Lesson: Merchandise Accounting
There are two methods:
1. Periodic
2. Perpetual
1. Journalize
To Learn and Practice:
“First Practice” W ho le
Cycle from Worksheet on.
Remember you can review
ALL of this online WITH
practice exercises at:
New concept of selling a good versus a service
Requires understanding of Inventory vs. Supplies
Go over inventory cycle here.
www.StudCo.ca
New accounts:
Merchandise Inventory
Sales, not Fees Earned
Sales Discounts
Sales Returns and Allowances (contra)
Purchases
Purchase Discounts
Purchase Returns and Allowances (contra)
Freight-in
Freight-out (delivery expense)
To Learn and Practice:
“Merch. Lesson” Jo urnal
Entries (printout)
2. Post
Nothing new.
3. On Worksheet: Balance with Trial Balance
Nothing new.
4. On Worksheet: Perform adjustments and complete
Inventory cycle: (B+P-PD-PRA+FI-E=COGS); inventory count (just like supplies)
O/H – New lines, calculate COGS
5. Produce Financial Statements
New Format for I/S
6. Journalise and Post Adjustments
To Learn and Practice:
To Learn and Practice:
“E xercise 22” pg 395 in workbook
Schedule of Cost of Goods
Sold (COGS section of Income
Statement.)
“Exercise 17” pg 386
Assignment (worksheet,
adjustments, closing entries)
Same
7. Closing Entries
Still close out all accounts from Drawings down.
But also must update Merchandise inventory
BAF 3M1 Note - Serv vs Merchan
December 13, 2006
J. Boulton
Service Business
vs.
Merchandising Business
1. Journal Entries
(A) Paying for Goods or Services or Buying Assets (A)
G e n e ral J o u rna l
D a te
P a rtic u la rs
2002
Ja n
G e n e ral J o u rna l
PAG E: ______
D e b it
P .R .
4 S u p p lie s
D a te
C re d it
2002
Ja n
5 4 0 ~
G S T R e co ve ra b le
P a rtic u la rs
PAG E: ______
P .R .
4 A u to E xp e n se
A cco u n ts P a ya b le
5 7 0 ~
P u rch a se d $ 5 0 0 o f su p p lie s o n
a cco u n t p lu s G S T a n d P S T .
C re d it
5 4 0 ~
G S T R e co ve ra b le
3 0 ~
D e b it
3 0 ~
A cco u n ts P a ya b le
Whether an
expense or an
asset, there is NO
difference here
between the two.
5 7 0 ~
B o u g h t $ 5 0 0 o f g a s o n a cco u n t
a ll ta xe s w e re a p p lica b le .
(A) Returning (or receiving credit for) Items Other Than Merchandise (A)
G e n e ral J o u rna l
D a te
2002
Ja n
PAG E: ______
P a rtic u la rs
P .R .
D e b it
G e n e ral J o u rna l
D a te
C re d it
2002
5 A cco u n ts P a ya b le
5 7 0 ~
G S T R e co ve ra b le
Ja n
PAG E: ______
P .R .
5 A cco u n ts P a ya b le
3 0 ~
S u p p lie s
P a rtic u la rs
D e b it
C re d it
5 7 0 ~
G S T R e co ve ra b le
5 4 0 ~
3 0 ~
A u to E xp e n se
R e tu rn e d $ 5 0 0 o f su p p lie s b o u g h t o n a cco u n t
R e ce ive d cre d it fo r $ 5 0 0 o f g a s
G S T a n d P S T w e re a p p lica b le
G S T a n d P S T w a s a p p lica b le
5 4 0 ~
NOTE that instead of Accounts Payable,
this could be Bank or Accounts Receivable,
if w e’ve alread y p aid for th e good s. T h is is
true for ALL returns.
(A2) Paying for the Purchase of MERCHANDISE (Goods for Resale) (A2)
Remember: the
“P U R C H A S E S ” accoun t is
only for the purchase of
merchandise for resale.
G e n e ral J o u rna l
D a te
P a rtic u la rs
2002
Ja n
PAG E: ______
P .R .
4 P u rch a se s
4 2 ~
A cco u n ts P a ya b le
IMPORTANT: Suppliers do
not charge PST on items that
will be resold.
C re d it
7 0 0 ~
G S T R e co ve ra b le
The difference is
here when
merchandise is
bought or returned.
There is no
comparable
equivalent for a
service business.
D e b it
7 4 2 ~
P u rch a se d $ 7 0 0 o f g o o d s o n a cco u n t
O n ly G S T a p p lie s.
(A2) Returning a Purchase of MERCHANDISE (A2)
G e n e ral J o u rna l
Likewise, BOTH of the
Returns and Allowances
accounts are for use
only when merchandise
items are returned.
