Chapter 4: Accounting for Merchandising Businesses

Vocabulary flashcards covering core accounting principles for merchandising businesses, including product vs. period costs, perpetual inventory systems, transaction events, discount terms, and shipping responsibilities.

Merchandising Business

A business that generates revenue by selling goods.

Merchandise Inventory

The goods purchased by a merchandising business for resale.

Product Cost

All costs directly traceable to acquiring inventory and getting it ready for sale, including goods purchased for resale, shipping and handling (transportation-in), transit insurance, and storage costs.

Period Cost

Expenses recognized in the period in which they are incurred regardless of when cash payments are made, which cannot be directly traced to products (e.g., advertising costs, salaries of salespersons, and office building insurance).

Perpetual Inventory System

An inventory system in which the inventory account is adjusted continually throughout the accounting period.

Inventory Allocation

The process where Beginning Inventory plus Purchases/Produced equals Goods Available for Sale, which is then allocated between Sold (recorded as Cost of Goods Sold on the Income Statement) and Not Sold (recorded as Inventory on the Balance Sheet).

Purchase Returns

Transactions that occur when a business returns defective, damaged, or otherwise undesirable products to the seller.

Purchase Allowances

Price reductions granted by a seller when a buyer agrees to keep defective or damaged merchandise rather than returning it.

Purchase Discount

A reduction in the gross price of merchandise offered to a buyer if the buyer pays cash for the merchandise within a stated time frame.

Credit Terms 2/10, n/30

A payment term offering a 2% discount off the gross invoice price if paid within 10 days; otherwise, the full amount is due within 30 days.

Payment Terms Timeline

A timeline illustrating the Discount Period (during which the full amount less discount is due) and the Credit Period (during which the full amount is due).

FOB Shipping Point

A freight term where the buyer is responsible for paying freight costs, ownership transfers when goods are delivered to a common carrier, and the buyer records the cost in Merchandise Inventory.

FOB Destination

A freight term where the seller assumes the entire cost of transportation, ownership transfers when the buyer receives the goods, and the seller records the expense as Transportation-out.

Freight Terms Responsibility Chart

A summary chart detailing the responsible party and account titles for shipping terms: FOB Shipping Point is paid by the Buyer (Merch. Inventory), while FOB Destination is paid by the Seller (Transportation-out).

Sales Returns and Allowances

Transactions involving customer returns or price adjustments, requiring decreases to Sales and Accounts Receivable as well as increases to Inventory for returned items.

Sales Discount

A cash discount offered by the seller of merchandise to encourage prompt payment by a customer.

Net Sales

Gross sales minus customer returns, allowances, and cash discounts granted to customers.