Accounting
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
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