Accounting and Reporting for Merchandising

Course Outline

  • Discuss sales & purchase discounts and returns: general journal entries

  • Recording purchases and sales of merchandise under perpetual and periodic inventory systems

  • Worksheet of a merchandising concern (adjusting entry method and closing entry method)

  • Financial statements of a merchandising concern

Sales Revenue

  • Types: Cash sales, Sales on account, Sales returns and allowances

  • Example: Marty's Outpost returned $180 of shirts purchased; Peachtree Jeans recorded a net sale of $520 ($700 - $180)

    • Established separate account for Sales Returns & Allowances to track returns

    • Important for assessing customer satisfaction

Trade Discounts

  • Offered to purchasers (mostly businesses)

  • Price reduction from the list price, results in the invoice price being lower

  • Benefits of trade discounts:

    • Flexibility in pricing under changing market conditions

    • Encourages bulk purchases

    • Not recorded in accounting records since reflected in selling prices

Cash Discounts

  • Encourages prompt payment on sales on account

  • Stated on invoices (e.g., 2/10, n/30)

  • Example: Sale recorded at the total invoice price, and if discount taken, difference recorded as "Sales Discounts"

Cost of Goods Sold (COGS)

  • Significant expenditure for merchandising businesses

  • COGS calculation involves:

    1. Beginning inventory

    2. Net purchases

    3. Ending inventory

  • Use example to illustrate COGS computation

Accounting for Merchandise Acquisitions

  • Purchases and corresponding accounts payable recorded at total cost

  • Separate accounts for purchase returns and allowances allow better examination of purchasing department effectiveness

Purchasing Discounts

  • Two methods for accounting for purchasing discounts:

    1. Gross Method: Record at total invoice cost

    2. Net Method: Record at net cost (taking anticipated discount)

  • Accounts differ based on whether discounts are taken or missed

Perpetual vs. Periodic Inventory Systems

Perpetual Inventory System

  • Continuous updates of inventory account

  • Entries made for purchases and sales

  • Compare actual inventory with records at period-end

Periodic Inventory System

  • No continual updates; inventory accounted for at reporting period end

  • Calculating COGS after physical count

Merchandising Work Sheet

  • Combine trial balance data with adjustments

  • Helps in preparation of financial statements

Financial Statements of a Merchandising Concern

  1. Income Statement: Highlights sales revenue, COGS, and net income

  2. Statement of Owner's Equity: Summarizes changes in the capital account

  3. Balance Sheet: Reports assets, including inventory.

Example Financial Statement Entries

  • Sales of $307,000 with deductions for discounts and returns to arrive at net sales of $300,000

  • COGS calculated and reflected in the income statements

  • Ending inventory presented in balance sheet

Closing Process

  • Close revenue and expense accounts at the reporting period end

  • Special treatment for inventory to reflect beginning and ending balances