Merchandise a

1. Acctg 2 lectureAcctg 2 lecture
PurchasesPurchases
Merchandise andMerchandise and
PaymentsPayments
DR CR

2. INVENTORY SYSTEMS
Merchandising entities may use either of the
following inventory systems:
1) Perpetual
Detailed records of the cost of each item are
maintained, and the cost of each item sold is
determined from records when the sale occurs.
2) Periodic
Cost of goods sold is determined only at the end of
an accounting period.

3. Inventory Systems
+
+
Beginning
inventory
Beginning
inventory
Net cost of
purchases
Net cost of
purchases
== Merchandise
available for sale
== Merchandise
available for sale
Ending
inventory
Ending
inventory
Cost of goods
sold
Cost of goods
sold
C 3

4. 5- 4
When using the Periodic system, inventory
transactions are not recorded directly in
the INVENTORY account. Instead,
separate accounts are used for
PURCHASES
PURCHASE RETURNS & ALLOWANCES
PURCHASE DISCOUNTS
TRANSPORTATION IN
Periodic Inventory
System
Separate Accounts Used
Let’s look at another Inventory system.

5. 5- 5
Periodic Inventory Systems
• Because entries are not made to the inventory
account during the accounting period, the amount of
inventory is not known until the end of the period
when the inventory count is done.
• The PERIODIC system is being used less and
less due to advancements in technology
that make the extra record keeping of the
perpetual system easy and inexpensive.
• Periodic inventory systems require more closing
entries at the end of the period. (Purchases,
Purchase Returns and Allowances, Purchase
Discounts, and Transportation In are all separate
TEMPORARY accounts that must be closed out at the
end of the period.)
Bar codes/scanners

6. 5- 6
Periodic Inventory System
Purchases and Purchase Returns and
Allowances
• Purchases is an account that holds the
current period’s inventory purchases (a
debit balance) and is used in the
calculation of Cost of Goods Sold on the
Income Statement.
• The Purchase Returns and Allowances
account also is used to calculate Cost
of Goods Sold on the income statement.
It is a deduction from the cost of
purchases in a periodic inventory
system.

7. 5- 7
When using the Periodic system
Purchase Discounts are recorded
in a separate account. This
helps managers keep track of
the company’s performance in
taking advantage of discounts.
Periodic Inventory
System
Purchase Discounts

8. Main Source, Inc. Invoice
614 Tech Avenue Date Number
Nashville, TN 37651 5/4/09 358-BI
S
o
l
d
T
o
Name: Barbee, Inc.
Attn: Tom Bell
Address: One Willow Plaza
Cookeville, Tennessee
38501
P.O. Date Salesperson Terms Ship
4/25/2009 #25 2/10,n/30 Via FedEx
Item Description Quanity Price Amount
AC417 250 Backup System 500 54.00$ 27,000$
Sub Total 27,000
We appreciate your business! Ship Chg. -
Tax -
Total 27,000$
Invoice
FOB Destination
Freight
Seller
Invoice date
Purchaser
Order date
Credit terms
Freight terms
Goods
Total invoice
Seller
Invoice date
Purchaser
Order date
Credit terms
Freight terms
Goods
Total invoice




  

P1

9. 2/10,n/302/10,n/302/10,n/302/10,n/30
Discount
Percent
Discount
Percent
Number of
Days
Discount Is
Available
Number of
Days
Discount Is
Available
Otherwise,
Net (or All)
Is Due in 30
Days
Otherwise,
Net (or All)
Is Due in 30
Days
Credit
Period
Credit
Period
PURCHASE DISCOUNTSP1

10. PURCHASE RETURNS AND
ALLOWANCES
Purchase Return . . .Purchase Return . . .
Merchandise returned by the purchaser to the supplier.Merchandise returned by the purchaser to the supplier.
Purchase Allowance . . .Purchase Allowance . . .
A reduction in the cost of defective merchandise received by a purchaser from aA reduction in the cost of defective merchandise received by a purchaser from a
supplier.supplier.
Purchase Return . . .Purchase Return . . .
Merchandise returned by the purchaser to the supplier.Merchandise returned by the purchaser to the supplier.
Purchase Allowance . . .Purchase Allowance . . .
A reduction in the cost of defective merchandise received by a purchaser from aA reduction in the cost of defective merchandise received by a purchaser from a
supplier.supplier.
P1

11. 5- 11
Terms of Sales & Purchases
•F. O. B. (FFree OOn BBoard) shipping
point or F.O.B. destination
– tells who pays for the shipping and when
ownership “title” passes from the seller to
the buyer.

