cash discount
for prompt payment of balance due.
Credit terms indicate the discount percent,
Discount period, and final due date.
2/10, n/ A 2% discount may be taken if payment is made
within 10 days of the invoice date.
1/10 EOM A 1% discount is available if payment is made
by the 10th of the next month.

20. RECORDING SALES DISCOUNTS
GENERAL JOURNAL
Date
Account Titles and Explanation
Dr.
Cr.
May 14
Cash
3,430 70
3,500
Sales Discounts
Accounts Receivable
(To record collection within 2/10,
n/30 discount period from Beyer
Video)
Sales discounts is a CONTRA-REVENUE ACCOUNT.
It’s normal balance is a DEBIT.

21. COMPLETING THE ACCOUNTING CYCLE
Study Objective 4
After all adjustments have been posted,
closing entries are prepared from the
Income Statement section of the worksheet.
All accounts that affect the determination of
net income are closed to Income Summary.
GENERAL JOURNAL
Date
Account Titles and Explanation
Debit
Credit
(1)
Dec. 31
Sales
Income Summary
(To close income statement
accounts with credit balances).
480,000

22. CLOSING ENTRIES Cost of Goods Sold is closed to Income Summary.
GENERAL JOURNAL
Date
Account Titles and Explanation
Debit
Credit
(2)
Dec. 31
Income Summary
Sales Returns and Allowances
Sales Discounts
Cost of goods sold
Store Salaries Expense
Rent Expense
450,000
12,000
8,000
316,000
45,000
19,000
7,000
16,000
17,000
2,000
Freight -
out
Advertising Expense
Utilities Expense
Depreciation Expense
Insurance Expense
(To close income statement
accounts
with debit balances)

23. CLOSING ENTRIES GENERAL JOURNAL
Date
Account Titles and Explanation
Debit
Credit
2002
(3)
Dec. 31
Income Summary
Retained Earnings
(To close net income to retained
earnings )
(4) 31
30,000
15,000
Dividends
(To close dividends to retained
earnings )
After the closing entries are posted, all temporary accounts have zero balances, and Retained Earnings has a credit balance of $48000.

24. CLOSING ENTRIES REVIEW QUESTION
Orlaida Company has the following merchandise account balances:
Sales $192,000
Sales Discounts $2,000
Cost of Goods Sold $105,000
Merchandise Inventory $40,000
Prepare entries to record the closing of these items to Income Summary.
Account
Debit
Credit
Sales
$192,000
Sales Discounts
$2,000
Cost of Goods Sold
$105,000
Income Summary
$85,000

25. MULTIPLE - STEP INCOME STATEMENT Computation of Net Sales
STUDY OBJECTIVE 5
MULTIPLE - STEP INCOME STATEMENT
Illustration 5-6
Computation of Net Sales
Sales revenues
Sales
$480,000
Less: Sales returns & allowances
$12,000
Sales Discounts
8,000
20,000
Net Sales
$460,000

26. MULTIPLE - STEP INCOME STATEMENT
STUDY OBJECTIVES 5 & 6
MULTIPLE - STEP INCOME STATEMENT
The multiple step income statement arrives at net income in stages.
Sellers Electronix
Income Statement
Net Sales
$460,000
Less: Cost of Goods Sold
316,000
Gross Profit
$144,000
Operating Expenses
114,000
Net Income
$30,000
The multiple step income statement also distinguished between
operating and non-operating activities.

27. MULTIPLE - STEP INCOME STATEMENT NON-OPERATING ACTIVITIES
OTHER REVENUES
& GAINS
OTHER LOSSES
& EXPENSES
Interest revenue
Interest expense
Dividend revenue
Casualty losses
Rent revenue
Loss from employee strikes
Gains on sale of assets
Loss on sale of assets

28. SINGLE-STEP INCOME STATEMENT
Sellers Electronix
Income Statement
For the Year Ended December 31, 2006
Revenues
Net sales
$ 460,000
Interest revenue
3,000
Gain on sale of equipment
600
Total revenues
463,600
Expe
nses
Cost of goods sold
$ 316,000
Selling expenses
76,000
Administrative expenses
38,000
Interest expense
1,800
Casualty loss from vandalism
All data are classified under two categories: Revenues
2 Expenses
Only one step is required in determining net income or net loss.
200
Total expenses
432,000
Net income
$ 31,600

29. STUDY OBJECTIVES 7 COST OF GOODS SOLD—PERIODIC INVENTORY
Sellers Electronix
Cost of Goods Sold
For the year ended December 31, 2006
Cost of Goods Sold
Inventory, January 1
$36,000
Purchases
$325,000
Less: Purchase returns & 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
Inventory, December 31
40,000
316,000

30. COPYRIGHT
Copyright © 2006 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written consent of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.

31. CHAPTER 5 ACCOUNTING FOR MERCHANDISING OPERATIONS