Chapter 4: Accounting for Merchandising Operations

Comprehensive vocabulary flashcards covering Chapter 4 merchandising operations, perpetual inventory journal entries, credit terms, sales returns, allowances, discounts, closing procedures, and financial statement calculations.

Merchandising company

A business that buys and resells merchandise.

Merchandise inventory

Goods held for resale; classified as an asset.

Cost of Goods Sold (COGS)

The cost of inventory sold.

Perpetual inventory system

An inventory system in which inventory records update after each purchase and sale.

Asset account debit

Increases an asset account.

Asset account credit

Decreases an asset account.

Expense account debit

Increases an expense account.

Revenue account credit

Increases a revenue account.

Accounts Payable credit

Increases Accounts Payable.

On account

Payment is made later, not immediately.

Purchase of $\$500$ inventory on account

Debit Merchandise Inventory $\$500$; credit Accounts Payable $\$500$.

Purchase of $\$800$ inventory for cash

Debit Merchandise Inventory $\$800$; credit Cash $\$800$.

Payment of $\$600$ owed to supplier

Debit Accounts Payable $\$600$; credit Cash $\$600$.

2/10, n/30

$2\%$ discount if paid within $10$ days; full amount due in $30$ days.

Purchase discount calculation ($2\%$ on $\$1,500$)

$1,500 \times .02 = \$30$.

Amount paid on $\$1,500$ with a $2\%$ discount

$\$1,470$.

Purchase discount under perpetual system

Merchandise Inventory is credited.

Return of $\$200$ of inventory bought on account

Debit Accounts Payable $\$200$; credit Merchandise Inventory $\$200$.

Reason to subtract returns before a purchase discount

Discount applies only to merchandise kept.

FOB Shipping Point

Shipping terms where the buyer generally pays freight.

FOB Destination

Shipping terms where the seller generally pays freight.

Buyer pays freight-in

Debit Merchandise Inventory; credit Cash or Accounts Payable.

Seller pays freight-out

Debit Delivery Expense; credit Cash or Accounts Payable.

Two entries needed for a merchandise sale

One records revenue; the other records inventory cost.

Sale of goods for $\$900$ on account (revenue entry)

Debit Accounts Receivable $\$900$; credit Sales $\$900$.

Inventory entry for goods sold costing $\$540$

Debit Cost of Goods Sold $\$540$; credit Merchandise Inventory $\$540$.

Sales return

A transaction in which a customer sends purchased goods back.

Sales allowance

A price reduction granted when the customer keeps the goods.

Cash refund of $\$200$ for a sales return

Debit Sales Returns and Allowances $\$200$; credit Cash $\$200$.

Inventory entry for resalable returned item costing $\$120$

Debit Merchandise Inventory $\$120$; credit Cost of Goods Sold $\$120$.

Sales allowance inventory entry requirement

No entry is required because the merchandise is not returned.

Cash received on $\$3,000$ invoice with $3\%$ discount

$\$2,910$.

Record $\$3,000$ A/R collected with $3\%$ sales discount

Debit Cash $\$2,910$; debit Sales Discounts $\$90$; credit A/R $\$3,000$.

Sales Returns and Sales Discounts

Contra-revenue accounts; they reduce net sales.

Adjusting entry

An end-of-period entry to correct account balances.

Inventory shrinkage

Inventory missing compared with accounting records.

Inventory shortage ($\$5,000$ records vs. $\$4,700$ physical count)

$\$300$.

Record $\$300$ inventory shrinkage entry

Debit Cost of Goods Sold $\$300$; credit Merchandise Inventory $\$300$.

Closing entry

An end-of-period entry that resets temporary accounts to zero.

Temporary accounts

Revenues, expenses, contra-revenues, dividends, and Income Summary.

Permanent accounts

Assets, liabilities, and equity accounts such as Retained Earnings.

Closing status of Merchandise Inventory

It is not closed because it is a permanent asset account.

Close $\$8,000$ Sales through Income Summary

Debit Sales $\$8,000$; credit Income Summary $\$8,000$.

Close $\$5,000$ expenses through Income Summary

Debit Income Summary $\$5,000$; credit expense accounts $\$5,000$.

Close Income Summary with $\$3,000$ credit net income

Debit Income Summary $\$3,000$; credit Retained Earnings $\$3,000$.

Net sales formula

$$\text{Sales} - \text{Sales Returns and Allowances} - \text{Sales Discounts}$$

Gross profit formula

$$\text{Net Sales} - \text{Cost of Goods Sold}$$

Net income formula for a basic merchandiser

$\text{Gross Profit} - \text{Operating Expenses}$ (assuming no other items).

Gross margin ratio

$$\text{Gross Profit} \div \text{Net Sales} \times 100\%$$

Net sales calculation ($\$20,000$ sales, $\$1,000$ returns, $\$500$ discounts)

$\$18,500$.

Gross profit calculation ($\$18,500$ net sales, $\$11,000$ COGS)

$\$7,500$.

Net income calculation ($\$7,500$ gross profit, $\$3,000$ operating expenses)

$\$4,500$.