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Unformatted text preview: 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. 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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