HOSP 1210 (Financial Acct) Learning Centre

Accounting for Merchandising

Operations
Recording transactions related to the purchase of merchandise can be tricky as the
entries change depending on whether the journal entries are for the BUYER or the
SELLER. It is very important to be clear about which company is which when asked to
record a transaction in the journal. There are four basic transactions listed below, with
the BUYER’s journal entries to the left and the corresponding entries in the SELLER’s
journal to the right.

(1) Purchase/sale of merchandise: For the buyer, purchases of merchandise are

debited to Merchandise Inventory account and credited to cash or accounts
payable. For the seller, the journal entries are a bit more involved. The first entry
recognizes the revenue earned on the sale and the second entry recognizes the
expense (Cost of Goods Sold) and the depletion of the seller’s Merchandise
Inventory. *If you have a problem where a company buys a good and resells it,
you must find the cost of the good based on whether shipping was paid by the
buyer, returns were made, and if discounts were received in buying it.*

Date  BUYER  Debit Credit SELLER Debit Credit

  Merchandise Inventory  $800 Accounts Receivable**  $800
     Accounts Payable**  $800   Sales Revenue   $800
    Cost of Goods Sold $560
**could also be Cash    Merchandise Inventory    $560

(2) Sales returns & allowances: The buyer returns goods that are damaged or
defective, or are not what the buyer ordered. The buyer receives a credit on A/P
or debit to cash, depending on how goods were bought, and merchandise
inventory is reduced by the value of the goods returned. A purchase allowance is
similar, except the buyer chooses to keep the merchandise. For the seller, the
expense account Sales Returns & Allowances must be debited and the A/R or
cash credited for the amount of returned goods. Similarly, Merchandise Inventory
and Cost of Goods Sold must also be adjusted for the cost of goods returned.
(This second entry does not occur when a sales allowance is granted).

Date  BUYER  Debit Credit SELLER Debit Credit

  Accounts Payable**  $400 Sales Returns & Allowances  $400
    Merchandise Inventory  $400   Accounts Receivable**    $400
    Merchandise Inventory  $280
**could also be Cash    Cost of Goods Sold   $280

(3) Sales Discounts: If the goods are bought on account, the buyer may receive a
cash discount for prompt payment of the purchase. When an invoice is paid
within the discount period, both Cash and Merchandise Inventory are credited.
Cash is the actual amount paid after discount, and the balance of the total
purchase goes to Merchandise Inventory. This makes sense since the buyer has
reduced the cost of the merchandise by paying quickly.

© 2014 Vancouver Community College Learning Centre. Authored by Emily Simpson

Student review only. May not be reproduced for classes.
 The seller has comparable entries, but debits the expense account Sales
Discount for the amount of discount offered on payment.

Date  BUYER  Debit Credit SELLER Debit Credit

  Accounts Payable  $400 Cash $380
    Cash  $380 Sales Discount $20 
    Merchandise Inventory  $20  Accounts Receivable    $400

(4) Freight Costs: The buyer or the seller may be responsible for the cost of
transporting the merchandise. FOB shipping point means the buyer pays the
costs of shipping. In the buyer’s books, a transaction with FOB shipping point is
recorded as debit to Merchandise Inventory and credit to cash for payment. FOB
destination means the seller pays the shipping costs. When the seller is
recording payment for FOB destination, the shipping costs are debited to Freight-
out. Payment for shipping costs is always credited to Cash.

Date  BUYER (FOB shipping  Debit Credit SELLER (FOB destination)  Debit Credit

OR 
point) 
  Merchandise Inventory  $50 Freight‐out $50 
    Cash    $50   Cash   $50

Example: Journalize the following transactions for both companies.

August 1: JZ & Co purchases 200 necklaces from Bling-Bling at $55 each with terms
2/20, n /30 FOB shipping. The cost of each necklace for Bling-Bling was $20.
August 2: JZ & Co pays $40 shipping.
August 3: JZ & Co returns 10 necklaces with broken clasps.
August 4: JZ & Co pays for the necklaces.
August 10: JZ & Co sells 60 necklaces for $70 each to HipHop Inc with terms 5/10, n/30.

