Financial
Accounting I
Winter 2024-Lecture “9”
1
Chapter 5
Accounting for
Merchandising
Operations
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Learning Objectives
1 Describe merchandise activities and identify income
components for a merchandising company.
2 Identify and explain the inventory asset and cost flows of a
merchandising company.
3 Analyze and record transactions for merchandise purchases
using a perpetual system
4 Analyze and record transactions for merchandise purchases
using a periodic system
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Learning Objective 1: Describe
merchandise activities and identify
income components for a merchandising
company.
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without the prior written consent of McGraw-Hill Education. 5-4
Reporting Income for a Merchandiser
Learning Objective 1: Describe merchandise activities and identify income
components for a merchandising company.
Service organizations sell time to earn revenue.
Examples: Accounting firms, law firms, and education
institutions services
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Reporting Income for a Merchandiser
Merchandising Companies
An intermediary that buys the
inventory from the manufacturer and
sells it to the retailer
Transfers raw An intermediary that buys the
materials to a inventory either from the
finished product wholesaler or manufacturer and
sells it to the consumer
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without the prior written consent of McGraw-Hill Education. 5-6
Reporting Income for a Merchandiser
Learning Objective 1: Describe merchandise activities and identify income
components for a merchandising company.
Merchandising companies sell products to earn
revenue.
Examples: sporting goods, clothing, and auto parts
stores
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without the prior written consent of McGraw-Hill Education. 5-7
Learning Objective 2: Identify and explain
the inventory asset and cost flows of a
merchandising company.
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without the prior written consent of McGraw-Hill Education. 5-8
Exhibit 5.3 Operating Cycle for a
Merchandiser
Learning Objective C2: Identify and explain the inventory asset and cost flows of a
merchandising company.
Begins with the purchase of merchandise and ends with the
collection of cash from the sale of merchandise.
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Inventory Systems
• Learning Objective C2: Identify and explain the inventory asset and cost flows of a
merchandising company.
Perpetual systems Periodic systems
Is a method of accounting for accounting records relating
inventory that records the sale to merchandise
or purchase of inventory transactions are updated
immediately through the use of only at the end of the
computerized software. accounting period
Perpetual inventory provides a
highly detailed view of changes
in inventory with immediate
reporting of the amount of
inventory in stock, and
accurately reflects the level of 10
goods on hand.
Learning Objective 3: Analyze and record
transactions for merchandise PURCHASES
using a perpetual system
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Purchasing Transactions in a
Merchandizing Company
“Perpetual Inventory System”
1. Purchase of Inventory
2. Recording Freight or Transportation Costs
3. Return of Inventory (Purchase Return and Allowance)
4. Payment of amount due and Purchase Discount
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QUESTION 1
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1. RECORDING COST OF
GOODS PURCHASED
• When merchandise is purchased for resale
to customers, the account, Merchandise
Inventory, is debited for the cost of the
goods.
• Purchases may be made for cash or on
account (credit).
14
Apr. 2 Purchased merchandise from Lyon Company under the following terms: $4,600 price, invoice dated April 2
credit terms of 2/15, n/60, and FOB shipping point.
Date General Journal Debit Credit
Apr. 2 Merchandise inventory 4,600
Accounts payable - Lyon 4,600
Merchandise inventory Accounts payable - Lyon
Apr. 02 4,600 Apr. 02 4,600
For purchases on account, Merchandise Inventory
is debited and Accounts Payable is credited. For
cash purchases, Merchandise Inventory is debited
and Cash is credited.
15
Exercise5-3page233
2. FREIGHT COSTS
• The sales agreement should indicate whether the
seller or the buyer is to pay the cost of transporting
the goods to the buyer’s place of business.
• FOB Shipping Point
• Buyer is responsible for shipping and must pay
and record the shipping costs
FOB Destination
• Seller pays the shipping costs and the buyer would
and need not to pay or record anything for the
shipping
16
ACCOUNTING FOR
FREIGHT COSTS
• Merchandise Inventory is debited by the buyer, if the
buyer pays the freight bill (FOB shipping point).
