BAF 3M
10.1 The Merchandising Business
Name:
A merchandising business is either a wholesaler that buys goods from a manufacturer and sells to
a retailer or a retailer that buys goods from manufacturers and wholesalers and sells them to the
public. Merchandise inventory is an asset that is the quantity of goods in stock that will be sold.
Physical inventory is the process of counting and totalling the cost of inventory. In a periodic
inventory system, beginning inventory and ending inventory are how much merchandise inventory
there is at the beginning and end of the accounting period.
Purchases is an expense that is the cost of goods purchased in a period that will be sold.
The cost of goods sold is an expense that is the cost of the inventory that was sold in the period.
Cost of
beginning
inventory
+
Cost of
goods
purchased
Cost of
ending
=
inventory
Cost of
goods
sold
Cost of goods available for sale is beginning inventory plus purchases. Gross profit, or gross
margin is sales minus cost of goods sold. Markup is gross profit divided by cost of goods sold.
Sales is the revenue account for a merchandising business.
Example
Use the following amounts to make the income statement for Eastern Trading Company, December
31, 2016.
Sales $231,967; Inventory, January 1 $55,325; Purchases $120,402; Inventory, December 31
$57,350; Bank Charges Expense $375; Building Maintenance Expense $875; Car Expense $2,507;
Depreciation Expense $1,075; Miscellaneous Expense $275; Rent Expense $12,000; Telephone
Expense $957; Utilities Expense $1,850; Wages Expense $36,587.
Use the following amounts to make the income statement for Western Trading Company, December
31, 2016.
Sales $265,829; Inventory, January 1 $49,682; Purchases $117,359; Inventory, December 31
$60,130; Bank Charges Expense $295; Building Maintenance Expense $904; Car Expense $2,358;
Depreciation Expense $1,121; Miscellaneous Expense $320; Rent Expense $11,500; Telephone
Expense $964; Utilities Expense $1,795; Wages Expense $38,276.