CHAPTERTHREE:ACCOUNTI

NGFORMERCHANDI
SINGBUSI
NESSES

Lear
ningObj
ect
ive
Afterstudyingt hisChapt er ,youwillbeabl eto:
 Descr ibewhatamer chandisingbusi nessi sandcompar ei ttoaser vicegi vi
ngbusi ness.
 descr i
bet hedi fferencebet weent het woal t
er nati
vesystemsofr ecordingi nv entory(peri
odic
andt heper pet
ual inv entor
ysy stems)
 r ecor dj ournalent riesf ormer chandi sing transact i
onssuchast hepur chaseand sal eof
mer chandi se
 compl etethewor ksheetofamer chandi si
ngbusi nessandr ecordadj ust mentj ournalentri
es
relatedt otheMer chandi seInvent oryaccount
 pr epar ef i
nancialst atement sforamer chandi singbusiness
3.1INTRODUCTI ON
I
nt hepr evi
ouschapt ers, wesawhowt or ecor dt ransact i
onsofaser vicegivingbusi ness.Thest eps
thatwegot hrought opr epar ethef inanci alst atement sofot hert ypesofbusi nesses( suchasa
mer chandisingbusi ness)ar ebasicallyt hesame.Tr ansacti
onsar ef ir
stjournalized,andt henpost ed
tot hel edger ;awor ksheeti sprepar ed and compl et
ed…. But ,t herear esomet ransacti
onsi n
mer chandisingcompani est hatwedon’ tf i
ndi naser v i
cegivi
ngbusi ness,l i
ket hepur chaseofgoods
forsaleandt hesal eoft hosegoods.Thef i
rstsect i
onoft hi
schapt er,therefore,discussest henature
ofamer chandi singbusi nessandhow t or ecor dmer chandisingt ransactions.Thenextsect ion
discussesaboutt hepr epar ationoffinanci al statement sformerchandi singcompani es.

3.
2NATUREOFAMERCHANDI
SINGBUSI
NESS
3.
2.1Whati
saMer
chandi
singBusi
ness?
Amer chandisi
ngbusi nessbuy sgoodsi nf i
nishedf or mf orr esaletocust omers.Amer chandising
businesssellst angiblegoodst oi t
scust omer s.Whenwesaygoodsi tcanbeany t
hingt hathas
physicalcharacteri
sticst hatyoucanseeandt ouch( i.
e.,tangible).Thesecanbegoodsr angingfrom
tel
evisionsets,cars,of f
icetableandchai r( f
urniture),tochewi nggums,t oot
hbrushesandv ar
ious
stat
ionery. These goods t hata mer chandising company sel lst oi t
s cust omers are cal l
ed
merchandi seinventor y.( Acustomerisani ndivi
dual oraf i
rmt owhom abusi nesssell
sitspr oducts.)
Onef i
nalthingt haty oushoul dknow aboutamer chandi singbusi nessi sthatamer chandising
companydoesnotpr oducet hegoodst hatitsells.Inst ead,itbuy sthesegoodsf rom manuf acturers,
whichpr oducethegoodsusi ngr awmat eri
als.Thef ollowingdi agram canhel pyout obetterv i
suali
ze
theflowofgoodsf rom amanuf acturertothef i
nal consumer :

Mer
chandi
si
ngcompani
es
Sel
l Ret
ail
e Final
Manuf
act
urer goo Whol
esal
er r consumer
ds s Sel
l
s
goods
Awhol esal
erisatrader,whi
chbuy sgoodsf rom manufact
urer
sandsel lsthem toaretai
leroranother
wholesaler
.I tist heretai
lerwhosel l
st hegoodst ot hefinalconsumerbybuy i
ngt hem from
wholesaler
s(orsomet i
mesfr om amanuf actur
er)
.Wheny ouwantt obuyasoapt owashy ourcl
othes,
wheredoy oubuyi t
?Whoi st hemanufact ur
erofthesoap?Ar ethereanywhol esal
ersofthatsoapi n
yourarea?Canthewhol esal
erbet akenast hecustomerofthemanuf acturer
?Andf i
nall
y,canwesay
t
heshopf r
om whichyoubuyt hesoapisamer chandi
singbusi
ness?

