Faculty of Business Administration
Department of Finance, Banking and Accounting
Prof. Dr. Sameh Reyad, CMA
Dr. Christine Yacoub
2025
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Course information
Course Instructor: Course Instructor:
Prof. Dr. Sameh Reyad, CMA Dr. Christine Yacoub
sameh.reyad@giu-uni.de christine.yacoub@giu-uni.de
Office: M.421 Office: M.418
Office hours: Thursday 3rd slot Office hours: Wednesday 4th slot
Course Assistants:
Ms. Mariam Hussein
Mr. Basel Loay
Ms. Lma Haitham
Ms. Farida Gado
Mr. Abderahman Mostafa
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Course information
Course Assessment: Course Textbooks: Course Content:
• Jerry J.Weygandt, Paul D. • Accounting for
Quizzes (Best 2
Kimmel Donald E. Kieso Merchandising Operations
out of 3) 15% (2018). Accounting Principles. • Accounting for Receivables
In-class 13th edition. John Wiley & • Plant Assets: Depreciation
Assignments 15% Sons, Inc. ISBN: 978-1-119- and disposals
(Best 4 out of 6) 41101-7 • Current Liabilities
Midterm • Long- Term Liabilities:
30% Bonds issuance and
• Jerry J. Weygandt, Paul D. retirement
Final Kimmel, Jill E. Mitchell • Accounting for
40 % (2022). Accounting Principles, Corporations: Stocks and
14th edition. John Wiley & dividends’ treatment
Sons, Inc. ISBN: 9781-119-
707080 3
Lecture One
Accounting for Merchandising Operations
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Learning Objectives
After studying this Lecture, you should be able to:
1 Describe merchandising operations and inventory systems.
2 Explain the recording of purchases under a Periodic inventory system.
3 Explain the recording of purchases under a perpetual inventory system.
4 Explain the recording of sales revenues under a Periodic inventory system.
5 Explain the recording of sales revenues under a perpetual inventory system.
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Inventory Classification and Systems
Classification
Inventories are:
items held for sale, or
goods to be used in the production of goods to be sold
Businesses with Inventory:
Merchandiser or Manufacturer
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Classifying Inventory
Merchandising Manufacturing
Company Company
One Classification: Three Classifications:
◆ Inventory ◆ Raw Materials
◆ Work in Process
◆ Finished Goods
Helpful Hint Regardless of the
classification, companies report
all inventories under Current
Assets on the balance sheet.
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Inventory Classification and Systems
Type of Business Balance Sheet (in thousands)
Current assets
Cash $ 285,000
Marketable securities 530,000
Merchandiser
Accounts receivable 149,000
Merchandise inventory 777,000
One inventory Prepaids 33,000
account Total current assets 1,774,000
Investments:
Invesment in ABC bonds 321,657
Purchase goods Investment in UC Inc. 253,980
ready for sale Notes receivable 150,000
Land held for speculation 550,000
Sinking fund 225,000
Pension fund 653,798
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Inventory Classification and Systems
Type of Business Balance Sheet (in thousands)
Current assets
Cash $ 285,000
Manufacturer Marketable securities 530,000
Accounts receivable 149,000
Inventory
Three accounts Raw materials 210,000
Raw materials Work in process 417,000
Finished goods 150,000
Work in process
Total inventory 777,000
Finished goods
Prepaids 33,000
Total current assets 1,774,000
Investments:
Invesment in ABC bonds 321,657
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Operating Cycles
The operating
cycle of a
merchandising
company
ordinarily is longer
than that of a
service
company.
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Inventory Classification and Systems
Two systems for maintaining inventory records:
Periodic system
Perpetual system
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Inventory Classification and Systems
Periodic System
1. Purchases of merchandise are debited to Purchases.
2. Ending Inventory determined by physical count at the end of the
accounting period.
3. Calculation of Cost of Goods Sold:
Beginning inventory $ 100,000
+ Purchases, net 800,000
= Goods available for sale 900,000
- Ending inventory (125,000)
= Cost of goods sold $ 775,000
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ADVANTAGES OF THE PERIODIC SYSTEM
◆ Simple and cheap (no need to invest in software for record
keeping)
◆ Suitable for small businesses.
◆ No disruption to normal operations (physical inventory counts can
be scheduled at any time outside of normal business hours).
DISADVANTAGES OF THE PERIODIC SYSTEM
◆ Increased risk of human error during physical count
◆ No real-time visibility
◆ Difficult to maintain control of inventory or identify losses/theft.
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Inventory Classification and Systems
Perpetual System
1. Purchases of merchandise are debited to Inventory.
2. Freight-in, purchase returns and allowances, and
purchase discounts are recorded in Inventory.
3. Physical count done to verify Inventory balance.
4. The perpetual inventory system provides a
continuous record of Inventory and Cost of Goods
Sold.
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ADVANTAGES OF THE PERPETUAL SYSTEM
◆ Suitable for large businesses that have complex operations and
multiple branches.
◆ Real-time visibility of quantity and cost of inventory.
◆ Provides better control over inventories than a periodic system.
DISADVANTAGES OF THE PERPETUAL SYSTEM
◆ Costly to implement and maintain as it requires ongoing
investment in technology, equipment and staff training.
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Recording Purchases of Merchandise
Freight on Board Costs – Terms of Sale
Ownership of the goods
passes to the buyer when the
public carrier accepts the
goods from the seller.
Ownership of the goods
remains with the seller until
the goods reach the buyer.
Freight costs incurred by the seller are an operating expense.
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Recording Purchases of Merchandise
Purchase Returns and Allowances
Buyer may be dissatisfied because goods are damaged or
defective, of inferior quality, or do not meet specifications.
