Merchandising Company Flashcards
Merchandising company
A merchandising company is an business that buys and sells goods to earn a profit.
A merchandiser’s primary source of revenue is sales, whereas a service company’s primary source of revenue is service revenue.
Expenses for a merchandising company are divided into 2 categories:
A) Cost of goods sold
B) Operating expenses
Merchandising operations
The Cost of Goods Sold is the total cost of merchandise sold during the period.
Sales minus Cost of Goods Sold = Gross Profit.
After Gross Profit is calculated, operating expenses are deducted to determine net income (or net loss).
Inventory systems (perpetual)
where detailed records of each inventory purchase and sale are maintained. This systems continuously shows the quantity and cost of the inventory purchased and sold. Cost of goods sold is calculated at the time of each sale.
this chapter covers perpetual
Inventory system (periodic)
detailed records are not maintained. Cost of goods sold is calculated only at the end of the accounting period. (OUTDATED)
Merchandise Inventory
ASSET account, has a normal DEBIT balance (inventory we own until we sell it)
Cost of Goods Sold
EXPENSE account, has a normal DEBIT balance (the cost of buying the things we sell)
Sales
REVENUE account, has a normal CREDIT balance (replace service revenue)
Recording Merchandising Purchased
The purchase is normally recorded by the merchandiser when the goods are received from the seller.
Cash and credit purchases are supported by a purchase invoice. This source document indicates the total purchase price and other relevant information
The same invoice is used for 2 roles: it serves as a sales invoice for the seller and a purchase invoice for the buyer.
FOB Shipping Point
As online shopper shipping is annoying cuz we have to pay
1. Goods delivered to shipping point by seller 2. Buyer pays freight costs from shipping point to destination
IF Merchandiser/buyer pays freight (FOB Shipping Point)
Merchandise Inventory is debited by the merchandiser/buyer (increases the cost of merchandise)
FOB Destination
Destination = seller has to get the goods
1. Goods delivered to merchandiser directly by seller 2. Seller pays freight costs
Freight Out (or Delivery Expense) is debited by the seller (an expense for the seller)
A merchandiser may return merchandise received because the goods:
- are damaged or defective,
- are of inferior quality, or
- are not made the way the merchandiser
would like.
Quantity Discounts
A merchandiser that buys a lot of goods in bulk may receive a quantity discount.
The merchandise inventory is simply recorded at the discounted cost.
Quantity discounts are not the same as purchase discounts.
Quantity discount ≠ Purchase Discount
A quantity discount can be offered by a merchandiser to a buyer for a bulk purchase.
Quantity discounts result in a sales price reduction.
They are not separately journalized. Instead the sale is recorded at the reduced price.
Purchase Discounts
Merchandisers may receive a discount on the goods they buy if they back the seller early.
The merchandiser calls this discount a purchase discount.
A purchase discount is based on the invoice cost less any returns and allowances granted.
Sales Transaction
Revenues are reported when earned in accordance with the revenue recognition principle.
In a merchandising company. revenues are earned when the goods are transferred from seller to buyer.
Sales Tax
A merchandiser collects tax from the buyer when a sale occurs.
Taxes are periodically (usually monthly) remitted to the Canada Revenue Agency.
As such, sales taxes are not revenue but are a current liability until remitted.
Sales Returns
Sales Returns occur when customers are dissatisfied with merchandise and are allowed to return the goods for a refund
Sales Returns and Allowances is a contra revenue account to the Sales account.
Sales Allowance
Sales Allowances occur when customers are dissatisfied, and the seller allows the buyer to pay less for the goods.
The normal balance of Sales Returns and Allowances is a debit.
Sales Discounts
A sales discount is the offer of a cash discount to a customer in exchange for the prompt payment of a bill
Sales Discounts is also a contra revenue account with a debit balance.
Completing the accounting cycle
A merchandising company requires the same types of adjusting entries as a service company, with one additional adjustment for inventory remaining
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.
Everything, except sales, would be closed in the second set of closing entries. Sales are closed in the first closing entries with revenue accounts
For purchases on account
Merchandise Inventory is debited and Accounts Payable is credited.
For cash purchases
Merchandise Inventory is debited and Cash is credited.
Assume Chelsea Video returned goods costing $300 to Highpoint Electronics
The entry by Chelsea Video shows a decrease to inventory when the goods were returned
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
