CHAPTER 5

ACCOUNTING FOR
MERCHANDISING
OPERATIONS
Chapter
5-1
 Study Objectives
1. Identify the differences between service and
merchandising companies.
2. Explain the recording of purchases under a perpetual
inventory system.
3. Explain the recording of sales revenues under a perpetual
inventory system.
4. Explain the steps in the accounting cycle for a
merchandising company.
5. Distinguish between a multiple-step and a single-step
income statement.
6. Explain the computation and importance of gross profit.
7. Determine cost of goods sold under a periodic system.
Chapter
5-2
 Accounting for Merchandising Operations

Recording Recording Completing the Forms of

Merchandising
Purchases of Sales of Accounting Financial
Operations
Merchandise Merchandise Cycle Statements

Operating Freight costs Sales returns Adjusting Multiple-step

cycles Purchase and entries income
Inventory returns and allowances Closing statement
systems— allowances Sales entries Single-step
perpetual and Purchase discounts Summary of income
periodic discounts merchandising statement
Summary of entries Classified
purchasing balance sheet
transactions Determining
cost of goods
sold under a
Chapter periodic system
5-3
 Merchandising Operations

Merchandising Companies
Buy and Sell Goods

Wholesaler Retailer Consumer

The primary source of revenues is referred to as

sales revenue or sales.
Chapter
5-4 LO 1 Identify the differences between service and merchandising companies.
 Merchandising Operations

Income Measurement
Not used in a
Sales Less Illustration 5-1
Service business.
Revenue

Cost of Equals Gross Less

Goods Sold Profit

Operating Equals Net

Cost of goods sold is the total Income
cost of merchandise sold Expenses
(Loss)
during the period.

Chapter
5-5 LO 1 Identify the differences between service and merchandising companies.
 Operating Cycles
Illustration 5-2

The operating
cycle of a
merchandising
company
ordinarily is
longer than that
of a service
company.

Chapter
5-6 LO 1 Identify the differences between service and merchandising companies.
 Inventory Systems

Perpetual System
Features:
1. Purchases increase Merchandise Inventory.
2. Freight costs, Purchase Returns and Allowances and
Purchase Discounts are included in Merchandise
Inventory.
3. Cost of Goods Sold is increased and Merchandise
Inventory is decreased for each sale.
4. Physical count done to verify Merchandise Inventory
balance.
The perpetual inventory system provides a continuous record
of Merchandise Inventory and Cost of Goods Sold.
Chapter
5-7 LO 1 Identify the differences between service and merchandising companies.
 Inventory Systems

Periodic System
Features:
1. Purchases of merchandise increase Purchases.
2. Ending Inventory determined by physical count.
3. Calculation of Cost of Goods Sold:

Beginning inventory

$ 100,000
Add: Purchases, net

800,000
Goods available for sale
Chapter
5-8 LO 1 Identify the differences between service and merchandising companies.
 Recording Purchases of Merchandise

Made using cash or credit (on account). Illustration 5-4

Normally recorded when

goods are received.
Purchase invoice should
support each credit
purchase.

Chapter
5-9 LO 2 Explain the recording of purchases under a perpetual inventory system.
 Recording Purchases of Merchandise

E5-2 Information related to Steffens Co. is presented

below. Prepare the journal entry to record the
transaction under a perpetual inventory system.
1. On April 5, purchased merchandise from Bryant
Company for $25,000 terms 2/10, net/30, FOB
shipping point.

April 5 Merchandise inventory 25,000

Accounts payable
25,000

Chapter
5-10 LO 2 Explain the recording of purchases under a perpetual inventory system.
 Recording Purchases of Merchandise

E5-2 Continued Prepare the journal entry to record the

transaction under a perpetual inventory system.
2. On April 6, paid freight costs of $900 on
merchandise purchased from Bryant.

April 6 Merchandise inventory 900

Cash
900

Chapter
5-11 LO 2 Explain the recording of purchases under a perpetual inventory system.
 Recording Purchases of Merchandise

Not all purchases increase Merchandise Inventory.

E5-2 Continued Prepare the journal entry to record the
transaction under a perpetual inventory system.
3. On April 7, purchased equipment on account for
$26,000.

