Accounting for Merchandising Operations Summary

Merchandising Operations

  • Merchandising involves purchasing products to resell to customers.

  • The primary source of revenue is Sales Revenue (or Sales).

  • Two categories of expenses are recognized:

    • Cost of Goods Sold: The cost of merchandise that has been sold.

    • Operating expenses: Expenses incurred in the process of completing performance obligations.

  • Gross profit is determined by the following equation:     Sales Revenue−Cost of Goods Sold=Gross Profit\text{Sales Revenue} - \text{Cost of Goods Sold} = \text{Gross Profit}

Perpetual Inventory System

  • Detailed records of each inventory purchase and sale are maintained continuously.

  • The system perpetually shows the quantity and cost of inventory that should be on hand.

  • Cost of Goods Sold is calculated and recorded at the time of each individual sale.

  • Merchandise Inventory (an asset) is debited for purchases and credited for the cost of goods sold each time a sale occurs.

Periodic Inventory System

  • Detailed inventory records are not maintained throughout the accounting period.

  • Cost of Goods Sold is calculated only at the end of the period (periodically).

  • The equation to determine the cost of goods sold is:     Beginning Inventory+Cost of Goods Purchased−Ending Inventory=Cost of Goods Sold\text{Beginning Inventory} + \text{Cost of Goods Purchased} - \text{Ending Inventory} = \text{Cost of Goods Sold}