What is the journal entry for merchandise sold?
The Periodic Method of Merchandise Accounting Show Part I: Journal Entries By Jeff Boulton home Introduction back to top In this entire topic, the approach will be as follows: You will learn accounting for a merchandise business by being shown only what differs between a service business and a merchandise business. To re-emphasize, you will find that differences only arise when the cost of merchandise inventory is involved. Below is the accounting cycle. Accounting methods differ in some way between a service business and a merchandise business for all of the highlighted steps below.
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back to top To track the purchase, shipment, and cost of merchandise, new accounts are needed. They are as follows:
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It’s position is usually as shown in the partial Balance Sheet below.
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Since HST applies to most services and almost all goods, there is little new here. Observe the following illustration for revenue of $1,000 plus applicable taxes.
Back to the new accounts for a merchandise business.
back to top Sales discounts operate in exactly the same way as before. Below assume $1,000 of revenue is earned with a 1% discount on the total owing. The entries for this would be as follows:
back to top As we have all experienced, at times some customers will purchase things they wish to return for a variety of reasons. These returns are not removed from the Sales account, for the same reasons as explained in the contra-accounts review above. Users of the financial statements would want to see the size of Sales and compare it to the size of Sales Returns. If a lot of Sales were being returned, this could suggest poor quality, which may necessitate a change in suppliers. The journal entry for the return of a $100 of revenue looks like this: back to top
back to top When purchasing items OTHER than inventory, journal entries are the same as in a service business. Observe this purchase of supplies for $500 plus HST:
It is important to understand that all purchases of merchandise are debited to the Purchases account. Though inventory on hand is a current asset (short-term), the Purchases account is NOT an asset account. It is a Cost of Goods Sold account (an expense). The reason will become clearer later, but be sure not to touch the merchandise inventory account when you buy inventory. Remember: the only time the Merchandise Inventory account is changed is during closing entries. It is also important to note that just because you have made a purchase, doesn’t mean it goes to the Purchases account. Only if it is a purchase of Merchandise Inventory (i.e. goods for re-sale), do you debit the Purchases account. back to top 6. Purchase Discounts back to top Purchase discounts are dealt with in exactly the same way. The discount appears on the same side as cash, and the discount rate reduces the amount of cash that changes hands. Similarly, the discount is only recorded when payment is made in cash, as that is the only time when you are certain payment is made within the discount period.
back to top Similar to Sales returns and allowances, when we return merchandise purchased, we credit the contra-cost of goods sold account called Purchase Returns and Allowances. We DO NOT reduce the Purchases account. We want to compare our original purchases to our returns. The journal entry looks like this
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Conversely, Freight-out (freight charges for sending merchandise OUT to customers) is not a Cost of Goods Sold. It is part of running the business, and is therefore an operating expense. The entry to record a freight-in charge of $200 is as follows.
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The entry would look like this: Practice Exercise back to top Record the following journal entries in the paper provided (MS Excel 2003).
NOTE: If you prefer, you can do it by hand. You can print out your own accounting paper at any time by using this file:
Answer Try the practice first!
What is the journal entry for sold merchandise on account?When Merchandise Are Sold on Account. When merchandise are sold on account, the two accounts involved in the transaction are the accounts receivable account and sales account. The accounts receivable account is debited and the sales account is credited.
What is sold merchandise?What is the Cost of Merchandise Sold? The cost of merchandise sold is the cost of goods that have been sold by a wholesaler or retailer. These entities do not manufacture their own goods, instead buying the goods from third parties and selling them to their customers.
What journal is sale of merchandise for cash?A sales journal entry records a cash or credit sale to a customer. It does more than record the total money a business receives from the transaction. Sales journal entries should also reflect changes to accounts such as Cost of Goods Sold, Inventory, and Sales Tax Payable accounts.
How do you record Cost of merchandise sold?You should record the cost of goods sold as a business expense on your income statement. Under COGS, record any sold inventory. On most income statements, cost of goods sold appears beneath sales revenue and before gross profits. You can determine net income by subtracting expenses (including COGS) from revenues.
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