Merchandise Inventory AccountMerchandise Inventory Account

A merchandising business buys goods and then sells them to customers

(retailers and/or wholesalers) for a profit Retailer

a business that sells to the final user; the consumer

Wholesaler a business that sells to retailers

Goods purchased for resale merchandise

The items of merchandise the business has in stock inventory

A merchandising business buys goods and then sells them to customers

(retailers and/or wholesalers) for a profit Retailer

a business that sells to the final user; the consumer

Wholesaler a business that sells to retailers

Goods purchased for resale merchandise

The items of merchandise the business has in stock inventory

The Sales Slip/InvoiceThe Sales Slip/Invoice

A sales slip or invoice is a source document for a sale on account.

Accounts Receivable is debitedfor the total sales slip(sales amount plus sales tax).

Sales is credited for the amountof the merchandise sale.

Sales Tax Payable is credited forthe amount of sales tax being collected.

A sales slip or invoice is a source document for a sale on account.

Accounts Receivable is debitedfor the total sales slip(sales amount plus sales tax).

Sales is credited for the amountof the merchandise sale.

Sales Tax Payable is credited forthe amount of sales tax being collected.

Sales AccountSales Account

The account used by a merchandising business to record the sale of goods to a customer

Sales account

Increase the profits of a business Revenue account The rules

The account used by a merchandising business to record the sale of goods to a customer

Sales account

Increase the profits of a business Revenue account The rules

Sales

Debit–

Decrease Side

Credit+

Increase SideNormal Balance

Sales TaxSales Tax

A tax paid by the customer and collected by a business based on the total selling price of the goods.

Sales taxes are assessed by cities, states and special districts.

The sales tax is calculated as a percentage of the sale. Sales Tax has no impact on profits. The business keeps a record of the sales tax collected

and paid in an account called Sales Tax Payable. The Sales Tax Payable account is a liability account. The rules

A tax paid by the customer and collected by a business based on the total selling price of the goods.

Sales taxes are assessed by cities, states and special districts.

The sales tax is calculated as a percentage of the sale. Sales Tax has no impact on profits. The business keeps a record of the sales tax collected

and paid in an account called Sales Tax Payable. The Sales Tax Payable account is a liability account. The rules

Sales Tax Payable

Debit–

Decrease Side

Credit+

Increase SideNormal Balance

Cash SalesCash Sales

When the business receives full payment in cash for merchandise sold and any applicable sales tax at the time of the sale.

Source document - cash register tape Debit Cash for full amount of

cash received including sales tax (CA + ST)

Credit Sales for amount of merchandise sales (CA)

Credit Sales Tax Payable for the amount of sales tax collected (ST)

When the business receives full payment in cash for merchandise sold and any applicable sales tax at the time of the sale.

Source document - cash register tape Debit Cash for full amount of

cash received including sales tax (CA + ST)

Credit Sales for amount of merchandise sales (CA)

Credit Sales Tax Payable for the amount of sales tax collected (ST)

Cash Sales

Sales Tax

Bankcard SalesBankcard Sales When the business receives full payment with a

bankcard (Discover, American Express, etc) for merchandise sold and any applicable sales tax at the time of the sale.

Treated like cash sales Source Document: cash register tape Debit Cash for full amount of

cash received including sales tax (BCS + ST)

Credit Sales for amount of merchandise sales (BCS)

Credit Sales Tax Payable for the amount of sales tax collected (ST)

When the business receives full payment with a bankcard (Discover, American Express, etc) for merchandise sold and any applicable sales tax at the time of the sale.

Treated like cash sales Source Document: cash register tape Debit Cash for full amount of

cash received including sales tax (BCS + ST)

Credit Sales for amount of merchandise sales (BCS)

Credit Sales Tax Payable for the amount of sales tax collected (ST)

Bankcard Sales

Sales Tax

Sales Returns and AllowancesSales Returns and Allowances

Any merchandise returned for credit or a cash refund is called a sales return.

A price reduction granted for damaged goods kept by the customer is called a sales allowance.

Source document = Credit memorandum

Any merchandise returned for credit or a cash refund is called a sales return.

A price reduction granted for damaged goods kept by the customer is called a sales allowance.