April 7 Equipment 26,000

Accounts payable
26,000

Chapter
5-12 LO 2 Explain the recording of purchases under a perpetual inventory system.
 Recording Purchases of Merchandise

Freight Costs
Terms
FOB shipping point - seller places goods Free On
Board the carrier, and buyer pays freight costs.
FOB destination - seller places the goods Free On
Board to the buyer’s place of business, and seller
pays freight costs.

Freight costs incurred by the seller on outgoing merchandise are an

operating expense to the seller (Freight-out or Delivery Expense).

Chapter
5-13 LO 2 Explain the recording of purchases under a perpetual inventory system.
 Recording Purchases of Merchandise

Purchase Returns and Allowances

Purchaser may be dissatisfied because goods are
damaged or defective, of inferior quality, or do not
meet specifications.

Purchase Return Purchase Allowance

Return goods for credit May choose to keep the
if the sale was made on merchandise if the seller
credit, or for a cash will grant an allowance
refund if the purchase (deduction) from the
was for cash. purchase price.

Chapter
5-14 LO 2 Explain the recording of purchases under a perpetual inventory system.
 Recording Purchases of Merchandise

Review Question
In a perpetual inventory system, a return of
defective merchandise by a purchaser is
recorded by crediting:
a. Purchases
b. Purchase Returns
c. Purchase Allowance
d. Merchandise Inventory

Chapter
5-15 LO 2 Explain the recording of purchases under a perpetual inventory system.
 Recording Purchases of Merchandise

E5-2 Continued Prepare the journal entry to record

the transaction under a perpetual inventory system.
4. On April 8, returned damaged merchandise to
Bryant Company and was granted a $4,000 credit
for returned merchandise.

April 8 Accounts payable 4,000

Merchandise inventory
4,000

Chapter
5-16 LO 2 Explain the recording of purchases under a perpetual inventory system.
 Recording Purchases of Merchandise

Purchase Discounts
Credit terms may permit buyer to claim a cash
discount for prompt payment.
Advantages:
Purchaser saves money.
Seller shortens the operating cycle.

Example: Credit terms of 2/10, n/30, is read “two-ten, net

thirty.” 2% cash discount if payment is made within 10 days.

Chapter
5-17 LO 2 Explain the recording of purchases under a perpetual inventory system.
 Recording Purchases of Merchandise

Purchase Discounts Terms

2/10, n/30 1/10 EOM n/10 EOM

2% discount if 1% discount if Net amount due

paid within 10 paid within within the first
days, otherwise first 10 days of 10 days of the
net amount due next month. next month.
within 30 days.

Chapter
5-18 LO 2 Explain the recording of purchases under a perpetual inventory system.
 Recording Purchases of Merchandise

E5-2 Continued Prepare the journal entry to record

the transaction under a perpetual inventory system.
5. On April 15, paid the amount due to Bryant Company
in full. Remember the return of $4,000 of
merchandise.
(Discount = $21,000 x 2% = $420)

April 15 Accounts payable 21,000

Cash
Merchandise Inventory 20,580
420
Chapter
5-19 LO 2 Explain the recording of purchases under a perpetual inventory system.
 Recording Purchases of Merchandise

E5-2 Continued Prepare the journal entry to record

the transaction under a perpetual inventory system.
5. On April 15, paid the amount due to Bryant Company
in full.
What entry would be made if the company
failed to pay within 10 days?

April 16 Accounts payable 21,000

or later Cash
21,000

Chapter
5-20 LO 2 Explain the recording of purchases under a perpetual inventory system.
 Recording Purchases of Merchandise

Purchase Discounts
Should discounts be taken when offered?
D iscount of 2 % on $2 1,0 0 0 $ 4 2 0 .0 0
$2 1,0 0 0 invested at 10 % for 2 0 days 115 .0 7
Savings by taking the discount $ 3 0 4 .9 3

Passing up the discount offered equates to paying an

interest rate of 2% on the use of $21,000 for 20 days.
Example: 2% for 20 days = Annual rate of 36.5%
(365/20 = 18.25 twenty-day periods x 2% = 36.5%)
Chapter
5-21 LO 2 Explain the recording of purchases under a perpetual inventory system.
 Recording Purchases of Merchandise