3.
2.2Compar
isonofFi
nanci
alSt
atement
sforMer
chandi
singandSer
viceGi
vi
ngBusi
nesses
Page1of1
I
ncomeSt
atement
A modelincomestatementforamer chandisi
ngbusi
nessandanot
heronef
oraser
vicegi
vi
ng
busi
nessareshownbelow.Compar
ethem careful
ly
.

ABCser vi
cecompany XYZmer chandisi
ng
Incomestatement Incomest atement
FortheyearendedDec.
31,2012 Fort heyearendedDec.31,2012
Revenue: Revenue:
Servi
cefee………………….Bi
rr23,
200 NetSal es…………………Birr360,000
Costofgoodssol d……………. (
256,000)
GrossPr ofi
t……………………. 104,000
Expenses: VariousOper at
ing
Vari
ousOperat
ingExpenses (7120) Expenses………………………. (
79,400)
NetIncome 16080 NetI ncome……………………. .
24,600

Asyoucanseef r
om theaboveIncomeSt at
ements,merchandisi
ngcompani eshavetopaytobuyt he
goodst hattheysell
.Ther ef
ore,t
heyhav etodeductthiscostofgoodssol dinadditi
ont oother
operat
ingexpensesfrom t
heirsal
esrevenuetodeter
minetheirnetincome.
Thedifferencebetweensalesrevenueandcostofgoodssol disrefer
redtoasgr ossprofit
.Why
‘
gross’
?Becauseot herexpenseshavey ett
obedeductedt oar r
iveatthenetprof
itornetincomeof
thebusiness.

St
atementoff
inanci
alposi
ti
on/
Bal
anceSheet
TheSt at
ementoff inancialpositionaser vi
cebusinessandt hatofamer chandisi
ngbusi nessare
simi
larinever
yaspectexceptonet hing.Thecur r
entassetssect i
onoftheSt atementoff i
nancial
posi
tionofamerchandi singbusinessi ncl
udesoneassett hatser
vicecompaniesdonothav e.Thatis
merchandisei
nventory.Mer chandiseinventoryref
erstogoodsboughtbyamer chandisingbusiness
forr
esaletocustomer s.So,i famer chandisi
ngbusinesshassomeunsol dgoods( mer chandise)on
handattheendofthey earthiswoul dber eport
edasoneassetont heSt
atementoff inancialposit
ion.
3.3THEPERI ODICANDTHEPERPETUALI NVENTORYSYSTEMS
Thev al
ueofgoods( merchandise)onhandatt heendoft hey earforresalewouldbereport
edon
Statementoffi
nancialposit
ionasoneassetasdescr i
bedabove.Thismeanst hatweneedtoopena
separat
eledgeraccountinwhi chtorecordmerchandiseinv
entoryinformati
on.Thetwoalter
nati
ves
i
ndeal i
ngwiththi
saccountar e:
1. Toupdat ethisaccounteveryti
megoodsar eboughtandsold( cont
inuousl
y=perpet
uall
y)or
2. Toupdat ethisaccountonlyattheendoftheperi
od(peri
odically
).

3.3.
1ThePer
iodi
cInv
ent
orySy
stem
Undert hissy stem,ast henameper i
odicsuggests,thei nventoryaccountisupdatedonlyper i
odi
call
y
i
.e.,onlyatt heendofaper i
od. Whengoodsar ebought ,at emporarypurchasesaccounti sdebit
ed
i
nst eadoft heinventoryaccountitsel
f.Likewise,whengoodsar esoldrevenueisrecorded,butthe
factt hatt hereisar educti
oni nmer chandisei nventoryi snotr ecogni
zed. Thisisbecauset he
Mer chandi seI nventoryaccounti
snotcr edit
edev erytimegoodsar esold.
Ther efore,i fonewant stoknowt hecostofgoodsonhand,i tisamustt hataphy si
calinventorybe
conduct edf ir
st.Theaccountdoesn’ trefl
ectthevalueofgoodsonhandbecausei twasnotupdat ed
whenmer chandisewasboughtandsol d.Phy si
cali nventorymeanscount i
ngt hequanti
tyofgoods
onhand.Oncet hequantityofgoodsonhandhasbeendet er
mi ned,i
tismulti
pli
edbytheuni tpri
ceof
Page2of2
thosegoodst odet er
minet hecostofgoodsonhand.
I
nconcl usion,undertheper i
odi
csy st
em,sincet
hemer chandisei
nventoryaccountisnotcont
inuall
y
updated,thecostofmer chandi
seonhandi sdeter
minedonl yattheendoft heperiodaft
ercarr
ying
outaphy sicalinvent
ory.Compani essuchasdepart
mentst oresor‘supermarkets’
,whichsel
lsmall
i
tems, useper i
odi
csy st
ems.

