7 Accounting for Merchandising Transactions

Accounting is an essential term for every type of business. Here we discuss accounting for merchandising transactions in detail.

List of accounting for merchandising transactions

1. Merchandise (goods) purchased
2. Purchase returns & allowances
3. Freight cost (transportation costs)
4. Payment on account  and purchase discounts (Cash)
5. Sale of merchandise (goods)
6. Sales returns & allowances
7. Collection of accounts & sales discounts (Cash)

Merchandise (goods) purchased

Jan. 01.2021: Goods purchased from a supplier on account $ 500 terms 2/10, n/30:

Perpetual system

• Merchandise inventory        Dr.  5,000
• Accounts payable               Cr.  5,000

Periodic system

• Purchases                         Dr. 5,000
• Accounts payable              Cr. 5,000

*If the purchase was made for cash, cash is credited in place of accounts payable.

Purchase returns & allowances

Jan 05, 2021: Goods costing USD 1,000 returned to the supplier:

Perpetual System

• Accounts payable                           Dr.  1,000
• Merchandise inventory                   Cr.1,000

Periodic System

• Accounts payable                          Dr.  1,000
• Purchase returns & allowances      Cr.  1,000

Freight cost (transportation costs)

Here, the common question arises: whether the costs of transporting the goods are to give the seller or the buyer, this question leads to two concepts:

Freight Terms

1. FOB (Free on Board) shipping point
2. FOB destination

FOB shipping point: This means that the supplier/seller places the goods free on board at the point of origin and the buyer pays the freight costs. It is also called the ‘FOB factory’.

Example: A buyer bought equipment from Japanese Toshiba Corporation. They delivered the shipment free on board at Chittagong. The buyer paid the transportation cost from Chittagong  to Dhaka (FOB shipping  point)

FOB destination: This means that the supplier/seller places the goods at the place of delivery and he pays the freight costs.

Example: A buyer bought equipment from Japanese Toshiba Corporation. They delivered the shipment to Dhaka (Destination). The supplier (Toshiba Corporation) paid the transportation cost of the shipment (FOB destination)

The difference is quite clear from the following table:

Freight terms	Place of delivery	Who pays the  freight cost	Accounting  treatment in the buyer’s book
FOB shipping  point	At  origin	Buyer	Perpetual system  Dr. Cash  Cr
FOB destination	At destination	Seller/Supplier	No accounting entry

Payment on account  and purchase discounts (Cash)

A purchase discount is a policy by which the seller tries to make the collection from the buyer sooner. The seller offers a credit term that tells the amount of discount and the discount period. A very common term is 2/10,n/30. This means:

2% cash discount

10= discount period

N=Net of meaning invoice price/cost price less purchase returns & allowances

30= Ultimate payment date.

So two-ten, net thirty means if payment is made within ten days of the purchase date, the buyer can enjoy a two percent discount. Otherwise, he has to pay within the next thirty days.

***purchase discount = (Invoice price-Purchase returns & allowances) x discount percentage.

*** Freight cost is not mentioned on the invoice. So it is considered while calculating the discount.

Example:

Now assuming that the buyer paid the dues on Jan. 10, 2021 [Purchase date was Jan. 01, 2021, as stated earlier]. So he could enjoy the discount.

Discount  amount =USD (5,000-1,000) x 2% =USD 80

Cash  payment= USD (4,000-80) = USD 3,920

Recording  procedure  under two  inventory systems:

Perpetual system

• Accounts payable              Dr. 4,000
• Cash                                 Cr. 3,920
• Merchandise inventory       Cr.      80

Periodic system

• Accounts payable            Dr.     1,000
• Cash                               Cr.      3,92
• Purchase discount           Cr.          80

Again, the credit term may be 2/10, EOM (end of the month). This means that a 2% discount is available if the amount is paid within the first 10 days of the next month.

The seller may not always offer a cash discount to make collection sooner. In this case, the credit term just specifies the credit period only. 

For instance, n/30, 1/45, or n/10 EOM (end of the month). This means that the net dues must be paid within 30 days, 45 days, or within the first 10 days of the month respectively.

