Page 248 - Accounting Principles (A Business Perspective)

6. Merchandising transactions

transaction until 2010 January 5. If terms are FOB shipping point, the buyer includes the goods in its 2009
December 31, inventory, and both parties record the exchange transaction as of 2009 December 30.
Sometimes the seller prepays the freight as a convenience to the buyer, even though the buyer is ultimately

responsible for it. The buyer merely reimburses the seller for the freight paid. For example, assume that Wood
Company sold merchandise to Loud Company with terms of FOB shipping point, freight prepaid. The freight
charges were USD 100. The following entries are necessary on the books of the buyer and the seller:
Buyer—Loud Company Seller—Wood Company
Transportation-In (-SE) 100 Accounts Receivable (+A) 100
Accounts Payable (+L) 100 Cash (-A) 100
Such entries are necessary because Wood initially paid the freight charges when not required to do so.
Therefore, Loud Company must reimburse Wood for the charges. If the buyer pays freight for the seller (e.g. FOB
destination, freight collect), the buyer merely deducts the freight paid from the amount owed to the seller. The
following entries are necessary on the books of the buyer and the seller:
Buyer—Loud Company Seller—Wood Company
Accounts Payable (-L) 100 Delivery Expense (-SE) 100
100 Accounts Receivable (-A) 100
Cash (-A)
Purchase discounts may be taken only on the purchase price of goods. Therefore, a buyer who owes the seller for
freight charges cannot take a discount on the freight charges owed, even if the buyer makes payment within the
discount period. We summarize our discussion of freight terms and the resulting journal entries to record the
freight charges in Exhibit 37.
Merchandise inventory is the cost of goods on hand and available for sale at any given time. To determine
the cost of goods sold in any accounting period, management needs inventory information. Management must
know its cost of goods on hand at the start of the period (beginning inventory), the net cost of purchases during the
period, and the cost of goods on hand at the close of the period (ending inventory). Since the ending inventory of

the preceding period is the beginning inventory for the current period, management already knows the cost of the
beginning inventory. Companies record purchases, purchase discounts, purchase returns and allowances, and
transportation-in throughout the period. Therefore, management needs to determine only the cost of the ending
inventory at the end of the period in order to calculate cost of goods sold.
Taking a physical inventory Under periodic inventory procedure, company personnel determine ending
inventory cost by taking a physical inventory. Taking a physical inventory consists of counting physical units of
each type of merchandise on hand. To calculate inventory cost, they multiply the number of each kind of

merchandise by its unit cost. Then, they combine the total costs of the various kinds of merchandise to provide the
total ending inventory cost.
In taking a physical inventory, company personnel must be careful to count all goods owned, regardless of where
they are located, and include them in the inventory.

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