Merchandise Operation
Terms Definitions
Merchandising Business Sells a particular or group of products either
wholesale or retail in the same form they were
bought.
Earn profit through buying and selling goods.
Also known as “trading concern”
Income Statement Service Concern; Single Step (Revenues –
Expenses = Profit)
Merchandising; Multiple Step (Net Sales – Cost
of Sale = Gross Profit – Expenses = Profit)
2 Inventory System:
Perpetual Inventory System
Periodic Inventory System
Perpetual Inventory System The inventory account is continuously updated.
Ending inventory should reconcile with the actual
physical account at the of the period assuming
that no theft, spoilage, or error has occurred.
The use of stock card is a must.
It facilitates a better control as it provides
information of merchandise inventory on hand.
In recording sales, 2 entries must be prepared:
1. Accounts Receivable
Sales
2. Cost of Sales
Merchandise Inventory
(2nd Entry reduces the actual cost of goods sold)
In recording Sales Returns and Allowances, 2 entries are
prepared;
1. Sales Returns and Allowances
Accounts Receivable
2. Merchandise Inventory
Cost of Sales
(2nd Entry, Merchandise Inventory was debited to
increase foods available for sale and credited
Cost of Sale to effect reduction of COGS)
Periodic Inventory System - Primarily used by business that sell inexpensive
goods.
- “No entries are made to the inventory account as
the merchandise is bought and sold”. Only at the
end of the period, when the inventory is counted,
will entries be made to the inventory account.
- When goods are purchased, there is a separate set
of accounts:
Asset Accounts:
Merchandise Inventory, End – refers to the unsold
merchandise at the end of the period. The normal balance
of the account is a debit.
Cost Account:
Merchandise Inventory, beginning – refers to the
merchandise inventory at the beginning which will turn
asset into cost when period ended. This is usually credited
in the adjustments.
Purchases – debited when merchandise are purchase
either in cash or accounts payable.
JE: PURCHASES XX
CASH OR A/P XX
Purchase Discount – credited when there is discount
availed from a supplier for early payment purchased on
credit.
JE: ACCOUNTS PAYABLE XX
PURCHASE DISCOUNT XX
CASH XX
Purchase Returns and Allowances – credited for
merchandise purchased either in cash or on credit that
were returned to the supplier for a reason.
JE: CASH
XX
PURCHASE RETURNS AND ALLOW.
XX
Freight-In – this account is debited for the freight and
handling charges of merchandise purchased by the buyer
or customer and shipped.
JE: FREIGHT-IN XX
CASH OR ACCOUNTS PAYABLE XX
Income Accounts:
Sales – this account is credited for merchandise that are
sold either in cash or on credit.
JE: CASH OR A/R XX
SALES XX
Sales Discounts – debited for sales discount given to a
customer for early collection from his or her account.
JE: CASH XX
SALES DISCOUNTS XX
ACCOUNTS RECEIVABLE XX
Sales Returns and Allowances – this account is debited
for merchandise sold but were returned by the customer.
JE: SALES RETURNS AND ALLOWANCES XX
CASH OR A/R
XX
Expense Account:
Freight-Out – this account is debited for freight and
handling charges of merchandise sold to customer and
shipped.
JE: FREIGHT OUT XX
CASH OR A/R XX
Freight-In and Freight-Out Freight-In or Transportation-In
- debited when merchandise is purchased.
- Considered as part of cost and being added to
purchase account to arrive at the gross purchase.
Freight-Out or Transportation-On
- debited when merchandise is sold.
- Considered as business expenses
