Accounting for Merchandising Operations

Recording Merchandise Purchases

• Purchase Entry: When merchandise is purchased for resale, it is recorded when received.

  • $Dr.\,\text{Merchandise Inventory}$ (at cost)

  • $Cr.\,\text{Accounts Payable}$ (credit purchase) or $\text{Cash}$ (cash purchase)

• Subsidiary Ledger: A group of accounts with a common characteristic used to organize and track specific items like individual inventory, accounts receivable, accounts payable, and payroll.

Freight Costs

• FOB Shipping Point: Ownership transfers at the point of shipping. The purchaser is responsible for shipping costs, which are added to the cost of inventory.

  • $Dr.\,\text{Merchandise Inventory}$

  • $Cr.\,\text{Cash}$

• FOB Destination: Ownership transfers when goods reach the purchaser. The seller is responsible for shipping costs.

  • $Dr.\,\text{Delivery Expense}$

  • $Cr.\,\text{Cash}$

Purchase Returns, Allowances, and Discounts

• Returns and Allowances: Occur when goods are damaged, defective, or inferior. The entry reduces the inventory cost.

  • $Dr.\,\text{Cash}$ or $\text{Accounts Payable}$

  • $Cr.\,\text{Merchandise Inventory}$

• Quantity Discount: A price reduction based on the volume of the purchase.

• Purchase Discount: A reduction in price granted for the early payment of an invoice.

  • Recording Early Payment:

  • $Dr.\,\text{Accounts Payable}$ (full invoice amount)

  • $Cr.\,\text{Merchandise Inventory}$ (discount amount)

  • $Cr.\,\text{Cash}$ (net amount paid)