1. Unit 1.5 Accounting for a Merchandising Operation

2. 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. What is a Merchandising Company?

3. Accounts Receivable Cash Service Company Cash Merchandising Company Receive Cash Perform Services Sell Inventory Accounts Receivable Receive Cash Buy Inventory Merchandise Inventory Operating Cycles for a Merchandising Company and Service Company

4. Merchandising 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. This section covers the perpetual method. Inventory Systems

5. When merchandise is purchased for resale to customers, the account, Merchandise Inventory, is debited for the cost of the goods. Purchases may be made for cash or on account (credit). The purchase is normally recorded by the purchaser when the goods are received from the seller. Recording Cost of Goods Purchased

6. Merchandise Inventory is debited by the buyer, if the buyer pays the freight bill (FOB shipping point). Freight Out (or Delivery Expense) is debited by the seller, if the seller pays the freight bill (FOB destination). Accounting for Shipping Costs

7. A purchaser may be dissatisfied with merchandise received because the goods 1. are damaged or defective, 2. are of inferior quality, or 3. are not in accord with the purchaser’s specifications. Purchase Returns and Allowances

8. 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. Sales Transactions

9. Sales Returns occur when customers are dissatisfied with merchandise and are allowed to return the goods to the seller for credit or a refund. Sales Allowances occur when customers are dissatisfied, and the seller allows a deduction from the selling price. Sales Returns and Allowances

10. The normal balance of Sales Returns and Allowances is a debit. Sales Returns and Allowances is a contra revenue account to the Sales account. Sales Returns and Allowances - continued

11. A sales discount is the offer of a cash discount to a customer in exchange for the prompt payment of a balance due. Similar to Sales Returns and Allowances, Sales Discounts is also a contra revenue account with a normal debit balance. Sales Discounts

12. A merchandising company requires the same types of adjusting entries as a service company, with one additional adjustment for inventory to ensure the recorded inventory amount agrees with the actual quantity on hand. A physical count is an important control feature since a perpetual system indicates what should be there but a count will determine what is actually there. Completing the Accounting Cycle

13. A merchandising company also requires the same types of closing entries as a service company. The additional accounts that need to be closed out in a merchandising account include Sales, Sales Returns and Allowances, Cost of Goods Sold, and Freight Out. Merchandise Inventory is an asset account and is not closed at the end of the period. Completing the Accounting Cycle - continued

14. As contra revenue accounts, sales returns and allowances (and sales discounts, if any) are deducted from sales in the income statement to arrive at Net Sales. Sales Section of the Income Statement

15. This is the format of a multi-step income statement that has both operating and non-operating activities. As shown, the non-operating activities are reported immediately after the company’s primary operating activities.

16. On the balance sheet, merchandise inventory is reported as a current asset and appears immediately below accounts receivable. This is because current assets are listed in the order of their liquidity. Classified Balance Sheet