Accounting Principles: Merchandising Operations

Chapter 5: Accounting for Merchandising Operations

Learning Objectives

• Prepare entries for purchases under a perpetual inventory system.

Perpetual Inventory System: Recording Merchandise Purchases

• Merchandise purchases for resale require specific entries:
  • Debit (Dr.) Merchandise Inventory for the cost of goods purchased.
  • Credit (Cr.) Accounts Payable for purchases made on credit or Cash for cash purchases.
• The purchase is typically recorded when the merchandise is received.

Perpetual Inventory System: Subsidiary Ledger

• Definition: A subsidiary ledger is a specialized group of accounts that share a common characteristic, specifically for inventory items.
• Purpose: It is utilized to organize and track individual inventory items effectively.
• Application: Subsidiary ledgers are also commonly employed to track:
  • Accounts Receivable
  • Accounts Payable
  • Payroll

Freight Costs

FOB Shipping Point

• Definition: The purchase invoice specifies when ownership of the goods transfers from seller to buyer.

• In the FOB Shipping Point scenario, the purchaser accepts ownership at the shipping point and is responsible for shipping costs.

• **Journal Entry:

  • Dr. Merchandise Inventory (for cost of shipping)
  • Cr. Cash

• Example Entry:** Purchase of goods with shipping costs included:

  • The cost of shipping is added to the Merchandise Inventory.

FOB Destination

• In this situation, the purchaser accepts ownership of the goods only when they are delivered to the purchaser’s business.

• Here, the seller pays the freight costs.

• **Journal Entry:

  • Dr. Delivery Expense (for cost of shipping)
  • Cr. Cash

• Example Entry:** Costs incurred for delivering goods to the buyer’s location.

Purchase Returns and Allowances

• Context: Goods may be:
  • Damaged
  • Defective
  • Inferior quality
  • Not meeting purchaser’s specifications
• Options available to buyers:
  • Return the goods.
  • Take a purchase price reduction through an allowance.
• Journal Entry:
  • Dr. Cash or Accounts Payable (for the amount returned or adjusted)
  • Cr. Merchandise Inventory (for the amount related to the return or adjustment)

Discounts on Purchases

Quantity Discounts

• Offered as a reduction in the price based on the quantity of goods purchased.

Purchase Discounts

• Given as a price reduction for the early payment of the amount due.

• **Journal Entry for Early Payment:

  • Dr. Accounts Payable
  • Cr. Merchandise Inventory (for the amount of discount)
  • Cr. Cash (for the net amount paid)

• Example Entry:** Reflects the benefit of receiving a discount through early payment.