Journalizing the

Transactions
in a Merchandising
Business
Objectives:
Differentiate periodic and
perpetual inventory System
of journalizing in a
merchandising business.

Record transactions of a
merchandising business in the
general and special journal

Appreciate the importance

of journalizing in a
merchandising business.
 Periodic
Inventory
system
System
is an
Physical counts may be
conducted monthly,
inventory system
quarterly, or annually
that updates
depending on the
inventory once at
business
the end of a
specific period of
time
periodic inventory uses a physical count
system is used in of inventory
businesses with low
inventory turnover
 Low Inventory
Turnover
 means that items are not moving in and out of the
business quickly
PURCHASES OF MERCHANDISE:

PERIODIC SYSTEM

1.When merchandize is purchased for

resale to customers, the account

Next slide
Purchases, is debited for the cost of
PURCHASES OF MERCHANDISE: PERIODIC

SYSTEM

2. Like sales, purchases may be made for

cash or on account (credit).

Next slide
PURCHASES OF MERCHANDISE: PERIODIC

SYSTEM
3. The purchase is normally recorded by the
purchaser when the goods are received from the
seller.
• Each credit purchase should be supported by a
purchase invoice.

• A purchase invoice received by the buyer is

actually a sales invoice or a charge invoice
prepared by the supplier or vendor.

• Note that only purchases of merchandise are

debited to the ‘Purchase’ account. Acquisition
(purchases) of other assets: supplies, equipment,
 COMPANY
REVENUE IN
 COMPANY
REVENUE IN
 PURCHASE RETURNS AND
ALLOWANCES
 A purchaser may find the merchandise received to be
unsatisfactory because the goods are:
 Damaged or defective
 Inferior quality
 Not in accord with the purchaser’s specifications
 PURCHASE RETURNS AND
ALLOWANCES
 The Purchaser initiates the request for a reduction of
the balance due through the issuance of a debit
memorandum.
 Debit Memorandum

 Issued by a buyer to inform a seller that the seller’s

account has been debited because of
unsatisfactory goods.
 Debit Memorandum

A return of the merchandise (a deduction from the

purchase price when unsatisfactory goods are kept ) is
shown by the entry where Accounts Payable is debited
and Purchase Returns and Allowances is credited to
show that the purchases was reduced with a return or
an allowance.
The Purchase Returns and Allowances account
is a “contra purchases” account when merchandise
is returned to a supplier.
Accounting
for The sales agreement
should indicate
whether the seller or
Freight Costs the buyer is to pay
the cost of
transporting the
goods to the buyer’s
place of business

The two most common

arrangements for freight
costs are FOB Shipping
Point and FOB
Destination.
FOB Shipping A. Goods placed
free on board (FOB)
Point: the
seller.
carrier by

B. Buyer pays freight

costs.
FOB Shipping C. Freight-In is
debited if buyer
Point: pays freight.

D. Cash is credited if
the goods come on
cash on delivery
(COD), for example an
was paid immediately.
Accounts Payable
would be credited if on
account.
FOB Shipping
Point: E. Ownership over
the goods is
transferred to the
buyer once it is out
of the premises of
the seller. .
 FOB
Destination: Goods placed free on
board (FOB) at
buyer’s business

Seller pays freight costs

 FOB Delivery Expense is debited if
Destination: seller pays freight on
outgoing merchandise to a
buyer. This is an operating
expense to the seller.

Ownership over the goods is

transferred to the buyer
once the goods
are delivered and received
by the buyer.
Purchase
Discounts: Credit terms (specify the amount of
cash discount and time period during
which a discount is offered) may permit
the buyer to claim a cash discount for
the prompt payment of a balance due.
If the credit terms show 2/10, n/30
means a 2% discount is given if paid
within 10 days (called the discount
period); otherwise, the invoice is due in
30 days.
Purchase A purchase discount
is normally based on
Discounts: the invoice cost less
returns and
allowances, if any.

The buyer calls this

discount a purchase
discount
Recording of Sales and
Related Transactions
under the Periodic
Inventory System
 SALES TRANSACTIONS : Revenue Entries for a Merchandiser

Revenues are reported when

earned in accordance with the
revenue recognition principle, and
in a merchandising company,
revenues are earned when the
goods are transferred from seller
to buyer
 SALES TRANSACTIONS : Revenue Entries for a Merchandiser

All sales should be supported by a

document such as a cash register
tape (to provide evidence of cash
sales) or cash receipt, or office receipt
for cash sales, and charge invoice for
credit sales, or sales on account.
 SALES TRANSACTIONS : Revenue Entries for a Merchandiser

