Merchandising Entreprise Accounting

Entries for Purchases Transactions Accounting Entries used to Record The Purchase and Payment of Goods

1. When goods are purchased with cash, the following entry is necessary:
   debit Purchases, credit Cash
2. When goods are purchased on credit, the following entry is necessary:
   debit Purchases, credit Accounts Payable
3. When goods are purchased on credit, but are paid back early due to a cash discount incentive, the following entry is necessary:
   debit Accounts Payable, credit Cash, and credit Purchases Discount.

Purchases Discounts

A seller will often offer a cash discount to the buyer for an early payment. Credit terms are the conditions for the payment agreed upon by the buyer and the seller. Cash discounts are stated in a fractional form with the percentage of discount in the numerator and the number of days in the denominator. The credit period, or number of days a buyer can pay without incurring a finance charge, is stated in NET days or n/days. Example: terms 3/15, n/60 means a buyer will receive a 3% cash discount if paid within 15 days of the invoice date, and the buyer has a maximum of 60 days to pay the entire debt amount.

Purchases Returns And Allowances Rules for Recording Returns and Allowances for Goods Purchased on Credit

1. If merchandise is returned or a price adjustment is necessary, the buyer should debit Accounts Payable and credit the Purchases Returns and Allowances account.
2. When the returned goods were purchased on credit, and a cash discount for early payment is available, the discount only applies to the price of the goods that are kept, (in addition, discounts are not taken on freight costs).
   

Sales Accounting

When goods are sold for cash or on credit, the Sales account should be credited. To encourage early payment of goods purchased on credit, the seller will often offer a cash discount. These discounts are recorded in the Sales Discounts account. When goods are returned or an allowance is requested, the adjustment is made to the Sales Returns and Allowances account. All sales discounts, returns, and allowances reduce sales revenues.

Sales Accounting - Rules for Recording Sales Transactions

1. When goods are sold and payment is made in cash, debit Cash and credit Sales.
2. When goods are sold on credit, debit Accounts Receivable and credit Sales.
3. When goods are sold through the use of a credit card, there often will be a service fee.
   

In such circumstances, debit Cash and Credit Card Collection Expense (for the fee) and credit Accounts Receivable.

Sales Accounting - Recording Sales Discounts

When a buyer takes advantage of a cash discount, Cash and Sales Discount should be debited, and Accounts Receivable should be credited.
Example: Invoice for $950 with terms 3/15, n/30 is paid early by the buyer.
Debit Cash $921.50
Debit Sales Discounts $28.50
Credit Accounts Receivable $950

Sales Accounting - Recording Sales Returns And Allowances

When a seller grants a return or an allowance, Sales Returns and Allowances is debited, and Accounts Receivable is credited. A buyer of goods can only take a cash discount on the goods that are actually kept (cash discounts do not apply to freight either). Example: A seller receives a debit memorandum for $70 of goods that were not ordered by ABC company. If the return is granted, the following entry is necessary.
Debit Sales Returns & Allowances $70
Credit Accounts Receivable ABC company $70

Sales Accounting

Manufacturers and wholesalers often reduce catalog list prices by allowing trade (or quantity) discounts. The discounts vary depending on customer and order size. Trade discounts permit flexible prices without having to print new catalogs. Trade discounts are not reflected in accounting records, only the agreed upon price between a buyer and seller is recorded.

Transportation Costs

Whenever goods are sold, the buyer and the seller must agree upon who pays shipping costs. When goods are shipped FOB shipping point, the buyer agrees to pay for shipping costs and ownership passes to the buyer when the merchandise is delivered to the shipper. When goods are shipped FOB destination, the seller agrees to pay for transportation costs and ownership of goods passes to the buyer when the goods are delivered.

Sales Taxes

The majority of states in the United States levy a tax on the sale of merchandise. At the moment the sale is competed (whether payment is received or not) the amount of the sales tax is credited to the Sales Tax Payable in the books of the seller. Periodically the Sales Tax Payable account will be debited when the tax is remitted to the state tax authority. The buyer of goods does not record a sales tax expense separately in his/her accounts, it is merely added to the cost of the goods, and the entire amount is debited to Purchases.

Interim Reporting for Merchandising Enterprises

Merchandising enterprises often prepare quarterly or monthly financial reports, called interim financial statements, which are useful to management. This requires the preparation of a trial balance, and an analysis of accounts to determine what adjustments are necessary. Once adjusting entries are entered on the work sheet, the adjusted trial balance is prepared. Interim financial statements are then prepared based upon the information that is provided by the work sheet.

Accounting For Merchandise Inventory

There are two systems commonly used to keep track of inventory: periodic inventory and perpetual inventory systems. In the periodic inventory system, revenue is recorded each time a sale is made. However, but the cost of goods sold is not determined until a physical inventory is taken. In the perpetual system, both sales amount and the cost of goods sold are recorded each time an item is sold. This makes it possible to know quantity and the value of inventory at all times.

Determining The Cost of Goods Sold

The cost of goods sold is usually reported in a separate section of the income statement. In the periodic inventory system, determining the cost of goods sold requires the following steps:

1. All purchases must be totaled.
2. Purchases returns & allowances and purchases discounts are deducted from purchases to determine the net purchase balance.
3. Net purchases plus transportation costs equals cost of goods purchased.
4. Beginning inventory plus cost of goods purchased equals goods available for sale.
5. Goods available for sale minus ending inventory equals cost of goods sold.
   

Adjustments for Merchandise Inventory

The merchandise inventory account only shows the beginning balance of inventory, not any purchases made during the period. It is therefore necessary to remove the beginning inventory balance and replace it with the ending inventory balance. This is performed by the following two adjusting entries:

1. Debit the beginning inventory balance to Income Summary, and credit the Merchandise Inventory account.
2. Debit the ending inventory balance to Merchandise Inventory, and credit the Income Summary account.
   

Adjustments On The Work Sheet

The first step in preparing a work sheet requires a trial balance to be taken. Next, data should be gathered to perform adjusting entries. Accounts that typically require adjustments are Merchandise Inventory, prepaid expenses, supplies, assets that have to be depreciated, and outstanding liabilities. All these adjustments are posted to the adjustments column of the work sheet, and the debit and credit columns must prove.

After the adjusting entries have been entered, the adjusted trial balance is prepared. Balances in this column reflect the correct ending balances of the accounts at the end of the fiscal period.

by John Petroff