Summary of Purchasing Transactions

E5-2 Merchandise Inventory

Debit Credit

5th - Purchase $25,000 $4,000 8th - Return

6th – Freight-in 900 420 15th - Discount

Balance $21,480

Chapter
5-22 LO 2 Explain the recording of purchases under a perpetual inventory system.
 Recording Sales of Merchandise

Made for cash or credit (on account). Illustration 5-4

Normally recorded when

earned, usually when
goods transfer from
seller to buyer.
Sales invoice should
support each credit
sale.

Chapter LO 3 Explain the recording of sales revenues

5-23
under a perpetual inventory system.
 Recording Sales of Merchandise

Two Journal Entries to Record a Sale

#1 Cash or Accounts receivable XXX Selling

Sales XXX Price

#2 Cost of goods sold XXX

Cost
Merchandise inventory XXX

Chapter LO 3 Explain the recording of sales revenues

5-24
under a perpetual inventory system.
 Recording Sales of Merchandise
E5-5 Presented are transactions related to Wheeler Company.
1. On December 3,Wheeler Company sold $500,000 of
merchandise to Hashmi Co., terms 2/10, n/30, FOB shipping
point. The cost of the merchandise sold was $350,000.
2. On December 8, Hashmi Co. was granted an allowance of
$27,000 for merchandise purchased on December 3.
3. On December 13,Wheeler Company received the balance due
from Hashmi Co.
Instructions: Prepare the journal entries to record these
transactions on the books of Wheeler Company using a
perpetual inventory system.
Chapter LO 3 Explain the recording of sales revenues
5-25
under a perpetual inventory system.
 Recording Sales of Merchandise

E5-5 Prepare the journal entries for Wheeler Company .

1. On December 3, Wheeler Company sold $500,000 of
merchandise to Hashmi Co., terms 2/10, n/30, FOB
shipping point. Cost of merchandise sold was $350,000.

Dec. 3 Accounts receivable 500,000

Sales
500,000
Cost of goods sold 350,000
Merchandise inventory
350,000
Chapter LO 3 Explain the recording of sales revenues
5-26
under a perpetual inventory system.
 Recording Sales of Merchandise

Sales Returns and Allowances

“Flipside” of purchase returns and allowances.
Contra-revenue account (debit).
Sales not reduced (debited) because:
 would obscure importance of sales returns and
allowances as a percentage of sales.
 could distort comparisons between total sales
in different accounting periods.

Chapter LO 3 Explain the recording of sales revenues

5-27
under a perpetual inventory system.
 Recording Sales of Merchandise
E5-5 Continued Prepare the journal entries for
Wheeler Company.
2. On December 8, Hashmi Co. was granted an
allowance of $27,000 for merchandise purchased
on December 3.

Dec. 8 Sales returns and allowances 27,000

Accounts receivable
27,000

Chapter LO 3 Explain the recording of sales revenues

5-28
under a perpetual inventory system.
 Recording Sales of Merchandise
E5-5 Continued Prepare the journal entries for
Wheeler Company.
2. Variation On Dec. 8, Hashmi Co. returned
merchandise for credit of $27,000. The original cost
of the merchandise to Wheeler was $19,800.

Dec. 8 Sales returns and allowances 27,000

Accounts receivable
27,000
Merchandise inventory 19,800
Cost of goods sold
19,800
Chapter LO 3 Explain the recording of sales revenues
5-29
under a perpetual inventory system.
 Recording Sales of Merchandise

Review Question
The cost of goods sold is determined and
recorded each time a sale occurs in:
a. periodic inventory system only.
b. a perpetual inventory system only.
c. both a periodic and perpetual inventory
system.
d. neither a periodic nor perpetual inventory
system.
Chapter LO 3 Explain the recording of sales revenues
5-30
under a perpetual inventory system.
 Recording Sales of Merchandise

Sales Discount
Offered to customers to promote prompt payment.
“Flipside” of purchase discount.
Contra-revenue account (debit).

