Merchandising Notes - JFGC PDF

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SOURCE 1: ACCOUNTING FOR MERCHANDISING PPT  A merchandising business is one that buys and sells goods in order to make a profit.  Merchandise - goods that a company buys in order to resell are known as merchandise.  Accounting for Merchandise Merchandise may be accounted for under one of two inventory methods: INVENTORY SYSTEMS Merchandising entities may use either (or both) of the following inventory systems: Perpetual where detailed records of each inventory purchase and sale are maintained. Cost of goods sold is calculated at the time of each sale. Periodic detailed records are not maintained. Cost of goods sold is calculated only at the end of the accounting period. This chapter covers the perpetual method.

CHART OF ACCOUNTS

MERCHANDISE TRANSACTIONS Several types of transactions are common for merchandising companies:

1   

PURCHASE OF MERCHANDISE Before it can be sold, merchandise must be purchased. The seller of merchandise is more commonly known as the vendor. The source document for a purchase of merchandise is the purchase invoice.

2 

PURCHASE RETURNS & ALLOWANCES Sometimes merchandise must be returned to the vendor or an adjustment is made to the amount due for the merchandise (allowance).

 

The source document for a purchase return or allowance is the debit memorandum. A purchaser may be dissatisfied because the goods: damaged or defective, of inferior quality, or not in accord with the purchaser’s specifications.



Effect of Purchase Returns & Allowances When a return is made or an allowance is granted for merchandise bought on account, the effect of the transaction is to reduce the amount due to the Vendor (Accounts Payable) and to reduce the value of Merchandise Inventory

 For purchases returns and allowances that were originally made on account, Accounts Payable is debited and Merchandise Inventory is credited. For cash returns and allowances, Cash is debited and Merchandise Inventory is credited.

3

PURCHASE DISCOUNTS  Merchandise is often purchased on account. When this occurs, the business and the vendor must agree on the credit terms. The credit terms determine when the invoice must be paid. 

Many vendors offer a discount if the invoice is paid within a specified period of time that is less than the full credit term.



Discount terms are stated in the following way: 2/10, n/30



This term is read “Two ten, net thirty” and means that the buyer will receive a 2 percent discount on the purchase price if the invoice is paid within ten days of the invoice date, else the total (net) is due within thirty days.



Other discount terms include: 1/15, n/30 and 3/10, n/45

Journal Entry for Payment with a Purchase Discount  Discount taken, no purchase return & allowance (paid on June 22) Accounts Payable Cash Merchandise Inventory

265 260 5

Effect of Discount on Accounts Payable  Notice that Accounts Payable is debited for $265 even though the company was paid only $260. If Accounts Payable were not debited for the full amount of the invoice, a balance of $5 would remain in this account. When a discount is granted, the purchaser pays the amount of the invoice less the discount but is given credit by the creditor for the full amount.

Effect of Discount on Merchandise Inventory Notice that the purchase discount is deducted directly from the Merchandise Inventory account. The effect of a purchase discount is to reduce the cost of the merchandise purchased. This is accomplished in the journal entry by crediting Merchandise Inventory. Journal Entry for Payment with a Purchase Discount  Discount taken, but with allowance Now examine the journal entry when the allowance for the four books is taken into account. Notice that the discount cannot be calculated on the amount of the returned merchandise, and the balance of Accounts Payable has been reduced by the amount of the return. (See the slide for Journal Entry for a Purchase Allowance if you need a reminder.) Accounts Payable Cash Merchandise Inventory

215 211 4

4

SALE OF MERCHANDISE  The purpose of buying merchandise is to resell it, generally at a profit.  The source document for a sale of merchandise is the sales invoice.  Recording the Sale of Merchandise Two journal entries are required to record the sale of merchandise in a perpetual inventory system: The first entry records the sale of the merchandise and either the receipt of cash or the account receivable. The amount used in this transaction is the sales price of the merchandise. The second entry records the reduction in merchandise and the recognition of an expense for the cost of merchandise sold. The amount used in this transaction is the cost of the merchandise.

5

SALES RETURNS & ALLOWANCES  Just as merchandise is sometimes returned to the vendor or an adjustment is made to the amount due for the merchandise (allowance), the seller must sometimes account for a sales return or allowance.  The source document for a salesreturn or allowance is the credit memorandum.

Recording a Sales Return or Allowance Recall that two journal entries are required to record the sale of merchandise in a perpetual inventory system. Two journal entries are also required to record a sales return or allowance. The first entry recognizes the sales return or allowance and either the payment of cash or the reduction of the account receivable. The amount used in this transaction is the sales price of the merchandise returned or adjusted. The second entry records the replacement of the merchandise in inventory and the reduction of the expense for the cost of merchandise sold. The amount used in this transaction is the cost of the merchandise. The essential affect of the journal entries to record a sales return or allowance is to reverse the original entry to record the sale—it is as if the merchandise was never sold. The only difference is that instead of reducing the Sales account, the amount of returns and allowances are kept up with in the Sales Returns & Allowances account.

