ACCOUNTING FOR

MERCHANDISING OPERATIONS

Dr. Md. Hamid U Bhuiyan

Merchandising Operations
Merchandising companies buy and sell merchandise rather than

performing services as their prime source of revenue.

For example: Wal-Mart, Kmart, and Target
Merchandising companies that purchase and sell directly to

consumers are called RETAILERS

Merchandising companies that sell to retailers are known as
WHOLESALERS
the primary source of revenues for merchandising companies is
the sale of merchandise, often referred to simply as SALES
REVENUE OR SALES
COST OF GOODS SOLD (COGS) is the total cost of
merchandise sold during the period

Income Measurement Process for a

Merchandising Company

Operating Cycle of a Merchandising Company

Perpetual and Periodic Inventory System

Perpetual inventory system:
companies keep detailed
records of the cost of each
inventory purchase and sale
These records continuously
show the inventory that
should be on hand for every
item
Under a perpetual inventory
system,
a
company
determines the cost of goods
sold each time a sale occurs

Perpetual and Periodic Inventory System

Periodic inventory system, companies
do not keep detailed inventory
records of the goods on hand
throughout the period.
Steps in determining Cost of Goods
Sold:
1. Determine the cost of goods on hand
at the beginning of the accounting
period (Beginning Inventory)
2. Add to it the cost of goods purchased
3. Subtract the cost of goods on hand at
the end of the accounting period
(Ending Inventory)

Freight Cost Who Will Pay

The sales agreement should indicate who - the seller or the buyer
is to pay for transporting the goods to the buyers warehouse
Freight terms are expressed as either FOB shipping point or FOB
destination. The letters FOB mean free on board
FOB shipping point means that the seller places the goods free on
board the carrier, and the buyer pays the freight costs
FOB destination means that the seller places the goods free on
board to the buyers place of business, and the seller pays the
freight

Purchase Discount & Sales Discount

Discount is offered for prompt payment
Sellers: Discount is offered for prompt collection
Suppliers:

Purchase Discount: When the buyer pays an invoice within the

discount period, the amount of the discount decreases Inventory
Why? Because companies record inventory at cost and, by paying
within the discount period, the merchandiser has reduced that
cost
Sales Discount: sales discount is based on the invoice price less
returns and allowances, if any
A contra-revenue account is opened for discount given to
customers for early payment (within discount period) named Sales
Discount and is debited with the discount amount

Purchase Returns & Sales Returns

Purchase Returns: A purchaser may be dissatisfied with the
merchandise received because the goods are damaged or
defective, of inferior quality, or do not meet the purchasers
specifications
In such cases, the purchaser may return the goods to the seller for
credit (for credit purchase) or cash (for cash purchase)
Purchase return will be treated as a reduction in liability or cash
& the returned goods will decrease the value of inventory
Sales Returns: A contra-revenue account is to be opened to record
goods returned from customers named Sales Returns &
Allowances & there will a decrease in accounts receivable or
cash. In addition, sales returns will also increase the inventory
and decrease the cost of goods sold at the fair value of the
returned goods

Perpetual Inventory System Problem

Pace Distributing Company completed the following
merchandising transactions in the month of April. At the
beginning of April, the ledger of Pace showed Cash of
$9,000 and Owners Capital of $9,000.
April. 2: Purchased merchandise on account from Monaghan
Supply Co. $6,900, terms 1/10, n/30
April 2: Inventory $6900
Accounts Payable $6900
[To record goods purchased on account]

Perpetual Inventory System Problem

4: Sold merchandise on account $6,500, FOB destination,
terms 1/10, n/30. The cost of the merchandise sold was
$3,900
April 4:Accounts Receivable $6500
Sales Revenue $6500
[To record credit sales ]
April 4:Cost of Goods Sold $3900
Inventory $3900
[To record cost of merchandise sold]

Perpetual Inventory System Problem

5: Paid $240 freight on April 4 sale
April 5: Freight Out $240
Cash 240
[To record payment of freight on goods sold]
6: Received credit from Monaghan Supply Co. for merchandise
returned $500
April 6: Accounts Payable $500
Inventory $500
[To record return on goods purchased from Morgan Supply Co.]

Perpetual Inventory System Problem

11 Paid Monaghan Supply Co. in full, less discount
April 11: Accounts Payable $6400
Cash $6336
Inventory
$64
[To record payment within discount period]
13 Received collections in full, less discounts, from customers
billed on April 4.
April 13: Cash $6435
Sales Discount
$65
Accounts Receivable $6500
[To record collection within 1/10, n/30 discount period]

Perpetual Inventory System Problem

14 Purchased merchandise for cash $3,800
April 14: Inventory $3800
Cash $3800
[To record goods purchased for cash]
16 Received refund from supplier for returned
goods on cash purchase of April 14, $500
April 16: Cash $500
Inventory $500
[To record return on goods purchased]

Perpetual Inventory System Problem

18 Purchased merchandise from Dominic Distributors
$4,500, FOB shipping point, terms 2/10, n/30
April 18: Inventory $4500
Accounts Payable $4500
[To record merchandise purchase on account from
Dominic Distributors]
20 Paid freight on April 18 purchase $100.
April 20: Inventory $100
Cash $100
[To record payment of freight on goods purchased]

Perpetual Inventory System Problem

23 Sold merchandise for cash $7,400. The

merchandise sold had a cost of $4,120.