3.
3.2Per
pet
ualI
nvent
orySy
stems
A perpetualinventorysystem cont i
nuouslyrecordst heamountofi nv entoryonhand( per
petual
=conti
nuous) .Underthissystem, t
hemer chandi
sei nv
entoryaccountisdebi t
edorcr edi
tedever
ytime
(goods)areboughtorsol d.Whenani tem issold,it
scosti srecordedinasepar atecostofgoods
soldaccounti nadditi
ontor ecor
dingsales.Thecostofmer chandi
seonhandcanbel ookedupfrom
themer chandiseInventor
yaccountanyt i
me, withoutconducti
ngaphy sicalinvent
ory.
Exercise-1:Ifyouhav easuper marketbusiness,woul dyouuset heper petualorper i
odicsy
stem?
Whatify oursystem iscomput er
ized?Explai
n.
3.4RECORDI NGPURCHASESANDSALESTRANSACTI ONS

3.
4.1Recor
dingSal
es
Whenamer chandisi
ngcompanyt ransfer
sgoodstothebuyer
,inexchangeforcashorapromisetop
atalat
erdate,revenueisproducedt othecompany
.Thi srevenueisrecor
dedinaSal esaccount
.
However
,thesalesrevenue,
whichisreportedont
heIncomeStatement,i
sNetSales.Thatis,

NetSal
es=Gr
ossSal
es–Sal
esDi
scount
s-Sal
esRet
urnsandAl
lowances

Recor
dingGr
ossSal
es
Thegrosssalesamounti sobtainedfrom salesinvoi
ces.Aninvoiceisadocument ,prepar
edbyt he
sel
l
erofmer chandisetonotif
ytot hebuyerthedetail
softhesale.Thesedetai
lscani ncl
udenumber
ofi
temssold,unitpriceofi
tems, tot
alpri
ce,ter
msofsal eandmannerofshipment .Whengoodsar e
del
iver
edtothecust omer,t
heSal esaccountiscredit
edbecauserevenuesar
eincreasedbycr edi
ts.A
companycansell goodseit
herforcashoronaccount .

Recor
dingCashSal
es
Whenmerchandisei
ssoldoncash,theCashaccountisdebi
tedandtheSal
esaccounti
scredi
ted.
Example–IkaCompanybasedinBahi rDar
,buysandsell
susedcommodi t
ies.OnJanuar
y14.2009.
I
kasoldgoodsforBi
rr20,
000.Recordthetr
ansact
ion.
Januar
y14,2009 Dr.Cash………………………………. .
20,000.
00
Cr.Sales……………………………………20, 000.00

Recor
dingCr
edi
tSal
es
TheAccount
sRecei
vabl
eaccounti
sdebi
tedwhengoodsar
esol
donaccount(
forcr
edi
t)
.
Example-I
kasol
dgoodswor
thBi
rr35,
000onaccountonJanuar
y15,
2009.Recor
dthet
ransact
ion.
Solut
ion
Januar
y15. Account
sRecei
vabl
e………………….
.35,
000.
00
Sal
es…………………………………………35,
000.00

Det
ermini
ngGr ossSal
eswhenther
ear
etradedi
scounts
Atradediscountis aper
cent
agededucti
onfr
om t hespeci
fi
edl
i
stpr
iceorcat
aloguepr
iceof
Page3of3
merchandise.Tradediscount sall
owus:
 Toav oi
dpubl i
shinganewcat al
oguesever
ytimepri
ceschange.
 Togr antquant i
tydiscounts
 Quot ati
onofdi ff
erentpr i
cestodif
fer
entty
pesofcustomers.
Tradediscountsar enotr ecordedinthesell
er’
saccount
ingrecords;t
heyareonlyusedtocalcul
ate
thegrossselli
ngprice.
Example:IKAsol d500T. V.sets,eachwithali
stpri
ceofBir
r80,onJanuary17,2009forcash.I
tgave
thecustomera30%t radedi scount,
asthecustomerwasav er
yloyalone.Recor
dthesale.

