Chapter 5

Accounting for Merchandising

Operations
 Part 1

Perpetual Inventory System

 Purchase
1. May 4 – Made a purchase as stated in invoice
#731.
2. May 6 – received an invoice of 150$ from Public
Freight Company for freight charges
3. May 8 - Returned goods costing $300.
4. May 14 – paid the balance due of $3,500 (gross
invoice price of $3,800 less purchase returns and
allowances of $300) on May 14, the last day of the
discount period.
 Summary of Purchasing Transactions

Inventory
Debit Credit

4th - Purchase 3,500 300 8th - Return

6th – Freight-in 150 70 14th - Discount

Balance 3,580

LO 2
Purchase Discounts

Should discounts be taken when offered?

Discount of 2% on $3,500 $ 70.00

$3,500 invested at 10% for 20 days 19.18
Savings by taking the discount $ 50.82

Example: 2% for 20 days = Annual rate of 36.5%

$3,500 x 36.5% x 20 ÷ 365 = $70

LO 2
 Freight Costs

Ownership of the goods

passes to the buyer when the
public carrier accepts the
goods from the seller.

Ownership of the goods

remains with the seller until
the goods reach the buyer.

Illustration 5-7
Shipping terms
Freight costs incurred by the seller are an
operating expense.
LO 2
Freight Costs

Illustration: Assume upon delivery of the goods on May 6, Sauk

Stereo pays Public Freight Company $150 for freight charges,
the entry on Sauk Stereo’s books is:

May 6 Inventory 150

Cash 150

LO 2
Purchase Returns and Allowances

Purchaser may be dissatisfied because goods are damaged

or defective, of inferior quality, or do not meet specifications.

Purchase Return Purchase Allowance

Return goods for credit if the May choose to keep the
sale was made on credit, or merchandise if the seller will
for a cash refund if the grant a reduction of the
purchase was for cash. purchase price.

LO 2
Purchase Returns and Allowances

Illustration: Assume Sauk Stereo returned goods costing

$300 to PW Audio Supply on May 8.

May 8 Accounts Payable 300

Inventory 300

LO 2
Purchase Discounts

Credit terms may permit buyer to claim a cash discount

for prompt payment.

Advantages:

 Purchaser saves money.

 Seller shortens the operating cycle by converting the

accounts receivable into cash earlier.
2% discount if
paid within 10
Example: Credit terms days, otherwise
may read 2/10, n/30.
net amount due
within 30 days.
LO 2
Purchase Discounts

Illustration: Assume Sauk Stereo pays the balance due of

$3,500 (gross invoice price of $3,800 less purchase returns
and allowances of $300) on May 14, the last day of the
discount period. Prepare the journal entry Sauk Stereo
makes on May 14 to record the payment.

May 14 Accounts Payable 3,500

Inventory 70
Cash 3,430

(Discount = $3,500 x 2% = $70)

LO 2
Purchase Discounts

Illustration: If Sauk Stereo failed to take the discount, and

instead made full payment of $3,500 on June 3, the journal
entry would be:

June 3 Accounts Payable 3,500

Cash 3,500

LO 2
 Summary of Purchasing Transactions

Inventory
Debit Credit

4th - Purchase 3,500 300 8th - Return

6th – Freight-in 150 70 14th - Discount

Balance 3,580

LO 2
 Recording Sales of Merchandise

Journal Entries to Record a Sale

#1 Cash or Accounts receivable XXX Selling

Sales revenue XXX Price

#2 Cost of goods sold XXX

Cost
Inventory XXX

LO 3
 Sales
A. June 4 – Made a sale of $2,500 on account with a credit
term of 2/10, n/30. The merchandise cost $1,000.
B. June 5 – Paid $100 for delivery of goods sold on June 4 to
customers.
C. June 6 – Customers returned goods that had a $300 selling
price, a $140 cost. The goods were not defective.
D. June 7 - Customers returned goods that had a $600 selling
price, a $280 cost. Assume the returned goods were
defective and had a scrap value of $50.
E. June 8 – Customers paid the balance due of $1,600 (gross
invoice price of $2,500 less purchase returns and allowances
of $900) on May 7, the last day of the discount period.
Recording Sales of Merchandise

Illustration: PW Audio Supply records the sale of $3,800

on May 4 to Sauk Stereo on account (Illustration 5-6) as
follows (assume the merchandise cost PW Audio Supply
$2,400).