April 23: Accounts Receivable $7400
Sales Revenue $7400
[To record cash sales ]
April 23: Cost of Goods Sold $4120
Inventory $4120
[To record cost of merchandise sold]

Perpetual Inventory System Problem

26 Purchased merchandise for cash $2,300
April 26: Inventory $2300
Cash $2300
[To record goods purchased for cash]
27 Paid Dominic Distributors in full, less discount
April 27: Accounts Payable $4500
Cash $4410
Inventory
$90
[To record payment within discount period]

Perpetual Inventory System Problem

29 Made refunds to cash customers for defective

merchandise $90. The returned merchandise had a fair

value of $30
April 29:
Sales Returns & Allowances 90
Cash 90
[To record refund granted to cash customers]
April 29:
Inventory $30
Cost of goods sold $30

Perpetual Inventory System Problem

30 Sold merchandise on account $3,700, terms n/30. The cost of

the merchandise sold was $2,800.

April 30: Accounts Receivable $3700
Sales Revenue $3700
[To record credit sales ]
April 30: Cost of Goods Sold $2800
Inventory $2800
[To record cost of merchandise sold]
Instructions
(a) Journalize the transactions using a perpetual inventory system.

Worksheet
Worksheet: facilitates the end-of-period (monthly,

quarterly, or annually) accounting and reporting

process.
Use of a worksheet helps a company prepare the

financial statements on a more timely basis

A company prepares a worksheet either on columnar

paper or within a computer spreadsheet. In either

form, a company uses the worksheet to adjust
account balances and to prepare financial statements

Worksheet
The worksheet does not replace the financial statements.

Instead, it is an informal device for accumulating and

sorting information needed for the financial statements
Completing

the worksheet provides considerable

assurance that a company properly handled all of the
details related to the end-of-period accounting and
statement preparation

The 10-column worksheet provides columns for the first

trial balance, adjustments, adjusted trial balance, income

statement, and balance sheet.

Steps in Preparing a Worksheet

Adjusting Entries
Adjustments ensure that a company follows the revenue recognition and
expense recognition principles
In order for revenues to be recorded in the period in which services are
performed and for expenses to be recognized in the period in which
they are incurred, companies make adjusting entries

Adjusting entries ensures that balance sheet reports the appropriate

assets, liabilities, and owners equity at the statement date.
Adjusting entries also ensure that income statement reports the proper
revenues and expenses for the period

Adjusting Entries
The trial balancethe first pulling together of the transaction datamay not
contain up-to-date and complete data.
This occurs for the following reasons:
Some events are not recorded daily because it is not efficient to do so
Examples are the use of supplies and the earning of wages by employees

Some costs are not recorded during the accounting period because these
costs expire with the passage of time rather than as a result of recurring
daily transactions
Examples of such costs are building and equipment depreciation and rent and
insurance

Some items may be unrecorded

An example is a utility service bill that will not be received until the next
accounting period

Adjusting Entries
Adjusting entries are classified as either deferrals
or accruals

Presented below is the December 31 trial balance of New

York Boutique (P3-10)

Prepare adjusting journal entries for the following adjustments

(1) Bad debt expense is estimated to be $1,400.

(2) Equipment is depreciated based on a 7-year life
(no salvage value).
(3) Insurance expired during the year $2,550.
(4) Interest accrued on notes payable $3,360.
(5) Sales salaries and wages earned but not paid
$2,400.
(6) Advertising paid in advance $700.
(7) Office supplies on hand $1,500, charged to
Supplies Expense when purchased

General Journal - Adjusting Entries

Date

Name of Accounts

Dec. 31 Bad Debt Expense

Ref.
1

Debit
$1400

$1400

Allowance for Doubtful Accounts

Dec. 31 Depreciation Expenses

12000
12000

Accumulated Depreciation - Equipment

Dec. 31 Insurance Expenses

2550
2550

Prepaid Insurance
Dec. 31 Interest Expenses

3360
3360

Interest Payable
Dec. 31 Salaries and Wages Expenses (Sales)

2400
2400

Salaries and Wages Payable

Dec. 31 Prepaid Advertising

700
700

Advertising Expenses
Dec. 31 Supplies

Credit

1500

Worksheet

Preparation of Financial Statement

Income Statement: The purpose of the income

statement , sometimes called the statement of

operations or statement of earnings , is to
summarize the profit-generating activities that
occurred during a particular reporting period.
Many investors and creditors perceive it as the

statement most useful for predicting future

profitability (future cash-generating ability).

