Principles of accounting 2

1. Chapter 1
Accounting for Merchandising Operations
Learning Objectives :-
• Identify the differences between service and merchandising companies
• Explain the recording of purchases under perpetual and periodic inventory system
• Explain the steps in the accounting cycle for a merchandising company
• Distinguish between a multiple-step and a single-step income statement
• Explain the computation and the importance of the gross profit

2. Types of Activities
Services
• A company
provides services
to customers
• There is no
goods.
• Shorter operating
cycle.
• For example :
Teaching,
transportation
and barbers .
Merchandising
• A company buys
and sells goods.
• Only one type of
inventory called
Finished goods.
• Longer operating
cycle.
• For example :
Supermarkets
Industrial
• A company
transforms raw
materials into
finished goods.
• There are 3 types
of inventory (Raw
materials-Work in
process-Finished
goods).
• For example:
Restaurants and
bakeries.
Note : The type of the activity rely basically on “the primary source of revenue”

3. Wholesaler
Retailers
Consumers
•Companies that sell directly to consumers
•The Final consumer
•Companies that sell directly to retailers

4. Note: Inventory is the added asset for a merchandising company, the company reports it as a
current asset in the balance sheet.

5. Inventories systems
Use the word
"Inventory "
includes wide
variety of
goods.
In selling we use
two entries.
Perpetual
Use the word
" Purchase "
Includes less
variety of
goods
In selling we
record only
one entry.
Periodic

6. Recording process
Perpetual
Periodic
Purchase
Dr. Inventory
Cr. Cash/Bank/ Account
payable
Sales
Dr. Cash/ Account receivable
Cr. Sales Revenue
Dr. COGS
Cr. Inventory
Purchase
Dr. Purchase
Cr. Cash/Bank/ Account payable
Dr. Cash/ Account receivable
Cr. Sales Revenue
Sales
Sales
entry
Cost
entry

7. Example :
_ On 1/10/2022 goods purchased for $ 5,000 on account, paid 3,000 in cash and
the remaining on credit.
_ On 5/10/2022 the goods sold for 7,000 collected 4,000 in cash
Prepare journal entries to record this transaction by :
1) Perpetual inventory system
2) Periodic inventory system

8. Answer
Credit
Debit
Account title
Date
5,000
Inventory
1/10/2022
3,000
Cash
2,000
Account payable
4,000
Cash
5/10/2022
3,000
Account Receivable
7,000
Sales revenues
5,000
Cost of goods sold
5,000
Inventory
1) Perpetual inventory system

9. Answer
Credit
Debit
Account title
Date
5,000
Purchase
1/10/2022
3,000
Cash
2,000
Account payable
4,000
Cash
5/10/2022
3,000
Account Receivable
7,000
Sales revenues
1) Periodic inventory system

10. Example :
Xerox sells printing machines, transactions relating to this products (using the perpetual inventory system)
were as follows:
May 10 Purchased five machines on account from Electronics company, at a cost of $500 each.
May 23 Sold four machines on account to Foster company, sales price of $700 per machine.
May 24 Purchased additional seven machines on account from Electronics company, at a cost of $500 each.
June 9 Paid $2,500 cash to Electronics company for the machines purchased on May 10.
June 19 Sold two machines to Foster company for cash, sales price of $750 per machine.
June 22 Collected $2,800 from Foster company of the credit sale on May 23.

11. Credit
Debit
Account title
Date
2,500
Inventory
May 10
2,500
Account payable
2,800
Account Receivable
May 23 2,800
Sales Revenue
2,000
COGS
2,000
Inventory
3,500
Inventory
May 24
3,500
Account payable
2,500
Account Payable
June 9
2,500
Cash
1,500
Cash
June 19 1,500
Sales Revenue
1,000
COGS
1,000
Inventory
2,800
Cash
June 23
2,800
Account Receivable
Computation
5 X 500 = 2,500
4 X 700 = 2,800
5 X 700 = 3,500
2 X7 50 = 1,500
Sale Price
4 X 500 = 2,000 Cost
Sale Price
Cost
2 X 500 = 1,000
The Answer
We paid our liability which raised
on May 10
We collected our Receivables
which raised on May 23

12. True or False :-
1) If there is a supermarket has a big variety of inventory, it should use the periodic
system. False
2) When we make sales under the perpetual inventory system, there’s only one entry to
be recorded. False
MCQ :-
1) Which of the following activity has no goods to sell ?
a) Services activity b) Merchandising activity c) Industrial activity
Answer: A
3) Inventory is the added asset in the service activity. False

13. Freight Cost
Seller pays freight cost
Dr. Freight out ( Delivery Expense )
Cr. Cash
Destination
Shipping
point
Buyer pays freight cost
Dr. Inventory
Cr. Cash

14. The goods are damaged or
defective, of inferior
quality, or do not meet the
purchaser’s specifications.
Purchase
Return
Purchase
Allowance
the purchaser may
choose to keep the
merchandise if the seller
is willing to grant an
allowance (deduction)
from the purchase price.

15. Purchase
Return and
Allowance
Sales
Return and
Allowance
Dr. Purchase
Cr. Cash or A/P
* Purchase Return and Allowance *
Dr. Cash or A/P
Cr. Purchase Return and Allowance
Dr. Cash or A/P
Cr. Sales
Dr. COGS
Cr. Inventory
* Sales Return and Allowance *
Dr. Sales Return
Cr. Cash or A/P
Dr. Inventory
Cr. COGS

16. Example :
_On November 20, Tom buys goods from Jerry amounted to $50,000 ( which costed Jerry
$30,000 ), After five days Tom realized that the fourth of the goods were defective, so he
decided to return the defective amount only.
Required: Prepare the journal entries in Tom and Jerry Books.
Tom
Credit
Debit
Account title
Date
50,000
Purchase
20/11
50,000
Cash
12,500
Cash
25/11
12,500
Purchase Return
Jerry
Credit
Debit
Account title
Date
50,000
Cash
20/11
50,000
Sales Revenue
30,000
COGS
30,000
Inventory
12,500
Sales Return
25/11
12,500
Cash
7,500
Inventory
7,500
COGS

17. DISCOUNT
Commercial ( Trade ) Discount :
• It’s given to promote the sales
of the product.
• It’s unconditioned.
• The sale price or purchase
price will be recorded at net
amount.
• It’s not recorded in the
accounting records.
Cash Discount :
• It’s given to encourage the
payment of the amount due.
• It’s conditioned.
• It’s not recorded in the
accounting records.