2 3 Purchases of Merchandise- Perpetual System Financial and Managerial Accounting

The periodic inventory system recognition of these example transactions and corresponding journal entries will be studied in more advanced accounting courses. As was the case for Sales Returns and Allowances, the balance in the Sales Discounts account is deducted from Sales on the income statement to arrive at Net Sales. Merchandisers often report only the net sales amount on the income statement. Details from sales returns and allowances, and sales discounts, are often omitted because they are immaterial in amount relative to total sales. However, as already stated, separate general ledger accounts for each of sales returns and allowances, and sales discounts, are useful in helping management identify potential problems that require investigation. In addition to the purchase of merchandise inventory, there are other activities that affect the Merchandise Inventory account.

This can better identify quality
control issues, track whether a customer was satisfied with their
purchase, and report how many resources are spent on processing
returns. Most companies choose to combine returns and allowances
into one account, but from a manager’s perspective, it may be
easier to have the accounts separated to make current
determinations https://business-accounting.net/ about inventory. Similar to credit terms between a retailer and a manufacturer, a
customer could see credit terms offered by the retailer in the form
of 2/10, n/30. This particular example shows that if a customer
pays their account within 10 days, they will receive a 2% discount. Otherwise, they have 30 days to pay in full but do not receive a
discount.

Accounting for Purchase Transactions in a Merchandising Business

Net sales (see Figure 6.7) equals gross sales less sales discounts, sales returns, and sales allowances. Recording the sale as it occurs allows the company to align with the revenue recognition principle. The revenue recognition principle requires companies to record revenue when it is earned, and revenue is earned when a product or service has been provided. For example, assume that a retailer is considering an order for $4,000 in inventory on September 1. The manufacturer offers the retailer a 15% discount on the price if they place the order by September 5.

  • The Purchase Discounts account (used only with the gross method) identifies the amount of discounts taken, but does not indicate discounts missed, if any.
  • The seller’s discount is on the sales side of the transaction Company 1.
  • The globalization of commerce, rising energy costs, and the increasing use of overnight delivery via more expensive air transportation all contribute to high freight costs.
  • In a periodic inventory system, the real-time balances in merchandise inventory and cost of goods sold are not known.
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Receiving payment in a timely manner allows the manufacturer to free up cash for other business opportunities and decreases the risk of nonpayment. Based on the above information, Green Co. records the transaction using the following journal entry. Exercise 5 (perpetual) Under the perpetual inventory method, prepare the adjusting entry for inventory if ending merchandise inventory is $101,000 and the physical count of inventory is $96,000. Since the customer https://quick-bookkeeping.net/ paid the account in full within the discount
qualification period of ten days, the following journal entry on
the retailer’s books reflects the payment. Business owners may encounter several sales situations that can
help meet customer needs and control inventory operations. For
example, some customers will expect the opportunity to buy using
short-term credit and often will assume that they will receive a
discount for paying within a brief period.

LO3 – Analyze and record sales transactions for a merchandiser.

On the other hand, it also entails recognizing the applicable compensation method to the supplier. Overall, the journal entry for the purchase of merchandise is as below. Purchase of merchandise is the acquisition of inventory or goods that a company intends to sell to customers to generate revenue. Companies may also use other terms, such as “merchandise purchases” or “cost of goods purchased”, to describe it. However, the merchandise can vary greatly depending on the type of business and industry.

Recognition of Purchases

To better illustrate merchandising activities, let’s follow California Business Solutions (CBS), a retailer providing electronic hardware packages to meet small business needs. Each electronics hardware package (see Figure below) contains a desktop computer, tablet computer, landline telephone, and a 4-in-1 desktop printer with a printer, copier, scanner, and fax machine. Each electronics hardware package (see Figure 2.33) contains a desktop computer, tablet computer, landline telephone, and a 4-in-1 desktop printer with a printer, copier, scanner, and fax machine. Each electronics hardware package (see Figure 6.9) contains a desktop computer, tablet computer, landline telephone, and a 4-in-1 desktop printer with a printer, copier, scanner, and fax machine.

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3 Merchandise Inventory: Sales and Collection (Perpetual)

Revenues (sales) are reported first, followed by
any period operating expenses. The outcome of sales less expenses,
which is net income (loss), is calculated from these accounts. Accounts Receivable increases because the customer owes sales tax and is paying it to the company. The company records https://kelleysbookkeeping.com/ a liability to show it owes the collected tax to a taxing authority. In a merchandising business, tracking purchases and tracking and valuing inventory are critical to the success of the business. Careful control of the cost of merchandise directly impacts the profit of a business.

Ethical Discounts

The next illustration contrasts the gross and net methods for the case where the discount is lost. The gross method simply reports the $5,000 gross purchase, without any discount. In contrast, the net method shows purchases of $4,900 and an additional $100 expense pertaining to lost discounts. While discounts may seem slight, they can represent substantial savings and should usually be taken. Consider the following calendar, assuming a purchase was made on May 31, terms 2/10, n/30.

Accounting for Sales Taxes

Their income statement format is a bit more complicated than for
a service company and is discussed in greater detail in

Describe and Prepare Multi-Step and Simple Income Statements for
Merchandising Companies. A simple retailer income statement is shown in

Figure 6.5 for comparison. Because you can’t sell from an empty shelf, we’ll start out our step-by-step accounting transaction discussion with the purchasing and inventory side of a merchandising business. Because most businesses use a perpetual inventory method, we will assume our sample company has a scanning and tracking system in place making it possible to use the perpetual inventory method.

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