Merchandising Company Fundamentals

Initial concepts, inventory systems, and accounting entries for merchandising companies including purchases, sales, freight costs, and discounts.

Merchandising company

An enterprise that buys and sells goods to earn a profit.

Wholesalers

Entities that sell goods to retailers.

Retailers

Entities that sell goods to consumers.

Gross Profit

The result of the calculation: $\text{Sales Revenue} - \text{Cost of Goods Sold} = \text{Gross Profit}$

Net Income (Loss)

The result of the calculation: $\text{Gross Profit} - \text{Operating Expenses} = \text{Net Income (Loss)}$

Perpetual Inventory System

A system where detailed records of each inventory purchase and sale are maintained, and cost of goods sold is calculated at the time of each sale.

Periodic Inventory System

A system where detailed records are not maintained and cost of goods sold is calculated only at the end of the accounting period.

Merchandise Inventory

The account debited for the cost of goods when merchandise is purchased for resale to customers.

FOB Shipping Point

Shipping terms where goods are delivered to the shipping point by the seller and the buyer pays freight costs from the shipping point to the destination.

FOB Destination

Shipping terms where goods are delivered to the destination by the seller and the seller pays the freight costs.

Freight Out

Also known as Delivery Expense, this account is debited by the seller if the seller pays the freight bill under FOB destination terms.

Purchase Returns and Allowances

A situation where a purchaser is dissatisfied with merchandise (due to damage, inferior quality, or lack of specification) and either returns the goods or receives a price deduction.

Quantity Discount

A price reduction based on volume purchase terms; for which the inventory is simply recorded at the discounted cost and no separate journal entry is made.

Purchase Discount

A cash discount permitted to the buyer for the prompt payment of a balance due, based on the invoice cost less any returns and allowances.

Revenue Recognition Principle

The principle stating that revenues are reported when earned; for a merchandising company, this is when goods are transferred from seller to buyer.

Sales Returns

Occurs when customers are dissatisfied with merchandise and are allowed to return the goods to the seller for credit or a refund.

Sales Allowances

Occurs when customers are dissatisfied and the seller allows a deduction from the selling price.

Contra revenue account

An account with a normal debit balance, such as Sales Returns and Allowances or Sales Discounts, used to reduce the Sales account.

Sales Discount

A cash discount offered to a customer by the seller in exchange for the prompt payment of a balance due.