Chapter 7
Inventory: Merchandising Transactions
194
In Summary
Define a merchandising business
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A merchandising business, or merchandiser, is any business that buys and sells products for
the purpose of making a profit.
Differentiate between the perpetual and the periodic inventory systems
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The perpetual inventory system constantly updates inventory whenever a purchase or sale is
made.
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The periodic inventory system only updates inventory when a physical count of the inventory
is taken, usually at the end of a period.
Record journal entries related to inventory purchases under the perpetual inventory system
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Purchase returns and allowances cause accounts payable and inventory to decrease.
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Purchase discounts allow the buyer to save money by paying early. Inventory value is reduced
by the amount of the discount to reflect the actual cost of the inventory.
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Goods shipped FOB shipping point are owned by the buyer as soon as they are loaded onto
the carrier.The buyer pays for shipping costs and records them in inventory.
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Goods shipped FOB destination are owned by seller until they arrive at the buyer’s destination.
The seller pays for shipping costs and records them as a delivery expense.
Record journal entries related to inventory sales under the perpetual inventory system
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Inventory sales require two journal entries: one to record the sale and one to remove the
inventory from the balance sheet.
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Sales returns and allowances cause an increase to a contra-revenue account called sales returns
and allowances. If returned merchandise can be resold, an additional entry must be recorded
to increase inventory and decrease COGS.
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Sales discounts allow customers to save money by paying early. Another contra-revenue
account called sales discounts is used to track the amount of discounts taken by customers.
Calculate gross profit and gross profit margin
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Gross profit is the amount of profit remaining after the cost of goods sold is deducted from
revenue. Gross profit is used to cover operating expenses.
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Gross profit margin is the gross profit as a percentage of sales.The formula is: Gross Profit ÷
Sales Revenue × 100%.
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