Notes

Merchandising:
Merchandising involves purchasing products (also called merchandise inventory or just inventory) to resell to customers.

The steps in the accounting cycle for a merchandising company ARE THE SAME as the steps for a service company. However, merchandising companies need additional accounts and entries in order to record merchandising transactions.

Measuring profit for a merchandising company is basically the same as for a service company. That is, profit (or loss) is equal to revenues minus expenses.

In a merchandising company, the main source of revenues is the sale of merchandise.
• These revenues are called sales revenue, or simply sales.

Expenses for a merchandising company are divided into two categories:
1. Cost of Goods Sold
2. Operating Expenses

Cost of goods sold is the total cost of merchandise sold during the period. This expense is directly related to the revenue earned from the sale of the goods, as a merchandiser must purchase the goods to be able to sell them to its customers.
• Sales revenue minus cost of goods sold is called gross profit.
• They are reported on the income statement.

Inventory:
Beginning inventory (inventory on hand at the beginning of the period) plus the cost of goods purchased is the cost of goods available for sale. As goods are sold, the cost of these goods becomes an expense (cost of goods sold).

Those goods not sold by the end of the accounting period represent ending inventory. The ending inventory is reported as a current asset on the balance sheet.

EX: Business has 320 burgers in their inventory at the start of April. They sold 31, had 2 go missing, threw out 6. Ending inventory is 281.

In a perpetual inventory system, the company keeps detailed records of each inventory purchase and sale. This system continuously - perpetually - shows the quantity and cost of the inventory that should be on hand for every item.
• When inventory is purchased under a perpetual system, the purchase is recorded by increasing (debiting) the Merchandise Inventory account.
• When inventory items are sold under a perpetual inventory system, the cost of the goods sold is transferred from the Merchandise Inventory account (an asset) to the Cost of Goods Sold account (an expense).
• Under a perpetual inventory system, the company determines and records the cost of goods sold and the reduction in inventory each time a sale occurs.

The Merchandise Inventory account is on the balance sheet.