Sale of merchandise (goods)

This is one of the most important accounting for merchandising transactions. On May 01, 2021, the business concern made a sale of an electronic product at $ 4,000 (cost of which  was $ 3,000), terms  3/10, n/30:

Perpetual system

1. Accounts receivable          Dr. 4,000
2. Sales                                Cr. 4,000
3. Cost of goods sold             Dr. 3,000
4. Merchandise inventory       Cr. 3,000

Periodic System

• Accounts receivable         Dr.  4,000
• Sales                               Cr. 4,000

Lazz Pharma a practical focus:

Lazz Pharma Ltd. is a  merchandising concern. It’s a retail shop for pharmaceutical products. It manages its stock and sales by customized software, ‘perfect solutions’ developed by daffodils computers Ltd.  Lazz Pharma prepares accounts annually for reporting to the owner. It also prepares monthly reports if necessary.

Sales returns & allowances

On May 03, goods of $ 1,000 were returned from the customer (cost of which was $ 750):

Perpetual System

• Sales returns & allowances    Dr.  1,000
• Accounts  receivable             Cr. 1,000
• Merchandise  inventory         Dr. 1,000
• Cost of goods sold                Cr. 1,000

Periodic System

• Sales returns & allowances   Dr.  1,000
• Accounts receivable              Cr. 1,000

Collection of accounts & sales discounts (Cash)

On May 09, 2003, the customer paid the dues to the seller. So he could enjoy the sales discounts.

Sales discount= $ (4,000-1000) x 3% = $ 90

Collection = $ (3,000-90) = $ 2,910

Recording procedures under two inventory systems:

Perpetual System

• Cash                            Dr.  2,910
• Sales discounts            Dr. 90
• Accounts receivable     Cr.  3,000

Periodic System

• Cash                             Dr. 2,910
• Sales discounts             Dr. 90
• Accounts  receivable     Cr. 3,000

*** Sales discount is debited instead of merchandise inventory because it is an operating expense.

*Financial Statements of merchandising concerns-periodic inventory system:

The merchandising concern prepares the following statements usually:

1. Classified income statement
2. Statement of owner’s equity and
3. Classified balance sheet

Classified income statement: A classified income statement is so named because we calculated the net income following several steps. It is also known as the multiple-step income statement.

The income statement has the following

Broad sections: The Merchandising concern prepares the required adjustment (adjusting entries) before the preparation of financial statements. Again, the concern closes its temporary accounts (closing entries) on the preparation of financial statements.

1. Operating  revenue
2. Cost of goods sold

Expenses:

1. Operating &
2. Non-operating
3. Non-operating  revenues

The income statement of accounting for merchandising transactions

Income statement (Classified form)

For the year ended on…………

Particulars	USD	USD	USD	USD
Sales			*
Less: Sales return & allowances		*
Less: Sales discount		*
Net Sales
Less: Cost of  goods sold:
Opening  Inventory		*
Add: Purchase	*
Less: Purchase return	*
Less: Purchase discount	*
		*
Add: Purchase	*
Less: Purchase return	*
Less: Purchase discount		*
Less Ending Inventory		*
Cost of goods sold			*
Gross profit				*
Less: Operating expenses		*
Administrative  expense		*
Office salaries		*
Rent expense		*
Office expensed		*
Suppliers expense		*
Depr expense		*
Insurance expense		*
Miscellaneous expense		*
Utility expense		*
			*
Selling expenses:		*
Store /seals salaries		*
Advertising  expense		*
Freight-out		*
Freight-out		*
Sales commission		*
Depr expense		*
Doubtful expense		*
			*
Total operating expenses				*
Operating Income				*
Add: Non-Operating  Income
Interest expense			*
Loss on sale of a fixed asset			*
Income before tax
Income tax				*
Net Income				*

Hope you find all accounting for merchandising transactions otherwise, you can leave a comment below.

You may like also

• 15 Advantages of a computerized accounting system
• 3 Basic principles of accounting information system
• All Types of Special Journals