{"id":98,"date":"2015-03-18T23:18:41","date_gmt":"2015-03-18T23:18:41","guid":{"rendered":"https:\/\/courses.candelalearning.com\/finacct2x10xmaster\/?post_type=chapter&p=98"},"modified":"2017-08-22T19:46:09","modified_gmt":"2017-08-22T19:46:09","slug":"preparing-financial-statements-for-a-merchandising-enterprise","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/clinton-finaccounting\/chapter\/preparing-financial-statements-for-a-merchandising-enterprise\/","title":{"raw":"Seller Entries under Periodic Inventory Method","rendered":"Seller Entries under Periodic Inventory Method"},"content":{"raw":"Companies using the periodic inventory method make no attempt to determine the cost of goods sold at the time of each sale. Instead, they calculate the cost of all the goods sold during the accounting period at the end of the period. We will look at calculating cost of goods sold a little later.\u00a0 Key point to remember:\u00a0 Under the periodic inventory method, a cost of good sold account is not used to record sales transactions<\/em>.\r\n

This section explains how to record sales revenues, including the effect of trade discounts. Then, we explain how to record two deductions from sales revenues\u2014sales discounts and sales returns and allowances.<\/p>\r\n

Usually sales are for cash or on account. When a sale is for cash, the company credits the Sales account and debits Cash. For example, it records a\u00a0$20,000 sale for cash as follows:<\/p>\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
Account<\/strong><\/td>\r\nDebit<\/strong><\/td>\r\nCredit<\/strong><\/td>\r\n<\/tr>\r\n
Cash<\/td>\r\n20,000<\/td>\r\n<\/td>\r\n<\/tr>\r\n
\u00a0\u00a0\u00a0 Sales<\/td>\r\n<\/td>\r\n20,000<\/td>\r\n<\/tr>\r\n
To record the sales of merchandise for cash<\/em>.<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nWhen a sale is on account, it credits the Sales account and debits Accounts Receivable. The following entry records a\u00a0 $20,000 sale on account:\r\n\r\n\r\n\r\n\r\n\r\n\r\n
Account<\/strong><\/td>\r\nDebit<\/strong><\/td>\r\nCredit<\/strong><\/td>\r\n<\/tr>\r\n
Accounts Receivable<\/td>\r\n20,000<\/td>\r\n<\/td>\r\n<\/tr>\r\n
\u00a0\u00a0\u00a0 Sales<\/td>\r\n<\/td>\r\n20,000<\/td>\r\n<\/tr>\r\n
To record the sales of merchandise on account.\u00a0\u00a0<\/em><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nWhen a company sells merchandise to a customer, the seller provides credit terms.\u00a0 Remember, terms tell a buyer when the invoice is due and if there is a discount allowed for paying early.\u00a0 Discounts are not recorded until payment is received since the seller does not know if the buyer will take the discount at the time of the sale.\r\n

