Accounting for Merchandise Operations

Two categories of expenses:

1. Cost of Goods Sold: cost of merchandise sold

2. Operating expenses: incurred in the process of earning sales revenue

Perpetual Inventory System

• Maintains detailed records of inventory purchases and sales

• Continuously shows quantity and cost of inventory that should be on hand

• Cost of Goods Sold is calculated and recorded at the time of each sale

Periodic Inventory System

• Detailed inventory records are not kept throughout period

• Cost of Goods Sold is calculated only at the end of the accounting period

Entry when merchandise is PURCHASED for resale

DEBIT: Merchandise inventory (for COST of goods)

CREDIT: Accounts payable (purchases on credit) or Cash (cash purchases)

FOB Shipping Point:

BUYER debits Merchandise Inventory for cost of

shipping

FOB Destination:

SELLER debits to the Freight Out account for cost of shipping

Revenue is recorded when goods are transferred from seller to buyer

What entry is used to record?

• Two entries needed to record the sale:

To record sales revenue:

Dr. Cash/Accounts Receivable

Cr. Sales

To record cost of goods sold:

Dr. Cost of Goods Sold

Cr. Merchandise Inventory

Sales Returns & Allowances

• Seller’s entry required:

Dr. Sales returns and allowances

Cr. Accounts receivable or cash

• Also, if merchandise returned, and is saleable:

Dr. Merchandise inventory

Cr. Cost of goods sold

Gross Profit Margin

Gross profit / Net sales

Profit Margin

Profit / Net sales

Gross profit

Net sales - COGS

Net Sales

Gross sales -