Accounting for Merchandising Operations: Sales and Perpetual Inventory

Revenue Recognition under the Earnings Approach

  • Used by companies following ASPE (Accounting Standards for Private Enterprises).

  • Revenue is recognized when the seller's performance obligation is complete, goods are delivered, the revenue amount is known, and collection is certain.

Recording Sales in a Perpetual Inventory System

  • Two distinct entries are required for every sale:

    • Record Sales Revenue: Dr. Cash or Accounts Receivable\text{Cash or Accounts Receivable}, Cr. Sales\text{Sales}.

    • Record Cost of Goods Sold: Dr. Cost of Goods Sold\text{Cost of Goods Sold}, Cr. Merchandise Inventory\text{Merchandise Inventory}.

Freight, Returns, and Discounts

  • FOB Destination: The seller pays freight costs, which are recorded as an operating expense rather than part of the cost of goods sold.

  • Sales Returns and Allowances: A contra revenue account.

    • Entry: Dr. Sales Returns and Allowances\text{Sales Returns and Allowances}, Cr. Accounts Receivable or Cash\text{Accounts Receivable or Cash}.

    • If goods are resalable, restore inventory: Dr. Merchandise Inventory\text{Merchandise Inventory}, Cr. Cost of Goods Sold\text{Cost of Goods Sold}.

  • Sales Discounts: A contra revenue account used for early payment incentives.

    • Entry: Dr. Cash\text{Cash}, Dr. Sales Discounts\text{Sales Discounts}, Cr. Accounts Receivable\text{Accounts Receivable}.

Sales Taxes and Data Analytics

  • Sales Taxes: Collected amounts are recorded as a liability until remitted to the government; they are not considered revenue.

  • Data Analytics: Companies utilize analytics on credit sales, returns, and discounts to manage customer bases and minimize the risk of unpaid receivables.