May 4 Accounts Receivable 3,800

Sales Revenue 3,800

4 Cost of Goods Sold 2,400

Inventory 2,400

LO 3
Sales Returns and Allowances

 “Flip side” of purchase returns and allowances.

 Contra-revenue account to Sales Revenue (debit).

 Sales not reduced (debited) because:

► Would obscure importance of sales returns and

allowances as a percentage of sales.

► Could distort comparisons.

LO 3
Sales Returns and Allowances

Illustration: Prepare the entry PW Audio Supply would make

to record the credit for returned goods that had a $300 selling
price (assume a $140 cost). Assume the goods were not
defective.

May 8 Sales Returns and Allowances 300

Accounts Receivable 300

8 Inventory 140
Cost of Goods Sold 140

LO 3
Sales Returns and Allowances

Illustration: Assume the returned goods were defective

and had a scrap value of $50, PW Audio would make the
following entries:

May 8 Sales Returns and Allowances 300

Accounts Receivable 300

8 Inventory 50
Cost of Goods Sold 50

LO 3
Sales Discount

 Offered to customers to promote prompt payment of

the balance due.

 Contra-revenue account (debit) to Sales Revenue.

LO 3
Sales Discount

Illustration: Assume Sauk Stereo pays the balance due of

$3,500 (gross invoice price of $3,800 less purchase returns
and allowances of $300) on May 14, the last day of the
discount period. Prepare the journal entry PW Audio Supply
makes to record the receipt on May 14.

May 14 Cash 3,430

Sales Discounts 70 *
Accounts Receivable 3,500

* [($3,800 – $300) X 2%]

LO 3
 Illustration 5-14

Multiple-
Step

Key Items:
 Net sales

Illustration 5-14

LO 5
Classified Balance Sheet

Illustration 5-16

LO 5
 Part 2

Periodic Inventory System

 Purchase - periodic inventory system
1. May 4 – Made a purchase as stated in invoice
#731.
2. May 6 – received an invoice of 150$ from Public
Freight Company for freight charges
3. May 8 - Returned goods costing $300.
4. May 14 – paid the balance due of $3,500 (gross
invoice price of $3,800 less purchase returns and
allowances of $300) on May 14, the last day of the
discount period.
 Sales - periodic inventory system
A. June 4 – Made a sale of $2,500 on account with a credit
term of 2/10, n/30. The merchandise cost $1,000.
B. June 5 – Paid $100 for delivery of goods sold on June 4 to
customers.
C. June 6 – Customers returned goods that had a $300 selling
price, a $140 cost. The goods were not defective.
D. June 7 - Customers returned goods that had a $600 selling
price, a $280 cost. Assume the returned goods were
defective and had a scrap value of $50.
E. June 8 – Customers paid the balance due of $1,600 (gross
invoice price of $2,500 less purchase returns and allowances
of $900) on May 7, the last day of the discount period.
Determining Cost of Goods Sold
Under a Periodic System Illustration 5B-2
Cost of goods sold for a
merchandiser using a periodic
inventory system

Illustration 5B-2

LO 7
Recording Sales of Merchandise

COMPARISON OF ENTRIES
Illustration 5B-3

LO 7
Recording Sales of Merchandise

COMPARISON OF ENTRIES
Illustration 5B-3

LO 7
Recording Merchandise Transactions

 Record revenues when sales are made.

 Do not record cost of merchandise sold on the date of
sale.
 Physical inventory count determines:
► Cost of merchandise on hand and
► Cost of merchandise sold during the period.

 Record purchases in Purchases account.

 Purchase returns and allowances, Purchase discounts,
and Freight costs are recorded in separate accounts.

LO 7
LEARNING APPENDIX 5B: Record purchases and
OBJECTIVE
7
sales under a periodic inventory system.