Sales returns and allowances<\/h3>\r\nMerchandising companies usually allow customers to return goods that are defective or unsatisfactory for a variety of reasons, such as wrong color, wrong size, wrong style, wrong amounts, or inferior quality.\u00a0 A sales return<\/strong> is merchandise returned by a buyer.\u00a0 A sales allowance<\/strong> is a\u00a0reduction of the price\u00a0when the customer keeps the merchandise but is dissatisfied for any of a number of reasons, including inferior quality, damage, or deterioration in transit.\u00a0 The account entry is the same whether it is a sales return or allowance.\r\n\r\nSellers record sales returns and sales allowances in a separate Sales Returns and Allowances account.<\/strong> The Sales Returns and Allowances account is a contra revenue account (to Sales) that records the selling price of merchandise returned by buyers or reductions in selling prices granted.\r\n\r\nFollowing are two examples illustrating the recording of sales returns in the Sales Returns and Allowances account:\r\n
    \r\n \t
  • Assume that a customer returns\u00a0$300 of goods sold on account. If payment has not yet been received, the required entry is:<\/li>\r\n<\/ul>\r\n\r\n\r\n\r\n\r\n\r\n\r\n
    Account<\/strong><\/td>\r\nDebit<\/strong><\/td>\r\nCredit<\/strong><\/td>\r\n<\/tr>\r\n
    Sales Returns and Allowances<\/td>\r\n300<\/td>\r\n<\/td>\r\n<\/tr>\r\n
    \u00a0\u00a0\u00a0 Accounts Receivable<\/td>\r\n<\/td>\r\n300<\/td>\r\n<\/tr>\r\n
    To record a sales return from a customer.<\/em>\u00a0<\/em>\u00a0<\/em><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n
      \r\n \t
    • Assume that the customer has already paid the account and the seller gives the customer a cash refund. Now, the credit is to Cash rather than to Accounts Receivable. If the customer has taken a 2% discount when paying the account, the company would return to the customer the sales price less the sales discount amount. For example, if a customer returns goods that sold for\u00a0$300, on which a 2% discount was taken, the following entry would be made:<\/li>\r\n<\/ul>\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
      Account<\/strong><\/td>\r\nDebit<\/strong><\/td>\r\nCredit<\/strong><\/td>\r\n<\/tr>\r\n
      Sales Returns and Allowances<\/td>\r\n300<\/td>\r\n<\/td>\r\n<\/tr>\r\n
      \u00a0\u00a0\u00a0 Cash (300 - 6)<\/td>\r\n<\/td>\r\n294<\/td>\r\n<\/tr>\r\n
      \u00a0\u00a0\u00a0 Sales Discount\u00a0 (300 x 2%)<\/td>\r\n<\/td>\r\n6<\/td>\r\n<\/tr>\r\n
      To record a sales return from a customer who had taken a\u00a0\u00a0<\/em><\/td>\r\n<\/tr>\r\n
      discount and was sent a cash refund.\u00a0\u00a0<\/em><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nThe debit to the Sales Returns and Allowances account is for the full selling price of the purchase. The $6 credit\u00a0reduces the balance of the Sales Discounts account and the balance is the cash refund.\r\n\r\nNext, we illustrate the recording of a sales allowance in the Sales Returns and Allowances account. Assume that a company grants a\u00a0$400 allowance to a customer for damage resulting from improperly packed merchandise. If the customer has not yet paid the account, the required entry would be:\r\n\r\n\r\n\r\n\r\n\r\n\r\n
      Account<\/strong><\/td>\r\nDebit<\/strong><\/td>\r\nCredit<\/strong><\/td>\r\n<\/tr>\r\n
      Sales Returns and Allowances<\/td>\r\n400<\/td>\r\n<\/td>\r\n<\/tr>\r\n
      \u00a0\u00a0\u00a0 Accounts Receivable<\/td>\r\n<\/td>\r\n400<\/td>\r\n<\/tr>\r\n
      To record a sales allowance granted for damaged merchandise<\/em>.<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nIf the customer has already paid the account, the credit is to Cash instead of Accounts Receivable. If the customer took a 2% discount when paying the account, the company would refund only the net amount $ 392. Sales Discounts would be credited for\u00a0$8. The entry would be:\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
      Account<\/strong><\/td>\r\nDebit<\/strong><\/td>\r\nCredit<\/strong><\/td>\r\n<\/tr>\r\n
      Sales Returns and Allowances<\/td>\r\n400<\/td>\r\n<\/td>\r\n<\/tr>\r\n
      \u00a0\u00a0\u00a0 Cash (400 - 8)<\/td>\r\n<\/td>\r\n392<\/td>\r\n<\/tr>\r\n
      \u00a0\u00a0\u00a0 Sales Discount (400 x 2%)<\/td>\r\n<\/td>\r\n8<\/td>\r\n<\/tr>\r\n
      To record a sales allowance when a customer has paid and\u00a0\u00a0<\/em><\/td>\r\n<\/tr>\r\n
      taken a 2% discount.\u00a0\u00a0<\/em><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n

      \u00a0Receiving Payment from Customers<\/h3>\r\nRemember, the credit terms (or terms) provides information to the buyer about when the invoice is due and if there is a discount allowed for paying the invoice early.\u00a0 The discount is not recorded until payment is received because the seller does not know if a buyer will take the discount or not.\u00a0 Discounts are recorded in a contra-revenue account called Sales Discounts.<\/strong>\u00a0\u00a0We will be reducing the amount owed by the customer (accounts receivable) and increasing sales discounts (if any) and cash.\r\n\r\nFor example, we receives payment of the $20,000 and the customer took\u00a0a 2% discount.\u00a0 The entry to record this transaction would be:\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
      Account<\/strong><\/td>\r\nDebit<\/strong><\/td>\r\nCredit<\/strong><\/td>\r\n<\/tr>\r\n
      Sales Discounts (20,000 x 2%)<\/td>\r\n400<\/td>\r\n<\/td>\r\n<\/tr>\r\n
      Cash (20,000 \u2013 400)<\/td>\r\n19,600<\/td>\r\n<\/td>\r\n<\/tr>\r\n
      \u00a0\u00a0\u00a0\u00a0 Accounts Receivable<\/td>\r\n<\/td>\r\n20,000<\/td>\r\n<\/tr>\r\n
      To record customer payment with 2% discount.<\/em>\u00a0<\/em>\u00a0<\/em><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nIf\u00a0the customer\u00a0had returned merchandise for $300 before paying the invoice, the entry to record this transaction with a 2% discount would be:\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
      Account<\/strong><\/td>\r\nDebit<\/strong><\/td>\r\nCredit<\/strong><\/td>\r\n<\/tr>\r\n
      Sales Discounts (19,700 x 2%)<\/td>\r\n394<\/td>\r\n<\/td>\r\n<\/tr>\r\n
      Cash (19,700 \u2013 394)<\/td>\r\n19,306<\/td>\r\n<\/td>\r\n<\/tr>\r\n
      \u00a0\u00a0 \u00a0 \u00a0 Accounts Receivable (20,000 - 300)<\/td>\r\n<\/td>\r\n19,700<\/td>\r\n<\/tr>\r\n
      To record customer payment with 2% discount and return.<\/em>\u00a0<\/em>\u00a0<\/em><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nIf\u00a0the customer\u00a0had a $400 allowance but paid the invoice after the discount period, the entry to record the transaction (less the allowance) would be:\r\n\r\n\r\n\r\n\r\n\r\n\r\n
      Account<\/strong><\/td>\r\nDebit<\/strong><\/td>\r\nCredit<\/strong><\/td>\r\n<\/tr>\r\n
      Cash (20,000 \u2013 400)<\/td>\r\n19,600<\/td>\r\n<\/td>\r\n<\/tr>\r\n
      \u00a0\u00a0\u00a0\u00a0 Accounts Receivable (20,000 \u2013 400)<\/td>\r\n<\/td>\r\n19,600<\/td>\r\n<\/tr>\r\n
      To record customer payment less allowance and no discount.<\/em>\u00a0<\/em>\u00a0<\/em><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n

