Lecture Principles of financial accouting - Chapter 5: Accounting for merchandising operations

Chapter 5

Accounting for Merchandising
Operations

PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
Winston Kwok, Ph.D., CPA
McGraw­Hill/Irwin

        Copyright © 2011 by The McGraw­Hill Companies, Inc. All rights reserved.


5 ­ 2

C 1

Service Companies
Service organizations sell time to
earn revenue.
Examples:  Accounting firms, law firms and 
Examples:  Accounting firms, law firms and 
plumbing services
plumbing services


5 ­ 3

C 1

Merchandiser
Merchandising Companies
Manufacturer

Wholesaler

Retailer

Consumers


C 1

Reporting Income for a
Merchandiser
Merchandising companies sell products
to earn revenue.

Examples: sporting goods, clothing, and auto parts stores

5 ­ 4


C 2

Operating Cycle for a
Merchandiser
Begins with the purchase of merchandise

and ends with the collection of cash from the
sale of merchandise.

5 ­ 5


5 ­ 6

C 2

Inventory Systems


5 ­ 7

C 2

Inventory Systems
 Perpetual

systems

 continually update
accounting records for
merchandising
transactions

 Periodic

systems

 accounting records
relating to merchandise
transactions are
updated only at the end
of the accounting period


5 ­ 8

P1

Merchandise Purchases
On November 2, Z-Mart purchased $1,200 of
merchandise inventory for cash.


5 ­ 9

P1

Trade Discounts
Used by manufacturers and wholesalers
to offer better prices for greater
quantities purchased.
Example
Example

Z-Mart
Z-Mart offers

offers aa 30%
30% trade
trade
discount
discount for
for orders
orders of
of 1,000
1,000
units
units or
or more
more on
on its
its popular
popular
product
product Racer.
Racer. Each
Each
Racer
Racer has
has aa list
list price
price of
of $5.25.
$5.25.


5 ­ 10

P1

Accounting for Merchandise Purchases


5 ­ 11

P1

Purchase Discounts
A deduction from the invoice price granted to
induce early payment of the amount due.


5 ­ 12

Purchase Discounts

P1

2/10,n/30
Discount
Discount
Percent
Percent

Number
Number of
of

Days
Days
Discount
Discount Is
Is
Available
Available

Otherwise,
Otherwise,
Net
Net (or
(or All)
All)
Is
Is Due
Due in
in 30
30
Days
Days

Credit
Credit
Period
Period


5 ­ 13

P1

Purchase Discounts
On November 2, Z-Mart purchased $1,200 of
merchandise inventory on account, credit
terms are 2/10, n/30.


5 ­ 14

P1

Purchase Discounts
On November 12, Z-Mart paid the amount
due on the purchase of November 2.


5 ­ 15

P1

Purchase Discounts

After we post these entries, the accounts involved
look like these:


5 ­ 16

P1

Purchase Returns and
Allowances
Purchase
Purchase Return
Return .. .. ..
Merchandise
Merchandise returned
returned by
by the
the purchaser
purchaser to
to
the
the supplier.
supplier.
Purchase
Purchase Allowance
Allowance .. .. ..
A
A reduction
reduction in
in the
the cost
cost of
of defective
defective or
or
unacceptable
unacceptable merchandise

merchandise received
received by
by aa
purchaser
purchaser from
from aa supplier.
supplier.


5 ­ 17

P1

Purchase Returns and
Allowances
On November 15, Z-Mart (buyer) issues a
$300 debit memorandum for an allowance
from Trex for defective merchandise.


5 ­ 18

P1

Purchase Returns and
Allowances
Z-Mart purchases $1,000 of merchandise on June 1 with
terms 2/10, n/60. Two days later, Z-Mart returns $100 of
goods before paying the invoice. When Z-Mart later pays
on June 11, it takes the 2% discount only on the $900

remaining balance.


P1

Transportation Costs and
Ownership Transfer

5 ­ 19


5 ­ 20

P1

Transportation Costs
Z-Mart purchased merchandise on terms of FOB
shipping point. The transportation charge is
$75.


5 ­ 21

P1

Accounting for Merchandise


5 ­ 22

P2

Accounting for Merchandise Sales


5 ­ 23

P2

Sales of Merchandise
Each sales transaction for a seller of
merchandise involves two parts:

Revenue received in
the form of an asset
from a customer.

Recognition of the
cost of merchandise
sold to a customer.


5 ­ 24

P2

Sales of Merchandise
On November 3, Z-Mart sold $2,400 of
merchandise on credit. The merchandise has a
cost basis to Z-Mart of $1,600.

5 ­ 25

P2

Sales Discounts

Sales discounts on credit sales can benefit a seller by
decreasing the delay in receiving cash and reducing future
collection efforts.