Source document = Credit memorandum

Debit Sales Returns and Allowances (SR&A)

Debit Sales Tax Payable Credit Accounts Receivable

Debit Sales Returns and Allowances (SR&A)

Debit Sales Tax Payable Credit Accounts Receivable

The Sales Returns and Allowances AccountThe Sales Returns and Allowances Account

Decrease the total revenue earned by a business; reduces the overall sales of the business

A contra revenue account The balance of a contra account is a decrease to

the balance of another account In this example - the Sales account

The rules

Decrease the total revenue earned by a business; reduces the overall sales of the business

A contra revenue account The balance of a contra account is a decrease to

the balance of another account In this example - the Sales account

The rules

Debit+

Increase SideNormal Balance

Credit–

Decrease Side

Sales Returns and Allowances

Credit TermsCredit Terms

A sales discount, is the amount a customer can deduct from the amount owed if payment is made within a certain time.

Credit terms state the time allowed for net payment, applicable discount and discount time n/30 n/60 2/10, n/30 3/15, n/60

N = Net due 30 = Number of days to pay 2/10 = % discount if paid in number of days

A sales discount, is the amount a customer can deduct from the amount owed if payment is made within a certain time.

Credit terms state the time allowed for net payment, applicable discount and discount time n/30 n/60 2/10, n/30 3/15, n/60

N = Net due 30 = Number of days to pay 2/10 = % discount if paid in number of days

The Sales Discount AccountThe Sales Discount Account

Decreases the total revenue earned by a business; reduces the overall sales of the business A contra revenue account The rules

Decreases the total revenue earned by a business; reduces the overall sales of the business A contra revenue account The rules

Sales Discounts

Debit+

Increase SideNormal Balance

Credit–

Decrease Side

Calculating Net SalesCalculating Net Sales

The amount of sales for the period less any

sales discounts, returns and allowances.

Sales (credit balance)

- Sales Discounts (contra debit balance)

- Sales Returns & Allowances (contra debit balance)

= Net Sales

The amount of sales for the period less any

sales discounts, returns and allowances.

Sales (credit balance)

- Sales Discounts (contra debit balance)

- Sales Returns & Allowances (contra debit balance)

= Net Sales

Merchandise Inventory AccountMerchandise Inventory Account

The account used to track the dollar amount of merchandise in stock at the beginning of each period Merchandise Inventory

Asset account The rules

The account used to track the dollar amount of merchandise in stock at the beginning of each period Merchandise Inventory

Asset account The rules

Merchandise Inventory

Credit–

Decrease Side

Debit+

Increase SideNormal Balance

The Purchasing Process

The purchase of supplies, equipment, and

merchandise is divided into four stages:

The Purchasing Process

The purchase of supplies, equipment, and

merchandise is divided into four stages:

PROCESS SOURCE DOCUMENT

requesting needed items Purchase requisition

ordering from a supplier Purchasing order

verifying items received Packing slip

recording purchase Invoice

PROCESS SOURCE DOCUMENT

requesting needed items Purchase requisition

ordering from a supplier Purchasing order

verifying items received Packing slip

recording purchase Invoice

The Supplier’s invoice

Lists the details of a purchase Lists credit terms

The Supplier’s invoice

Lists the details of a purchase Lists credit terms

Processing stamp

Completedby the accounting department to determine the

The Purchases AccountThe Purchases Account

• The account used to track the cost of the merchandise bought during a period

• Purchases account

• Purchases decrease the profits of a business

• Classified as a Cost of Merchandise account

• In chart of accounts between Revenue and Expense accounts

• A temporary account

• The rules

• The account used to track the cost of the merchandise bought during a period

• Purchases account

• Purchases decrease the profits of a business

• Classified as a Cost of Merchandise account

• In chart of accounts between Revenue and Expense accounts

• A temporary account

• The rulesDebit

+Increase SideNormal Balance

Credit–

Decrease Side

Purchases

Cash Purchases of MerchandiseCash Purchases of Merchandise

Cash purchase of merchandise involves paying for the merchandise at the time of the purchase; getting the merchandise at the time you pay for it.

Source document = Check Stub

Debit Purchases for amount purchased

Credit Cash for amount paid

Cash purchase of merchandise involves paying for the merchandise at the time of the purchase; getting the merchandise at the time you pay for it.