Income Statement
Income from Continuing Operations
Income from continuing operations: includes the revenues,

expenses, gains and losses that will probably continue in future

periods .
Revenues are inflows of resources resulting from providing

goods or services to customers.

Expenses are outflows of resources incurred while generating

revenue. They represent the costs of providing goods and

services. The matching principle is a key player in the way we
measure expenses.

Income Statement
Income from Continuing Operations
Gains and losses are increases or decreases in equity from
peripheral or incidental transactions of an entity.
In general, these gains and losses result from changes in
equity that do not result directly from operations but
nonetheless are related to those activities.
For example, gains and losses from the routine sale of
equipment, buildings, or other operating assets and from
the sale of investment assets normally would be included in
income from continuing operations.

Income Statement
Operating Vs. Non-Operating Income & Expenses
Many corporate income statements distinguish between operating

income and non operating income.

Operating income includes revenues and expenses directly related

to the primary revenue-generating activities of the company

For example, operating income for a manufacturing company

includes sales revenues from selling the products it manufactures

as well as all expenses related to this activity

Income Statement
Operating Vs. Non-Operating Income & Expenses
Non-operating income relates to peripheral or

incidental activities of the company.

For example, a manufacturer would include interest

and dividend revenue, gains and losses from selling

investments, and interest expense in non-operating
income

Income Statement Income Tax Expenses

Income taxes represent a major expense to a corporation, and

accordingly, income tax expense is given special treatment in the

income statement.
Like individuals, corporations are income-tax-paying entities.

Because of the importance and size of income tax expense

(sometimes called provision for income taxes ), it always is

reported as a separate expense in corporate income statements.

Income Statement Format Single -Step

Single-step format: lists all the revenues and gains included in

income from continuing operations. Then, expenses and losses

are grouped, subtotaled, and subtractedin a single stepfrom
revenues and gains to derive income from continuing
operations.

In a departure from that, though, companies usually report income

tax expense as a separate last item in the statement.

Operating and non-operating items are not separately classified.

Example: Single Step Income Statement

Income Statement Format Multiple -Step

Multiple-step format reports a series of intermediate subtotals such as:

gross profit, operating income, and income before taxes.

Advantage of the multiple-step format: it provides information that might be

useful in analyzing trends. Similarly, the classification of expenses by

function also provides useful information.
For example, reporting gross profit for merchandising companies highlights

the important relationship between sales revenue and cost of goods sold.
A recent survey of income statements of 500 large public companies

indicates that the multiple-step format is used more than five times as often
as the single-step format

Example: Multiple Step Income Statement

Balance Sheet
The purpose of the balance sheet , sometimes referred to as the

statement of financial position , is to report a companys

financial position on a particular date.

The balance sheet, along with accompanying disclosures,

provides a wealth of information to external decision makers.

The information provided is useful not only in the prediction of

future cash flows but also in the related assessments of

liquidity and long-term solvency.

Classification of Elements in the Balance Sheet

CURRENT ASSETS
Cash and Cash Equivalents xxx
Short-Term Investments xxx
Accounts Receivable, Net
Accounts Receivablesxxx
Less: Allowances for Doubtful-Accounts xxx
xxx
Inventories, net
Inventories xxx
Less: Obsolescence or Write-down of Inventory
xxx
Other Current Assets:
Prepaid & Unexpired Expenses xxx

xxx

NON CURRENT ASSETS

Property, Plant, & Equipment xxx
Less: Accumulated Depreciation xxx
Investments xxx
Long-Term Financing Receivables xxx
Goodwill xxx
Less: Amortization xxx xxx
Purchased Intangible Assets xxx
(Patents, Copyrights, Franchise)
Less: Amortization xxx xxx
Other Non-Current Assets xxx
(Deferred Charges, Long-Term
Financing Receivables)

xxx

LIABILITIES
Current Liabilities:
Short Term Debt xxx
Accounts Payable xxx
Accrued and Other Payables xxx
Unearned Revenue xxx
Total Current Liabilities xxx
Non-Current Liabilities:
Notes Payable xxx
Mortgage Payable xxx
Long Term Debt xxx
Bonds / Debentures Payable xxx
Other Long Term Liabilities xxx
Total Non Current Liabilities xxx
Total Liabilities xxx

SHAREHOLDERS EQUITY
Common Stock
Less: Treasury Stock

xxx
xxx

xxx

Paid In Capital in Excess of Par

xxx

Other Comprehensive Surplus / Losses

xxx

Retained Earnings
Total Shareholders Equity

xxx
xxx

York Boutique
Income Statement
For the year ended December 31

York Boutique
Balance Sheet
As at December 31

Completing the Accounting Cycle