2. Learning Objectives
• Describe merchandising and identify business
examples
• Describe merchandising activities and identify the
components of income for a merchandising entity
• Describe the business documents used
• Describe both perpetual and periodic inventory
systems.
• Analyze and record transactions for merchandise
purchases
3. Service vs Merchandising
Service Business
• Net income is the difference between its
revenues and the expenses incurred in providing
the services
Merchandising Business
• Earns net income by buying and selling
merchandise
• Merchandise inventories represent goods
intended for sale
4. Wholesale vs Retail
Wholesaler
• An intermediary that buys products from
manufacturers or other wholesalers and sells them
to retailers or other wholesalers
Retailer
• Buys products from the manufacturers or
wholesalers and sells them to consumers
Manufacturer Wholesaler Retailer Customer
5. Measuring Net Income
• Net income to a merchandiser implies that
revenue from selling merchandise exceeds
both the cost of the merchandise sold to
customers and the cost of other expenses for
the period.
7. Operating Cycle for a Merchandiser
Purchases
Merchandise
inventory
Credit sales
Account
receivable
Cash
collectionPurchases
Merchandise
inventory
Cash
sales
8. Business Documents
Main Source, Inc. Invoice
614 Tech Avenue Date Number
Nashville, TN 37651 5/4/05 358-BI
S
o
l
d
T
o
Name: Barbee, Inc.
Attn: Tom Bell
Address: One Willow Plaza
Cookeville, Tennessee
38501
P.O. 167 Sales: 25 Terms 2/10,n/30 Ship: FedEx Prepaid
Item Description Quanity Price Amount
AC417 250 Backup System 500 54.00$ 27,000$
Sub Total 27,000
We appreciate your business! Ship Chg. -
Tax -
Total 27,000$
10. Inventory Systems
Two alternative inventory accounting system:
• Periodic Inventory System – cost of goods are
determined only at the end of an accounting
period
– Low Value, High Quantity Inventories
• Perpetual Inventory System – maintains detailed
records of the cost of each inventory item and
continuously show the inventory that should be
on hand
– High Value, Low Quantity Inventories
11. Periodic Inventory System
• Purchases – is debited when goods are bought
from supplier; classified as part of the account
Cost of Goods Sold upon sale or as
Merchandising Inventory, an asset account, if
unsold.
• The purchase account is used only for goods
purchased for resale.
12. • The purchase transaction is normally recorded by
the purchaser when the goods are received from
the seller.
• Every purchase should be supported by business
document that provide written evidence of the
transaction.
– Cash purchases – cash register receipt indicating the
items purchased
– Credit purchases – purchase invoice indicating the
total purchase price and other relevant information
Periodic Inventory System
13. • Purchase returns and allowances account
represents reduction in the cost of goods
purchased. It is a contra account to purchase
and its normal balance is credit.
• Debit memorandum – a document the
purchaser issues to inform the supplier of a
debit made to the supplier’s account,
including the reason for the return or
allowance.
Periodic Inventory System
14. • Purchase discount is based on the invoice cost
less returns and allowances, if any.
• The Purchase Discount account is used to
record the amount saved by paying promptly.
It is a contra account having a normal credit
balance.
Periodic Inventory System
16. • Trade discounts are given to reduce the list
price to actual sales price which may be due to
the volume of transactions.
• A buyer and or the seller does not record the
list prices and the trade discounts in its
accounts. Instead, a buyer/seller records
purchases or sales net of the trade discount
(at invoice price).
Trade Discount
17. • Cash discounts are normally given to
encourage prompt payment.
• Some common examples of cash discount
terms:
– 2/10, n/30
– 2/10, 1/15, n/30
– 2/10 EOM, n/60
Cash Discount
18. • On May 5, ABC Co. purchased merchandise
from XYZ Co. worth P100,000 less 10, terms
2/10, n/30.
• On May 8, ABC Co. returned defective
merchandise worth P10,000.
• On May 15, ABC Co. paid his balance to XYZ
Co. in full.
Sample Transaction