Chapter LO 3 Explain the recording of sales revenues

5-31
under a perpetual inventory system.
 Recording Sales of Merchandise

E5-5 Continued Prepare the journal entries for Wheeler

Company.
3. On December 13, Wheeler Company received the
balance due from Hashmi Co.
Dec. 13 Cash 463,540 *
Sales discounts 9,460 **
Accounts receivable ***
473,000
* ($473,000 – $9,460)
** [($500,000 – $27,000) X 2%]
*** ($500,000 – $27,000)
Chapter LO 3 Explain the recording of sales revenues
5-32
under a perpetual inventory system.
 Recording Sales of Merchandise

E5-5 Continued Prepare the sales revenue section of

the income statement for Wheeler Company.

Wheeler Company
Income Statement (Partial)
For the Month Ended Dec. 31,
Sales revenue
Sales $ 500,000
Less: Sales returns and allowances (27,000)
Sales discounts (9,460)
Net sales 463,540

Chapter LO 3 Explain the recording of sales revenues

5-33
under a perpetual inventory system.
 Recording Sales of Merchandise

Discussion Question

Q5-9 Joan Roland believes revenues from

credit sales may be earned before they
are collected in cash. Do you agree?
Explain.

See notes page for discussion

Chapter LO 3 Explain the recording of sales revenues
5-34
under a perpetual inventory system.
 Completing the Accounting Cycle

Adjusting Entries
Generally the same as a service company.
One additional adjustment to make the records
agree with the actual inventory on hand.
Involves adjusting Merchandise Inventory and
Cost of Goods Sold.

Chapter
5-35 LO 4 Explain the steps in the accounting cycle for a merchandising company.
 Completing the Accounting Cycle

Closing Entries
Close all accounts that affect net income.

E5-8 Presented is information related to Rogers Co. for the month

of January 2008.
Ending inventory per books $ 21,600 Rent expense $ 20,000
Ending inventory per count 21,000 Salary expense 61,000
Cost of goods sold 218,000 Sales discount 10,000
Freight-out 7,000 Sales returns 13,000
Insurance expense 12,000 Sales 350,000
Required: (a) Prepare the necessary adjusting entry for inventory.
(b) Prepare the necessary closing entries.
Chapter
5-36 LO 4 Explain the steps in the accounting cycle for a merchandising company.
 Completing the Accounting Cycle

E5-8 (a) Prepare the necessary adjusting entry for

inventory.

Cost of goods sold 600

Merchandise inventory 600

Ending inventory per books $ 21,600

Ending inventory per count 21,000
Overstatement of inventory $ 600

Chapter
5-37 LO 4 Explain the steps in the accounting cycle for a merchandising company.
 Completing the Accounting Cycle

E5-8 (b) Prepare the necessary closing entries.

Sales 350,000
Income summary 350,000
Income summary 341,600
Cost of goods sold 218,600
Freight-out 7,000
Insurance expense 12,000
Rent expense 20,000
Salary expense 61,000
Sales discounts 10,000
Sales returns 13,000
Income summary 8,400
Rogers, Capital 8,400
Chapter
5-38 LO 4 Explain the steps in the accounting cycle for a merchandising company.
 Forms of Financial Statements

Multiple-Step Income Statement

Shows several steps in determining net income.
Two steps relate to principal operating
activities.
Distinguishes between operating and non-
operating activities.

Chapter
5-39 LO 5 Distinguish between a multiple-step and a single-step income statement.
 Illustration 5-11

Forms of
Financial
Statements
Key Items:
Net sales
Gross profit
Gross profit
rate
Operating
expenses

Chapter
5-40 LO 5 Distinguish between a multiple-step and a single-step income statement.
 Illustration 5-11

Forms of
Financial
Statements
Key Items:
Net sales
Gross profit
Gross profit
rate
Operating
expenses
Nonoperating
activities
Net income
Chapter
5-41 LO 5 Distinguish between a multiple-step and a single-step income statement.
 Forms of Financial Statements

Review Question
The multiple-step income statement for a
merchandiser shows each of the following
features except:
a. gross profit.
b. cost of goods sold.
c. a sales revenue section.
d. investing activities section.

