1. A merchandising business is engaged in buying goods and selling these at a profit. 2. The primary source of revenues is referred to as sales revenue or sales. 3. The operating cycle of a merchandising company ordinarily is longer than that of a service company. 4. Income is measured by cost of goods and operating expenses from sales revenue. * Cost of goods sold is the total cost of merchandise sold during the period. Inventory Systems
1. Perpetual System
* Used when there are few controllable items in the inventory. * Purchases increase Merchandise Inventory.
* Freight costs, Purchase Returns and Allowances and Purchase Discounts are included in Merchandise Inventory. * Cost of goods sold is increased and Merchandise Inventory is decreased for each sale. -The perpetual inventory system provides a continuous record of Inventory and Cost of Goods Sold. * Physical count done to verify Inventory balance.
2. Periodic System
* Used by businesses with low priced high volume nature of merchandise. When there are numerous items to be accounted for, the cost of maintaining records for each item of merchandise becomes very prohibitive. * Purchases of merchandise increase Purchases.
* Separate accounts used to record purchases, freight costs, returns & allowances, and discounts. * Company does not maintain a running account of changes in inventory. * Ending Inventory is determined by physical count.
* Determining Cost of Goods Sold under a periodic system
Merchandise inventory, beginning| | | xxx|
Purchases| | xxx| |
Less: Purchase returns & allowances| xxx| | |
Purchase discounts| xxx| xxx| |
Net purchases| | xxx| |
Add: Freight in| | xxx| |
Cost of goods purchased| | | xxx|
Cost of goods available for sale | | | xxx|
Less: Merchandise inventory, end| | | xxx|
Cost of goods sold (Cost of sales)| | | xxx|
Types of discount:
1. Trade discounts
- granted to wholesalers or buyers in big quantities as deductions from the list prices of goods bought. - are not taken up in the accounting books.
-the amount of the invoice, net of trade discounts, is recorded as the cost of goods bought. 2.Cash discounts
-offered as an incentive for the buyer to pay his account before due date and within a discount period. -buyer → purchase discount; seller → sales discount
-Credit terms – the terms for when payments for merchandise are to be made, agreed on by the seller and the buyer. Example of credit terms:
1. n/30 – net 30 days
2. n/eom - net end of the month
3. 2/10, n/30 – 2% discount if paid within 10 days, net amount due within 30 days.
Recording Purchases of Merchandise
* Made using cash or credit (on account).
* Normally recorded when goods are received.
* Purchase invoice should support each credit purchase.
* Purchaser may be dissatisfied because goods damaged or defective, of inferior quality, or do not meet specifications. * Purchase return – buyer return goods for credit if the sale was made on credit, or for a cash refund if the purchase was for cash. * Purchase Allowance – buyer may choose to keep the merchandise if the seller will grant an allowance (deduction) from the purchase price. * If cash purchases, the seller will give cash refund to the buyer. * If on account, buyer issues debit memorandum.
* Debit memorandum – the form issued by a buyer to inform the seller that a debit has been posted to the seller’s accounts payable. * Purchase Discounts
* Credit terms may permit buyer to claim a cash discount for prompt payment. * Advantages: Purchaser saves money and seller shortens the operating cycle. * Example: Credit terms of 2/10, n/30, is read “two-ten, net...