12. 5- 12
FOB Shipping and
FOB Destination
• FOB Shipping Point:
Buyer pays the shipping
costs because ownership
“title” transfers to buyer at
the point the shipment starts
on its journey.
• FOB Destination:
Seller pays shipping costs
because title does not
transfer to the buyer until the
goods reach their destination
(the buyer’s place of
business).

13. TRANSPORTATION COSTS AND
OWNERSHIP TRANSFER
FOB shipping point
(buyer pays)
FOB destination
(seller pays)
Merchandise
Seller BuyerCarrier
P1

14. MERCHANDISING COST FLOW IN
THE ACCOUNTING CYCLE
Beginning
inventory
Net
purchases
Merchandise
available for sale
Ending
inventory
Cost of
goods sold To Income Statement
To Balance Sheet
To Income Statement
To Balance Sheet
Period1
Beginning
inventory
Net
purchases
Merchandise
available for sale
Ending
inventory
Cost of
goods sold
Period2C 4

15. ACCOUNTING FOR PURCHASES
Assume a periodic inventory system
 Each purchase and sale of merchandise is recorded as
it occurs
 Example 1: purchase merchandise for resale $4,000
on account
Date Account PR Debit Credit
Mar 1 Purchases $4,000
Accounts payable $4,000

16. Periodic Inv. System: Purchase, Purchase
Returns and Allowance and Purchase
Discounts
• On Feb. 10, $1,000 inventory was purchased on credit. $200 inv.
was returned on Feb. 15. The payment was made on Feb, 17. The
buyer paid freight charge $100 on 2/10.
2/10 Purchases 1,000
Accounts Payable
1,000
2/10 Freight-in 100
Cash 100
2/15 A/P 200
Purchase R&A 200
2/17 A/P 800
Cash 784
Purchase Discounts 16
ACCOUNTING FOR MERCHANDISING OPERATIONS 16

17. Net Purchases of a
Periodic Inventory
System
•Net purchases = Purchases –
Purchases Returns and
Allowances – Purchases
Returns + Freight-in
ACCOUNTING FOR MERCHANDISING 17

18. PURCHASES DISCOUNT
Credit terms
 Purchases discounts are discounts taken by the
buyer for early payment of an invoice.
 These discounts reduce the cost of the
merchandise purchased.
 Should be taken when offered if not it is a LOSS
to the business.

19. PURCHASE DISCOUNTS
• Credit terms may permit the buyer to claim
a cash discount for the prompt payment of
a balance due.
• The buyer calls this discount a
purchase discount.
• Like a sales discount, a
purchase discount is based on
the invoice cost less returns
and allowances, if any.

20. PURCHASE DISCOUNT
Example 9: Purchase merchandise for resale $4,000, terms 2/10,
n/30 on account.
Invoice: $
$ 4,000
Discount (2% x $4,000) 80
Net of discount $ 3,920

21. PURCHASE DISCOUNT
Date Account PR Debit Credit
Mar 1 Merchandise inventory $4,000
Accounts payable $4,000
Mar 10 Accounts payable $4,000
Cash $3,920
Merchandise
inventory
80

22. PURCHASE DISCOUNT
Reduction of the cost of the merchandise is reflected in the
merchandise inventory account.
Example 10: Purchase merchandise for resale $6,000, terms 1/15,
n/30 on account.

23. PURCHASES RETURNS AND
ALLOWANCES
Purchase returns – merchandise is returned to the seller
Purchase allowances – price adjustment
Debit memorandum – notification of the return or allowance by seller

24. • A purchaser may be dissatisfied with merchandise
received because the goods
1) are damaged or defective,
2) of inferior quality, or
3) not in accord with the purchaser’s
specifications.
• The purchaser initiates the request for a reduction
of the balance due through the issuance of a debit
memorandum.
• The debit memorandum is a document issued by a
buyer to inform a seller that the seller’s account has
been debited because of unsatisfactory merchandise.
PURCHASE RETURNS AND ALLOWANCES

25. PURCHASES RETURNS AND
ALLOWANCES
Example 11:
Returned
merchandise on
account $2,500.Date Account PR Debit Credit
Mar 09 Accounts payable $2,500
Cash $2,500

26. EXAMPLE
Example 12: Purchased
merchandise of $8,000 on
terms 2/10,n/30. Ennis pays
the original invoice less a
return of $2,500 within the
discount period. Record the
above entries

27. RECAP OF PURCHASES EXAMPLE
Example 7: ABC Merchandising had the following
transactions:
Purchased merchandise and received payment by
VISA at $6,000.
Purchased merchandise on account for $7,500 with
credit terms 1/10, n/30.
Purchased merchandise on account for $4,000.
Return of the merchandise in (c ) of sales price of
$2,000.
Paid within the discount period for merchandise in
(b).
Paid for merchandise in (c ).

