The document provides an overview of merchandising companies, detailing the distinctions between retailers and wholesalers, as well as their purchasing practices. It explains the perpetual and periodic inventory systems, outlining how inventory transactions are recorded and how cost of goods sold is calculated. Additionally, it discusses the impact of sales returns, allowances, and discounts on revenue and presents the importance of proper inventory management for effective business operations.

2. Course Instructor: Ma’am Hina Samdani
Prepared and Presented by:
 Haseeb Khattak
 BBA-Hon’s 4-Year
 +92 334 5851538
 Student of Bahria University Islamabad - Pakistan

3. 1. Merchandising Companies
2. Perpetual Inventory System
3. Periodic Inventory Systems
4. Transactions Related to Purchase
5. Transactions Related to Sale
6. The Flow of Inventory Costs

4. A Merchandising company is a company that
buys goods and then resell them, generally for a
higher price than they were purchased. There
are two types of merchandising companies.
 Retailers &
 Wholesalers

5. • Consist of small and large for profit businesses that sell
products directly to consumers
• Search for products that coincide with their business
objectives and find suppliers the most competitive
pricing.
• A retailer can buy small quantities of an item from a
distributor or a wholesaler.
A retailers are basically sole proprietors who
sells products directly to ultimate customers.

6. • Generally buy a large quantity of products directly
from distributors.
• High-volume purchase orders typically improve a
wholesaler’s buying power.
• Get discounts for a certain number of items purchased
or the total amount spent on merchandise.
Wholesalers is a company that buys items in
bulk from manufacturers and resells them to
retailers or other wholesalers.

8. Sales
Cost of Goods Sold
Gross Profit
Other Expenses
Net Income
MINUS
MINUS
EQUALS
EQUALS

9. • Subsidiary ledgers provide a detailed record of
the individual items comprising the balance of a
general ledger controlling account
• subsidiary ledgers are needed to keep track of the
amounts receivable from individual customers,
the amounts owed to specific suppliers, and the
quantities of specific products in inventory.

10. The series of transactions through which a business
generates its revenue and its cash receipts from
customer is called operating cycle.
It consists of the following basic transaction:
• Purchases of the merchandise.
• Sales of the merchandise, often on account.
• Collections of the accounts receivable from the
customers.

11. 1. Cash
2. Inventory
3. Accounts
Receivables
3. Collection of the Receivables 1. Purchase of Merchandise
2. Sale of Merchandise on account

12. Merchandisers Manufacturers
• Buy finished goods.
• Sell finished goods.
• Buy raw materials.
• Produce and sell
finished goods.

14. Two Approaches used in Accounting for Merchandise
Inventories.
1. Perpetual inventory system
2. Periodic inventory system

15. • The inventory account is continuously
updated to reflect items on hand.
Under the perpetual inventory system, an entity
continually updates its inventory records to account for
additions to and subtractions from inventory for such
activities as:
• Received inventory items
• Goods sold from stock
• Items moved from one location to another
• Items picked from inventory for use in the production
process

16. Reasonable amounts of inventory shrinkage are
viewed as a normal cost of doing business.
Examples include: Breakage, Spoilage and Theft.

17. • A periodic inventory system is an alternative to a
perpetual inventory system.
• In a periodic inventory system no effort is made
to keep up to date records of either the inventory
or the cost of goods sold.
• Usually these amounts are determined
periodically at the end of each year.

18. It operates as follow:
• When merchandise is purchased, its cost is
debited to an account as PURCHASES
• When merchandise is sold, entry is made to
recognize the SALES REVENUE
• As the inventory records are not updated as
transactions occur, there is no inventory
subsidiary ledgers

19. • Assume that one of computer city suppliers,
Wagner office products has a periodic system. At
Dec 31, 2009 as follow:
1. The inventory on hand at the end of 2008 cost
$14000.
2. During 2009, purchases of merchandise for resale
to customers totaled $130000.
3. Inventory on hand at the end of 2009 cost $12000.
4. The $130000 cost of merchandise purchased
during 2009 was recorded in PURCHASES
account.

20. Dr. Cr.
Jan 6: Purchases…. 2000
A/P…. 2000
Purchased inventory on account, payment due in 30 in days
Computing the cost of goods sold
Inventory…. 14000
Add: Purchases (2)…. 130000
Cost of good available on sale…. 144000
Less: Inventory (3)…. 12000
Cost of good sold.... 132000

21. • One of the approaches of recording the ending inventory
and cost of good sold is to create a COST OF GOODS
SOLD account.
Creating a cost of goods sold account
It is created by two special closing entries:
1. By bringing together the costs contributing toward the cost of
good sold
2. Adjust the cost of good sold account to its proper balance and
record the ending inventory
Dec 31: Cost of goods sold…. 144000
Inventory (beginning)…. 14000
Purchases…… 130000

22. Wagner’s Cost of Goods Sold Account:
Dec 31 Inventory(End Balance)….. 12000
Cost of Good sold…… 12000
Completing the closing process
 The company will make the usual 4 closing entries
1. REVENUE ACCOUNTS
2. EXPENSE ACCOUNTS
3. INCOME SUMMARY ACCOUNT
4. DIVIDENDS ACCOUNT

23. Perpetual Inventory
system:
Are used when
management needs
information throughout the
year about inventory levels
and gross profit.
Periodic inventory
system:
Are used when the
primary goals are develop
annual data and to
minimize record keeping
requirements.

