1. Accounting for
Merchandising
Business
February 17, 2013

2. Learning Objectives
• Describe merchandising and identify business
examples
• Describe merchandising activities and identify the
components of income for a merchandising entity
• Describe the business documents used
• Describe both perpetual and periodic inventory
systems.
• Analyze and record transactions for merchandise
purchases

3. Service vs Merchandising
Service Business
• Net income is the difference between its
revenues and the expenses incurred in providing
the services
Merchandising Business
• Earns net income by buying and selling
merchandise
• Merchandise inventories represent goods
intended for sale

4. Wholesale vs Retail
Wholesaler
• An intermediary that buys products from
manufacturers or other wholesalers and sells them
to retailers or other wholesalers
Retailer
• Buys products from the manufacturers or
wholesalers and sells them to consumers
Manufacturer Wholesaler Retailer Customer

5. Measuring Net Income
• Net income to a merchandiser implies that
revenue from selling merchandise exceeds
both the cost of the merchandise sold to
customers and the cost of other expenses for
the period.

6. Measuring Net Income
Net
Income
(Loss)
Less
LessEquals
Equals
Sales
Revenue
Cost of
Goods Sold
Gross
Profit
Operating
Expenses
Sales Revenue – income earned
in selling merchandise
Cost of Goods Sold – cost of
merchandise sold during the
period
Operating Expenses – expenses
incurred in running the business

7. Operating Cycle for a Merchandiser
Purchases
Merchandise
inventory
Credit sales
Account
receivable
Cash
collectionPurchases
Merchandise
inventory
Cash
sales

8. Business Documents
Main Source, Inc. Invoice
614 Tech Avenue Date Number
Nashville, TN 37651 5/4/05 358-BI
S
o
l
d
T
o
Name: Barbee, Inc.
Attn: Tom Bell
Address: One Willow Plaza
Cookeville, Tennessee
38501
P.O. 167 Sales: 25 Terms 2/10,n/30 Ship: FedEx Prepaid
Item Description Quanity Price Amount
AC417 250 Backup System 500 54.00$ 27,000$
Sub Total 27,000
We appreciate your business! Ship Chg. -
Tax -
Total 27,000$

9. Inventory Systems
+
+
Beginning
inventory
Net cost of
purchases
Ending Inventory
Cost of Goods
Sold
=

10. Inventory Systems
Two alternative inventory accounting system:
• Periodic Inventory System – cost of goods are
determined only at the end of an accounting
period
– Low Value, High Quantity Inventories
• Perpetual Inventory System – maintains detailed
records of the cost of each inventory item and
continuously show the inventory that should be
on hand
– High Value, Low Quantity Inventories

11. Periodic Inventory System
• Purchases – is debited when goods are bought
from supplier; classified as part of the account
Cost of Goods Sold upon sale or as
Merchandising Inventory, an asset account, if
unsold.
• The purchase account is used only for goods
purchased for resale.

12. • The purchase transaction is normally recorded by
the purchaser when the goods are received from
the seller.
• Every purchase should be supported by business
document that provide written evidence of the
transaction.
– Cash purchases – cash register receipt indicating the
items purchased
– Credit purchases – purchase invoice indicating the
total purchase price and other relevant information
Periodic Inventory System

13. • Purchase returns and allowances account
represents reduction in the cost of goods
purchased. It is a contra account to purchase
and its normal balance is credit.
• Debit memorandum – a document the
purchaser issues to inform the supplier of a
debit made to the supplier’s account,
including the reason for the return or
allowance.
Periodic Inventory System

14. • Purchase discount is based on the invoice cost
less returns and allowances, if any.
• The Purchase Discount account is used to
record the amount saved by paying promptly.
It is a contra account having a normal credit
balance.
Periodic Inventory System

15. Types of Discount
DISCOUNT
CASH
DISCOUNT
TRADE
DISCOUNT
PURCHASE
DISCOUNT
SALE
DISCOUNT

16. • Trade discounts are given to reduce the list
price to actual sales price which may be due to
the volume of transactions.
• A buyer and or the seller does not record the
list prices and the trade discounts in its
accounts. Instead, a buyer/seller records
purchases or sales net of the trade discount
(at invoice price).
Trade Discount

17. • Cash discounts are normally given to
encourage prompt payment.
• Some common examples of cash discount
terms:
– 2/10, n/30
– 2/10, 1/15, n/30
– 2/10 EOM, n/60
Cash Discount

18. • On May 5, ABC Co. purchased merchandise
from XYZ Co. worth P100,000 less 10, terms
2/10, n/30.
• On May 8, ABC Co. returned defective
merchandise worth P10,000.
• On May 15, ABC Co. paid his balance to XYZ
Co. in full.
Sample Transaction