Merchandise Transactions

Module 4:
Inventory & Costing

Duration:
45-60 minutes

Level:
Beginner to Diploma-Level

➛ Define merchandise transactions

➛ Identify types of merchandise transactions

➛ Record purchases of merchandise

➛ Record sales of merchandise

➛ Account for purchase returns and allowances

➛ Account for sales returns and allowances

➛ Understand trade discounts and cash discounts

➛ Distinguish between gross and net purchase methods | introductory

➛ Merchandise
➛ Merchandise Transactions
➛ Purchases
➛ Sales
➛ Purchase Returns
➛ Purchase Allowances
➛ Sales Returns
➛ Sales Allowances
➛ Trade Discount
➛ Cash Discount
➛ Freight-In

Merchandise transactions involve buying and selling goods that a business plans to resell for profit.

They are common in
➧ Retail businesses
➧ Wholesale businesses

1. Purchases of Merchandise

➛ Recorded when goods are bought for resale
➛ Includes cost of goods + freight-in
➛ Excludes trade discounts

Journal Entry | Cash Purchase

2. Sales of Merchandise

➛ Recorded when goods are sold to customers
➛ Revenue recognized at selling price

Journal Entry | Cash Sale - Periodic

Purchase Returns & Allowances
➛ Occur when buyers return goods or receive price reductions

Journal Entry

Occur when customers return goods or receive price reductions

Journal Entry

➛ Cost of transporting purchased goods
➛ Paid by buyer
➛ Added to cost of inventory | or Purchases

Journal Entry

Trade Discounts
➧ Reduction from list price
➧ Not recorded in accounting records

Cash Discounts
➧ Incentive for early payment
➧ Example: 2/10, n/30

Meaning
➧ 2% discount if paid within 10 days
➧ Otherwise, full amount due in 30 days

State the type of transaction

➛ Buying goods for resale
➛ Returning damaged goods to a supplier
➛ Selling goods to customers
➛ Giving a price reduction to a customer

1. Goods bought for resale are called __________

2. Freight-in is paid by the __________

3. Trade discounts are __________ recorded in accounting records

4. Sales returns reduce __________ revenue

A business
➛ Buys merchandise for $6,000 cash
➛ Pays freight-in of $400
➛ Sells goods for $9,500 cash

Prepare journal entries for each transaction | Periodic system

Invoice terms 3/15, n/45

➛ What is the discount rate?
➛ How many days is the discount period?
➛ How many days until full payment is due?

A retail shop frequently experiences customer returns due to damaged products.

Questions

➛ Which account records these returns?

➛ How do sales returns affect net sales?

➛ Why should returns be tracked separately?

➛ How can better inventory handling reduce returns?

➛ What are merchandise transactions?

➛ What account records goods returned by customers?

➛ Are trade discounts recorded?

➛ Who pays freight-in?

➛ What does 2/10, n/30 mean?

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Answers ➧ Here

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Cost of Goods Sold ➧ Here