Chapter Four
Accounting For
Merchandising Enterprise
Characteristics of Merchandise Business
Merchandise enterprise is a business organization that
purchases and resells goods to customers.
When this merchandise is sold:
Revenue is reported as sales
Its cost is recognized as an expense called the cost of
merchandise sold.
The cost of merchandise sold is subtracted from
sales to arrive at gross profit.
Merchandise on hand (not sold) at the end of an
accounting period is called merchandise inventory.
Accounting for Purchase of
Merchandises
Purchase can be made for cash or on account.
A cash purchase is acquisition of merchandise
immediately paying cash for the seller.
Purchase on credit which is also called purchase on
account is acquisition of goods on an agreement to
pay for the seller at a future date.
Purchase are normally recorded when the goods are
received from the supplier.
Inventory managment approachs
Periodic Inventory System: is a system in which at
the end of the accounting period the inventory
balance determined through physical count.
The purchase account is used only for merchandise
for resale to customers.
That is other assets purchased for use in the business
are not debited to the purchase account.
The acquisition of assets for use is recorded by
debiting for appropriate asset account.
Cont’d
Illustration: Assume the following transactions for Sofumer
stationary shop;
January 2, 2012: Purchased merchandise of Br 10,000 for cash
January 4, 2012: Purchase merchandise of Br 4,000 on account
January 8, 2012: Made another purchase of merchandise costing
Br 4,300 of which Br 3,500 in cash and the remaining on credit.
January 10, 2012: Purchase office supplies of Br 2,000 that used
for business operation for an agreement to pay in the near
future.
Required: Pass the necessary journal entries for Sofumer
Stationary shop.
Purchases Discounts
The terms for when payments for merchandise are to be made,
agreed on by the buyer and the seller, are called the credit
terms.
The buyer is allowed an amount of time, known as the credit
period, in which to pay.
Cash discount: a deduction from gross purchase for early
payment.
Example: For credit terms;
Net 30 days (n/30): the payment will be due within 30 days because
the buyer given 30 days credit period to pay.
Net end of the month (n/EOM): the payment will be paid by the end
of the month in which the purchase was made
Cash discount
Example: The following transactions are for Seifu
merchandising Company
1. December 3: Purchased merchandise costing Br 40,000 on
account and a credit term was 2/15, n/30.
Dec 3 Purchase 40,000
Accounts payable 40,000
2. December 18: Paid its liability for December 3 purchase
on account.
Dec 18 Accounts Payable 40,000
Cash 39,200
Purchase Discount 800
Purchase Return and Allowance
When purchased merchandise are defective, inferior
quality or wrong specification, it may return the
goods to the supplier(seller) for reduction of liability.
This transaction is called purchase returns.
Whereas, the merchandising enterprise may choose to
keep the purchased merchandise and request (ask)
price reduction,
This transaction is a purchase allowance.
The buyer initiates request for reduction of amount
payable or cash refund by issuing a debit
memorandum.
Cont’d
Illustration: The following transactions were for
Siham merchandising company;
1. On December 10: Acquired merchandises of Br
20,000 on account under terms 2/10, n/45
2. On December 15: Out of goods purchased on
December 10, merchandise having a value of 800
was wrong specification and returned to the
seller.
3. On December 20: Paid for purchases made on
December 10.
Required: Prepare the necessary journal entries.
Perpetual Inventory System
Maintain detailed records of the cost of each inventory purchase.
Is a system in which each purchase is recorded in an inventory
account.
Merchandises returned and purchase discount are credited to
Inventory.
Records continuously show inventory that should be on hand for
every item
Example
Assume that on May 2, ABC Co. purchases Br. 5,000 of merchandise
from Nigus Data Link, subject to terms 2/10, n/30. On May 4, ABC Co.
returns Br. 3,000 of the merchandise, and on May 12, ABC Co.
pays the original invoice less the return.
Required: What Would be journal entries for ABC Co.
COMPARISON OF ENTRIES
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Accounting for sales of merchandise
Merchandise firm is the one that purchases and
resells goods i.e a given merchandise firm is a buyer
as well as a seller.
Hence, the sale of merchandise during an accounting
period credited to the sales revenue account.
For the buyer to record it as purchases and for the
seller to record it as sales, the ownership right on
the goods should pass from seller to buyer.
Periodic Inventory System
Sales is debited to cash/Accounts receivable and
credit to sales account.
Sales Discounts: discounts taken by the buyer for early
payment.
The sales discounts account is a contra or offsetting
account to Sales
Sales Return and Allowance: Merchandise sold may be
returned to the seller.
If the return or allowance is for a sale on account, the
seller usually issues the buyer a credit memorandum.
It is is a contra (or offsetting) account to Sales.
Perpetual Inventory System
A business may sell merchandise for cash or on credit.
Under the perpetual inventory system, the cost of
merchandise sold and the reduction in merchandise
inventory should also be recorded.
Sales Return and Allowance: The seller debits inventory
for the amount of the return or allowance.
Example 3: Assume that on Jan 2, ABC Co. Sold Br. 10,000 of
merchandise (cost Br. 7, 000) to KK Co., on credit terms 2/10,
n/30. On Jan 4, KK Co. returns Br. 4,000 of the merchandise,
and on Jan 12, ABC Co. pays the original invoice less the return.
Required: What Would be journal entries for ABC Co.
Using periodic and perpetual inventory system.
Transportation Costs
The terms of a sale should indicate when the ownership
(title) of the merchandise passes to the buyer.
The ownership of the merchandise may pass to the buyer
when the seller delivers the merchandise to the
transportation company and In this case, the terms are said
to be FOB (free on board) shipping point.
This term means that the seller pays the transportation
costs from the shipping point (factory) to the final
destination.
The ownership of the merchandise may pass to the buyer
when the buyer receives the merchandise and the terms are
said to be FOB (free on board) destination.
Cont’d
When merchandise is purchased/sell on terms of
FOB shipping point and destination, the
transportation costs paid by the buyer/seller should
be debited to “Transportation In/out” or “Freight
In/out” and credited to cash.
Example4, On September 10, Hirut Company sold
commodity of Br 10,000 (cost Br. 9, 000) on account
to Abel trading, terms 2/10 n/EOM, FOB
destination. Hirut Company paid transportation
cost of Br 400
COMPARISON OF ENTRIES
End of the chapter
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