Ch 6.pdf - LEARNING OBJECTIVES LO1: Define merchandising...

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Dr. Bingbing HU
School of Business
ACCT1005 Principles of
Accounting I
Chapter 6 Accounting for Merchandising
Operations
LEARNING OBJECTIVES
 LO1 : Define merchandising accounting , and differentiate perpetual
from periodic inventory systems.
 LO2 : Describe the terms of sale related to merchandising transactions.
 LO3 : Prepare an income statement, and record merchandising
transactions under the perpetual inventory system.
 LO4 : Describe the features of multistep and single-step classified
income statements.
 LO5 : Explain the role of the operating cycle in evaluating the liquidity
of a merchandising company.
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Concepts Underlying
Merchandising Accounting
 Merchandising company: an enterprise that
purchases and sells goods to earn a profit.
– Additional accounts: Merchandise Inventory (MI), Sales,
Cost of goods sold (COGS), etc.
– Operating cycle : the cycle of buying and holding
merchandise until it is sold and then collecting payment
for the sales.
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Two basic systems of accounting for
merchandise inventory
Two basic systems of accounting for
merchandise inventory
 Merchandise Inventory (MI) :
goods held for resale purpose in the normal course of merchandisers’
business
.

Perpetual inventory system
 Record each inventory purchase
 For each sale , record (1) Cost of goods sold & reduction in
MI; and (2) Sales revenue
 MI account continuously show the balance of inventory on
hand
 Physical count done to verify inventory balance
COGS & MI are
continually updated.
A real-time system

Two basic systems of accounting for
merchandise inventory
 Periodic inventory system
 Record each inventory purchase
 For each sale , record only sale revenues
 Cost of goods sold and cost of inventory on hand are
determined only at the end of an accounting period
(periodically) by physical count.
 The physical count is called physical inventory , which
is usually taken at the end of the accounting period
(Balance Sheet date).
Comparison of the two inventory systems
– Perpetual system:
 Allows managers to
respond to customers’
inquiries about product
availability.
 Allows inventory to be
ordered more effectively
to avoid running out of
stock.
 Companies that sell items
with a high unit value have
tended to use this system.
– Periodic system:
 Reduces the amount of
clerical work, so is less
expensive for small
businesses.
 Companies that sell items
of low value in high
volume have traditionally
used the periodic
inventory system,
although computerization
and bar coding are
changing that.
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Three transactions involving purchases of
merchandise
1. Purchase on credit
2. Purchase returns and allowance
3. Payment on account
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1. Purchase on Credit
 Purchase is recorded when goods are received .
 The account, Merchandise Inventory (A) , is used to
record cost of merchandise purchased.