Answer
:
Li
stpri
ceofgoods(80X500) ………… Bi
rr40,
000
Less:Tradedi
scount(
30%of40, 000)
………( 12,
000)
Invoi
cepr
ice………. 28,000
Jour
nalent
ry:
Cash……………………. .28,
000
Sal
e………………………28, 000
Exerci
se–2:Recordt hejournalentryi
fIKaCompanyabov
esoldgoodswithali
stpri
ceofBi r
r
52,
000toacustomeronaccount .Ikaoff
eredt
hecust
omeratr
adedi
scountof20%forpur
chases
aboveBi
rr40,
000asitusual
lydoes.

Recor
dingDeduct
ionsf
rom Gr
ossSal
es
Gobackt oi l
lust
rati
on1-andhav eal ookatt hemodelIncomeStat
ementofamer chandi
sing
company .Youwi l
lseet hatt hesalesreport
edont heincomestat
ementisnetsal
es,i.
e.,af
ter
deducti
onofsal esdiscountsandsalesretur
nsandall
owances.
Grosssales(from i
nvoice)
…………………. .XXX
Less:Salesdiscounts……………………………. (XX)
Sal
esr et
urnsandal l
owances…………. …..
(XX)
Netsales………………………………. XX

Sal
esDi
scount
s
SalesDi scountsar ededuct i
onsfrom invoicepri
cet ocust omer swhopayear lywhengoodsaresold
oncr edit.
Asasel ler,youwoul dusual lywantt obepai dassoonaspossi bl
e.Thi sisbecause,asyoucan
i
magi ne,y oucanuset hemoneyf orv ar
iouspur posesoncey ouhav ebeenpai d.Ify
ouwanty our
customer st opayy ouearlyt hecust omarypracticeistoof fert hem a( deducti
on)di
scountfr
om the
i
nvoicepr iceiftheypayear ly
.
How muchdi scounti sgiv enusuallydependsont hecreditt erms.Theset erms(agr
eements)are
usuallystatedont heinvoi
ce.Themostf requentl
yusedt ermsar estat
edbel ow:
 “ n/30”or“ Net30”–meanst herei
snodi scountev eni fthecust omerpay sbef
orethepayment
date.
 2/ 10,n/ 30–meanst heduedat eoft hepay menti saf ter30day soft hesal
e. Butifthe
customerpay swi t
hin10day she/shewi l
lgeta2%di scount .
 2/ EOM,n/ 60-meanst henormalduedat ei swithin60day soft hesalebutthecustomerwil
l
geta2%di scounti fhe/shepay sbeforetheendofmont hofsal e.

Exer
cise-
3:Whatdot
hecr
edi
tter
ms1/
15,
n/60;
2/10,
n/EOM;
andn/
60mean?
………………………………………………………………………………………………………………………………………………………………………………
Page4of4
……………………………………………………
Salesdiscountsar
epur chasediscountsfrom t
hesideoft hebuyer.Salesdiscountsandpurchase
discountsarethesamet hingseenf rom dif
fer
entsides.Theyar egeneral
lycaledcashdi
l scounts
together
.Acashdi scountis,t
herefore,
deducti
onfrom ori
ginali
nvoi
cepriceforearl
ypaymentwhen
goodsar esoldoncredi
t(onaccount )
.
Example:OnJanuary21,2009I KACompanysol dmerchandi
sef orbir
r20,000onaccount.The
credi
tter
msare2/10,n/30.Thecustomerpai
donJanuary31,(10daysaf t
erinv
oicedat
e).
A.Howmuchwoul dIKACompanycol l
ectf
rom t
hissal
e?
B.Recor
dthenecessaryj
ournal
entri
esonJanuary21andJanuary31.
Sol
uti
on:
A-Si
ncethecust omerpai dwithi nthediscountper
iod,i
.e.
,wi
thi
n10day
s,shewi
l
lgeta2%
di
scount.Therefore,
I
nv oi
ceprice……………………. .20,
000
Less:SalesDiscount(2%X20, 000)………(400)
Cashcollect
ed…………….19, 600