28. TRANSPORTATION COSTS
The terms of a sale should indicate when
the ownership of the merchandise passes to
the buyer.
 This point determines which party, the buyer or the seller must pay
the transportation costs.

29. • The sales agreement should indicate whether
the seller or the buyer is to pay the cost of
transporting the goods to the buyer’s place of
business.
• FOB Shipping Point
1) Goods placed free on board the carrier
by seller
2) Buyer pays freight costs
• FOB Destination
1) Goods placed free on board at
buyer’s business
2) Seller pays freight costs
FREE ON BOARD

30. • Freight -in is debited if buyer pays
freight.
• Freight-out (or Delivery Expense) is
debited if seller pays freight.
ACCOUNTING FOR
FREIGHT COSTS

31. TRANSPORTATION COSTS
 FOB – shipping point
 The ownership of the merchandise passes to the buyer when the seller delivers
the merchandise to the transportation company.
 Buyer pays the transportation costs
Example 13: Purchased merchandise for $4,000 with shipping costs of
$50 FOB shipping point.

32. FOB – SHIPPING POINT
Date Account PR Debit Credit
Merchandise inventory $4,000
Accounts payable $4,000
Merchandise Inventory $50
Cash $50

33. TRANSPORTATION COSTS
 FOB – destination point
 The ownership of the merchandise passes to the buyer when the seller delivers
the merchandise to the buyer.
 Seller pays the transportation costs
Example 14: Sold merchandise for $4,000 with shipping costs of $50
FOB destination. Cost of merchandise sold is $2,000.

34. FOB – DESTINATION POINT
Date Account PR Debit Credit
Accounts receivable $4,000
Sales $4,000
Cost of merchandise sold 2000
Merchandise inventory 2000
Delivery expense 50
Cash 50

35. TRANSPORTATION COSTS
FREIGHT TERMS
FOB FOB
Shipping Point
Destination
Ownership (title)
passes to buyer
when merchandise Delivered to Received
is freight carrier
by buyer
Transportation
costs are paid
by Buyer Seller
Risk of loss during
transportation
belongs to Buyer
Seller

36. SALES TAXES
Liability to the business
Create a SALES TAX PAYABLE account
Example 15: Sold merchandise on account $7,000, plus 5% sales tax.
Cost of merchandise sold is $3,800.

37. SALES TAXES
Date Account PR Debit Credit
Accounts receivable $7,350
Sales 7,000
Sales tax payable 350
Cost of merchandise 3,800
Merchandise inventory 3,800

38. RECAP OF TRANSACTIONS
Seller Buyer
Sold merchandise on account:
Accounts receivable DR
Sales CR
Cost of merchandise sold DR
Merchandise inventory CR
Purchased merchandise on account:
Merchandise Inventory DR
Accounts Payable CR
Transportation costs Shipping point Transportation costs Shipping point:
Merchandise Inventory DR
Cash CR
Transportation costs – Destination:
Delivery Expense DR
Cash CR
Transportation costs - Destination
Merchandise returned:
Sales Returns & Allowances DR
Accounts receivable CR
Merchandise inventory DR
Cost of merchandise sold CR
Merchandise returned:
Merchandise inventory DR
Accounts payable CR
Payment :
Cash DR
Accounts receivable CR
Payment:
Accounts payable DR
Cash CR
Payment with discount:
Cash DR
Sales discount DR
Accounts receivable CR
Payment with discount:
Merchandise inventory DR
Cash CR

39. COST OF GOODS
SOLD
To determine the cost of goods sold
under a periodic inventory system, it is
necessary to:
1) Determine the cost of goods on hand at
the beginning of the accounting
period.
2) Add to it the cost of goods purchased.
3) Subtract the cost of goods on hand at

40. COST OF GOODS
SOLD
• The cost of goods sold may be determined
each time a sale occurs or at the end of an
accounting period.
• To make the determination when the sale
occurs, a company uses a perpetual inventory
system.
• When the cost of goods sold is determined
only at the end of an accounting period, a
company is said to be using a periodic

41. 5- 41
Periodic Inventory Systems
• The ending inventory is determined at the
end of the period by taking a physical
count of the goods remaining on hand.
• Cost of goods sold is calculated at the end
of the accounting period by subtracting
the ending inventory (determined from the
physical count) from the Cost of Goods
Available for Sale.
Beginning Inventory $ 400
+ Purchases, net 2000
= Goods Available for Sale 2400
- Ending Inv. (from count) 500
= Cost of Goods Sold $1900

42. Sales
Revenue
Cost of
Goods Sold
Gross
Profit
Operating
Expenses
Net
Income
(Loss)
Less
Equals
Less
Equals
ILLUSTRATION 5-1
INCOME MEASUREMENT PROCESS FOR A
MERCHANDISING COMPANY

43. IN CLOSING…