Chapter 04 – Accounting for Merchandising Operations
Accounting for Merchandising Operations
Additional accounts of a merchandising company likely include Merchandise Inventory,
Sales (of goods), Cost of Goods Sold, Sales Discounts, and Sales Returns and
Allowances (and possibly Delivery Expense).
Merchandising companies report Merchandise Inventory on the balance sheet, service
companies do not.
Also, merchandising companies report both Sales (of goods) and
Cost of Goods Sold on the income statement, while service companies do not.
A company can have a net loss if its expenses (absent cost of goods sold) are greater
than its gross profit from sales of merchandise.
A cash discount can be offered to encourage customers to promptly pay. This provides
cash more quickly to the seller and avoids the costs of additional collection activities.
Of course, the seller must perform a costs vs. benefits analysis on the merits and terms
of any cash discount offered to customers.
For a perpetual inventory system, inventory shrinkage is determined by taking a
physical count of the inventory available at the end of a period and comparing that
amount with the amount recorded in the Merchandise Inventory account.
Cash discounts are granted in return for early payment and reduce the amount paid
below the negotiated price.
Cash discounts are recorded in the accounting records (as
a reduction of Merchandise Inventory). Trade discounts are deducted from the list or
catalog price to determine the purchase (negotiated) price.
Trade discounts are not
recorded in the accounting records.
Sales discount is a term used by a seller to describe a cash discount granted to a
Purchase discount is a term used by a purchaser to describe a cash
discount received from a seller. (It is a matter of perspective: seller versus buyer.)
A manager is concerned about the quantity of its purchase returns because the
company incurs costs in receiving, inspecting, identifying, and returning the
More returns create more expenses.
By knowing more about returns,
the manager can decide if they are a problem and how they can be minimized.
The sender (maker) of a debit memorandum records a debit in an account of the
recipient; and the recipient records a credit in an account maintained for the sender.