Accounting for a Merchandising Business

On April 17, CBS makes full payment on the amount due from the April 7 purchase. If this same company decides to purchase merchandise on credit,
Accounts Payable is credited instead of Cash. Discuss these differences within your group and then present your findings in a report to your instructor. Group project E In teams of two or three students, go to the library (or find an annual report at /edgar.shtml) to locate one merchandising company’s annual report for the most recent year. Calculate the company’s gross margin percentage for each of the most recent three years. As a team, write a memorandum to the instructor showing your calculations and commenting on the results.

Cost of Goods Sold has a normal debit balance because it is an expense. To close these debit balance accounts, a credit is required with a corresponding debit to the income summary. In addition to purchases on account, a merchandising company's operating cycle includes the sale of merchandise inventory on account or on credit as highlighted in Figure 5.3. A
purchase return occurs when merchandise is returned and a full
refund is issued. A purchase allowance occurs when merchandise is
kept and a partial refund is issued. In either case, a manufacturer
will issue a debit memo to acknowledge the change in contract terms
and the reduction in the amount owed.


Each electronics hardware package (see Figure 6.9) contains a desktop computer, tablet computer, landline telephone, and a 4-in-1 desktop printer with a printer, copier, scanner, and fax machine. These goods will become a part of the inventory for Green Co. until they get processed or sold to a customer. The the 5 best accounting software of 2021 Wolverines defeated Washington on Monday night in Houston to officially become the 2023 national champions. The seller has no entry to make since the terms are FOB Shipping Point, the buyer incurs the cost. The buyer has no entry to make since the terms are FOB Destination, the seller incurs the cost.

  • The mechanics of sales discounts are demonstrated later in this section.
  • As a result, accounts receivable are assets since eventually, they will be converted to cash when the customer pays the company in exchange for the goods or services provided.
  • One entry recognizes the sale
    and the other recognizes the cost of the sale.
  • An important financial measurement for merchandising businesses is gross profit.

Merchandise return controls require that there be a separation
of duties between the employee approving the return and the person
recording the return of merchandise in the accounting records. Basically, the person performing the return should not be the
person recording the event in the accounting records. This is
called separation of duties and is
just one example of an internal control that should be used when
merchandise is returned. On 1 January 2016, John Traders purchased merchandise for $15,000 in cash from Sam & Co. The above process starts when a company purchases any of those goods.

A physical inventory is typically taken once a year and means the actual amount of inventory items is counted by hand. The physical inventory is used to calculate the amount of the adjustment. Under FOB Shipping Point, ownership of the merchandise passes to the buyer when it is shipped.

Accounting for a Merchandising Business Accounting Student Guide

Now, assume that the customer paid the retailer within the 30-day period but did not qualify for the discount. If the retailer does not pay within the discount window, they do not receive a discount but are still required to pay the full invoice price at the end of the term. In this case, Accounts Payable is debited and Cash is credited, but no reductions are made to Merchandise Inventory. When the closing entries above are posted and a post-closing trial balance prepared as shown below, notice that the Merchandise Inventory account reflects the correct balance based on the physical inventory count.

v2 Principles of Accounting — Financial Accounting

Since the customer paid the account in full within the discount qualification period of ten days, the following journal entry on the retailer’s books reflects the payment. For example, suppose a kitchen appliances retailer purchases merchandise for their store from a manufacturer on September 1 in the amount of $1,600. Businesses are required to show expenses on the income statement based on either the nature or the function of the expense. The nature of an expense is determined by its basic characteristics (what it is). For example, when expenses are listed on the income statement as interest, depreciation, income tax, or wages, this identifies the nature of each expense. In contrast, the function of an expense describes the grouping of expenses based on their purpose (what they relate to).

What is Purchase of Merchandise?

Since not all manufacturers can conveniently ship goods on a regular or daily basis, a certain amount of product needs to be kept in storage in case the retailer needs it. To better illustrate merchandising activities, let’s follow California Business Solutions (CBS), a retailer providing electronic hardware packages to meet small business needs. Each electronics hardware package (see Figure below) contains a desktop computer, tablet computer, landline telephone, and a 4-in-1 desktop printer with a printer, copier, scanner, and fax machine. My Accounting Course  is a world-class educational resource developed by experts to simplify accounting, finance, & investment analysis topics, so students and professionals can learn and propel their careers. Each electronics hardware package (see Figure 2.33) contains a desktop computer, tablet computer, landline telephone, and a 4-in-1 desktop printer with a printer, copier, scanner, and fax machine.

What is the accounting for the Purchase of Merchandise?

In these situations, it is best for the accountant’s employer to respect the other organization’s code of conduct. As well, it might be illegal for the accountant’s employer to provide discounts to a governmental organization’s employees. The professional accountant should always be aware of the discount policy of any outside company prior to providing discounts to the employees of other companies or organizations.

This format is generally used for internal reporting because of the detail it includes. An example of a classified multiple-step income statement is shown below using assumed data for XYZ Inc. for its month ended December 31, 2023. Recall that the cost of this vehicle in the Excel Merchandise Inventory account is $2,798, as shown below.

Create a Free Account and Ask Any Financial Question

An operating cycle is the amount of time it
takes a company to use its cash to provide a product or service and
collect payment from the customer. Completing this cycle faster
puts the company in a more stable financial position. A typical
operating cycle for a service company begins with having cash
available, providing service to a customer, and then receiving cash
from the customer for the service (Figure
6.2). Merchandise refers to goods a company purchases or produces for selling to customers.

When the customer returns merchandise
and receives a full refund, it is considered a sales return. When
the customer keeps the defective merchandise and is given a partial
refund, it is considered a sales allowance. The biggest difference
is that a customer returns merchandise in a sales return and keeps
the merchandise in a sales allowance.

Proudly designed and donated by