Accounting for Merchandising Operations Recording Purchases of Merchandise

Summary

This video introduces the basics of merchandising operations, focusing on the differences between retail and wholesale companies. It explains how merchandising companies generate revenue by buying and reselling goods, and compares their operating cycles to service companies. The video covers key financial concepts such as sales revenue, gross profit, and net income, using simple examples like selling water bottles. It also delves into inventory systems (perpetual vs periodic), purchase recording, freight costs, and purchase returns and discounts, providing practical journal entry examples for accounting purposes.

Takeaways

• 🛍️ Merchandising companies buy goods and resell them at higher prices, generating revenue through buying and selling goods.
• 🏬 There are two types of merchandising companies: retail (sells directly to consumers) and wholesale (buys in bulk and resells to retailers).
• 📉 The operating cycle of a merchandising company is longer than that of a service company due to the purchase and resale of tangible goods.
• 💵 Sales revenue is the primary source of income for merchandising companies, calculated by multiplying the number of items sold by the selling price.
• 💰 Gross profit is calculated by subtracting the cost of goods sold (COGS) from sales revenue. Net income is determined after subtracting operating expenses.
• 🛠️ Merchandising companies use either a perpetual or periodic inventory system to track goods. Perpetual systems continuously update records, while periodic systems update at specific intervals.
• 📦 The flow of costs includes beginning inventory, adding the cost of goods purchased, and calculating the cost of goods sold after subtracting ending inventory.
• 🧾 Purchases of merchandise are recorded upon receipt of goods, using cash or credit, with supporting documents like invoices.
• 🚚 Freight costs can be handled by either the buyer (FOB shipping point) or seller (FOB destination), depending on the shipping agreement.
• 🎯 Purchase returns and allowances are made when goods are defective or not meeting specifications. Discounts can be applied for early payment, benefiting both buyers and sellers.

Q & A

What is a merchandising company?

A merchandising company is a company that buys goods and resells them, typically for a higher price. There are two types of merchandising companies: retail, which sells directly to customers, and wholesale, which buys in bulk from manufacturers and resells to retailers or other wholesalers.

How is the operating cycle of a merchandising company different from that of a service company?

The operating cycle of a merchandising company is longer than that of a service company because merchandising involves the purchase and resale of tangible goods. The inclusion of inventory in the cycle extends its length, unlike service companies, which primarily sell services and do not maintain inventory.

How do you calculate the gross profit for a merchandising company?

Gross profit is calculated by subtracting the cost of goods sold (COGS) from sales revenue. For example, if 5 bottles of water are sold at $1 each, the sales revenue is $5. If the cost per bottle is $0.50, the COGS is $2.50, leading to a gross profit of $2.50 ($5 - $2.50).

What are the two inventory systems used by merchandising companies?

The two inventory systems are the perpetual system and the periodic system. The perpetual system maintains detailed, continuous records of inventory and COGS, while the periodic system updates inventory at specific intervals, determining COGS at the end of the accounting period.

How do you calculate the cost of goods sold (COGS) under a periodic system?

To calculate COGS under a periodic system, you start with the beginning inventory, add the cost of goods purchased, and subtract the ending inventory. For example, if the beginning inventory is $100,000 and purchases are $800,000, the cost of goods available for sale is $900,000. If the ending inventory is $125,000, the COGS is $775,000 ($900,000 - $125,000).

What is FOB shipping point, and how does it affect freight costs?

FOB (Free on Board) shipping point means that the buyer pays the freight costs, and ownership of the goods transfers to the buyer at the seller's business location. The buyer is responsible for the goods during transit.

What is FOB destination, and who is responsible for freight costs?

FOB (Free on Board) destination means that the seller pays the freight costs, and ownership transfers to the buyer at the buyer's place of business. The seller is responsible for the goods while in transit.

How is a purchase return recorded in the accounting system?

When a buyer returns merchandise, the inventory decreases, so the inventory account is credited. Accounts payable also decreases, so it is debited. For example, if Sam's Appliances returns goods worth $200, inventory is credited by $200, and accounts payable is debited by $200.

What are purchase discounts, and how are they beneficial to both the buyer and the seller?

Purchase discounts are cash discounts offered to buyers for prompt payment. They benefit the buyer by saving money and benefit the seller by shortening the operating cycle and encouraging quicker payment.

How is a purchase discount recorded when paying within the discount period?

If the buyer pays within the discount period, the accounts payable is debited by the full amount, inventory is credited by the discount amount, and cash is credited by the net payment. For example, if the gross amount is $3,300 with a 2% discount, accounts payable is debited by $3,300, inventory is credited by $66, and cash is credited by $3,234.