HOSP 1210 (Financial Acct)

Learning Centre

Accounting for Merchandising

Operations
Recording transactions related to the purchase of merchandise can be difficult as the
entries change depending on whether the transaction is occurring from the perspective
of the BUYER or the SELLER. It is very important to be clear about which company is
which when asked to record a transaction in the journal.
There are four transactions listed below, with the BUYERs journal entries to the left and
the corresponding entries in the SELLERs journal to the right.
(1) Purchase/sale of merchandise:
For the buyer, purchases of merchandise are recorded in the Merchandise
Inventory account. Merchandise can either be bought on account or paid for with
cash. For the seller, the journal entries are a bit more involved. The first entry
recognizes the revenue earned on the sale and the second entry deals with
recognizing the expense (Cost of Goods Sold) and the depletion of the sellers
Merchandise Inventory.

Date

BUYER
MerchandiseInventory
AccountsPayable**

SALESOFMERCHANDISE
Debit Credit SELLER
$800
AccountsReceivable**

$800 SalesRevenue

CostofGoodsSold

MerchandiseInventory
**couldalsobeCash

Debit
$800

$560

Credit

$800

$560

(2) Sales returns & allowances:

The buyer returns goods that are damaged or defective, or are not what the
buyer ordered. The buyer receives a credit (if the goods were bought on account)
or cash (if the goods were bought with cash) and merchandise inventory is
reduced by the value of the goods returned. A purchase allowance is similar,
except the buyer chooses to keep the merchandise. For the seller, the expense
account Sales Returns & Allowances must be debited, and the payment (A/R or
cash) credited for the amount of returned goods. Similarly, Merchandise
Inventory and Cost of Goods Sold must also be adjusted for the cost of goods
returned. (This second entry does not occur when a sales allowance is granted).

Date

SALESRETURNS&ALLOWANCES
Debit Credit SELLER
$400
SalesReturns&
Allowances
MerchandiseInventory
$400 AccountsReceivable**

MerchandiseInventory

CostofGoodsSold
**couldalsobeCash
BUYER
AccountsPayable**

2013 Vancouver Community College Learning Centre.

Student review only. May not be reproduced for classes.

Debit
$400

Credit

$280

$400

$280

Authored by Emily Simpson

(3) Sales Discounts:

If the goods are bought on account, the buyer may receive a cash discount for
prompt payment of the purchase. When an invoice is paid within the discount
period (which would be specified by the credit terms of the invoice), both Cash
and Merchandise Inventory are credited. Cash is the actual amount paid after
discount, and the balance of the total purchase goes to Merchandise Inventory.
This makes sense since the buyer has reduced the cost of the merchandise by
paying within the specified discount period. The seller has comparable entries,
but debits the expense account Sales Discount for the amount of discount
offered on payment.

Date

BUYER
AccountsPayable
Cash
MerchandiseInventory

Debit
$400

SALESDISCOUNTS
Credit SELLER

Cash
$380 SalesDiscount
$20
AccountsReceivable

Debit
$380
$20

Credit

$400

(4) Freight Costs:

The buyer or the seller may be responsible for the cost of transporting the
merchandise to the buyers business (called freight costs). FOB shipping point
means the buyer pays the costs of shipping. In the buyers books, a transaction
with FOB shipping point is recorded as costs debited to Merchandise Inventory
and credit to cash for payment. FOB destination means the seller pays the
shipping costs. When the seller is recording a payment for FOB destination, the
shipping costs are debited to the expense account, Freight-out. Payment for
shipping costs is always credited to Cash.

Date

BUYER(FOBshipping
point)
MerchandiseInventory
Cash

SHIPPINGCOSTS
Debit Credit SELLER(FOBdestination)

Debit

Credit

$50

$50

$50

$50

Freightout
Cash

Remember that there may be transactions related to purchases of merchandise

that are not specifically any of the transactions outlined above, but use the material
youve learned earlier in the course.
Example: JZ Sports sells $700 worth of merchandise, terms n/30 to Newport Equipment.
On January 10, JZ Sports receives Newport Equipments payment of the account in full.
Journalize the Jan 10 transaction.
Solution: Note that the terms do not include any discount offer so the full amount will be
paid. JZ Sports receives cash and accounts receivable is reduced.
Jan 10
Cash
$700
Accounts Receivable
$700

2013 Vancouver Community College Learning Centre.

Student review only. May not be reproduced for classes.

Exercises
1.

