Page 256 - Accounting Principles (A Business Perspective)

6. Merchandising transactions

You should now understand the distinction between accounting for a service company and a merchandising
company. The next chapter continues the discussion of merchandise inventory carried by merchandising
companies.

Understanding the learning objectives
• In a sales transaction, the seller transfers the legal ownership (title) of the goods to the buyer.
• An invoice is a document, prepared by the seller of merchandise and sent to the buyer, that contains the

details of a sale, such as the number of units sold, unit price, total price, terms of sale, and manner of
shipment.
• Usually sales are for cash or on account. When a sale is for cash, the debit is to Cash and the credit is to
Sales. When a sale is on account, the debit is to Accounts Receivable and the credit is to Sales.
• When companies offer trade discounts, the gross selling price (gross invoice price) at which the sale is
recorded is equal to the list price minus any trade discounts.
• Two common deductions from gross sales are (1) sales discounts and (2) sales returns and allowances.
These deductions are recorded in contra revenue accounts to the Sales account. Both the Sales Discounts
account and the Sales Returns and Allowances account normally have debit balances. Net sales = Sales - (Sales

discounts + Sales returns and allowances).
• Sales discounts arise when the seller offers the buyer a cash discount of 1 per cent to 3 per cent to induce
early payment of an amount due.
• Sales returns result from merchandise being returned by a buyer because the goods are considered
unsatisfactory or have been damaged. A sales allowance is a deduction from the original invoiced sales price
granted to a customer when the customer keeps the merchandise but is dissatisfied.

• Cost of goodssold=BeginninginventoryNet costof purchases−Endinginventory .
Netcost of purchases=Purchases−Purchase discountsPurchase returnsTransportation−¿
• Two methods of accounting for inventory are perpetual inventory procedure and periodic inventory
procedure. Under perpetual inventory procedure, the inventory account is continuously updated during the
accounting period. Under periodic inventory procedure, the inventory account is updated only periodically—
after a physical count has been made.
• Purchases of merchandise are recorded by debiting Purchases and crediting Cash (for cash purchases) or
crediting Accounts Payable (for purchases on account).
• Two common deductions from purchases are (1) purchase discounts and (2) purchase returns and
allowances. In the general ledger, both of these items normally carry credit balances. From the buyer's side of

the transactions, cash discounts are purchase discounts, and merchandise returns and allowances are purchase
returns and allowances.
• FOB shipping point means free on board at shipping point—the buyer incurs the freight.
• FOB destination means free on board at destination—the seller incurs the freight.
• Passage of title is a term indicating the transfer of the legal ownership of goods.
• Freight prepaid is when the seller must initially pay the freight at the time of shipment.

• Freight collect is when the buyer must initially pay the freight on the arrival of the goods.

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