Accounting Chapter 5 - Chapter 5 Merchandising Operations...

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Chapter 5 Merchandising Operations How Merchandising Differs from a Service Enterprise A merchandising company, such as Target, makes their revenue through buying and selling merchandise. This revenue is referred to as sales revenue or sales. * There are 2 different types of expenses for a merchandising company: cost of goods sold and operating expenses o Cost of goods sold is the total cost of merchandise sold during the period o Operating expenses are the selling and administrative expenses * In a merchandising company, the operating cycle is typically longer than that of a service company. The reason for this is that merchandising companies buy merchandise inventory. * Merchandising companies use one of the two types of systems for taking count of inventory: perpetual and periodic o In a perpetual system, COGS is determined each time a sale occurs. o In a periodic system, COGS is only determined at the end of the period Recording Purchases Under a Perpetual Inventory System Any purchase made should be supported by a purchase invoice, business documents that provide written evidence of the transaction. Merchandise Inventory * Merchandise Inventory is an asset account. It includes items that are bought and resold in the normal course of operations. * Purchases made on account (credit purchases) are recorded as an increase (debit) to Merchandise Inventory and an increase (credit) to Accounts Payable. o Example: On January 20th, Ginger Co. purchases $5,000 in merchandise inventory from Pepper Co. The entry would look like this Jan 20 Merchandise Inventory 5,000 Accounts Payable 5,000 * Cash purchases are recorded as an increase (debit) to Merchandise Inventory and a decrease (credit) to cash Jan 20 Merchandise Inventory 5,000 Cash 5,000 Purchase Returns and Allowances * Sometimes, goods recieved become damaged, defective, or are of an inferior quality.
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