This document summarizes accounting concepts and procedures for merchandising businesses. It discusses the periodic and perpetual inventory systems, transactions involved in purchases and sales, and how the cost of goods sold is determined. It also outlines the multiple-step and single-step income statement formats for merchandising companies.

1. Chapter Five ACCOUNTING FOR MERCHANDISING BUSINESSES

4. Merchandising Businesses Expenses Cost of Goods Sold Operating Expenses Total cost of merchandise sold during the period. Expenses incurred in the process of earning sales revenue

5. Merchandising Businesses Sales Revenue Less Cost of Goods Sold Gross Profit Less Operating Expenses Net Income / Loss Equals Equals

7. Purchases Purchase goods for resale purposes Cash Purchase Credit Purchase

8. Sales Sales of inventories Cash Sales Credit Sales

9. Discounts Incentive offers on purchases / sales Trade Discount Cash Discount Purchase Discount Sales Discount

10. Trade Discount Discounts offered for purchase in bulk Example Buy 100-200 unit = 10% Buy 201-300 unit = 20% No journal entries recorded.

11. Cash Discount Discounts offered for a prompt payment made within the discount period. It is stated in credit terms. Credit Term: 5/10, n/30 n/30 3/15, n/eom The amount is recorded in related accounts

12. Purchase Returns & Allowances Purchase Returns Purchase Allowances When merchandise is returned to the seller. When price adjustment is needed due to the quality / quantity of the merchandise.

13. Sales Returns & Allowances Sales Returns Sales Allowance When merchandise is returned by customer. When price adjustment is needed by customer due to the quality / quantity of the merchandise.

14. Transportation Cost The sales agreement would indicate whether the buyer or the seller is to pay the cost of transporting the goods to the buyer’s place. Freight terms: FOB Shipping Point FOB Destination

15. FOB Shipping Point Seller Transport Company Buyer Transportation cost to be borne / paid by the buyer. Ownership changed to buyer

16. FOB Destination Seller Transport Company Buyer Cost to be borne / paid by the seller. Ownership transferred

17. Accounting For Inventory Periodic Inventory System Perpetual Inventory System Detailed records of the cost of each item are maintained, and the cost of each item sold is determined from records when the sale occurs. Cost of goods sold is determined only at the end of an accounting period.

19. Determination Cost of Goods Sold Under Periodic Inventory System Less: cost of goods on hand at the end of the accounting period (xxxx) Cost of goods on hand at the beginning of the accounting period. xxx Add: cost of goods purchased xxxxx xxxxx Cost of Goods Sold xxxxx

20. Entries Under Perpertual Inventory System Purchases Purchase Return Purchase Discount Transportation Cost Sales Sales Return Sales Discount Transportation Cost

21. Purchases Cash Purchase: Credit Purchase: Dr. Inventory Dr. Inventory Cr. Cash Cr. Account Payable

22. Purchase Returns & Allowances Dr. Account Payable Cr. Inventory Cash Purchase: Credit Purchase: Dr. Cash Cr. Inventory

23. Purchase Discount Dr. Account Payable Cr. Cash Cr. Inventory

24. Transportation Cost Dr. Inventory Cr. Cash / Account Payable

25. Sales Cash Sale: Dr. Cash Dr. Cost of Goods Sold Cr. Sales Cr. Inventory ( to record sales at selling price ) ( to record cost of goods sold )

26. Sales Credit Sale: Dr. Account Receivable Dr. Cost of Goods Sold Cr. Sales Cr. Inventory ( to record sales at selling price ) ( to record cost of goods sold )

27. Sales Returns & Allowances Cash Sale: Dr. Sales Returns & Allowances Dr. Inventory Cr. Cash Cr. Cost of Goods Sold ( to record sales returns & allowances at selling price ) ( to record sales returns & allowances at cost )

28. Sales Returns & Allowances Credit Sale: Dr. Sales Returns & Allowances Dr. Inventory Cr. Account Receivable Cr. Cost of Goods Sold ( to record sales returns & allowances at selling price ) ( to record sales returns & allowances at cost )

29. Sales Discounts Dr. Sales Discount Dr. Cash Cr. Account Receivable

30. Transportation Cost Dr. Carriage Outwards Cr. Cash / Accounts Payables

31. Forms of Financial Statements Single-Step Income Statement Multiple-Step Income Statement

32. Multiple-Step Income Statement Involves 2 steps in determining net income / loss. Step 1: Net Sales xxxxx Less : Cost of Goods Sold (xxx) Gross Profit xxxx Step 2: Less: Operating Expenses Net Income / Loss xxx Selling Expenses Administrative Expenses xxxx

34. Multiple-Step Income Statement Sales Revenue xxxx Less: Cost of Goods Sold (xxx) Gross Profit xxxx Less: Operating Expenses Selling Expenses Administrative Expenses xxxx Income From Operations xxxx Other Revenues and gains xxx Less: Other Expenses and losses (xx) Net Income xxx xxx

35. Single-Step Income Statement Involves only one step in determining net income / loss. Total Revenues (operating & non-operating) xxxx Less: Total Expenses (Operating & non-operating) xxxx Net Income xxxx

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