Lesson 6 Accounting for Merchandising Activities. Task Team of FUNDAMENTAL ACCOUNTING School of Business, Sun Yat-sen University. Outline. Merchandising activities Operating cycle of merchandising companies Merchandising cost accounts Inventory systems Merchandise purchases
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Lesson 6 Accounting for Merchandising Activities
Task Team of
School of Business, Sun Yat-sen University
Operating cycle of merchandising companies
Merchandising cost accounts
Adjusting and closing entries
Cost ofGoods Sold
Beginning inventoryYear 1
Net cost ofpurchases
Merchandiseavailable for sale
Cost of GoodsSold
Ending InventoryYear 1
Becomes beginning inventory of Year 2
Perpetual MethodGives a continual record of the amount of inventory on hand. When an item is sold it is recorded in the Cost of Goods Sold account.
Periodic MethodRequires updating the inventory account only at the end of the period. Acquisition of merchandise inventory is recorded in a temporary Purchases account.
Oct. 1 Inventory 5,000
Trade discounts are used by manufacturers and wholesalers to change selling prices without republishing their catalogs.
MarCo, Inc. offers a 20% trade
discount on orders of 100
units or more of their popular
product Racer. Each Racer
has a list price of $5.00.
Credit Period = 30 days
Discount Period = 10 days
(Full amount minus 2% discount) due between Oct.1 and Oct.11
Full amount due anytime between Oct.12 and Oct.31
Purchase discount is a deduction from the invoice price granted to induce early payment of the amount due. Example – 2/10, n30
Number of Days Discount Is Available
Otherwise, Net (or All) Is Due
Case 1-Discount taken
Oct.11 Accounts Payable4,000
2% x (5,000 - 1,000) = 80
Case 2-Discount not taken
Oct.31 Accounts Payable4,000
Assume the purchase of $4,000 inventory on October 1 was on the terms 2/10,n30.
Failing to take a 2/10, n/30 discount is really expensive!
365 days ÷ 20 days × 2% = 36.5% annual rate
Purchase Returns and Allowances
Defective merchandise returned to supplier.
On Nov. 1, Helo Inc. purchased $10,000 of Merchandise Inventory on account, credit terms are 2/10, n/30.
On Nov 5, Helo Inc. returned $250 of defective merchandise to the supplier.
On Nov 9, Helo Inc. paid the amount owed for the purchase of Nov 1.
On May 8, Joye Co. sold merchandise costing $3,000 for $5,000 on account. Credit terms were 2/10, n/30.
On May 14, merchandise with a sales price of $600 and a cost of $400 was returned to Joye Co. The return is related to the May 12 sale.
On May 20, Joye received the amount owed to it from the sale of May 12.
Sales discounts and returns and allowances
are Contra Revenue accounts.
Perpetual inventory systems keep a running total of inventory levels by recording sales and purchase transactions.
Periodic adjustments must be made to account for shrinkage (loss due to theft or deterioration of inventory).
Inventory per accounting records: $198,000
Inventory per physical count: $194,200
Difference (shrinkage) $3,800
Merchandising companies have additional temporary accounts that must be closed.
However, no growth was found in cash collected from customers.
The operating cycle of merchandise companies begins with the purchase of merchandise and end with the collection of cash from the sale of merchandise.
Perpetual method and period method are two inventory systems. Today perpetual method is more and more adopted.
Accounting for merchandise purchases records purchases, trade discount, cash discounts, purchase returns and allowance, transportation costs.
Accounting for sales transactions records sales, sales discount, sales returns and allowance, etc.
Under perpetual inventory system, adjustments must be made for shrinkage at the end of period.
Closing entries transfers balances in sales, sales returns and allowance, sales discounts and cost of goods sold into income summary account.
The End of Lesson 6