17
3 Paid $300 for shipping charges on the April 2 purchase.
Date General Journal Debit Credit
Apr. 3 Merchandise inventory 300
Cash 300
Merchandise inventory Accounts payable - Lyon
Apr. 02 4,600 Apr. 02 4,600
Apr. 03 300
Cash
Apr. 03 300
When the buyer directly incurs the freight costs, the
18
account Merchandise Inventory is debited to reflect all
costs associated with acquiring the inventory.
Exercise5-3page233
3. GOODS RETURNS AND
ALLOWANCES
• A buyer may be dissatisfied with merchandise received because the
goods
1. are damaged or defective,
2. are of inferior quality, or
3. are not in accord with the
purchaser’s specifications.
Purchase
Purchase Return
Return .. .. ..
Merchandise
Merchandise returned
returned byby the
the buyer
buyer to
to the
the supplier.
supplier.
Purchase
Purchase Allowance
Allowance .. .. ..
AA reduction
reduction in
in the
the cost
cost of
of defective
defective or
or unacceptable
unacceptable 19
merchandise
merchandise received
received byby aa buyer
buyer from
from aa supplier.
supplier.
4 Returned to Lyon Company unacceptable merchandise that had an invoice price of $600 and received full credit.
Date General Journal Debit Credit
Apr. 4 Accounts payable - Lyon 600
Merchandise inventory 600
Merchandise inventory Accounts payable - Lyon
Apr. 02 4,600 Apr. 02 4,600
Apr. 03 300 Apr. 04 600
Apr. 04 600
Cash
Apr. 03 300
For goods returns that were originally made on account,
Accounts Payable is debited and Merchandise Inventory is
credited. 20
Exercise5-3page233
4. Payment of Amount Due
and PURCHASE DISCOUNTS
• Credit terms may permit the buyer to claim a
cash discount for the prompt payment of a
balance due.
• The buyer calls this discount a purchase
discount.
• A purchase discount is based on the
invoice cost less any returns and
allowances granted.
21
Purchase Discounts
A deduction from the invoice price granted to induce early
payment of the amount due.
2/15,n/60
Number of
Days Otherwise,
Discount Discount Is Net (or All) Credit
Percent Available Is Due in 60 Period 22
Days
17 Paid the amount due to Lyon Company for the April 2 purchase, net of the discount and the returned merchandise .
Date General Journal Debit Credit
Apr. 17 Accounts payable - Lyon 4,000
Merchandise inventory 80
Cash 3,920
Merchandise inventory Accounts payable - Lyon
Apr. 02 4,600 Apr. 02 4,600
Apr. 03 300 Apr. 04 600
Apr. 04 600 Apr. 17 4,000
Apr. 17 80 Balance 0
Cash
Apr. 03 300
Apr. 17 3,920
Purchase Discount = (Invoice Value – Purchase Return & Allowance ) × discount Percentage
Purchase Discount = (4600-600) × 2% = 80 23
Cash due = 4000 – 80 = 3,920
1. Recording Purchase of
Inventory-Periodic
The Periodic Inventory System uses the temporary account Purchases that
records the cost of all purchase transactions during each period. It has a
normal debit balances.
Perpetual Inventory System Periodic Inventory System
Date Account Dr. Cr. Account Dr. Cr.
April Merchandise Inventory 4600 4600
2nd Accounts Payable 4600 Purchases
Accounts Payable 4600 24
1. Recording Purchase of
Inventory-Periodic
Merchandise Inventory Merchandise Inventory
Apr. 02 4,600 Apr. 02 NO
effect
At period end, the Purchase account Purchases
is closed and its balance is used to
Apr. 02 4,600
update the Merchandise Inventory
account
Perpetual Inventory System Periodic Inventory System
(Solved Last Lecture)
Date Account Dr. Cr. Account Dr. Cr.
April Merchandise Inventory 4600 4600
2nd Accounts Payable 4600 Purchases
Accounts Payable 4600 25
2. Recording Freight Costs-
Periodic
Perpetual Inventory System Periodic Inventory System
Date Account Dr. Cr. Account Dr. Cr.
April Merchandise Inventory 300
3rd Cash 300 Delivery Expenses 300
Cash 300
The Periodic Inventory System uses the temporary account Delivery 26
Expense (Transportation In) that records the cost of all transportation of the
inventory during each period. It has a normal debit balance.
