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

2. Merchandising
Revenue is recognized when an exchange of Assets takes place, rather than when a service is provided
Merchandise is purchased and resold to customers
Unsold merchandise is held in Inventory
Two types of merchandising businesses:
Wholesalers buy from manufacturers and sell merchandise to retailers
Retailers buy from wholesalers and sell merchandise to consumers

3. Two Types of Inventory Systems
Periodic Inventory System
Inventory valued periodically (monthly, quarterly, yearly at a minimum)
Not used as much these days due to technology
Perpetual Inventory System
Inventory continuously valued and monitored (think of how scanners work at large grocery stores)
This is the system we will be working with

4. Comparison of Income Statements
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

5. Credit Terms
2/10, n/30 means there is a 2% discount for paying within 10 days, otherwise the entire amount is due in 30 days
This is the most common of terms, however, there are many other options that can be negotiated
The discount serves as an incentive for the purchaser to send cash early
The discount is deducted from Gross Sales in the computation of Net Sales
Sales discounts are contra revenue accounts

6. Example - Purchase debit Inventory 10,000 credit A/P - XYZ Company
On May 1st, ABC Company purchases $10,000 worth of merchandise on credit from XYZ Company.
The terms are 2/10, n/30 and the invoice is dated May 1st:
debit Inventory
10,000
credit A/P - XYZ Company
On May 9th, ABC Company paid the bill:
debit A/P
credit Cash
9,800
credit Inventory
200
Inventory
05-01
05-09

7. Sales Returns and Allowances
This is another contra revenue account used to record both purchase returns and allowances.
When merchandise is returned to the seller, this is a purchase return. This is generally for defective merchandise.
Sometimes merchandise is not totally defective, but not totally perfect. The purchaser may request a reduction in price, known as an allowance.

8. Example – Purchase Return
On May 21st, ABC Company purchased $20,000 more merchandise on credit from XYZ Company.
The terms are 2/10, n/30 and the invoice is dated May 21st:
debit Inventory
20,000
credit A/P - XYZ Company
On May 22nd, ABC Company determined that $5,000 of merchandise was defective and returned
it to XYZ Company:
debit A/P
5,000
credit Inventory
On May 31st, ABC Company paid the bill:
15,000
credit Cash
14,700
300

9. Example – Purchase Allowance
On June 7th, ABC Company purchased $12,000 more merchandise on credit from XYZ Company.
The terms are 2/10, n/30 and the invoice is dated June 7th:
debit Inventory
12,000
credit A/P - XYZ Company
On June 9th, ABC Company determined that $3,000 of merchandise did not exactly meet design
specifications and requested a price reduction:
debit A/P
3,000
credit Inventory
On June 16th, ABC Company paid the bill:
9,000
credit Cash
8,820
180

10. Merchandising Part 1 - Concluded
This time we looked at merchandise purchases and related transactions.
In Merchandising Part 2, we will look at sales of merchandise and related transactions.
Since merchandise needs to be shipped from business to business, we will look at shipping terms as well.