Date  JZ & Co  Debit Credit Bling‐Bling Debit Credit

Aug 1  Merchandise Inventory  $11000 Accounts Receivable  $11000
     Accounts Payable  $11000   Sales Revenue 11000
    Cost of Goods Sold $4000
  Merchandise Inventory  $4000
Aug 2  Merchandise Inventory  40
       Cash  40
Aug 3  Accounts Payable  550 Sales returns 550
     Merchandise Inventory  550       Accounts Receivable  550
    Merchandise Inventory  200
      Cost of Goods Sold  200
Aug 4  Accounts Payable  10450 Sales discount 209
      Cash  10241 Cash 10241
     Merchandise Inventory  209   Accounts Receivable  10450
   
  JZ & Co  HipHop Inc.
Aug 10  Accounts Receivable  4200 Merchandise Inventory  4200
         Sales Revenue  4200   Accounts Payable 4200
  Cost of Goods Sold**  3246.63
     Merchandise Inventory  3246.63
**To find Cost of Goods Sold = ($11,000 + 40 – 550 – 209)/190 necklaces =
$54.11/necklace. $54.11/necklace x 60 necklaces = $3246.63

© 2014 Vancouver Community College Learning Centre.

Student review only. May not be reproduced for classes. 2
Exercises

1. On October 5, MDMaxx bought 50 pairs of jeans on account from Zinc Co. The selling
price of the jeans was $65 per pair and the cost to Zinc Co. was $40 per pair. On October
10, MDMaxx returned 10 pairs of jeans. Record the transactions for both companies.

2. Gambits & Games needs to record the following transactions in their journal.
a. On February 3, purchased merchandise from Antics Co. for $15,000 terms 3/10,
net/30, FOB destination.
b. On February 6, purchased equipment on account for $12,000.
c. On February 8, returned defective merchandise to Antics Co. and was granted a
$5,000 allowance for returned merchandise.
d. On February 12, paid the amount due to Antics Co. in full.

(A) Prepare entries for the company under a perpetual inventory system.
(B) Assume that on the Feb 3 transaction, the terms were for FOB shipping point and
freight costs of $800 were paid on Feb 5. Prepare the journal entry to record this
transaction.

3. During November, the following transactions occurred for Mark’s Polo Wear. Journalize
the November transactions under a perpetual inventory system.

Nov. 4 Purchased 60 blazers at $52 each from Alize Co. terms 4/15, n/30, FOB
shipping point.
7 Paid shipping costs of $90 on blazers purchased from Alize Co.
11 Returned 5 blazers to Alize Co. because they were damaged.
13 Paid Alize Co. for half the amount owing.
21 Paid Alize Co. the remaining amount owing.
22 Sold 40 blazers to DeLuco Country Club for $75 each terms 2/10, n/30, FOB
destination.
23 Paid freight costs of $60 for merchandise sold to DeLuco Country Club.
25 Granted credit of $150 to DeLuco Country Club for return of 2 damaged
blazers.
30 Received payment in full from DeLuco Country Club.

Solutions

1. MDMaxx 
5‐Oct  Merchandise Inventory       3,250  
     Accounts Payable  3,250  
10‐Oct  Accounts Payable          650  
     Merchandise Inventory     650  
     Zinc Co. 
5‐Oct  Accounts Receivable       3,250  
     Sales Revenue  3,250  
   Cost of Goods Sold       2,000  
     Merchandise Inventory  2,000  
10‐Oct  Sales Returns          650  
    Accounts Receivable     650  
Merchandise Inventory          400  
    Cost of Goods Sold     400  

© 2014 Vancouver Community College Learning Centre.

Student review only. May not be reproduced for classes. 3
 2.   (A) Gambits & Games 
3‐Feb  Merchandise Inventory       15,000  
     Accounts Payable       15,000  
6‐Feb  Equipment       12,000  
    Accounts Payable       12,000  
8‐Feb  Accounts Payable         5,000  
     Merchandise Inventory         5,000  
12‐Feb  Accounts Payable       10,000 
     Cash         9,700  
     Merchandise Inventory             300  
(B) 
5‐Feb  Merchandise Inventory             800  
     Cash             800  

3.    
4‐Nov  Merchandise Inventory    3,120.00 
    Accounts Payable    3,120.00 
7‐Nov  Merchandise Inventory         90.00 
    Cash         90.00 
11‐Nov  Accounts Payable       260.00 
    Merchandise Inventory       260.00 
13‐Nov  Accounts Payable   1430.00 
    Cash    1372.80 
    Merchandise Inventory    57.20 
21‐Nov  Accounts Payable  1430.00 
    Cash  1430.00 
22‐Nov  Accounts Receivable  3000.00 
    Sales Revenue  3000.00 
Cost of Goods Sold  2103.85 
    Merchandise Inventory       2103.85 
23‐Nov  Freightout  60.00 
Cash     60.00 
25‐Nov  Sales returns  150.00 
    Accounts receivable       150.00 
Merchandise Inventory        105.19 
     Cost of Goods Sold  105.19 
30‐Nov  Cash  2793.00 
 Sales Discount  57.00 
       Accounts receivable    2850.00 

© 2014 Vancouver Community College Learning Centre.

Student review only. May not be reproduced for classes. 4