6

FREIGHT COSTS  The sales agreement should indicate whether the seller or the buyer is to pay the cost of transporting the goods to the buyer’s place of business.

FOB Shipping Point  Ownership of goods is transferred to buyer upon receipt FOB Destination  Ownership of goods is transferred to buyer upon shipment ACCOUNTING FOR FREIGHT COSTS Merchandise Inventory is debited by the buyer, if the buyer pays the freight bill (FOB shipping point). Freight Out (or Delivery Expense) is debited by the seller, if the seller pays the freight bill (FOB destination).

FOB-DESTINATION FREIGHT PREPAID FOB-DESTINATION FREIGHT COLLECT FOB-SHIPPING POINT FREIGHT PREPAID FOB-SHIPPING POINT FREIGHT COLLECT Pag DESTINATION, seller ang owner at shoulderer ng cost *SHIPPING POINT, buyer ang owner at shoulderer *PREPAID, seller ang final payor *COLLECT, buyer ang final payor

OWNER OF GOODS IN TRANSIT

WHO SHOULDERS COST

WHO PAYS COST

SELLER

SELLER

SELLER

SELLER

SELLER

BUYER

BUYER

BUYER

SELLER

BUYER

BUYER

BUYER

On May 11, York Company (BUYER) accepts delivery of 38,500 dollars of merchandise it purchases for resale from Troy Corporation with the merchandise is an invoice dated May 11 with terms of 3/10, n/90 FOB Shipping Point. The goods cost Troy 25,795 dollars. When the goods are delivered, York pays 350 dollars to Express Shipping for delivery charges on the merchandise on May 12. York returns 1,400 dollars of goods to Troy who receives them one day later and restores them to inventory. The returned goods had cost Troy 938 dollars. On May 20, York mails a check to troy corporation for the amount owed. Troy receives it the following day. Both York and Troy use a periodic inventory system *PURCHASE: 38,500 *Purchase Returns: 1,400 (one day later) *Sales returns: 938 *For seller, 25975= cost of goods sold May 11

May 11

May 12

May 20

7

*Invoice date: May 11, 3/10, n/90 FOB SHIPPING POINT. *TRANSPORTATION COST: 350 May 12 delivery. YORK PAID= FOB SP, Freight collect

ENTRIES FOR YORK COMPANY (buyer) Purchases 38,500 Accounts Payable To record purchase of merch Transportation In Cash To record transportation cost (FOB SP)

May 11 38,500

350

May 13 350

ENTRIES FOR TROY CORPORATION (seller) Accounts Receivable 38,500 Sales 38,500 To record purchase Sales Returns and Allowances Accounts Receivable

1,400 1,400

To record return of merch

Accounts Payable Purchase Returns &Allowances To record return of merchandise

1,400

Accounts Payable (100%-3%=97%) SO A/P*97%= 35,987 Cash or simply, A/P*Discount Purchase Discount To record discounted on account merch

37,100

May 21 1,400

Cash Sales Discounts Accounts Receivable To record discounted

35,987 1,113 37,100

35,987 1,113

COMPLETING THE ACCOUNTING CYCLE  A merchandising company requires the same types of adjusting entries as a service company, with one additional adjustment for inventory to ensure the recorded inventory amount agrees with the actual quantity on hand.  A physical count is an important control feature since a perpetual system indicates what should be there but a count will determine what is actually there.  A merchandising company also requires the same types of closing entries as a service company.  The additional accounts that need to be closed out in a merchandising account include Sales, Sales Returns and Allowances, Cost of Goods Sold, and Freight Out.  Merchandise Inventory is an asset account and is not closed at the end of the period.

SOURCE 3 https://www.slideshare.net/vjyaser/accounting-chapter-6?qid=01fb1d23-5875-4087-94c5-

0e0ed389ca6b&v=&b=&from_search=11

INVENTORY SYSTEMS Perpetual Method Gives a continual record of inventory on hand. When an item is sold, it is recorded in the COGS account. Periodic Method Requires updating inventory only at the end of period. Acquisition of merchandise is recorded through PURCHASES account.

*BEG + NET = GAS *BEG + NET = COGS + END

THE FOLLOWING FOCUSES INVENTORY METHOD.

ON

PERPETUAL

CLOSING ENTRIES FOR MERCH UNDER PERPETUAL METHOD

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