On October 5, MDMaxx buys 50 pairs of jeans on account from Zinc Co. The
selling price of the jeans is $65 per pair and the cost to Zinc Co. is $40 per pair.
On October 10, MDMaxx returned 10 pairs of jeans that were not the specified
size. Record the transactions in both books assuming a perpetual inventory
system.

2. Gambits & Games needs to record the following transactions in their journal.
a. On February 3, purchased merchandise from Antics Co. for $15,000 terms
3/10, net/30, FOB destination.
b. On February 6, purchased equipment on account for $12,000.
c. On February 8, returned defective merchandise to Antics Co. and was
granted a $5,000 allowance for returned merchandise.
d. On February 12, paid the amount due to Antics Co. in full.
(A) Prepare entries for the company under a perpetual inventory system.
(B) Assume that on the Feb 3 transaction, the terms were for FOB shipping point
and freight costs of $800 were paid on Feb 5. Prepare the journal entry to record
this transaction.
(C) Assume that Gambits & Games paid the full amount due to Antics Co. on
February 27th instead of February 12th. Prepare the journal entry to record this
payment.
3. On November 1, Marks Polo Wear had an inventory of 40 blazers at a cost of
$52 each. The company uses a perpetual inventory system. During November,
the following transactions occurred. Journalize the November transactions under
a perpetual inventory system.
Nov. 4 Purchased60blazersat$52eachfromAlizeCo.,FOBshippingpoint

7 Paidfreightof$90onblazerspurchasedfromAlizeCo.

11 Returned5blazerstoAlizeCo.for$260cashrefund(including
freight)becausetheyweredamaged.

13 Sold40blazersatacostof$52eachtoDeLucoCountryClubfor$75
eachterms2/10,n/30,FOBdestination.

14 Paidfreightcostsof$60formerchandisesoldtoDeLucoCountry
Club.

17 Grantedcreditof$150toDeLucoCountryClubforreturnof2
damagedblazers.

20 ReceivedpaymentinfullfromDeLucoCountryClub.

21 Sold10blazerscosting$52eachat$75eachtoB.Ling,forcash.

23 Grantedallowanceof$225toB.Lingforclothingthatdidnotfit
properly.

24 Purchased30blazersat$52eachfromAlizeCo.,terms4/10,n/30,
FOBdestination.

30 PaidAlizeCo.amountdueinfull.

2013 Vancouver Community College Learning Centre.

Student review only. May not be reproduced for classes.

Solutions
1.
MDMaxx
5Oct MerchandiseInventory
AccountsPayable
10Oct AccountsPayable
MerchandiseInventory
ZincCo.
5Oct AccountsReceivable
SalesRevenue

CostofGoodsSold
MerchandiseInventory
10Oct SalesReturns
AccountsReceivable
MerchandiseInventory
CostofGoodsSold

3,250
3,250
650
650
3,250
3,250
2,000
2,000
650
650
400
400

2.
(A)Gambits&Games
3Feb MerchandiseInventory
AccountsPayable
6Feb Equipment
AccountsPayable
8Feb AccountsPayable
MerchandiseInventory
12Feb AccountsPayable
Cash
MerchandiseInventory

15,000
15,000
12,000
12,000
5,000
5,000
10,000
9,700
300

(B)
5Feb MerchandiseInventory
Cash

800

(C)
27Feb AccountsPayable
Cash

10,000

800

10,000

3.
4Nov MerchandiseInventory
Cash
7Nov MerchandiseInventory
Cash
11Nov Cash
MerchandiseInventory

3,120.00
3,120.00
90.00
90.00
260.00

2013 Vancouver Community College Learning Centre.

Student review only. May not be reproduced for classes.

260.00

13Nov AccountsReceivable
SalesRevenue
CostofGoodsSold
MerchandiseInventory
14Nov Freightout
Cash
17Nov SalesReturns
AccountsReceivable
MerchandiseInventory
CostofGoodsSold
20Nov SalesDiscounts
Cash
AccountsReceivable
21Nov Cash
SalesRevenue
CostofGoodsSold
MerchandiseInventory
23Nov SalesAllowances
Cash
24Nov MerchandiseInventory
AccountsPayable
30Nov AccountsPayable
Cash
MerchandiseInventory

3,000.00
3,000.00
2,080.00
2,080.00
60.00
60.00
150.00
150.00
104.00
104.00
57.00
2,793.00
2,850.00
750.00
750.00
520.00
520.00
225.00
225.00
1,560.00
1,560.00
1,560.00

2013 Vancouver Community College Learning Centre.

Student review only. May not be reproduced for classes.

1,497.60
62.40