      Cost of Goods Sold<\/h3>\r\nRemember, companies using the periodic inventory method make no attempt to determine the cost of goods sold at the time of each sale. Instead, they calculate the cost of all the goods sold during the accounting period at the end of the period. To determine the cost of goods sold, a company must know:\r\n
        \r\n \t
      • Beginning inventory (cost of goods on hand at the beginning of the period).<\/span><\/li>\r\n \t
      • Net cost of purchases during the period.<\/span><\/li>\r\n \t
      • Ending inventory (cost of unsold goods at the end of the period).<\/span><\/li>\r\n<\/ul>\r\nInventory is a permanent account meaning the balance rolls over from period to period.\u00a0 The ending inventory balance of on period is the beginning inventory of the next period.<\/em>\r\n\r\nThe net cost of purchases is calculated as Purchases + Transportation In - Purchase Discounts - Purchases Returns and Allowances.\r\n\r\nEnding inventory is based on a physical count of inventory on hand before issuing financial statements.\u00a0 Taking a physical inventory consists of counting physical units of each type of merchandise on hand. To calculate inventory cost, they multiply the number of each kind of merchandise by its unit cost. Then, they combine the total costs of the various kinds of merchandise to provide the total ending inventory cost. When\u00a0taking a physical inventory, company personnel must be careful to count all goods owned, regardless of where they are located, and include them in the inventory.\r\n

        The company would show this information as follows:<\/span><\/p>\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
        \r\n

        Beginning inventory<\/b><\/span><\/p>\r\n<\/td>\r\n

        		\r\n

        $ 34,000<\/b><\/span><\/p>\r\n<\/td>\r\n<\/tr>\r\n

        \r\n

        Add: Net cost of purchases during the period<\/b><\/span><\/p>\r\n<\/td>\r\n

        		\r\n

        140,000<\/b><\/span><\/p>\r\n<\/td>\r\n<\/tr>\r\n

        \r\n

        Cost of goods available for sale during the period<\/b><\/span><\/p>\r\n<\/td>\r\n

        		\r\n

        $174,000<\/b><\/span><\/p>\r\n<\/td>\r\n<\/tr>\r\n

        \r\n

        Deduct: Ending inventory<\/b><\/span><\/p>\r\n<\/td>\r\n

        		\r\n

        20,000<\/b><\/span><\/p>\r\n<\/td>\r\n<\/tr>\r\n

        \r\n

        Cost of goods sold during the period<\/b><\/span><\/p>\r\n<\/td>\r\n

        		\r\n

        $154,000<\/b><\/span><\/p>\r\n<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n

        An adjusting entry would be made at year end to record the cost of goods sold expense and reduce inventory so the balance in inventory matches the physical count.\u00a0 The entry for the example above would be:<\/p>\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
        Account<\/strong><\/td>\r\nDebit<\/strong><\/td>\r\nCredit<\/strong><\/td>\r\n<\/tr>\r\n
        Cost of goods sold<\/td>\r\n154,000<\/td>\r\n<\/td>\r\n<\/tr>\r\n
        \u00a0\u00a0 \u00a0 \u00a0 Merchandise Inventory<\/td>\r\n<\/td>\r\n154,000<\/td>\r\n<\/tr>\r\n
        To record cost of goods sold during period.<\/em>\u00a0<\/em>\u00a0<\/em><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n

