Accounting

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Chapter 5
Accounting for Merchandising Operations
Chapter Summary

Merchandising Operations
• A merchandising company is an enterprise that buys and sells goods to earn a profit.

• Measuring net income for a merchandising company is the same as for a service company through matching of expenses with revenues.

• In a merchandising company, the primary source of revenue is the sale of merchandise, which is called sales revenue or sales.

• Expenses for merchandising company are divided into two groups: 1. Cost of goods sold: is the total cost of merchandise sold during the period. 2. Operating expenses: are expenses incurred in the process of earning sales revenue such as salary expense, advertising expense, rent expense, insurance expense, and utilities expense.

• Net income for a merchandising company is measured in two steps in the income statement: 1. Sales revenue – cost of goods sold = Gross profit 2. Gross profit – operating expenses = Net income

Inventory Systems:
In accounting for merchandising transactions, either of the two following systems may be used: 1. Perpetual inventory system.
2. Periodic inventory system.

Perpetual Inventory System:
• Detailed records of the cost of each inventory purchase and sale are maintained and continuously (perpetually) show the inventory that should be on hand for every item. • The cost of goods sold is determined and recorded each time a sale occurs.

Periodic Inventory System:
• No detailed inventory records are kept for the goods on hand during the period.

• The cost of goods sold is determined only at the end of the accounting period when a physical inventory count is taken to determine the cost of ending inventory.

• The cost of goods sold under a periodic inventory system is determined at the end of the accounting period in the following manner:

Beginning inventoryXX
Add: Cost of goods purchasedXX
Cost of goods available for saleXX
Less: Ending inventoryXX
= Cost of goods soldXX

** We will focus only on merchandising companies that follow a periodic inventory system. Before we record transactions for a merchandising company that uses a periodic inventory system, it would be very helpful to present the income statement of a merchandising company that uses a periodic inventory system.

PW AUDIO SUPPLY, INC.
Income Statement
For the Year Ended December 31, 2012

|Sales Revenue | | | | | | Sales | | | |$480000 | | Less: Sales returns and allowances | | |12000 | | | Sales Discount | | |8000 |20000 | | Net sales | | | |460000 | |Cost of Goods Sold | | | | | | Inventory, January 1 | | |36000 | | | Purchases | |325000 | | | | Less: Purchases returns and allowances |10400 | | | | | Purchase discount |6800 |17200 | | | |...
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