2. Recording Freight Costs-
Periodic Merchandise Inventory
Merchandise Inventory Apr. 02 NO
effect
Apr. 02 4,600 Apr. 03 NO effect
Apr. 03 300 Delivery Expenses
At period end, the Delivery Expense Apr. 02 300
(Transportation In) account is closed
and its balance is used to update the
Merchandise Inventory account
Perpetual Inventory System Periodic Inventory System
(Solved Last Lecture)
Date Account Dr. Cr. Account Dr. Cr.
April Merchandise Inventory 300 Delivery Expenses 300
3rd Cash 300
Cash 300
27
3. Recording Return of Goods
(Purchase Return)-Periodic
Perpetual Inventory System Periodic Inventory System
Date Account Dr. Cr. Account Dr. Cr.
April Accounts Payable 600 Accounts Payable 600
4th Merchandise Inventory 600 Purchase Return &
Allowance 600
28
The Periodic Inventory System uses the temporary account Purchase Return &
Allowance which is contra-purchases account and have normal credit balance, as
they decrease the cost of merchandise inventory.
3. Recording Return of Goods
(Purchase Return)-Periodic
Merchandise Inventory
Merchandise Inventory Apr. 02 NO
Apr. 02 4,600 effect NO
300
Apr. 03 NO effect Apr. 04 effect
Apr. 03 Apr. 04 600
Purchase Return and Allowance
At period end, Purchase Return and
Allowance account is closed and its Apr. 04 600
balance is used to update the
Merchandise Inventory account
Perpetual Inventory System Periodic Inventory System
Date Account Dr. Cr. Account Dr. Cr.
April Accounts Payable 600
4th Merchandise Inventory 600 Accounts Payable 600
29
Purchase Return 600
4. Recording of Payment due within the
Discount Period-Periodic
Purchase Discount = (Invoice Value – Purchase Return & Allowance ) × discount Percentage
It has normal credit balance and is used to
Purchase Discount = (4600-600) × 2% = 80
accumulates discounts taken on purchase
Cash due = 4000 – 80 = 3,920 transactions during the period.
Perpetual Inventory System Periodic Inventory System
Date Account Dr. Cr. Account Dr. Cr.
April Accounts Payable 4000 Accounts Payable 4000
17th Merchandise Inventory 80 Purchase Discount 30
Cash 3,92 80
0 Cash 3,920
4. Recording of Payment due within the
Discount Period-Periodic
Merchandise Inventory
Merchandise Inventory
Apr. 02 NO
Apr. 02 4,600 effect
Apr. 03 300 Apr. 04 NO
Apr. 04 600 Apr. 03 NO
effect effect
Apr. 17 80 Apr. 17 NO
Bal. 4,220 effect
At period end, Purchase Discount
account is closed and its balance is Purchase Discount
used to update the Merchandise Apr.17 80
Inventory account
Perpetual Inventory System Periodic Inventory System
Date Account Dr. Cr. Account Dr. Cr.
April Accounts Payable 4000 Accounts Payable 4000
17th Merchandise Inventory 80 Purchase Discount 31
Cash 3,92 80
0 Cash 3,920
Question 1
Under the periodic system, the Purchases, Purchases Return & Allowance,
Purchases Discounts, and Delivery (Transportation In)expenses are recorded
in separate temporary accounts. At the period-end, each of these temporary
accounts is closed, their balances are then transferred to and update the
Merchandise Inventory Account.
Calculation of Net Purchases
Purchases, Gross 4,600
Less: Purchases Return &
Allowance (600)
Less: Purchases Discount
Add: Freight In Expenses ( 80)
Net Purchases 300
32
4,220
Summary of Purchase Transactions (Buyer)
Perpetual vs. Periodic System
Transaction Perpetual Inventory System Periodic Inventory
System
PURCHASE OF INVENTORY ON Merchandise Inventory Purchases
CREDIT Accounts Payable Accounts Payable
PAYMENT OF FREIGHT COSTS BY Merchandise Inventory Delivery Expenses
THE BUYER (FOB SHIPPING Cash Cash
POINTS)
Return of Goods to the Seller Accounts Payable Accounts Payable
(Purchase Return) Merchandise Inventory Purchase Return
Payment of Amount Due within Accounts Payable Accounts Payable
the Discount Period Merchandise Inventory Purchase Discount
Cash Cash
33
END OF LECTURE 9 34
