Merchandising Accounting Summary

Merchandising Transactions: Purchasing Side

• Purchase of Merchandise:

  • Debit Merchandise Inventory.

  • Credit Accounts Payable (if on credit) or Cash (if paid immediately).

• Purchase Discounts:

  • No separate 'Purchase Discount' account.

  • Debit Accounts Payable (for full amount owed).

  • Credit Merchandise Inventory (for the discount amount) – reduces the cost of inventory.

  • Credit Cash (for the amount paid after discount).

• Purchase Returns and Allowances:

  • Before Payment: Debit Accounts Payable; Credit Merchandise Inventory.

  • After Payment (Refund): Debit Cash; Credit Merchandise Inventory.

• Transportation Costs (FOB Shipping Point):

  • The buyer is responsible for freight charges.

  • Debit Merchandise Inventory (increases the cost of inventory).

  • Credit Cash (if paid).

Merchandising Transactions: Selling Side

• Sale of Merchandise (Two Entries):

  • Entry 1 (Revenue):

    • Debit Accounts Receivable (if on credit) or Cash (if cash sale).

    • Credit Sales.

  • Entry 2 (Cost of Goods Sold):

    • Debit Cost of Goods Sold (for the cost of merchandise sold).

    • Credit Merchandise Inventory (to reduce inventory by the cost of goods sold).

• Sales Returns (Two Entries):

  • Entry 1 (Revenue Adjustment):

    • Debit Sales Returns and Allowances (a contra-revenue account, for the selling price).

    • Credit Accounts Receivable (reduces the amount owed by the customer).

  • Entry 2 (Inventory Adjustment):

    • Debit Merchandise Inventory (to put saleable goods back into inventory at cost).

    • Credit Cost of Goods Sold (to reverse the cost of goods sold for returned items).

• Sales Allowances (One Entry):

  • Debit Sales Returns and Allowances (for the allowance amount).

  • Credit Accounts Receivable (reduces amount owed by the customer).

• Sales Discounts:

  • Debit Cash (amount received after discount).

  • Debit Sales Discounts (a contra-revenue account, for the discount amount).

  • Credit Accounts Receivable (for the full amount previously owed).

• FOB Shipping Point (Seller): The buyer pays for shipping, the seller has no freight entry.

Income Statement for Merchandising Companies

Multi-Step Income Statement

• Net Sales: Gross Sales $-$ Sales Returns & Allowances $-$ Sales Discounts.

• Cost of Goods Sold: The direct cost attributable to the production of goods sold.

• Gross Profit: Net Sales $-$ Cost of Goods Sold.

• Operating Expenses: Categorized into:

  • Selling Expenses: Related to selling goods (e.g., sales salaries, advertising).

  • General & Administrative Expenses: Other operating expenses (e.g., office salaries, rent-office).

• Net Income: Gross Profit $-$ Total Operating Expenses.

Single-Step Income Statement

• Presents total revenues and total expenses (including Cost of Goods Sold, selling, and G&A expenses) to arrive at net income in one step.

Closing Entries for Merchandising Companies

• Entry 1 (Close Revenue Accounts):

  • Debit Sales.

  • Credit Income Summary.

• Entry 2 (Close Contra-Revenue, Cost of Goods Sold, and Expense Accounts):

  • Debit Income Summary (sum of all debits below).

  • Credit Sales Returns and Allowances.

  • Credit Sales Discounts.

  • Credit Cost of Goods Sold.

  • Credit all individual expense accounts (e.g., Sales Salaries Expense, Rent Expense, Advertising Expense, Office Salaries Expense, etc.).

• Entry 3 (Close Income Summary to Retained Earnings):

  • If Net Income: Debit Income Summary; Credit Retained Earnings.

  • If Net Loss: Debit Retained Earnings; Credit Income Summary.

• Entry 4 (Close Dividends to Retained Earnings):

  • Debit Retained Earnings.

  • Credit Dividends.