Lecture Notes#3: Merchandising

When a chart of accounts is developed for a firm, one important consideration is the nature of the firm’s
operations. The three basic types of businesses are
1. Service business - sells services
2. Merchandising business - which sells goods that it purchases for resale
3. Manufacturing business – which sells goods it produces

Each of this businesses would require a different chart of accounts.

Manufacturer sells to Wholesaler who sells to Retailer who sells to Consumer

Transactions shall be recorded in the journal, post them to the General Ledger and the Subsidiary Ledger.

What is a Subsidiary Ledger? It is ledger that contains accounts of a single type, such as customers or vendors.
New accounts to be familiar with under this chapter are the following:
Name of Account Type of Account Normal Balance Used to record
Sales Revenue CR Sales of merchandise
inventory
Sales Tax Payable Liability CR Sales tax charged to
customer
Sales Discounts Contra revenue DR. Early payment discounts
given to buyer by seller
Sales Returns and Contra Revenue DR. Products returned by
Allowances buyer on the seller’s
books
Purchases Expense DR. Purchases of merchandise
inventory
Purchases Returns and Contra Expense CR Returns of merchandise
Allowances inventory to seller on the
buyer’s book
Purchases Discounts Contra Expense CR. Record cash discounts
taken for early payments
to the seller by the buyer
Freight in or Expense DR. Record payment of
Transportation In transportation costs on
merchandise inventory
purchased.

Recording Sales with Sales Tax Payable for Cash and on Account:

The state imposes tax on sales of goods. Businesses are required to collect this tax from their customers and pay it
to the proper tax agency at regular intervals. When taxable goods and services are sold on credit , the sales tax is
usually recorded at time of sale, even though it will be collected from the customer later. A liability account called
Sales Tax Payable is credited for the sales tax charged.

For example:

If Du30 Sporting Goods was required to charge its customers an 8% sales tax, the amount collected for the sales
tax on a $500 for cash would be $40 ($500x8%=$40). The journal entry is:
 Cash 540
Sales Tax Payable 40
Sales 500
To record cash sales

However, what if the sales is on credit or on account,

For example:

If Du30 Sporting Goods sold merchandise on credit to An-AN company on Jan. 8, 2018 for $600 plus tax, it would
bill An-AN for $600 plus tax of $48($600x8%). Journal entry will be

Accounts Receivable 648

Sales Tax Payable 48
Sales 600
Sold merchandise on credit to An-AN

RECORDING SALES RETURNS and SALES ALLOWANCES:

If something is wrong with the goods sold, the firm may take the goods, resulting in a Sales Return. Or they
may negotiate a reduction in the sales price, resulting in Sales allowance.

If the goods returned were initially paid for with cash, the customer will receive a cash refund. When a return or
allowance is related to a credit sale, the normal practice is to issue a document called a CREDIT MEMORANDUM to
the customer instead of giving a cash refund.

The Sales Return and Allowance s account is debited to record returns and allowances. By debiting Sales Returns
and allowances instead of debiting sales account, the company can monitor the balance of the Sales Return and
Allowances account and see if product returns or allowances increase. This is to measure operating efficiency. The
Sales Returns and Allowances account is a Contra Revenue account, because it has a debit balance, which is
contrary or opposite of, the normal balance for revenue accounts.

The journal entry to record a cash refund for a return on January 2 of $100 merchandise sold for cash, plus sales
tax of $8, follows

Sales Returns and Allowances 100

Sales Taxes Payable 8
Cash 108

Note: if the sales was on account or credit the credit is Accounts Receivable.

COMPUTING FOR TRADE DISCOUNT:

A whole business offers goods to trade customers at less than retail prices. This price adjustment is based on the
volume purchased by trade customers and takes the form of a Trade Discount, which is a reduction from the list
price, the established retail price. There may be a single trade discount or a series of discounts for each type of
goods. The net price (the list price less all trade discounts) is the amount the wholesaler records as sales.
For example: If the list price of the goods is $1500 and the trade discount is quoted in a series such as 25% and
15% , a different net price will result

List Price $1,500

Less first discount (1500x25%) 375
Difference $1,125
Less second discount(1125x15%) 168.75
Invoice price $ 956.25

CASH DISCOUNTS ON SALES

DU30 Company, a wholesaler offers credit terms of 1/10, n/30 to its customers. On January 20 , DU30 sold
merchandise for $2,000 on account to Leni2 Company, issuing invoice 909. DU30 received payment for invoice

Jan. 20 Accounts Receivable 2,000

Sales 2,000

Jan. 29 Sales Discounts 20

Cash 1,980
Accounts Receivable 2,000

CASH DISCOUNTS ON SALES, with SALES RETURNS

A customer returning merchandise and paying within the discount period is only entitled to a cash discount on the
balance owed after the return.

For example, DU30 Company sells merchandise for $1,000 on account to Leni2 on January 21, terms 1/10, n/30.
Leni2 returned $100 of the merchandise on January 23, receiving a Credit Memorandum , Leni2 paid the balance
owed, less a 1% discount on January 30. The amount received by DU30 on Jan 30 would be $891, computed as
follows:

Original Sale $1,000

Less: Return 100
Balance 900
Less 1% discount(900x1%) 9
Amount Received 891

Jan. 21 Accounts Receivable 1,000

Sales 1,000
Sold merchandise on credit to Leni2

Jan.23 Sales Returns and Allowance 100

Accounts Receivable 100
To record returned of merchandise

Jan. 30 Cash 891

Sales Discounts 9
Accounts Receivable 900
REPORTING NET SALES

For Example,

Revenue
Sales 25,700
Less: Sales Returns and Allowances 600
Sales Discounts 100 700
Net Sales 25,000

Next Lecture Notes will cover Accounting for Purchases.