ACCOUNTING FOR ACCOUNTING FOR MERACHANDISING MERACHANDISING

BUSINESSBUSINESS

Inventory SystemsInventory Systems

Two types of inventory systems which keep Two types of inventory systems which keep track of how much inventory has been sold track of how much inventory has been sold and at what price.and at what price.

1.1. Periodic system-Periodic system- requires a physical count of requires a physical count of the inventory periodically, and at the point of the inventory periodically, and at the point of sale only records the sale price.sale only records the sale price.

2.2. Perpetual system-Perpetual system- at point of sale records at point of sale records selling price and type of item sold. Example: a selling price and type of item sold. Example: a bar code scanning system.bar code scanning system.

Differences in RecordingDifferences in RecordingPurchases of Inventory- Periodic

Purchases 3,000Accounts Payable 3,000

Sales During the Period- PeriodicAccounts Receivable 4,125

Sales 4,125

Accounts Receivable 4,125Sales 4,125

Cost of Goods Sold 2,750Inventory 2,750

Inventory 3,000Accounts Payable 3,000

Purchases of Inventory- Perpetual

Sales During the Period- Perpetual

What Is Inventory Cost?What Is Inventory Cost?Inventory costs comprise of all expenditures Inventory costs comprise of all expenditures both direct and indirect, relating to acquisition, both direct and indirect, relating to acquisition, preparation, and placement for sale.preparation, and placement for sale.Discounts can change the total inventory Discounts can change the total inventory costs.costs.

1.1. Trade DiscountsTrade DiscountsConvert the catalog price to the actual price.Convert the catalog price to the actual price.Record inventory at discounted priceRecord inventory at discounted price..

2.2. Cash DiscountsCash DiscountsGranted for payment of invoices within a limited time Granted for payment of invoices within a limited time period.period.Record inventory using the net method or gross methodRecord inventory using the net method or gross method..

Cash Discounts- Net MethodCash Discounts- Net Method

Records inventory net of any Records inventory net of any purchase (cash) discounts.purchase (cash) discounts.

ExampleExample::June 1:June 1:Purchased merchandise for $10,000;Purchased merchandise for $10,000;Terms of payment: 2/10, n/30;Terms of payment: 2/10, n/30;Assuming a perpetual inventory method,Assuming a perpetual inventory method,record the purchase of the inventory and record the purchase of the inventory and

payment on June 8.payment on June 8.

Cash Discounts- Net MethodCash Discounts- Net MethodJune 1June 1InventoryInventory 9,8009,800

Accounts Payable (A/P) 9,800Accounts Payable (A/P) 9,800

June 8June 8A/PA/P 9,8009,800

CashCash 9,8009,800June 28June 28A/PA/P 9,8009,800Discounts LostDiscounts Lost 200200

CashCash 10,00010,000June 30June 30Discounts LostDiscounts Lost 200200

A/PA/P 200 200

Assume that payment was not made until June

28.

Assume no payment till end

of the month (the discount period

has lapsed) here is the adjustment:

Cash DiscountsCash Discounts

Purchase Date

End of Discount Period

$9,800 Owed

$10,000 Owed

Final Payment Date

10 Days 20 DaysSupplier “Loan”

Period

Cash Discounts- Gross MethodCash Discounts- Gross Method

Records inventory gross cost; discounts Records inventory gross cost; discounts are recorded only if taken.are recorded only if taken.

ExampleExample::June 1June 1Purchased merchandise for $10,000;Purchased merchandise for $10,000;Terms of payment: 2/10, n/30;Terms of payment: 2/10, n/30;Assuming a perpetual inventory method,Assuming a perpetual inventory method,record the purchase of the inventory and record the purchase of the inventory and

payment on June 8payment on June 8..

Cash Discounts- Gross MethodCash Discounts- Gross Method

June 1June 1InventoryInventory 10,00010,000

Accounts Payable (A/P) 10,000Accounts Payable (A/P) 10,000

June 8June 8A/PA/P 10,00010,000

InventoryInventory 200 200CashCash 9,800 9,800

June 28June 28A/PA/P 10,00010,000

CashCash 10,00010,000

Assume that payment was not made until June

28.

Purchase Returns and AllowancesPurchase Returns and Allowances

Adjustments are Adjustments are also made when also made when goods are goods are damaged or not damaged or not lesser in quality lesser in quality than ordered. than ordered. Sometimes the Sometimes the customer customer returns the returns the goods.goods.

Accounts Payable 400

Purchase Returns &Allowances

400

Periodic Inventory System

Accounts Payable 400 Inventory

400

Perpetual Inventory System

END!!!