Chapter 5 Accounting for Merchandising Businesses

Chapter 5 Accounting for Merchandising Businesses - CHAPTER...

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CHAPTER   five ACCOUNTING FOR MERCHANDISING BUSINESSES Merchandising businesses  generate revenue by selling goods. They buy the merchandise they sell from companies called  suppliers. These goods purchased for resale are called  merchandise  inventory. Merchandising businesses include  retail companies  (companies  that sell goods to the final consumer) and  wholesale companies  (companies that sell to other businesses). Product Costs Versus Selling and Administrative Costs Inventory Costs o Inventory costs are shown on the balance sheet in an asset  account named Merchandise Inventory. o All costs incurred to acquire merchandise and ready it for sale  are included in the inventory account. o Examples:  Price of goods purchased. Shipping and handling costs. Transit insurance. Storage costs. o Since inventory items are referred to as products, inventory  costs are frequently called  product costs. o Product costs are expenses when inventory is sold regardless of  when it was purchases. o Product costs are matched directly with sales revenue. Selling and Administrative Costs o Selling and administrative costs are not included in inventory.
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Beginning Inventory Balance + Inventory Purchased During the Period = Cost of Goods Available for Sale o Examples: Advertising. Administrative salaries. Sales commission. Insurance. Interest. o Since selling and administrative costs are usually recognized as  expenses  in the period  in which they are incurred, they are  sometimes called  period costs. Allocation of Inventory Cost Between Asset and Expense  Accounts The amount of inventory that is available for sale during a specific  accounting period is determined as follows: The  cost of goods available for sale  is allocated between the asset  account Merchandise Inventory and an expense account called  Cost of  Goods Sold.
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