B-Jour
nalEnt
ri
es:

Januar
y21 A/
R…………………..
20,
000
Sal
es…………………….
.20,
000

Januar
y31, Cash………………….19600
SalesDi
scount
s………. .
.400
A/R………………..20,
000

Youmi ghtinit
iall
yhav et houghtofdebi t
ingtheSal esaccountf orBirr400onJanuar y31,sincethe
actualcashcollectedfrom thesalesoft hosegoodsi sbirr400l essthanwhatwasr ecordedasSales
onJanuar y21.Buti tisbet tertorecor
dt hereduct ioninsalesi nasepar at
econt r
aSal esaccount
.A
contraaccountr educesanot heraccount.I nthiscase, t
heamounti nt heSalesDiscountaccountwil
l
bededuct edf r
om ( Gross)Sal esont hei ncomest atement.Thatway ,wecandi sclosehow much
salesdiscountwasof feredandt akendur i
ngt hey earonthei ncomest atement,separatel
y.
Exercise–4:I KACompanysol dgoodswor thBirr120,000onaccountt oGizucompanyt er
ms1/10,
n/60onJanuar y18, 2001.Gi zuCompanypai donJanuar y28, 2001.
A-Howmuchwoul dIKACompanycol l
ectfrom thi
ssal e?
B-Recor dthenecessar yjournalent r
iesonJanuar y18andonJanuar y28.
Sal
esRet
urnsandAl
lowances
Customer scanr etur
nmer chandiset heyhav eboughti ftheyf i
nditt
obedef ect
iveorofthewrong
model ,orunsat
isfactor
yf orav arietyofreasons.Asal esreturnismerchandiseret
urnedbyabuyer
.
Thebuy erwouldbepai dbackhermoneyi fshehasal r
eadypai d.
A salesal l
owance isadeduct ionf rom theor i
ginalinvoicepr i
cewhent hecust omerkeepsthe
merchandisebuti sdissatisf
ied.I f,f
orexampl e,acustomerbuy sanit
em wor thbir
r100andfindsi
t
tobeoft hewr ongcol orafterr eceivi
ngi t
,shemayst il
lwantt oretai
nt heitem evenifsheis
di
ssatisfi
edwi t
hi t
scol or.Int hatcaset hesel l
ermayl etherpayonly,say,Bir
r95bygi vi
ngheran
al
lowanceofBi rr5.

Exampl
e:I
KACompanysol
dmer
chandi
sewor
thBi
rr15,
000onFebr
uar
y3,
2009onaccountt
erms
2/10,n/30.OnFebr
uar
y5,t
hebuyerr
eturnedaporti
onoft
hegoodsworthBi
rr5,
000astheywer
e
foundtobeofthewr
ongmodel
.Thebuyerthenpai
donFebr
uar
y13,2009.
Page5of5
Recor
dthenecessar
yjour
nal
ent
ri
esonFebr
uar
y3,
5and13.
Sol
uti
on:
Febr
uar
y3 A/
R…………………….
15,000
Sal
es……………………….
15,
000

Febr
uar
y5 Sal
esRetur
nsandAl
l
owances………5,000
A/
R……………………………………….5,000
Febr
uar
y13 Cash…………………………………. .9800
SalesDiscount………………………. .200
A/R……………………………10, 000
Her
e,t
hebuy
erpai
dwi
thi
nt hediscountperi
od.Therefore,theamountt
hatwoul
dbecol
l
ect
edi
s:
15,000–5,000= 10,000
Deduct :
2%Cashdi scount (200)
Cashcoll
ected 9800

Exer
cise-
5:Assumet
hecust
omeri
ntheabov
eexampl
eret
urnedt
hegoodsonFebr
uar
y15i
nst
ead
ofFebr
uar
y5,aft
erpayi
ngwi
thint
hedi
scountper
iodonFebr
uar
y13.Recor
dther
elev
antJour
nal
ent
ri
esonFebr
uary3,
13and15.