Determining Cost of Goods Sold Under a

Periodic System
 No running account of changes in inventory.

 Ending inventory determined by physical count.

 Cost of goods sold not determined until the end of the

period.

LO 7
Recording Purchases of Merchandise

Illustration: On the basis of the sales invoice (Illustration 5-6)

and receipt of the merchandise ordered from PW Audio Supply,
Sauk Stereo records the $3,800 purchase as follows.

May 4 Purchases 3,800

Accounts Payable 3,800

LO 7
Recording Purchases of Merchandise

FREIGHT COSTS
Illustration: If Sauk pays Public Freight Company $150
for freight charges on its purchase from PW Audio Supply on
May 6, the entry on Sauk’s books is:

May 6 Freight-In (Transportation-In) 150

Cash 150

LO 7
Recording Purchases of Merchandise

PURCHASE RETURNS AND ALLOWANCES

Illustration: Sauk Stereo returns $300 of goods to PW Audio
Supply and prepares the following entry to recognize the
return.

May 8 Accounts payable 300

Purchase Returns and Allowances 300

LO 7
Recording Purchases of Merchandise

PURCHASE DISCOUNTS
Illustration: On May 14 Sauk Stereo pays the balance due
on account to PW Audio Supply, taking the 2% cash discount
allowed by PW Audio for payment within 10 days. Sauk
Stereo records the payment and discount as follows.

May 14 Accounts Payable 3,500

Purchase Discounts 70
Cash 3,430

LO 7
Recording Sales of Merchandise

Illustration: PW Audio Supply, records the sale of $3,800 of

merchandise to Sauk Stereo on May 4 (sales invoice No. 731,
Illustration 5-6) as follows.

May 4 Accounts Receivable 3,800

Sales Revenue 3,800

No entry is recorded for cost of goods sold at the time of the

sale under a periodic system.

LO 7
Recording Sales of Merchandise

SALES RETURNS AND ALLOWANCES

Illustration: To record the returned goods received from Sauk
Stereo on May 8, PW Audio Supply records the $300 sales
return as follows.

May 8 Sales Returns and Allowances 300

Accounts Receivable 300

LO 7
Recording Sales of Merchandise

SALES DISCOUNTS
Illustration: On May 14, PW Audio Supply receives payment
of $3,430 on account from Sauk Stereo. PW Audio honors the
2% cash discount and records the payment of Sauk’s account
receivable in full as follows.

May 14 Cash 3,430

Sales Discounts 70
Accounts Receivable 3,500

LO 7
LEARNING Compare a multiple-step with a single-
OBJECTIVE
5
step income statement.

Multiple-Step Income Statement

 Shows several steps in determining net income.

 Two steps relate to principal operating activities.

 Distinguishes between operating and non-operating

activities.

LO 5
 Illustration 5-14

Multiple-
Step

Key Items:
 Net sales

Illustration 5-14

LO 5
 Illustration 5-14

Multiple-
Step

Key Items:
 Net sales

 Gross profit

Illustration 5-14

LO 5
 Illustration 5-14

Multiple-
Step

Key Items:
 Net sales

 Gross profit

 Operating
expenses

Illustration 5-14

LO 5
 Multiple-
Step

Key Items:
 Net sales

 Gross profit

 Operating
expenses

 Nonoperating
activities

Illustration 5-14

LO 5
 Multiple-
Step

Key Items:
 Net sales

 Gross profit

 Operating
expenses

 Nonoperating
activities

Illustration 5-14

LO 5
 Multiple-
Step

Key Items:
 Net sales

 Gross profit

 Operating
expenses

 Nonoperating
activities

 Net income

Illustration 5-14

LO 5
Single-Step Income Statement

 Subtract total expenses from total revenues

 Two reasons for using the single-step format:

1. Company does not realize any profit until total

revenues exceed total expenses.

2. Format is simpler and easier to read.

LO 5
Single-Step Income Statement

Illustration 5-15

LO 5
Classified Balance Sheet

Illustration 5-16

LO 5