What is a merchandiser?

A business that buys goods and resells them (a retailer or wholesaler), rather than selling services. Its biggest expense is the cost of goods sold.

What is cost of goods sold (COGS)?

The total cost of the merchandise sold during the period — a merchandiser's largest expense.

What is gross profit?

Net sales − cost of goods sold. It's what's left from sales to cover operating expenses and leave a profit.

The merchandiser profit chain?

Net sales − COGS = Gross profit; Gross profit − Operating expenses = Income from operations; ± other items = Net income.

Perpetual vs. periodic inventory systems?

Perpetual: Inventory and COGS updated continuously with each purchase and sale. Periodic: Inventory untouched during the period; COGS computed at period end from a physical count.

Perpetual — buy $6,000 of merchandise on account. Entry?

Debit Inventory 6,000; Credit Accounts Payable 6,000. (Purchases for resale go straight into Inventory.)

What do terms 2/10, n/30 mean?

2% discount if paid within 10 days; otherwise the net (full) amount is due in 30 days.

Perpetual — pay $200 freight on incoming goods (FOB shipping point). Entry?

Debit Inventory 200; Credit Cash 200. Freight-in is part of the cost of the inventory.

FOB shipping point vs. FOB destination?

FOB shipping point: buyer owns goods once shipped and pays the freight (freight-in). FOB destination: seller owns them until delivery and pays the freight (freight-out).

Freight-in vs. freight-out?

Freight-in = cost to bring goods IN (buyer; added to Inventory under perpetual, or a Freight-In account under periodic). Freight-out = cost to ship goods OUT to customers (seller; an operating expense).

Perpetual — return $1,000 of goods to a supplier. Entry?

Debit Accounts Payable 1,000; Credit Inventory 1,000.

Perpetual — take a 2% discount on a $5,000 balance. Entry?

Debit Accounts Payable 5,000; Credit Inventory 100 (the discount); Credit Cash 4,900.

Perpetual — record a sale of goods costing $5,400 for $9,000 on account.

Two entries. 1) Debit Accounts Receivable 9,000; Credit Sales Revenue 9,000. 2) Debit Cost of Goods Sold 5,400; Credit Inventory 5,400.

What are Sales Returns and Allowances and Sales Discounts?

Contra-revenue accounts (debit balances) that reduce Sales Revenue to get net sales.

Perpetual — a customer returns goods sold for $1,000 (cost $600). Entries?

1) Debit Sales Returns and Allowances 1,000; Credit Accounts Receivable 1,000. 2) Debit Inventory 600; Credit Cost of Goods Sold 600 (goods come back).

Perpetual — customer pays $8,000 within the 2% discount period. Entry?

Debit Cash 7,840; Debit Sales Discounts 160; Credit Accounts Receivable 8,000.

What is inventory shrinkage, and its adjusting entry?

The gap when the physical count is less than the perpetual records (theft, breakage, error). Adjust: Debit Cost of Goods Sold; Credit Inventory for the shortage.

Shrinkage: records $60,000, count $58,000. Entry?

Debit Cost of Goods Sold 2,000; Credit Inventory 2,000.

How do you close a merchandiser's accounts?

Close Sales Revenue into Income Summary; close Sales Returns, Sales Discounts, COGS, Freight-Out and all expenses out of Income Summary; then Income Summary and Drawings to Owner's Capital.

Sales Revenue − Sales Returns and Allowances − Sales Discounts.

What is a multi-step income statement?

An income statement with subtotals: net sales, gross profit, income from operations, and net income (after other revenues and expenses).

The four levels of a multi-step income statement?

1) Net sales. 2) Gross profit (net sales − COGS). 3) Income from operations (gross profit − operating expenses). 4) Net income (± other revenues/expenses like interest and gains/losses).

What is a single-step income statement?

Total revenues minus total expenses in one subtraction — no intermediate subtotals. Same net income, simpler layout.

What is the gross profit rate?

Gross profit ÷ net sales, as a percent. Example: 80,000 ÷ 200,000 = 40%. It shows margin per sales dollar.

Where do interest revenue, interest expense, and a loss on disposal appear?

In the 'other revenues and gains' / 'other expenses and losses' section, AFTER income from operations, to reach net income.

What is the periodic system's Purchases account?

A temporary account (debit) for merchandise bought for resale under the periodic system. Inventory itself is not touched until period end.

Periodic contra accounts to Purchases?

Purchase Returns and Allowances and Purchase Discounts — both credit-balance accounts that reduce purchases.

What is Freight-In (periodic)?

The freight cost on incoming merchandise, recorded in a Freight-In account (debit). It's added when computing net purchases.

How do you compute net purchases (periodic)?

Net purchases = Purchases − Purchase returns and allowances − Purchase discounts + Freight-In.

How do you compute cost of goods available for sale?

Beginning inventory + Net purchases = Cost of goods available for sale.

How do you compute cost of goods sold (periodic)?

Cost of goods available for sale − Ending inventory (from the physical count) = Cost of goods sold.

Periodic COGS example: beg 25,000; net purchases 135,000; end 30,000.

Available = 25,000 + 135,000 = 160,000. COGS = 160,000 − 30,000 = 130,000.

Periodic — buy $6,000 of merchandise on account. Entry?

Debit Purchases 6,000; Credit Accounts Payable 6,000. (Not Inventory — that's perpetual.)

Periodic — pay freight on incoming goods. Entry?

Debit Freight-In; Credit Cash. (Perpetual would debit Inventory.)

Periodic — return goods to a supplier. Entry?

Debit Accounts Payable; Credit Purchase Returns and Allowances. (Perpetual would credit Inventory.)

Periodic — take a purchase discount. Entry?

Debit Accounts Payable; Credit Purchase Discounts (and Credit Cash for the amount paid).

Under periodic, what happens to COGS when you make a sale?

Nothing during the period — you record only the sale (Dr Cash/AR, Cr Sales Revenue). COGS is computed at period end.

Do perpetual and periodic give the same gross profit?

Yes. They record the cost side differently during the period, but net purchases, COGS, gross profit, and net income come out the same.

Why does a merchandiser need an extra adjusting entry vs. a service business?

Inventory shrinkage — writing the perpetual Inventory balance down to the physical count (Dr COGS, Cr Inventory).

On a multi-step statement, what is 'income from operations'?

Gross profit minus operating expenses — profit from the core business, before other (non-operating) revenues and expenses.

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Accounting 1 · Chapter 5 · Free

Chapter 5 — Merchandising & Inventory Systems

Merchandising operations and the two inventory systems — perpetual vs periodic — and how each records purchases and sales.

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Explain how merchandising operations differ from service businesses
Record purchases and sales under the perpetual system
Contrast the perpetual and periodic inventory systems

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Part 1 — Perpetual System: How Stores Track Every Dollar of Inventory

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Chapter 5 — Merchandising & Inventory Systems

Full lecture (multi-part)

Short recaps for fast review

Test what stuck

Quick Quiz

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