Overview
This lecture introduces accounting for merchandising operations, highlighting key differences from service businesses, especially in how inventory and costs are recorded and matched with sales.
Service vs. Merchandising Operations
- Service operations earn revenue from providing services (e.g., law firms, car repair shops).
- Merchandising operations earn revenue from buying and selling physical goods (e.g., supermarkets, shoe stores).
- Merchandising companies buy finished goods for resale and record sales revenue; service firms record service revenue.
Revenue and Expense Recognition in Merchandising
- Merchandising revenue is called sales or sales revenue.
- Expense related to the sale of goods is called cost of goods sold (COGS).
- Gross profit = Sales revenue - Cost of goods sold.
- Operating expenses are deducted from gross profit to calculate net income.
- Service firms match service revenue directly with expenses for net income, while merchandising firms have additional gross profit calculation.
Operating Cycle in Merchandising
- Merchandising companies purchase inventory, then sell it to customers (sometimes on credit), and finally receive cash.
- The operating cycle is longer for merchandising companies than service companies due to inventory purchases and sales.
Flow of Costs in Merchandising
- Begin the period with beginning inventory, add purchases to get goods available for sale.
- Goods sold become cost of goods sold; unsold goods become ending inventory.
- Cost flow: Beginning inventory + Purchases = Goods available for sale → COGS (sold) + Ending inventory (unsold).
Inventory Systems: Perpetual vs. Periodic
- Perpetual System: Continuously updates inventory and COGS with each purchase and sale.
- Provides real-time inventory levels and instantly records cost of goods sold.
- Useful for businesses with high-value items requiring close inventory control.
- Periodic System: Updates inventory and COGS only at the end of the period by physical count.
- COGS is determined as: Beginning inventory + Purchases - Ending inventory.
- Less control, used for low-value inventory where tracking each sale is inefficient.
Key Terms & Definitions
- Sales Revenue — Revenue from selling goods in merchandising operations.
- Cost of Goods Sold (COGS) — Cost of inventory items actually sold during the period.
- Gross Profit — Sales revenue minus cost of goods sold.
- Operating Expenses — Costs not directly tied to sales, deducted from gross profit.
- Perpetual Inventory System — Inventory and COGS updated continuously after each transaction.
- Periodic Inventory System — Inventory and COGS updated at the end of the accounting period.
Action Items / Next Steps
- Review examples of perpetual and periodic inventory journal entries.
- Prepare to discuss advantages and disadvantages of each inventory system in the next session.