25. A perpetual inventory system is superior to the older
periodic inventory systems because it allows for
real-time tracking of sales as well as inventory levels
for individual items, helping to prevent stock outs. A
perpetual inventory also does not need to be
adjusted manually by the company's accountants
except to the extent it disagrees with the physical
inventory count due to loss, breakage or theft.

26. Event Perpetual system Periodic System
Acquiring merchandise
inventory
Inventory…… xxx
A/P…….. xxx
Purchases…………. xxx
A/P…………. Xxx
Sale of merchandise inventory A/R……. xxx
Sales…… xxx
Cost of good sold…. xxx
Inventory…. xxx
A/R…… xxx
Sales…… xxx
Settlement of accounts payable
to suppliers
A/P……. xxx
Cash……. xxx
A/P…… xxx
Cash ……. Xxx
Collections from credit
customers
Cash ….. xxx
A/R….. xxx
Cash…….. xxx
A/R……. Xxx
Creating end year balances for
cost of goods sold and inventory
accounts
Cost of good sold…. xxx
inventory…. xxx
Cost of good sold… xxx
inventory… xxx
purchase… xxx
Inventory….z xxx

27. What is PURCHASE TRANSACTION?
When cash is used to pay for an acquisition. It adds
revalued assets, Liabilities, and Equity to their sheet. The
Difference between fair market and merger price are put
in good will account.
 Credit Terms.
 Cash Discounts.

28. The terms which indicate when payment is due for
sales made on account (or credit). For example, the
credit terms might be 2/10, net 30. This means the
amount is due in 30 days; however, if the amount is
paid in 10 days a discount of 2% will be permitted.
Other terms might be net 10 days, due upon receipt,
net 60 days, etc.

29. A cash discount is a reduction in the amount of an invoice
that the seller allows the buyer. This discount is given in
exchange for the buyer paying the invoice earlier than the
normal payment date of the invoice. There are two
reasons why a seller might make this offer:
• To obtain earlier use of cash, which may be necessary
if the seller is short of cash; or
• To offer a discount for an immediate cash payment in
order to entirely avoid the effort of billing the
customer.

31. It is the cost incurred to bring the goods from
factory to the shop , this cost is directly debited
and treated as expense in cash book.

32. Credit terms and merchandise returns also affect the
amount of sales revenue earned by the seller. To the
extent that credit customers take advantage of cash
discounts or return merchandise for a refund, the
seller’s revenue is reduced. Thus revenue shown in
the income statement of a merchandising concern is
often called net sales.
Net sales = Sales Revenue – Sales and Allowances

33. Revenue:
Sales $912000
Less: Sales Return and allowances $8000
Sales Discount $4000
Net Incomes $900000

34. Company allow their customers to return their
goods and for this the customer has to made
entries under perpetual system
Sales return and allowances Debit
Account receivable (cash) Credit

35. • Both refund and allowances have the effect of
nullifying previously recorded sales and reducing
the amount of revenue earned by the business.
The Journal entry reduces sales revenue as the
result of a sales return (or Allowances)
• Sales returns and allowances 1000
• Accounts received or cash 1000
• Customer returned goods for worth 1000.

36. A sales discount is a reduction in the price
of a product or service that is offered by
the seller, in exchange for early payment
by the buyer. A sales discount may be
offered when the seller is short of cash, or
if it wants to reduce the recorded amount
of its receivables outstanding for other
reasons.

37. Example Sales Discounts:

38. As items are sold from inventory, their
costs are removed from the balance sheet
and transferred to the cost of goods sold,
which is offset against sales revenue in the
income statement.
Purchase
cost
Balance
sheet
As goods
are sold
Income
statement

39. Balance
sheet
Asset:
Inventory
As Goods
are Sold
Income statement
Revenue
Cost of goods sold
Gross profit
Expenses
Net income
Purchase
cost
As
Incurred

40. A costing method by which the value of a pool of
assets or expenses is assumed to be equal to the
average cost of the assets or expenses in the pool.
For example:
If one share of Company A's stock is purchased on June 1 for
$50.00, again on June 15 for $35.00, and again on Aug 10 for
$40.00, the average-cost method assumes that three stocks
were purchased for an average cost of $41.67. This number is
arrived at by adding $50.00 + $35.00 + $40.00 and dividing
the sum by 3, because there are three stocks in the pool.