D a te
2002
Ja n
P a rtic u la rs
PAG E: ______
P .R .
5 A cco u n ts P a ya b le
D e b it
C re d it
7 4 2 ~
G S T R e co ve ra b le
P u rch a se R e tu rn s & A llo w a n ce s
4 2 ~
7 0 0 ~
R e tu rn e d $ 5 0 0 o f g o o d s b o u g h t o n a cco u n t
O n ly G S T w a s a p p lica b le .
BAF 3M1 Note - Serv vs Merchan
December 13, 2006
J. Boulton
Service Business
Merchandising Busi
(B) Selling a Good or Service (B)
G e n e ral J o u rna l
D a te
2002
Ja n
P a rtic u la rs
PAG E: ______
P .R .
5 A cco u n ts R e ce iva b le
D e b it
G e n e ra l J o u rn a l
D a te
C re d it
P a rtic u la rs
2002
1 0 6 0 ~
G S T P a ya b le
F e e s R e ve n u e
Jan
PAG E: ______
P .R .
5 A c c o u n ts R e c e iva b le
6 0 ~
G S T P a ya b le
1 0 0 0 ~
P S T P a ya b le
P e rfo rm e d le g a l se rvice s
D e b it
1 1 4 0 ~
6 0 ~
8 0 ~
S a le s
o n a cco u n t fo r $ 1 0 0 0 . N o P S T
C re d it
1 0 0 0 ~
S o ld g o o d s o n a c c o u n t fo r
$ 1 0 0 0 . G S T a n d P S T a p p lie d
Remember: there is
no PST on services.
(B) Having a Sale Returned or Granting a Credit for a Service Performed (B)
NOTE that instead of
Accounts Receivable, this
could be Bank or Accounts
Payable if the customer has
already paid.
G e n e ra l J o u rn a l
D a te
2002
Jan
P a rtic u la rs
5 F e e s R e ve n u e
G S T P a ya b le
A c c o u n ts R e c e iva b le
PAG E: ______
P .R .
D e b it
G e n e ra l J o u rn a l
D a te
C re d it
2002
1 0 0 0 ~
Jan
6 0 ~
1 0 6 0 ~
C re d it g ive n to ira te c u s to m e r
P a rtic u la rs
PAG E: ______
D e b it
P .R .
5 S a le s R e tu rn s & A llo w a n c e s
1 0 0 0 ~
G S T P a ya b le
6 0 ~
P S T P a ya b le
8 0 ~
A c c o u n ts R e c e iva b le
fo r $ 1 0 0 0 . N o P S T a p p lie d
C re d it
1 1 4 0 ~
S a le s o n a c c o u n t o f $ 1 0 0 0 w e re
re tu rn e d . B o th ta x e s a p p lie d .
Remember: there is
no PST on services.
BOTH of the Returns and
Allowances accounts are for
use only when merchandise
items are returned.
Remember:
Value Before = Value with taxes
Taxes
(1 + tax rate)
BAF 3M1 Note - Serv vs Merchan
December 13, 2006
J. Boulton
Service Business
Merchandising Business
2. Posting
There is no difference here.
3. Worksheet
NOTE: the only difference on the Worksheet is the line for Merchandise Inventory. All other accounts
(new and old) are handled in the same fashion. Can you see how the 5 lines below calculate the
C o st o f G o o d s S o ld ? T h a t’s w h y th e y’re liste d on the Income Statement.
A P artial W ork s heet for a M e rch a n d isin g C om pany
A c c ounts
Trial B alanc e
DR
M erc handis e Inventory
P urc has es
A djus tm ents
CR
13 5 0 0 ~
5 0 0 0 ~
Inc om e S tatem ent
CR
B alanc e S heet
DR
CR
DR
13 5 0 0 ~
15 2 5 0 ~
15 2 5 0 ~
CR
5 0 0 0 ~
P urc has e D is c ounts
2 5 0 ~
P urc has e R eturns and A llow anc es
5 0 0 ~
F reight-in
DR
5 0 0 ~
2 5 0 ~
5 0 0 ~
5 0 0 ~
Beginning
Inventory
Inventory appears on
the I/S because it is
needed to calculate
the C.O.G.S.
Ending
Inventory
4. Adjusting Entries
There is no difference here
BAF 3M1 Note - Serv vs Merchan
December 13, 2006
J. Boulton
5. The Financial Statements
NOTE: there is no real difference in the way you construct the Balance Sheet. You
use the new 3-column format for both types of businesses. The only exception is the
M erch an d ise In ven to ry acco u n t: it o b vio u sly d o esn ’t ap p ear o n th e B alan ce S h eet o f
a Service company since you have no inventory.
There are numerous differences in the Income Statement between a service company
and a merchandising business. The largest difference is that a service business has
no need for a Cost of Goods Sold section.