Purchase Return Purchase Allowance
Return goods for credit if the May choose to keep the
sale was made on credit, or merchandise if the seller will
for a cash refund if the grant a reduction of the
purchase was for cash. purchase price.
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Purchase Discounts
Credit terms may permit buyer to claim a cash discount for prompt payment.
Advantages:
◆ Buyer saves money.
◆ Seller shortens the operating cycle by converting the accounts receivable into
cash earlier.
2% discount if
Example: Credit terms paid within 10
may read 2/10, n/30. days, otherwise
net amount due
within 30 days.
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Recording Purchases of Merchandise (perpetual system)
Buyer perspective
Exercise:
1- On May 4 On Sauk Stereo received merchandise ordered from PW Audio
Supply, it records the $3,800 purchases on account with Credit terms 2/10,
n/30 as follows:
May 4 Dr. Inventory 3,800
Cr. Accounts Payable 3,800
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2- Assume upon delivery of the goods on May 6, Sauk Stereo
pays Public Freight Company $150 for freight charges, the
entry on Sauk Stereo’s books is:
May 6 Dr. Inventory 150
Cr. Cash 150
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3- Assume Sauk Stereo returned goods costing $300 to PW Audio
Supply on May 8.
May 8 Dr. Accounts Payable 300
Cr. Inventory 300
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4- Assume Sauk Stereo pays the balance due of $3,500 (gross
invoice price of $3,800 less purchase returns and allowances of
$300) on May 14, the last day of the discount period. Prepare the
journal entry Sauk Stereo makes on May 14 to record the
payment.
May 14 Dr. Accounts Payable 3,500
Cr. Inventory 70
Cr. Cash 3,430
(Discount = $3,500 x 2% = $70)
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5- If Sauk Stereo failed to take the discount, and instead made full
payment of $3,500 on June 3, the journal entry would be:
June 3 Dr. Accounts Payable 3,500
Cr. Cash 3,500
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Recording Purchases of Merchandise (Periodic System)
Buyer perspective
Illustration:
1- On May 4 On Sauk Stereo received merchandise ordered from PW
Audio Supply, it records the $3,800 purchases on account with Credit
terms 2/10, n/30 as follows:
May 4 Dr. Purchases 3,800
Cr. Accounts Payable 3,800
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2- If Sauk Stereo pays Public Freight Company $150 for freight charges
on its purchase from PW Audio Supply on May 6, the entry on Sauk’s
Stereo books is:
May 6 Dr. Freight-in (Transportation-In) 150
Cr. Cash 150
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3- Sauk Stereo returns $300 of goods to PW Audio Supply and
prepares the following entry to recognize the return.
May 8
Dr. Accounts payable 300
Cr. Purchase Returns and Allowances 300
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4- On May 14 Sauk Stereo pays the balance due on account to PW Audio
Supply, taking the 2% cash discount allowed by PW Audio for payment
within 10 days. Sauk Stereo records the payment and discount as follows.
May 14 Dr. Accounts Payable 3,500
Cr. Purchase Discounts 70
Cr. Cash 3,430
(Discount = $3,500 x 2% = $70)
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5- If Sauk Stereo failed to take the discount, and instead made
full payment of $3,500 on June 3, the journal entry would be:
June 3 Dr. Accounts Payable 3,500
Cr. Cash 3,500
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COMPARISON OF ENTRIES
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Recording Sales of Merchandise(Periodic System)
Seller perspective
Illustration:
1- PW Audio Supply, records the sale of $3,800 of merchandise to Sauk
Stereo on May 4 (sales invoice No. 731) on account with Credit terms 2/10,
n/30 as follows:
May 4 Dr. Accounts Receivable 3,800
Cr. Sales Revenue 3,800
No entry is recorded for cost of goods sold at the time of the sale
under a periodic system.
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2- To record the returned goods received from Sauk Stereo on May 8,
PW Audio Supply records the $300 sales return as follows:
May 8 Dr. Sales Returns and Allowances 300
Cr. Accounts Receivable 300
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Recording Sales of Merchandise
Sales Discount
◆ Offered to customers to promote prompt payment of the
balance due.
◆ Contra-revenue account (debit) to Sales Revenue.
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3- On May 14, PW Audio Supply receives payment of $3,430 on account
from Sauk Stereo. PW Audio honors the 2% cash discount and records
the payment of Sauk’s account receivable in full as follows:
May 14 Dr. Cash 3,430
Dr. Sales Discounts 70
Accounts Receivable 3,500
* [($3,800 – $300) X 2%]
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Recording Sales of Merchandise(perpetual System)
Seller perspective
Illustration:
1- PW Audio Supply records the sale of $3,800 on May 4 to Sauk
Stereo on account as follows (assume the merchandise cost PW
Audio Supply $2,400).
May 4 Dr. Accounts Receivable 3,800
Cr. Sales Revenue 3,800
Dr. Cost of Goods Sold 2,400
Cr. Inventory 2,400
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2- Prepare the entry PW Audio Supply would make to record the
returned goods that had a $300 selling price (assume a $140 cost).
May 8 Dr. Sales Returns and Allowances 300
Cr. Accounts Receivable 300
Dr. Inventory 140
Cr. Cost of Goods Sold 140
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3- Assume Sauk Stereo pays the balance due of $3,500 (gross
invoice price of $3,800 less purchase returns and allowances
of $300) on May 14, the last day of the discount period.
Prepare the journal entry PW Audio Supply makes to record
the receipt on May 14.
May 14 Dr. Cash 3,430
Dr. Sales Discounts 70 *
Cr. Accounts Receivable 3,500
* [($3,800 – $300) X 2%]
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Thank you
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