Merchandising Transactions

Summary :

This chapter covers journal entries for sales and purchase transactions involving merchandise, the distinction between perpetual and periodic inventory procedures, freight terms, and how cost of goods sold is determined. It concludes with preparing a classified income statement and analyzing the gross margin percentage the business achieves on its merchandise.

Recording sales and purchases of merchandise

Sales transactions are recorded with entries that recognize revenue and, under the perpetual method, remove the sold goods from inventory at the same time. Purchase transactions record merchandise coming into the business, together with any purchase discounts or returns that affect the final recorded cost of the goods bought, which later flows through into cost of goods sold.

Perpetual versus periodic procedures, and freight

Perpetual inventory procedure updates the inventory account with every purchase and sale, while periodic procedure determines cost of goods sold only at the end of the period through a physical count. Freight terms determine who bears shipping cost and exactly when title to the goods transfers, both of which affect how transportation costs on merchandising transactions are ultimately recorded in the accounts.

Cost of goods sold and the classified income statement

Cost of goods sold is calculated by combining beginning inventory, net purchases, and ending inventory, and it is typically the largest single expense on a merchandising company's income statement. The chapter shows how to present this figure within a classified income statement, and introduces the gross margin percentage as a way to analyze how efficiently the business is pricing and selling its goods.