Source document = Check Stub

Debit Purchases for amount purchased

Credit Cash for amount paid

Purchases Returns and AllowancesPurchases Returns and Allowances

When a business returns merchandise to the supplier to request full credit a purchase return is recorded.

When a business agrees to keep less than satisfactory merchandise and requests to pay a reduced price a purchase allowance is recorded.

Source document = Debit memorandum

When a business returns merchandise to the supplier to request full credit a purchase return is recorded.

When a business agrees to keep less than satisfactory merchandise and requests to pay a reduced price a purchase allowance is recorded.

Source document = Debit memorandum

Purchases Returns and Allowances AccountPurchases Returns and Allowances Account

Increase the profits of a business; reduces

the overall cost of the purchases A contra cost of merchandise account

The rules

Increase the profits of a business; reduces

the overall cost of the purchases A contra cost of merchandise account

The rules

Credit+

Increase SideNormal Balance

Debit–

Decrease Side

Purchases Returns and Allowances

A purchase discount, is the amount a business can deduct from the amount owed if payment is made within a certain time.

Credit terms state the time allowed for net payment, applicable discount and discount time n/30 n/60 2/10, n/30 3/15, n/60

N = Net due 30 = Number of days to pay 2/10 = % discount if paid in number of days

A purchase discount, is the amount a business can deduct from the amount owed if payment is made within a certain time.

Credit terms state the time allowed for net payment, applicable discount and discount time n/30 n/60 2/10, n/30 3/15, n/60

N = Net due 30 = Number of days to pay 2/10 = % discount if paid in number of days

Credit TermsCredit Terms

The Purchase Discount AccountThe Purchase Discount Account

Increases the total profits of a business; reduces the overall cost of the purchases

A contra cost of merchandise account The rules

Increases the total profits of a business; reduces the overall cost of the purchases

A contra cost of merchandise account The rules

Purchase Discounts

Debit-

Decrease Side

Credit+

Increase SideNormal Balance

Transportation InTransportation In

A shipping charge is a charge to ship merchandise.

Shipping terms determine who will pay the shipping charges

FOB – Free on Board

FOB destination –supplier pays the shipping charges

FOB shipping point – buyer pays the shipping charges

Cost of Merchandise account – the rules

Decrease the profits of

a business; increases the

overall cost of the purchases

Source document = Check Stub

A shipping charge is a charge to ship merchandise.

Shipping terms determine who will pay the shipping charges

FOB – Free on Board

FOB destination –supplier pays the shipping charges

FOB shipping point – buyer pays the shipping charges

Cost of Merchandise account – the rules

Decrease the profits of

a business; increases the

overall cost of the purchases

Source document = Check Stub

Debit+

Increase SideNormal Balance

Credit-

Decrease side

Transportation In

Calculating Net PurchasesCalculating Net Purchases

Purchases

+ Transportation

= Cost of Delivered Merchandise

- Purchases Returns & Allowances

- Purchase Discounts

= Net Purchases

Prepaid InsurancePrepaid Insurance

The cost of insurance protection for a business (fire, theft,

etc) is called premiums. Premiums are paid in advance at the beginning of a

covered period. When the insurance protection expires, the premiums

become an expense. Asset account – the rules Source document = Check Stub

The cost of insurance protection for a business (fire, theft,

etc) is called premiums. Premiums are paid in advance at the beginning of a

covered period. When the insurance protection expires, the premiums

become an expense. Asset account – the rules Source document = Check Stub

Debit+

Increase SideNormal Balance

Credit–

Decrease Side

Prepaid Insurance

Bankcard FeesBankcard Fees

Fees charged by the bank for processing bankcard sales Fees are calculated as a percentage of the bankcard

sales slips processed Expense account

Decrease the profits of a business

Source document = Check stub

The bankcard fees are recorded on the check stub at the

time of bank reconciliation; when the bank statement is

received. The rules

Fees charged by the bank for processing bankcard sales Fees are calculated as a percentage of the bankcard

sales slips processed Expense account

Decrease the profits of a business

Source document = Check stub

The bankcard fees are recorded on the check stub at the

time of bank reconciliation; when the bank statement is

received. The rules

Debit Credit-

Decrease side

Bankcard Fees

+Increase Side

Normal Balance