Unit #14 – The Merchandising Company. There are 3 types of Businesses 1.A Service Company 2.A Merchandise Company 3.A Manufacturing Company We have covered

Unit #14 – The Merchandising Company


There are 3 types of Businesses1. A Service Company2. A Merchandise Company3. A Manufacturing Company

We have covered the Accounting Cycle for a Service Company, now we will learn the differences of a Merchandise company


Manufacturing Company

Wholesaler Retailer

CustomerRetailer

Service Company

Merchandising Company


Business that sell Merchandise are known as Merchandising companies

Since they sell products, we now must track the purchase, cost, and sale of these goods

This is done through tracking the Merchandise Inventory Account

This is the only essential difference between a Service & Merchandise Company

Unit #14 – Supplies Versus Inventory

The first thing we have to clear up is the difference between supplies and merchandise.

Supplies are purchased for use in running a business (i.e. office supplies, cleaning supplies).

Unit #14 – Supplies Versus Inventory

Merchandise Inventory is purchased for RE-SALE. This idea is you buy goods, and re-sell them for a higher price in order to make money.

Note: this doesn’t mean that pencils and paper can’t be inventory. If you are a stationary store, then these items ARE inventory. The key concept is “goods for re-sale”.

Unit #14 – Tracking Inventory

1. The Periodic Inventory Method Adjustments are made at the end of the

accounting period to track the inventory

2. The Perpetual Inventory Method Adjustments are continually made and

updated to keep track of the inventory

Unit #14 – The Periodic Inventory Method

In the days before computerized accounting and inventory systems, larger companies would sell goods out of inventory with no intention of trying to keep inventory records up to date, especially with a high volume of sales.

Instead, much like a supplies adjustment, an inventory count would be made at the end of the period (periodically). This will show how much inventory was missing, all of which is assumed to have been sold.

Unit #14 – The Perpetual Inventory Method

Now thanks to technology, inventory systems can tell you exactly how much inventory (and what kind) is in the storeroom or on the floor (inventory is kept perpetually up to date).

Every time a cashier scans a product, it records the sale, but also reduces the inventory level.

Now inventory counts are done much less

frequently, and are usually just to catch discrepancies in the records and to account for theft.

Unit #14 – Why Inventory is Important!

Inventory adds an entirely new dimension to running and evaluating a business.

Inventory can become obsolete (summer clothing not sold by fall, too many of the hottest toys from last Christmas).

Inventory also takes up space for which you pay rent, needs to be stored, stocked, and counted - which takes labour and inventory soaks up cash to sit there on the floor and do nothing, instead of paying the business’ bills. Not the least of which, inventory can be stolen.

Unit #14 – Why Inventory is Important! Inventory values can also be “played” with

to alter a business’ reported Net Income. How? This is because the cost of inventory eventually makes it to the income statement as an expense called Cost of Goods Sold. The more you sell, the higher your cost of goods sold expense.

The reason all this is significant, is because inventory is usually significant. The single largest expense for a merchandise business is usually the Cost of Goods Sold expense

http://jeffboulton.ca/BAF%203M1%20Note%20-%20Glossary.htm


The concept of Cost of Goods Sold (COGS)

Since now we are selling goods, part of the cost of generating revenue is the cost of the items we are selling.

It is calculated like this:


COGS is calculated like this:

Beginning Inventory + Purchases - Purchase

Returns & Purchase Discounts

We will learn about these next

Net Purchases

+ Freight In

This is the cost of having the merchandise shipped to us. It is deemed to be part of the cost of obtaining the goods, so it goes in Inventory.

Cost of Goods Available for Sales during period

- Ending Inventory

Value of what’s left in Inventory

= COGS Expense

Value of goods sold during the period


How it fits into the Income Statement

Sales

- COGS

= Gross Profit

Revenue is now referred to as Sales

This is also known as the ‘mark up’ on your goods

- Operating Expenses

These are the ‘expenses’ you are use to (Salaries, Rent, Amortization etc)

= Net Income

Unit #14 – The Merchandising CompanyA Class Example A business with $20,000 worth of inventory on January

1st makes the following purchases Jan. 10 - $7,500, Jan. 17 - $1,500 Jan. 21 – Return for $900

When Inventory was counted on Jan. 31st the business had $14,000 worth of Inventory left

Sales in January were $40,000, Operating Expenses were $17,000

1. Find the COGS2. Calculate the Net Income


#1 - COGSBeginning Inventory $20,000Add: Purchases 9,000Less: Purchase Returns (900)Total Available 28,100Less: Ending Inventory (14,000)Cost of Goods Sold 14,100


#2 – Net IncomeSales $40,000Less: Cost of Goods Sold (14,100)Gross Profit 25,900Less: Operating Expenses (17,000)Net Income $8,900

Unit #14 – Discounts Discounts are offered to people who buy on

account either from you – Sales Discounts Or from someone else – Purchase Discounts

The purpose is to encourage people to pay sooner

Think about it: an Accounts Receivable is your money in the hands of someone else – you want your money now!

