Chapter 5 Accounting for Merchandising Operations I Merchandising Operations A types of Merchandisers 1 Retailers consumers 2 Wholesalers merchandising companies who purchase and sell directly to merchandising companies that sell directly to wholesalers B Sales revenue C Cost of Goods Sold D Sales Revenue Cost of Goods Sold Gross Profit Operating expenses Net the total cost of merchandising sold during the period sale of merchandise income or Net Loss E Operating Cylce 1 Service Company F Flow of Costs i Cash Perform service Accounts Receivable Cash Circle 2 Merchandising Company i Cash Buy Inventory Merchandise Inventory Sell Inventory Accounts Receivable Receive Cash Cash Circle 1 Perpetual Inventory System of each cost Continously Perpetually show what inventory is on hand for sale i Determine the cost of a good sold each time a sale occurs companies keep detailed records of the Records inventory purchase and sale 2 Periodic System companies do not keep detailed inventory records of the goods on hand throughout the period Determine the costs of the goods sold only at the end of the accounting period i Determine the cost of goods on hand at beginning of accounting period ii Add to it the cost of goods purchased iii Subtract the cost of goods on hand at the end of the accounting II Recording Purchases of Merchandise period A Use Invoices to prove transaction occurred B Accounts affected Buyer 1 Merchandise Inventory Asset Debit 2 Accounts Payable Liability Credit C Freight Costs 1 Free On Board FOB Destination to the buyers place of business and the SELLER PAYS for freight seller places the goods free on board i Delivery Expense Expense Debit ii Cash Asset Credit 2 Free On Board FOB Shipping carrier and the Buyer Pays for freight seller places goods free on board the i Merchandise Inventory Expense Debit ii Cash Asset Credit iii Price part of merchandise purchssed and thus an expense D Purchase Discount Cash discount for prompt Payment 1 Credit Terms i 2 10 n 30 2 discount if payed within 10 days If not payed total due in 30 days ii 1 10 EOM 1 discount if payed within first 10 days of the iii Paying with a discount reduces the merchandise inventory 2 10 n 30 next month 3500 Accounts Payable Cash Merchandise Inventory Accounts Payable Cash n 30 3430 70 3500 3500
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