Accounting for Merchandising Operations

Introduction

• Speaker: Rachel White
• Series: Pisco Accounting Series
• Chapter: Accounting for Merchandising Operations
• Merchandising operations involve purchasing items for resale, referred to as merchandise inventory.
• Inventory cycle: Purchase goods → Sell to customer → Report cost as Cost of Goods Sold (COGS) → Collect cash.

Recording Purchases and Sales

Types of Inventory Systems

• Perpetual Inventory System: Continuously updates inventory and COGS with each transaction.
• Periodic Inventory System: Updates inventory and COGS only at end of accounting period.

Recording Purchases (Perpetual System)

• Journal Entry for Purchase:
  • Debit Merchandise Inventory (asset account)
  • Credit Cash or Accounts Payable
• Trade Discounts:
  • Record the actual price paid after discount, not the advertised price.
• Returns:
  • Reverse the purchase entry: Debit Cash or Accounts Payable, Credit Merchandise Inventory.
• Purchase Discounts:
  • If eligible for discount:
    • Debit Accounts Payable for full invoice value.
    • Credit Merchandise Inventory for discount amount.
    • Credit Cash for invoice value minus discount.

Recording Sales (Perpetual System)

• Two Journal Entries for Each Sale:
  1. Revenue Entry:
     • Debit Cash or Accounts Receivable
     • Credit Sales Revenue (reflects trade discount if applicable)
  2. Cost Entry:
     • Debit Cost of Goods Sold
     • Credit Merchandise Inventory
• Sales Returns and Allowances:
  • Record refunds: Debit Sales Returns in Allowances, Credit Cash or Accounts Receivable.
  • Sales Return: Update Merchandise Inventory and COGS.
• Sales Discounts:
  • Debit Sales Discount (Contra Revenue account)
  • Debit Cash
  • Credit Accounts Receivable

Completing the Accounting Cycle

Adjusting Entries

• Inventory Shrinkage:
  • Caused by theft, shoplifting, deterioration.
  • Adjust by debiting COGS and crediting Merchandise Inventory.

Closing Entries

• Similar to service businesses with additions:
  1. Close all temporary credit balance accounts to Income Summary.
  2. Close all temporary debit balance accounts to Income Summary (includes new accounts like sales returns, discounts, COGS).
  3. Close Income Summary to Equity.
  4. Close Withdrawals to Equity.

Conclusion

• Practice is key: Use Pisco virtual tutor for exercises.
• Study chapter in Pisco textbook for variations and advanced topics.