One entry is made with each sale:

o Debit — Accounts Receivable (if a
credit sale) or Cash (if a cash sale)
which increases assets for the sales
amount
o Credit — Sales which increases
revenues .
SALES TRANSACTIONS : Revenue Entries for a

Merchandiser

The sales account is credited only

for sales of goods held for resale.
Sales of assets not held for resale
(such as equipment, buildings,
land, etc.) are credited directly to
the asset account.
SALES TRANSACTIONS : Revenue Entries for a Merchandiser
SALES TRANSACTIONS : Revenue Entries for a Merchandiser
SALES TRANSACTIONS : Revenue Entries for a Merchandiser
Freight Terms: An entry is made when
seller pays the freight to
FOB Destination deliver goods to a
- customer or buyer. If the
buyer will pay for the
Seller Pays freight, no entry is
Freight made.

Debit — Delivery Expense

and credit — Cash or
Accounts Payable
SALES TRANSACTIONS : Revenue Entries for a Merchandiser
SALES TRANSACTIONS : Revenue Entries for a Merchandiser
Sales Returns and Sales Returns result when
Allowances: customers are dissatisfied with
merchandise and are allowed to
return the goods to the seller
for credit or a refund

Sales Allowances result when

customers are dissatisfied,
and the seller allows a
deduction from the selling
price.
 To grant the return or
allowance, the seller
Sales Returns and
prepares a credit
Allowances: memorandum to inform
the customer that a credit
has been made to the
customer’s account
receivable.

Sales Returns and

Allowances is a contra
revenue account to the Sales
account. A contra account is
a reduction to a particular
account.
Sales Returns and A contra account is used,
Allowances: instead of debiting sales,
to disclose the amount of
sales returns and
allowances in the
accounts.

This information is important

to management as excessive
returns and allowances
suggest inferior
merchandise, inefficiencies in
filling orders, errors in billing
customers, and mistakes in
delivery or shipment of
goods.
Sales Returns and The normal balance of Sales
Allowances: Returns and Allowances is a debit.

One entry is made with each sales

return and allowance. The entry to
record the sales return or
allowance:
Debit — Sales Return and
Allowances which decreases
revenues for the amount of the
sale
o Credit — Accounts Receivable (if
a credit sale) or Cash (if a cash
sale) which decreases assets
  A sales discount is the
Sales Discounts:
offer of a cash discount
to encourage customers
to pay the balance at an
earlier date.
 An example of a discount
term is commonly
expressed as: 2/10, n/30,
which means that the
customer is given 2%
discount if payment is
made within 10 days. After
10 days there is no
discount, and the balance is
due in 30 days.
 Sales Discounts is a
contra revenue account
with a normal debit
Perpetual Inventory
System
Physical counts may be
system is an
conducted monthly,
inventory system
quarterly, or annually
that updates
depending on the
inventory once at
business
the end of a
specific period of
time
periodic inventory uses a physical count
system is used in of inventory
businesses with low
inventory turnover
PURCHASES OF MERCHANDISE: PERPETUAL
SYSTEM
PURCHASES OF MERCHANDISE: PERPETUAL
SYSTEM
PURCHASE RETURNS AND ALLOWANCES:
PERPETUAL SYSTEM
PURCHASE RETURNS AND ALLOWANCES:
PERPETUAL SYSTEM
ACCOUNTING FOR FREIGHT COSTS
ACCOUNTING FOR FREIGHT COSTS
ACCOUNTING FOR FREIGHT COSTS
ACCOUNTING FOR FREIGHT COSTS
ACCOUNTING FOR FREIGHT COSTS
ACCOUNTING FOR FREIGHT COSTS
ACCOUNTING FOR FREIGHT COSTS
ACCOUNTING FOR FREIGHT COSTS
 RECORDING OF SALES AND RELATED
TRANSACTIONS UNDER THE PERPETUAL
INVENTORY SYSTEM
SALES RETURNS AND ALLOWANCES
SALES DISCOUNTS
SALES DISCOUNTS
SALES DISCOUNTS
SALES DISCOUNTS
SALES DISCOUNTS
SALES DISCOUNTS
SALES DISCOUNTS
SALES DISCOUNTS
SALES DISCOUNTS
SALES DISCOUNTS
DETERMINING COST OF GOODS SOLD UNDER THE
PERPETUAL INVENTORY SYSTEM
DETERMINING COST OF GOODS SOLD UNDER THE
PERPETUAL INVENTORY SYSTEM
THE FLOW OF INVENTORY COSTS
THE TWO MOST COMMONLY USED COST FLOW ASSUMPTIONS ARE:
THE TWO MOST COMMONLY USED COST FLOW ASSUMPTIONS ARE: