Basically, all merchandise iscapitalizedwhen it is purchased and recorded on the balance sheet as a current asset. The beginning inventory is equal to the prior year’s ending inventory, as determined by reference to the prior year’s ending balance sheet. The net purchases is extracted from this year’s ledger (i.e., the balances of Purchases, Freight-in, Purchase Discounts, and Purchase Returns & Allowances). Goods available for sale is the sum of beginning inventory and net purchases. Goods available for sale is not an account, per se; it is merely a defined result from adding two amounts together.
The journal entry to record the sale of the inventory follows the
entry for the sale to the customer. Whether or not a customer pays with cash or credit, a business
must record two accounting entries. One entry recognizes the sale
and the other recognizes the cost of the sale. The sales entry
consists of a debit to either Cash or Accounts Receivable (if
paying on credit), and a credit to the revenue account, Sales.
Cash and Credit Purchase Transaction Journal Entries
Accounting transactions for a merchandising business track sales transactions and purchase and inventory transactions. An important financial measurement for merchandising businesses is gross profit. When a physical count of inventory is conducted, the costs attached to these inventory items are totalled. This total is compared to the Merchandise Inventory account balance in the general ledger. Theft and deterioration of merchandise inventory are the most common causes of shrinkage. For example, assume that a retailer is considering an order for $4,000 in inventory on September 1.
As previously mentioned, a sale is usually considered a transaction between a merchandiser or retailer and a customer. When a sale occurs, a customer has the option to pay with cash or credit. For our purposes, let’s consider “credit” as credit extended from the business directly to the customer. It is possible to show these entries as one, since they affect the same accounts and were requested at the same time. An operating cycle is the amount of time it takes a company to use its cash to provide a product or service and collect payment from the customer.
However, the merchandise can vary greatly depending on the type of business and industry. A merchandising company is a company that buys goods and then resells them, generally for a higher price than they were purchased. There are two types of merchandising companies – retail and wholesale.
- Net purchases reflect the actual costs that were deemed to be ordinary and necessary to bring the goods to their location for resale to an end customer.
- Since the retailer doesn’t know at the point of sale whether or not the customer will qualify for the sales discount, the entire account receivable of $1,000 is recorded on the retailer’s journal.
- Discrepancies are recorded as an adjusting entry that debits cost of goods sold and credits Merchandise Inventory.
- Every company faces different challenges with returns, but one
of the most common challenges includes fake or fictitious returns. - The outcome of sales less expenses,
which is net income (loss), is calculated from these accounts.
A larger company will usually have an automated payment system where checks are scheduled to process concurrent with invoice discount dates. When we post this adjusting journal entry, you can see the ending inventory balance matches the physical inventory count and cost of good sold has been increased. To describe the discount terms, the manufacturer can write
descriptions such as 2/10, n/30 on the invoice. The “2” represents
a discount rate of 2%, the “10” represents the discount period in
days, and the “n/30” means “net of 30” days, representing the
entire payment period without a discount application. So, “2/10,
n/30” reads as, “The company will receive a 2% discount on their
purchase if they pay in 10 days.
Under the perpetual inventory system, the company can make the journal entry for merchandise purchased on credit by debiting the merchandise inventory account and crediting the accounts payable. Under the periodic inventory method, we do not record any purchase or sales transactions directly into the inventory account. The unadjusted trial balance for inventory represents last period’s ending balance and includes nothing from the current period. We will use the physical inventory count as our ending inventory balance and use this to calculate the amount of the adjustment needed.
CBS decides to keep the phones but receives a purchase allowance from the manufacturer of $8 per phone. For both the return and the allowance, if the customer had already paid their account in full, Cash would be affected rather than Accounts Receivable. At issue is that the employee of the outside organization is placed in a conflict between their personal interests and the interest of their employer. In these situations, it is best for the accountant’s employer to respect the other organization’s code of conduct.
What Does Merchandise Mean?
The perpetual inventory method has ONE additional adjusting entry at the end of the period. This entry compares the physical count of inventory to the inventory a small business guide to payroll management balance on the unadjusted trial balance and adjusts for any difference. There are two kinds of purchase discounts, cash discounts and
trade discounts.
3 Merchandise Inventory: Sales and Collection (Perpetual)
Be aware that the income statement for a merchandising company may not present all of this detail. Purchases, Purchase Returns and Allowances, Purchase Discounts, and Freight-in have all been illustrated. Each of these accounts is necessary to calculate the “net purchases” during a period. This would be based on the total invoice amount for all goods purchased during the period, as identified from the Purchases account in the ledger. Purchase discounts and purchase returns and allowances are subtracted.
Accounting for Purchases Returns and Allowances
Even though we do not see the word Expense this in fact is an expense item found on the Income Statement as a reduction to Revenue. Under the perpetual inventory method, we compare the physical inventory count value to the unadjusted trial balance amount for inventory. If there is a difference (there almost always is for a variety of reasons including theft, damage, waste, or error), an adjusting entry must be made. If the physical inventory is less than the unadjusted trial balance inventory amount, we call this an inventory shortage. These errands
may include buying products and services from local retailers, such
as gas, groceries, and clothing. As a consumer, you are focused
solely on purchasing your items and getting home to your family.
What is a journal entry?
You are probably not thinking about how your purchases impact the
businesses you frequent. Whether the business is a service or a
merchandising company, it tracks sales from customers, purchases
from manufacturers or other suppliers, and costs that affect their
everyday operations. There are some key differences between these
business types in the manner and detail required for transaction
recognition. The periodic inventory system does not maintain a constantly-updated merchandise inventory balance.
Let’s assume a guitar store sold goods for $500 to a customer that cost the store $100. As purchase results in increase in the expense and decrease in assets of the entity, expense must be debited while assets must be credited. A purchase also results in increase in inventory, however the accounting for inventory is kept separate from accounting for purchase as will be further discussed in the inventory accounting section. Upon receipt, the customer discovers the plants have been
infested with bugs and they send all the plants back. For example, when a shoe store sells 150 pairs of athletic
cleats to a local baseball league for $1,500 (cost of $900), the
league may pay with cash or credit.