        Summary<\/h3>\r\nUnder the periodic inventory method, the seller will use the following accounts:\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
        Name<\/strong><\/td>\r\nAccount Type<\/strong><\/td>\r\nIncreases<\/strong><\/td>\r\nDecreases<\/strong><\/td>\r\n<\/tr>\r\n
        Cash<\/td>\r\nCurrent asset<\/td>\r\nDebit<\/td>\r\nCredit<\/td>\r\n<\/tr>\r\n
        Accounts Receivable<\/td>\r\nCurrent asset<\/td>\r\nDebit<\/td>\r\nCredit<\/td>\r\n<\/tr>\r\n
        Sales Revenue<\/td>\r\nRevenue<\/td>\r\nCredit<\/td>\r\nDebit<\/td>\r\n<\/tr>\r\n
        Sales Discounts*<\/td>\r\nRevenue<\/td>\r\nDebit<\/td>\r\nCredit<\/td>\r\n<\/tr>\r\n
        Sales Returns and Allowances*<\/td>\r\nRevenue<\/td>\r\nDebit<\/td>\r\nCredit<\/td>\r\n<\/tr>\r\n
        Delivery Expense<\/td>\r\nExpense<\/td>\r\nDebit<\/td>\r\nCredit<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nSales Discounts and Sales Returns and Allowances are contra-revenue accounts.\u00a0 Remember, we do not record sales transactions using either merchandise inventory or cost of goods sold expense account under the periodic inventory method.\u00a0 Instead, cost of goods sold is calculated at the end of the period and recorded in an adjusting journal entry.\r\n\r\n \r\n\r\n ","rendered":"

        Companies using the periodic inventory method make no attempt to determine the cost of goods sold at the time of each sale. Instead, they calculate the cost of all the goods sold during the accounting period at the end of the period. We will look at calculating cost of goods sold a little later.\u00a0 Key point to remember:\u00a0 Under the periodic inventory method, a cost of good sold account is not used to record sales transactions<\/em>.<\/p>\n

        This section explains how to record sales revenues, including the effect of trade discounts. Then, we explain how to record two deductions from sales revenues\u2014sales discounts and sales returns and allowances.<\/p>\n

        Usually sales are for cash or on account. When a sale is for cash, the company credits the Sales account and debits Cash. For example, it records a\u00a0$20,000 sale for cash as follows:<\/p>\n\n\n\n\n\n\n
        Account<\/strong><\/td>\nDebit<\/strong><\/td>\nCredit<\/strong><\/td>\n<\/tr>\n
        Cash<\/td>\n20,000<\/td>\n<\/td>\n<\/tr>\n
        \u00a0\u00a0\u00a0 Sales<\/td>\n<\/td>\n20,000<\/td>\n<\/tr>\n
        To record the sales of merchandise for cash<\/em>.<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

        When a sale is on account, it credits the Sales account and debits Accounts Receivable. The following entry records a\u00a0 $20,000 sale on account:<\/p>\n\n\n\n\n\n\n
        Account<\/strong><\/td>\nDebit<\/strong><\/td>\nCredit<\/strong><\/td>\n<\/tr>\n
        Accounts Receivable<\/td>\n20,000<\/td>\n<\/td>\n<\/tr>\n
        \u00a0\u00a0\u00a0 Sales<\/td>\n<\/td>\n20,000<\/td>\n<\/tr>\n
        To record the sales of merchandise on account.\u00a0\u00a0<\/em><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

        When a company sells merchandise to a customer, the seller provides credit terms.\u00a0 Remember, terms tell a buyer when the invoice is due and if there is a discount allowed for paying early.\u00a0 Discounts are not recorded until payment is received since the seller does not know if the buyer will take the discount at the time of the sale.<\/p>\n

        Sales returns and allowances<\/h3>\n

        Merchandising companies usually allow customers to return goods that are defective or unsatisfactory for a variety of reasons, such as wrong color, wrong size, wrong style, wrong amounts, or inferior quality.\u00a0 A sales return<\/strong> is merchandise returned by a buyer.\u00a0 A sales allowance<\/strong> is a\u00a0reduction of the price\u00a0when the customer keeps the merchandise but is dissatisfied for any of a number of reasons, including inferior quality, damage, or deterioration in transit.\u00a0 The account entry is the same whether it is a sales return or allowance.<\/p>\n

        Sellers record sales returns and sales allowances in a separate Sales Returns and Allowances account.<\/strong> The Sales Returns and Allowances account is a contra revenue account (to Sales) that records the selling price of merchandise returned by buyers or reductions in selling prices granted.<\/p>\n

        Following are two examples illustrating the recording of sales returns in the Sales Returns and Allowances account:<\/p>\n