Chapter
5-42 LO 5 Distinguish between a multiple-step and a single-step income statement.
 Forms of Financial Statements

Single-Step Income Statement

Subtract total expenses from total revenues
Two reasons for using the single-step format:
1) Company does not realize any type of profit
until total revenues exceed total expenses.
2) Format is simpler and easier to read.

Chapter
5-43 LO 5 Distinguish between a multiple-step and a single-step income statement.
 Forms of Financial Statements
Illustration 5-12

Single-
Step

Chapter
5-44 LO 5 Distinguish between a multiple-step and a single-step income statement.
 Forms of Financial Statements
Classified Balance Sheet Illustration 5-13

Chapter
5-45 LO 5 Distinguish between a multiple-step and a single-step income statement.
 Illustration 5-11
Calculation
of Gross
Profit
Key Items:
Net sales
Gross profit
Gross profit
rate

Illustration 5-8

Chapter LO 6 Explain the computation and importance of gross profit.

5-46
 Determining Cost of Goods Sold Under a
Periodic System

Periodic System
Separate accounts used to record purchases,
freight costs, returns, and discounts.
Company does not maintain a running account
of changes in inventory.
Ending inventory determined by physical count.

Chapter
5-47 LO 7 Determine cost of goods sold under a periodic system.
 Determining Cost of Goods Sold Under a
Periodic System

Calculation of Cost of Goods Sold Illustration 5-14

$316,000
Chapter
5-48 LO 7 Determine cost of goods sold under a periodic system.
 Recording Purchases of Merchandise under a Periodic System

*E5-17 Information related to Chevalier Co. is

presented below. Prepare the journal entry to record the
transaction under a periodic inventory system.
1. On April 5, purchased merchandise from Paris
Company for $22,000 terms 2/10, net/30, FOB
shipping point.

April 5 Purchases 22,000

Accounts payable
22,000

Chapter
LO 8 Explain the recording of purchases and sales of inventory under
5-49 a periodic inventory system.
 Recording Purchases of Merchandise under a Periodic System

*E5-17 Continued Prepare the journal entry to record

the transaction under a periodic inventory system.
2. On April 6, paid freight costs of $600 on
merchandise purchased from Paris.

April 6 Freight-in (Transportation-in) 600

Cash
600

Chapter
LO 8 Explain the recording of purchases and sales of inventory under
5-50 a periodic inventory system.
 Recording Purchases of Merchandise under a Periodic System

*E5-17 Continued Prepare the journal entry to record

the transaction under a periodic inventory system.
4. On April 8, returned damaged merchandise to Paris
Company and was granted a $4,000 allowance.

April 8 Accounts payable 4,000

Purchase returns and allowances 4,000

Chapter
LO 8 Explain the recording of purchases and sales of inventory under
5-51 a periodic inventory system.
 Recording Purchases of Merchandise under a Periodic System

*E5-17 Continued Prepare the journal entry to record

the transaction under a periodic inventory system.
5. On April 15, paid the amount due to Paris Company
in full. Remember the return of $4,000 of
merchandise.
(Discount = $18,000 x 2% = $360)

April 15 Accounts payable 18,000

Cash
Purchase Discounts 17,640
360
Chapter
LO 8 Explain the recording of purchases and sales of inventory under
5-52 a periodic inventory system.
 Recording Sales of Merchandise under a Periodic System

E5-5 Prepare the journal entry for Wheeler Company to

record a sale of merchandise under a periodic system.
1. On December 3, Wheeler Company sold $500,000 of
merchandise to Hashmi Co., terms 2/10, n/30, FOB
shipping point. Cost of merchandise sold was $350,000.

Dec. 3 Accounts receivable 500,000

Sales 500,000

No entry is recorded for cost of goods sold at the time

of the sale under a periodic system.

Chapter
LO 8 Explain the recording of purchases and sales of inventory under
5-53 a periodic inventory system.
 Worksheet for a Merchandising Company

Chapter Illustration 5B-1

5-54 LO 9 Prepare a worksheet for a merchandising company.
 Copyright

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Chapter
5-55