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. The number of days allowed for both the discount
period and the full payment period begins counting from the invoice
date. Their income statement format is a bit more complicated than for
a service company and is discussed in greater detail in
Describe and Prepare Multi-Step and Simple Income Statements for
Merchandising Companies. A simple retailer income statement is shown in
Figure 6.5 for comparison.
- Companies debit the Merchandise Inventory account for each purchase and credit it for each sale so that the current balance is shown in the account at all times.
- Service companies do not sell tangible goods to produce income; rather, they provide services to customers or clients who value their innovation and expertise.
- Transactions 1 through 3 are for purchases under the perpetual inventory system.
- Purchases account is a temporary account for the merchandise purchased in which its normal balance is on the debit side.
- Remember, to close means to make the balance zero and we do this by entering an entry opposite from the balance in the trial balance.
In contrast, the net method shows purchases of $4,900 and an additional $100 expense pertaining to lost discounts. While discounts may seem slight, they can represent substantial savings and should usually be taken. Consider the following calendar, assuming a purchase was made on May 31, terms 2/10, n/30.
Purchase Discounts (Perpetual)
Had the terms been F.O.B. Chicago, then Hair Port Landing would have to bear the freight cost. In the U.S., the F.O.B. point is normally understood to represent the place where ownership of goods transfers. Along with shifting ownership comes the responsibility for the purchaser to assume the risk of loss, pay for the goods, and pay freight costs beyond the F.O.B. point. 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.
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. Business owners may encounter several sales situations that can
help meet customer needs and control inventory operations. For
example, some customers will expect the opportunity to buy using
short-term credit and often will assume that they will receive a
discount for paying within a brief period.
Credit Purchase
To recognize a return or allowance, the retailer will reduce
Accounts Payable (or increase Cash) and reduce Merchandise
Inventory. Accounts Payable decreases if the retailer has yet to
pay on their account, and Cash increases if they had already paid
and received a subsequent refund. Merchandise Inventory decreases
to show the reduction of inventory cost from the retailer’s
inventory stock. Note that if a retailer receives a refund before
they make a payment, any discount taken must be from the new cost
of the merchandise less the refund. There are differing opinions as to whether sales returns and allowances should be in separate accounts.
1 Compare and Contrast Merchandising versus Service Activities and Transactions
When a customer returns the merchandise, a retailer issues a
credit memo to acknowledge the change in contract and reduction to
Accounts Receivable, if applicable. The retailer records an entry
acknowledging the return by reducing either Cash or Accounts
Receivable and increasing Sales Returns and Allowances. Cash would
decrease if the customer had already paid for the merchandise and
cash was thus refunded to the customer. Accounts Receivable would
decrease if the customer had not yet paid on their account.
On the other hand, the company that uses a periodic inventory system will not record the merchandise purchased directly into the inventory account but record it into a temporary account, e.g. the purchases account. And the merchandise inventory account will usually only be updated cma exam difficulty when the company performs the physical count of the remaining merchandise inventory that it has on hand (usually at the end of the period). In merchandising business, purchasing merchandise is one of the main activities that the merchandising company operates in its business.
What is merchandise in accounting?
Like
Sales Discounts, the sales returns and allowances
account is a contra revenue account with a normal debit balance
that reduces the gross sales figure at the end of the period. Like Sales Discounts, the sales returns and allowances account is a contra revenue account with a normal debit balance that reduces the gross sales figure at the end of the period. They can be current liabilities, such as accounts payable and accruals, or long-term liabilities, such as bonds payable or mortgages payable.
3: Basic Merchandising Transactions (Perpetual Inventory System)
Once those reductions are recorded at the
end of a period, net sales are calculated. Net
sales (see
Figure 6.7) equals gross sales less sales discounts, sales
returns, and sales allowances. Recording the sale as it occurs
allows the company to align with the revenue recognition principle. The revenue recognition principle requires companies to record
revenue when it is earned, and revenue is earned when a product or
service has been provided.
Purchase Returns and Allowances Transaction Journal Entries
Goods available for sale is not an account, per se; it is merely a defined result from adding two amounts together. The total cost incurred (i.e., cost of goods available for sale) must be “allocated” according to its nature at the end of the year. The cost of goods still held are assigned to inventory (an asset), and the remainder is attributed to cost of goods sold (an expense). Please note that the entire $1,000 account receivable created is eliminated under both payment options. However, when the discount was received by the customer, the retailer received $980, and the remaining $20 is recorded in the sales discount account. To illustrate, assume that Carter Candle Company received a shipment from a manufacturer that had 150 candles that cost $150.