What is a Merchandise Business? A merchandise business is a business that sells merchandise. n In other words, instead of a service, a merchandise business sells goods. n The “goods” a business has on hand is called inventory n Essentially, the accounting system differs ONLY WHERE INVENTORY is concerned n
Methods of Merchandise Accounting Periodic: n inventory count would be made at the end of the period – hence the term periodic. n The physical count would show much inventory was missing, assuming that the difference was the amount that was sold.
Methods of Merchandise Accounting Perpetual: n Now, thanks to technology, inventory systems can tell you exactly how much inventory is in the storeroom or on the floor. n Using a bar code, the inventory count is perpetually kept up to date. Every time a cashier scans a product, it records the sale, but also reduces the inventory level.
Supplies versus Merchandise Supplies are purchased for use in running a business (e. g. , office supplies – pens, paper, stamps, printer ink; cleaning supplies - paper towels, cleaners). n Merchandise Inventory is purchased for RE-SALE. The idea is you buy goods and re-sell them for a higher price in order to make money. n
The Concept of Cost of Goods Sold n Interactive Show
The Concept of Cost of Goods Sold Beginning Inventory + All Purchases in the year - Discounts/Returns + Freight-In (cost of transportation to get the inventory to the store) = Cost of Goods Available for Sale. n Cost of Goods available for Sale – Ending Inventory = COGS (Cost of Goods Sold) n
Example A business with $20, 000 of inventory on January 1 st makes the following transactions: n Jan. 10 th, purchase: $7, 500 Jan. 17 th, purchase: $1, 500 Jan. 21 st, return defective goods: $900 n Physical count of inventory on January 31 st: $14, 000 January sales: $40, 000 January Operating Expenses: $17, 000. Instructions: n Calculate: Cost of Goods Sold n Calculate: Net Income n
COGS Beginning Inventory Add: Purchases Less: Purchase Returns Freight-in Cost of goods available for sale Less: Ending Inventory Cost of Goods Sold 20, 000. 00 9, 000. 00 -900. 00 28, 100. 00 -14, 000. 00 14, 100. 00
Net Income Sales $40, 000. 00 Less: Cost of Goods Sold -14, 100. 00 Gross Profit Less: Operating Expenses Net Income 25, 900. 00 -17, 000. 00 $8, 900. 00