Course Hero Logo

Accounting for Merchandising Businesses


cash refund

money that is returned to a customer in the form of a cash payment

cost of merchandise sold

cost associated with the goods sold to consumers

customer refunds payable

account used to document refund payments to customers as a result of returned or damaged merchandise

free on board (FOB) destination point

shipping term indicating the seller is paying for shipping costs and that the title of ownership does not pass from the seller to the buyer until the item arrives at the buyer's place of business

free on board (FOB) shipping point

shipping term indicating that the buyer is paying for freight costs for the shipping and that the title of ownership passes from the seller to the buyer when the item has been picked up by a third-party shipper

gross profit

income from cost of merchandise sold subtracted from the sales

inventory shrinkage

difference in the amount of inventory on hand per a count from what is recorded

merchandise inventory

merchandise on hand; a current asset

multiple-step income statement

income statement with multiple sections, subsections, and subtotals, including gross profit

operating cycle

process that involves spending cash to generate revenues and receive cash payments in the present or in the future

operating income

income earned from normal business operations

periodic inventory system

inventory system that involves a periodic physical inventory count to determine the quantity of goods on hand

perpetual inventory system

inventory system in which each sale and purchase transaction related to merchandise is recorded directly to the inventory account and corresponding subsidiary ledger

purchase returns and allowances

merchandise returned by the buyer or cost modification due to a product defect


revenue generated from the sale of goods to consumers

sales discounts

early payment discount provided to the buyer from the seller

single-step income statement

income statement that shows only revenues less expenses, and does not include gross profit