Unit #14 – Discount Rules

Rule1. Discounts only occur when cash changes

hands

2. Discounts always appear on the same side as cash

Reason1. This is the only time you know for sure that

someone has paid within the discount period

2. This is because you are accepting less cash for the discount

Unit #14 – Discount Rules cont.

Rule3. The Discount only affects Cash

4. Discounts are calculated on total amount owing

Reason3. Same as previous

4. Because Tarantino said so

Unit #14 – Discounts

There are 2 new accounts we will be using for recording Discounts

1. Purchase Discount (When you buy) This is a Contra–Expense Account

2. Sales Discount (When you sell)1. This is a Contra–Revenue Account

Therefore this has a Credit Balance

Therefore this has a Debit Balance


One last thing about Discounts What are “Terms”? How do we ‘read’

them?

What does 2/10, n30 mean?

2% Discount

If paid within 10 Days

With 30 Days to pay without penalty


An Example Jan. 10 – We bought a $1000 worth of

supplies on account. Terms are 2/10, n30. Write this information down!

Date Particulars P.R. Debit Credit

1 1

2 2

3 3

Jan 10 Supplies 1000

Accounts Payable 1000

Bought supplies, Terms 2/10, n30.

Unit #14 – Purchase Discounts Let’s now say that we want to take advantage of

the “Discount” and pay within the allotted time period (in this case it is 10 Days to receive a 2% Discount)


1 1

2 2

3 3

Jan 18 Accounts Payable 1000

Cash 980

Purchase Discounts 20

Unit #14 – Sales Discounts Let’s take the same question, only now we

sold instead or bought Jan. 10 – We sold $1000 worth of Supplies on

account. Terms are 2/10, n30.


1 1

2 2

3 3

Jan 10 Accounts Receivable 1000

Sales Revenue 1000

Sold $1000 to J. Doe

Unit #14 – Sales Discounts Again, it is now within the 10 Days and our

customer has chosen to take advantage of the Discount


1 1

2 2

3 3

Jan 18 Cash 980

Sales Discount 20

Accounts Receivable 1000

Unit #14 - Purchase Discounts If the transaction was for cash (when you

bought supplies) and the discount was taken right away, it would look like this


1 1

2 2

3 3

Jan 10 Supplies 1000

Cash 980

Purchase Discount 20

Unit #14 - Sales Discounts If the transaction was for cash (when you

sold supplies) and the discount was taken right away, it would look like this


1 1

2 2

3 3

Jan 10 Cash 980

Sales Discount 20

Sales Revenue 1000


To track the purchase, cost, and shipment of merchandise new accounts are needed.

They are as follows:


New Account Type of Account

1. Merchandise Inventory Current Asset

2. Sales Revenue

3. Sales Discounts Contra-Revenue

4. Sales Returns & Allowances

Contra-Revenue

5. Purchases COGS (expense)

6. Purchase Discounts COGS (Contra-Expense)

7. Purchase Returns & Allowances

COGS (Contra-Expense)

8. Freight In COGS (expense)

9. Freight Out (Delivery Expense)

Operating Expense


Updated Chart of Accounts Assets 100-199 Liabilities 200-299 Capital (including Drawings) 300-399 Revenues 400-499 COGS Expenses 500-599 Operating Expenses 600-699

Unit #14 – The Merchandising Company: The Periodic Inventory Method

1. Merchandising Inventory is our new Current Asset, under the Periodic method of Accounting, it is only touched during the Closing Entries

2. If you have bought inventory, instead of going to the Merchandise Inventory account it goes to the Purchases account


New Account Type of Account1. Merchandise Inventory Current Asset(Beginning Accounting Period Value)2. Sales Revenue3. Sales Discounts Contra-Revenue4. Sales Returns & Allowances Contra-Revenue5. Purchases COGS (expense)6. Purchase Discounts COGS (Contra-Expense)7. Purchase Returns & Allowances COGS (Contra-

Expense)8. Freight In COGS (expense)9. Freight Out (Delivery Expense) Operating Expense


Cash Purchase of Merchandise (Page 300) Jun. 8 – Purchases sports equipment from

Schwinn, $500, Cheque 86


1 1

2 2

3 3

Jun 8 Purchases 500

Cash 500

Purchase Sports Equipment, Cheque 86


Credit Purchase of Merchandise Jun. 9 – Purchases sports equipment from

Spalding, invoice 2974, $200 on account


1 1

2 2

3 3

Jun 9 Purchases 200

A/P Spalding 200

Purchased Equipment, invoice 2974


Goods Returned for Cash Refund (Purchase Return & Allowances)

Jun. 10 – Received refund Cheque for $100 from Schwinn for goods returned.


1 1

2 2

3 3

Jun 10 Cash 100

Purchases Ret. & Allow. 100

Cash Refund from Schwinn


Goods returned for Credit (Purchase Returns & Allowances)

Jun. 11 – Received Credit Invoice 981 for $200 from Spalding Ltd. for returned tennis equipment.


