Chapter 5Merchandising Businesses

Sale

Merchandising businesses

generate revenue by selling goods.

The goods purchased for

resale are called merchandise

inventory.

Product Costs Versus Selling and Administrative Costs

Product Costs

Costs that are included in inventory.

Selling & Admin. Costs

Costs that are not included in

inventory. They are

sometimes called period

costs.

Allocation of Inventory Cost Between Asset and Expense Accounts

Beginning Inventory Balance

+

Inventory Purchased During the

Period

=

Cost of Goods

Available for Sale

Cost of Goods Available for Sale

Merchandise Inventory

(Balance Sheet)

Cost of Goods Sold (Income Statement)

Gross Margin (or Gross Profit)

Sales Revenue- Cost of Goods Sold

Gross Margin

Perpetual Inventory System

Perpetual Inventory System

Inventory account is adjusted perpetually (continually)

throughout the accounting

period.

Perpetual Inventory System

Let’s see how a perpetual

inventory system works by looking at transactions for June’s Plant Shop (JPS) from

chapter.

Event 2: JPS purchased merchandise inventory for $14,000 cash.

1. Decrease assets (cash).

2. Increase assets (merchandise inventory).

Asset Exchange

Transaction

Cash + Inventory = Common

Stock + Retained Earnings Revenue - Expenses =

Net Income

(14,000) + 14,000 = n/a + n/a n/a - n/a = n/a (14,000) OA Cash Flow

Account Title Debit CreditInventory 14,000 Cash 14,000

In general journal form, the entry is as follows:

Event 3a: JPS recognized sales revenue from selling inventory for $12,000. Sales of inventory requires two entries, one for revenue and one for cost.

1. Increase assets (cash).

2. Increase equity (sales revenue).

Asset Source

Transaction

Cash + Inventory = Common

Stock + Retained Earnings Revenue - Expenses =

Net Income

12,000 + n/a = n/a + 12,000 12,000 - n/a = 12,000 12,000 OA Cash Flow

Account Title Debit CreditCash 12,000 Sales 12,000

In general journal form, the entry is as follows:

Event 3b: JPS recognized $8,000 of cost of goods sold.

1. Decrease assets (merchandise inventory).

2. Decrease equity (cost of goods sold).

Asset Use Transaction

Cash + Inventory = Common

Stock + Retained Earnings Revenue - Expenses =

Net Income

n/a + (8,000) = n/a + (8,000) n/a - 8,000 = (8,000) n/a Cash Flow

Account Title Debit CreditCost of Goods Sold 8,000 Inventory 8,000

In general journal form, the entry is as follows:

A deduction from the invoice price granted to induce early payment

of the amount due.

A deduction from the invoice price granted to induce early payment

of the amount due.

Terms

Time

Due

Discount Period

Full amountless discount

Credit Period

Full amount due

Purchase or SalePurchase or Sale

Cash Discounts for Purchases

2/10, n/30Percentage of Discount

# of Days Discount Is Available

Otherwise, the Full

Amount Is Due

# of Days when Full Amount Is

Due

Cash Discounts

Transportation Terms

FOB shipping point(buyer pays)

FOB destination(seller pays)

Merchandise

Seller Buyer

Buyer Seller

Freight Terms FOB Shipping Point FOB DestinationCost Title Transportation-in Transportation-out

Responsible Party

FOB = Free on Board

Event 6 pg 248: The shipping terms for the inventory purchased were FOB shipping point. JPS paid the freight company $300 cash for delivering the merchandise. (A buying expense)

1. Decrease assets (cash).

2. Increase assets (merchandise inventory).

Asset Exchange

Transaction

Cash + Accts. Rec. + Inventory =

Accts. Pay. +

Common Stock +

Retained Earnings Revenue - Expenses =

Net Income

(300) + n/a + 300 = n/a + n/a + n/a n/a - n/a = n/a (300) OA Cash Flow

In general journal form, the entry is as follows:

Account Title Debit CreditInventory 300 Cash 300

Event 8: JPS incurred $450 of freight costs on inventory delivered to customers. (A selling expense)

1. Decrease assets (cash).

2. Decrease equity (transportation-out).

Asset Use Transaction

Buyer Seller

Freight Terms FOB Shipping Point FOB DestinationCost Title Transportation-in Transportation-out

Responsible Party

Cash + Accts. Rec. + Inventory =

Accts. Pay. +

Common Stock +

Retained Earnings Revenue - Expenses =

Net Income

(450) + n/a + n/a = n/a + n/a + (450) n/a - 450 = (450) (450) OA Cash Flow

Account Title Debit CreditFreight out expense 450 Cash 450

Lost, Damaged, or Stolen Inventory

Most merchandise companies

experience some level of inventory shrinkage, a term

that reflects decreases in inventory for

reasons other than sales to

customers.

Lost, Damaged, or Stolen Inventory

Assets = Liab. + Equity Revenue - Expenses = Net

Income (500) = n/a + (500) n/a - 500 = (500) n/a

Cash Flow

Assume a company determined that $500 of inventory was lost through shrinkage.

Here is how it would effect the statements:

Account Title Debit CreditInventory Loss (or Cost of Goods Sold) 500 Inventory 500

In general journal form, the entry is as follows: