Section 1
Chapter 5
Accounting for Merchandising Companies
Merchandising Companies:
-The Companies which buy and sell Goods
-The Primary source of Revenues in this type of Companies is Sales Revenues
-The Income statement of Merchandising companies is different from the income statement of Service companies because a new type of Expenses appears in this type of companies called (Cost).
-Income Statement follows the Equation:
Sales Revenue – Cost of Goods Sold = Gross Profit.
Gross Profit – Operating Expenses = Net Income.
-The Format of Income Statement :
-Application 1:
Ahmed's Company has the following Data Covering the period from 1/5/2014 till 30/6/2014:
Goods Sold 200 units
Selling Price $ 20
Purchasing Price $ 10
Operating Expenses $ 1000
Required: Prepare Income Statement.
-Application 2
Mona's Company has the following Data Covering the period from 1/5/2014 till 30/6/2014:
Goods Sold 100 units
Selling Price $ 50
Operating Expenses $ 2000
Required: Calculate the Purchasing Price.
Accounting for Merchandising Companies
There are 2 systems of Accounting for merchandising companies:
1- Perpetual System
-This System Use only one Account for the Inventory which is called Merchandise Inventory System (MIS)
- Therefor the Balance of the Inventory is always available for users after each transaction and whenever it is needed.
- The Merchandise Inventory System Account is an Asset Account so it is debited when the Inventory increased and credited when it is decreased
Example:
On purchasing goods:
The Double Entry would be as following:
Dr. Inventory xxxxxx
Cr. Account Payable xxxxxxx
Freight Costs
They are the costs of transporting Goods from the seller's place to the buyer's place.
There are 2 types of Freight costs:
1- FOB. Shipping point:
In this type the goods are handed over at the seller's place so its ownership is transferred from seller to buyer at the seller's place so the responsibility of its transportation transferred to buyer so he pays freight costs.
2- FOB. Destination:
In this type the goods are handed over at the buyer's place so its ownership is transferred from seller to buyer at the buyer's place so the seller is responsible for transporting goods to the buyer's place so he pays freight costs.
The Double entry would be as following:
Inventory / XxCash / Xx