1 1

2 2

3 3

Jun 11 A/P Spalding Ltd 200

Purchases Ret. & Allow 200

Returned Defective Equipment, invoice 981


Sales Returns & Allowances Jun 14 - J. Doe returned $100 worth of

hockey sticks


1 1

2 2

3 3

Jun 14 Sales Returns & Allowances 100

Cash 100

Refund for J. Doe


Freight In Freight In is part of the Cost Of Goods Sold

Account (Freight Out is not)


1 1

2 2

3 3

Jun 16 Freight In 200

Cash 200


Freight out (An Operating Expense) It would be recorded like this


1 1

2 2

3 3

Jun 18 Freight Out 150

Cash 150


The previous examples along with the Purchase & Sales Discount examples are the new entries you may have to make into the General Journal for a Merchandising Company using the Periodic Inventory Method.


Each of these new accounts also have to shown on the Trial Balance and either the Income Statement or Balance Sheet!

Also note that all of these transactions can include taxes! (HST Recoverable (When Buying) or HST Payable (When Selling)) with them, but we have already covered that!

Unit #14 – The Merchandising Company: The Perpetual Inventory Method

The name perpetual is a reference to the fact that the merchandise inventory account always shows us the value of inventory that should be on hand (i.e. it is perpetually kept up to date).

As technology becomes more and more widespread and affordable, most businesses have acquired computerized inventory and accounting systems. In fact, some computerized accounting software programs do not even support the periodic method of accounting anymore – only the perpetual!

Unit #14 – The Merchandising Company: The Perpetual Inventory Method Recall!!!New Account Type of Account1. Merchandise Inventory Current Asset2. Sales Revenue3. Sales Discounts Contra-Revenue4. Sales Returns & Allowances Contra-Revenue5. Purchases COGS (expense)6. Purchase Discounts COGS (Contra-Expense)7. Purchase Returns & Allowances COGS (Contra-

Expense)8. Freight In COGS (expense)9. Freight Out (Delivery Expense) Operating Expense10. Inventory Shortage Operating Expense

We use the Cost of Goods Sold Account to track the items we’re selling - as we sell them.


Cash Purchase of Inventory Jun. 8 – Purchases sports equipment from

Schwinn, $500, Cheque 86


1 1

2 2

3 3

Jun 8 Merchandise Inventory 500

Cash 500

Purchased Sports Equipment, Cheque 86

Notice, we now use the Merch. Inventory Account instead of the Purchases Account


Credit Purchase of Merchandise Jun. 9 – Purchases sports equipment from

Spalding, invoice 2974, $200 on account


1 1

2 2

3 3


A/P Spalding Ltd. 200

Purchases Equipment, Invoice 2974


Goods Returned for Cash Refund (Purchase Return & Allowances)

Jun. 10 – Received refund Cheque for $100 from Schwinn for goods returned.


1 1

2 2

3 3

Jun 10 Cash 100

Merchandise Inventory 100

Cash Refund received from Schwinn


Goods returned for Credit (Purchase Returns & Allowances)

Jun. 11 – Received Credit Invoice 981 for $200 from Spalding Ltd. for returned tennis equipment.


1 1

2 2

3 3

Jun 11 A/P Spalding Ltd 200

Merchandise Inventory 200Merchandise return, credit invoice 981


Recording a Purchase Discount Jun 12 - Sent Cheque for $490 to Spalding

Ltd. In payment of invoice 4918, terms 2/10, n30


1 1

2 2

3 3

4 4

Jun 27 A/P Spalding 500

Cash 490 Merchandise Inventory 10

Paid invoice 4918, less 2% discount

Notice that instead of using the Purchase Discount Account, we used the Merchandise Inventory Account


Freight In Freight In is part of the Cost Of Goods Sold

Account, so we now use Merchandise Inventory instead


1 1

2 2

3 3


Cash 200


To Recap the differences in Journal Entries from the Periodic Method! Anytime you would use the following accounts in

the Periodic Inventory Method, you use Merchandise Inventory in the Perpetual Inventory Method – Merch Inventory is a Current Asset!

5. Purchases COGS (expense)6. Purchase Discounts COGS (Contra-Expense)7. Purchase Returns & Allowances COGS (Contra-Expense)8. Freight In COGS (expense)


Every time we make a Sale and/or give a Sales Discount, or make a Sales Return the original entry is the same, but we have to “update” our Merchandise Inventory Account

So let’s assume we made of sale of $1000 plus HST. How would we record this?



1 1

2 2

3 3

4 4

5 5

6 6

7 7

8 8

Jan 10 Cash 1130

HST Payable 130

Sales Revenue 1000

Merchandise Inventory 700

Cost of Goods Sold 700

This is to keep our inventory “up-to-date” with every sale, sales discount, or sales return

Documents

Unit #14 – The Merchandising Company. There are 3 types of Businesses 1.A Service Company 2.A Merchandise Company 3.A Manufacturing Company We have covered