1. Professor Eric Carstensen
Merchandising Part 2
Professor Eric Carstensen
MiraCosta College

2. Comparison of Income Statements (from Part 1)
Service Company
Merchandising Company
Service Revenue
$890,000
Sales Revenue
$950,000
Op. Expenses
620,000
less: Sales Discounts
(1,000)
Op. Income
270,000
less: Sales Returns & Allowances
(2,000)
Other Income(Expense)
(20,000)
Net Sales
947,000
Income Before Taxes
250,000
COGS
450,000
Taxes
85,000
Gross Margin
497,000
Net Income
$165,000
247,000
5,000
252,000
88,000
$164,000

3. Example Sale debit A/R - ABC Company 10,000 credit A/P - XYZ Company
On May 1st, XYZ Company sold $10,000 worth of merchandise to ABC company on credit; the
cost of merchandise was $5,000. The terms are 2/10, n/30 and the invoice is dated May 1st:
debit A/R - ABC Company
10,000
credit A/P - XYZ Company
debit Cost of Goods Sold
5,000
credit Inventory
On May 9th, XYZ Company received payment from ABC Company:
debit Cash
9,800
debit Sales Discounts
200
credit A/R - ABC Company

4. Example Sales Return debit A/R - ABC Company 20,000 credit Sales
On May 21st, XYZ Company sold $20,000 more merchandise to ABC Company; the cost of the
merchandise was $10,000. The terms are 2/10, n/30 and the invoice is dated May 21st:
debit A/R - ABC Company
20,000
credit Sales
debit Cost of Goods Sold
10,000
credit Inventory
On May 22nd, ABC Company determined that $5,000 of merchandise was defective and returned
it to XYZ Company; the cost of the returned merchandise was $2,500:
debit Sales Returns & Allowances
5,000
crebit A/R - ABC Company
debit Inventory
2,500
credit Cost of Goods Sold
On May 31st, XYZ Company received payment from ABC Company:
debit Cash
14,700
debit Sales Discounts
300
credit A/R - ABC Company
15,000

5. Example Sales Allowance
On June 7th, XYZ Company sold $12,000 more merchandise to ABC Company on credit; the cost of
that merchandise was $6,000. The terms are 2/10, n/30 and the invoice is dated June 7th:
debit A/R - ABC Company
12,000
credit Sales
debit Cost of Goods Sold
6,000
credit Inventory
On June 9th, ABC Company determined that $3,000 of merchandise did not exactly meet design
specifications and requested a price reduction:
debit Sales Returns & Allowances
3,000
crebit A/R - ABC Company
On June 16th, XYZ Company received payment from ABC Company:
debit Cash
8,820
debit Sales Discounts
180
credit A/R - ABC Company
9,000

6. Shipping Terms FOB = Free On Board
FOB Shipping Point: Purchaser Responsible for paying shipping from Seller to Purchaser
Amount is added to Inventory Cost
FOB Destination: Seller Responsible for paying shipping to purchaser
Included as part of Operating Expenses

7. Shipping Terms Comparison
On June 21st, XYZ Company sold $14,000 worth of merchandise to ABC company on credit; the cost of the merchandise was $7,000.
The terms are 2/10, n/30 and the invoice is dated June 21st:
As recorded by the purchaser:
As recorded by the seller:
debit Inventory
14,000
debit A/R - ABC Company
credit A/P - XYZ Company
Credit Sales
debit Cost of Goods Sold
7,000
credit Inventory
The cost to ship the merchandise from XYZ Company to ABC Company is $1,000. The correct journal entry would be
If the terms are FOB Shipping Point:
If the terms are FOB Destination:
1,000
debit Shipping Expense
Credit Cash

8. Important Note
Discounts DO NOT apply to amounts paid for shipping, as another company usually provides that service.

9. Merchandising Part 2 - Conclusion
Remember, Part 1 covered some basics about merchandising businesses and purchases of merchandise, along with discounts, purchase returns and allowances
In this part, we covered sales of merchandise, along with sales discounts, sales returns and allowances
Also in this Part 2, we covered shipping terms