From the worksheet the following statements would be constructed:
A Ser vi ce C om p an y
I ncom e Statem ent
M onth Ended January 31, 2003
R even u e
Fees Revenue
$
10,000
Total Revenue
$
10,000
O per at i n g E xpen ses
A uto Expense
$
1,000
D elivery Expense
100
D epreciation Expense - A uto
300
I nsurance Expense
200
Salaries Expense
1,500
Supplies Expense
500
Total Oper ati ng Expenses
I n com e bef or e I n t er est , T axes
3,600
(an d
E xt r aor di n ar y I t em s)
L oss on D isposal of A sset
$
$
1,000
Total Non-Oper ati ng Expenses
N et I n com e
BAF 3M1 Note - Serv vs Merchan
December 13, 2006
6,400
1,000
$
5,400
J. Boulton
A M erchandising Company
Income Statement
Month Ended January 31, 2003
Operating Revenue
Sales
$ 10,000
Less: Sales Discounts
(100)
Less: Sales Returns and A llowances
(400)
(500)
Net Sales
$
9,500
Cost of Goods Sold
Merchandise Inventory, January 1
A dd: Purchases
$ 13,500
$
5,000
Less: Purchase Discounts
(250)
Less: Purchase Returns and A llowances
(500)
Net Purchases
4,250
A dd: Freight-in
500
Goods A vailable for Sale
18,250
Less: Merchandise Inventory, January 31
(15,250)
Cost of Goods Sold
3,000
Gross Profit
$
6,500
Operating Expenses
A uto Expense
$
1,000
Freight-out/Delivery Expense
100
Depreciation Exp. - A uto
300
Insurance Expense
200
Salaries Expense
1,500
Supplies Expense
500
Total Operating Expenses
3,600
Operating Income (Incom e befor e Inter es t,
$
Taxes and Extr aor dinar y Item s )
Loss on Disposal of A sset
$
1,000
Total Non-Operating Expenses
Net Income
BAF 3M1 Note - Serv vs Merchan
December 13, 2006
2,900
1,000
$
1,900
J. Boulton
6. Closing Entries
This is an asset. It is the new
inventory balance. This is why
it’s a d eb it. T his entry sets u p
the new inventory balance in
the account for next period.
Ge n e r a l Jo u r n a l
Da te
2003
Jan
G e n e r a l Jo u r n a l
PA GE: _ _ _ _ _ _
Da te
Pa r tic u la r s
31 F ees R evenue
P.R.
De b it
Cr e d it
Jan
10 0 0 0 ~
Inc om e S um m ary
10 0 0 0 ~
Pa r tic u la r s
2003
PA G E: _ _ _ _ _ _
P.R.
31 S ales
P urc has e D is c ounts
P urc has e R eturns & A llow anc es
31 Inc om e S um m ary
M e rch a n d ise In ve n to ry (e n d in g )
4 6 0 0 ~
A uto E x pens e
1 0 0 0 ~
D elivery E x pens e
1 0 0 ~
D eprec iation E x p. - A uto
3 0 0 ~
Ins uranc e E x pens e
2 0 0 ~
Los s on dis pos al of A s s et
1 0 0 0 ~
S alaries E x pens e
1 5 0 0 ~
S upplies E x pens e
5 0 0 ~
31 Inc om e S um m ary
5 4 0 0 ~
J. S m ith, C apital
5 4 0 0 ~
De b it
10 0 0 0 ~
2 5 0
5 0 0 ~
15 2 5 0 ~
Inc om e S um m ary
31 Inc om e S um m ary
26 0 0 0 ~
24 1 0 0 ~
M e rch a n d ise In ve n to ry (b e g in .)
13 5 0 0 ~
A uto E x pens e
1 0 0 0 ~
D elivery E x pens e
1 0 0 ~
D eprec iation E x p. - A uto
3 0 0 ~
Ins uranc e E x pens e
2 0 0 ~
Los s on dis pos al of A s s et
1 0 0 0 ~
P urc has es
5 0 0 0 ~
F reight-in
5 0 0 ~
S alaries E x pens e
31 J. S m ith, C apital
J. S m ith, D raw ings
5 0 0 ~
5 0 0 ~
BAF 3M1 Note - Serv vs Merchan
December 13, 2006
1 5 0 0 ~
S ales D is c ounts
1 0 0 ~
S ales R eturns & A llow anc es
4 0 0 ~
S upplies E x pens e
5 0 0 ~
31 Inc om e S um m ary
This credit entry
eliminates the old
inventory balance from
the account to start
fresh for next period.
Cr e d it
1 9 0 0 ~
J. S m ith, C apital
31 J. S m ith, C apital
J. S m ith, D raw ings
1 9 0 0 ~
5 0 0 ~
5 0 0 ~
J. Boulton