Glossary: Accounting for a Merchandising Enterprise


Adjunct account Closely related to another account; its balance is added to the balance of the related account in the financial statements.

Administrative expenses Expenses a company incurs in the overall management of a business.

Cash discount A deduction from the invoice price that can be taken only if the invoice is paid within a specified time. To the seller, it is a sales discount; to the buyer, it is a purchase discount.

Chain discount Occurs when the list price of a product is subject to a series of trade discounts.

Classified income statement Divides both revenues and expenses into operating and nonoperating items. The statement also separates operating expenses into selling and administrative expenses. Also called the multiple-step income statement.

Consigned goods Goods delivered to another party who attempts to sell the goods for the owner at a commission.

Cost of goods available for sale Equal to beginning inventory plus net cost of purchases.

Cost of goods sold Shows the cost to the seller of the goods sold to customers; under periodic inventory procedure, cost of goods sold is computed as Beginning inventory + Net cost of purchases – Ending inventory.

Delivery expense A selling expense recorded by the seller for freight costs incurred when terms are FOB destination.

FOB destination Means free on board at destination; goods are shipped to their destination without charge to the buyer; the seller is responsible for paying the freight charges.

FOB shipping point Means free on board at shipping point; buyer incurs all transportation costs after the merchandise is loaded on a railroad car or truck at the point of shipment.

Freight collect Terms that require the buyer to pay the freight bill on arrival of the goods.

Freight prepaid Terms that indicate the seller has paid the freight bill at the time of shipment.

Gross margin or gross profit Net sales – Cost of goods sold; identifies the number of dollars available to cover expenses other than cost of goods sold.

Gross margin percentage Gross margin divided by net sales.

Gross selling price (also called the invoice price) The list price less all trade discounts.

Income from operations Gross margin – Operating (selling and administrative) expenses.

Invoice A document prepared by the seller of merchandise and sent to the buyer. It contains the details of a sale, such as the number of units sold, unit price, total price billed, terms of sale, and manner of shipment. It is a purchase invoice from the buyer’s point of view and a sales invoice from the seller’s point of view.

Manufacturers Companies that produce goods from raw materials and normally sell them to wholesalers.

Merchandise in transit Merchandise in the hands of a freight company on the date of a physical inventory.

Merchandise inventory The quantity of goods available for sale at any given time.

Net cost of purchases Net purchases + Transportation-in.

Net income Income from operations + Nonoperating revenues – Nonoperating expenses.

Net purchases Purchases – (Purchase discounts +Purchase returns and allowances).

Net sales Gross sales – (Sales discounts + Sales returns and allowances).

Nonoperating expenses (other expenses) Expenses incurred by a business that are not related to the acquisition and sale of the products or services regularly offered for sale.

Nonoperating revenues (other revenues) Revenues not related to the sale of products or services regularly offered for sale by a business.

Operating expenses Those expenses other than cost of goods sold incurred in the normal business functions of a company.

Operating revenues Those revenues generated by the major activities of a business.

Passage of title A legal term used to indicate transfer of legal ownership of goods.

Periodic inventory procedure A method of accounting for merchandise acquired for sale to customers wherein the cost of merchandise sold and the cost of merchandise on hand are determined only at the end of the accounting period by taking a physical inventory.

Perpetual inventory procedure A method of accounting for merchandise acquired for sale to customers wherein the Merchandise Inventory account is continuously updated to reflect items on hand; this account is debited for each purchase and credited for each sale so that the current balance is shown in the account at all times.

Physical inventory Consists of counting physical units of each type of merchandise on hand.

Purchase discount See Cash discount.

Purchase Discounts account A contra account to Purchases that reduces the recorded gross invoice cost of the purchase to the price actually paid.

Purchase Returns and Allowances account An account used under periodic inventory procedure to record the cost of merchandise returned to a seller and to record reductions in selling prices granted by a seller because merchandise was not satisfactory to a buyer; viewed as a reduction in the recorded cost of purchases.

Purchases account An account used under periodic inventory procedure to record the cost of goods or merchandise bought for resale during the current accounting period.

Retailers Companies that sell goods to final consumers.

Sales allowance A deduction from original invoiced sales price granted to a customer when the customer keeps the merchandise but is dissatisfied for any of a number of reasons, including inferior quality, damage, or deterioration in transit.

Sales discount See Cash discount.

Sales Discounts account A contra revenue account to Sales; it is shown as a deduction from gross sales in the income statement.

Sales return From the seller’s point of view, merchandise returned by a buyer for any of a variety of reasons; to the buyer, a purchase return.

Sales Returns and Allowances account A contra revenue account to Sales used to record the selling price of merchandise returned by buyers or reductions in selling prices granted.

Selling expenses Expenses a company incurs in selling and marketing efforts.

Trade discount A percentage deduction, or discount, from the specified list price or catalog price of merchandise to arrive at the gross invoice price; granted to particular categories of customers (e.g. retailers and wholesalers). Also see Chain discount.

Transportation-In account An account used under periodic inventory procedure to record inward freight costs incurred in the acquisition of merchandise; a part of cost of goods sold.

Unclassified income statement Shows only major categories for revenues and expenses. Also called the single-step income statement.

Wholesalers Companies that normally sell goods to other companies (retailers) for resale.

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