3.
4.2Recor
dingPur
chases
Undertheperi
odi
cinvent
orysy st
em amer chandisi
ngcompanyusesthePurchasesaccountt
orecor
d
thecostofgoodsboughtforresaletocustomers.
Example:IKACompanyboughtgoodswor thBirr43,
000f r
om SabaCo.,whichisbasedinAddis
Ababa,onaccountonJanuary4, 2009,t
erms20/ 10,n/
30.Recor
dthetr
ansacti
on.
Sol
uti
on:
Januar
y4–Purchases…………………. .
43,
000
Accountspay
able………………………..43,
000
Exerci
se–6:Recordt hesametransact
ionforI
KACompanyi
fthemer
chandi
sewer
eboughtf
or
cash.

Deductionsfr
om Purchases
PurchaseDiscount
s
Amer chandi
singcompanycanbuygoodsundercreditt
ermsthatpermitittogetadi
scounti
fitpay
s
wit
hinaspeci fi
edper i
odoftime.Thededuct
ionfrom theori
ginalpurchasepri
cei
sr ecor
dedina
separ
atecontraPurchaseaccountcal
l
edPur
chaseDiscount
s.
Exampl
e:I
KACompanyboughtgoodswor
thBi
rr50,
000f
rom Gi
birCompanyonaccountonJanuar
y
14,2009,
ter
ms1/
10,
n/60.I
kaCompanypai
donJanuar
y24,
2009.Recor
dthet
ransact
ionsonbot
h
dat
es.
Sol
uti
on:
Jan.14. Purchases………………..50,
000
A/P…………………………50, 000
Jan.24. A/P………………………50, 000
PurchaseDi
scounts………. .
..
..
.500
Cash……………………. .
…..49,500
Exer
cise-
7:WhatwouldGi
birCompanyr ecordonJanuar
y14, andJanuary24?

Page6of6
Pur
chaseRet
urnsandal
lowances
Apur chaseretur
noccurswhenabuy erretur
nsmer chandi setoaseller
.Apurchaseallowanceisa
reducti
onont hepr i
ceofgoodsboughtfordissati
sfactionont hesideofthebuyer.
Bot hpurchase
retur
nsandpur chaseall
owancesarer
ecordedinacont rapurchaseaccountcal
ledPurchaseReturns
andAl l
owances.
Exampl e:I
ntheprevi
ousexampleforI
KACompany ,
apor tionofthegoodsworthbir
r5,000boughton
January14f r
om GibirCompanywereofthewr ongsize.GibirCompanyacknowledgedthisandgav e
IKaCompanya5%pr i
ceall
owanceonJanuary17.
Whatshoul dI
KACompanyr ecor
donJanuary17?
Sol
uti
on:
Januar
y17 A/ P…………………………………250
PurchaseRet urnsandAll
owance…………250
Exerci
se–8:Whatwoul dGibirCo.recordonJanuary17?
Whenbot hpurchasedi scountsandpur chaseret
urnsandall
owancesar
ededuct
edf
rom pur
chases
whatisobtai
nedi scall
edNetpur chase.Thatis,
GrossPur chase…………………………XX
Less: Pur chasediscounts……………………. (XX)
Purchaser et
urnsandal lowances………(XX)
NetPur chases…………………. .
XX

Tr
anspor
tat
ioncost
s
Oncemer chandi
sehasbeenboughti
thastobemovedfrom t
hesel
ler
’spl
acetot
hebuyer
’spl
ace.A
thi
rdpartycomesintothesceneher
e:thetr
anspor
tat
ioncompanywhomov est
hegoodsbetween
thetwoplaces.
Thatis:

Sel
l
er Goods goods Buy
er
Fr
eight
er

So,t hequest ioni s,whoi sgoi ngt opayt othef reighter( transportat i
on)company .Whocov ersthe
transpor tati
oncost sdepends,asy oumi ghthav eguessed,ont heagr eementbet weent hebuy erand
sel l
er .Theagr eement sareusuallyst at edi ntheei t
heroft heset wot erms:
 FOBDest ination–means“ freeonboar datdest ination“ .Thati s,sincethedest i
nationofthe
goodsi st hebuy er’
splace, i
ti sf reeatdest i
nat i
onmeanst r
anspor tationcosti spaidwhent he
goodsar el oaded.I tsimplymeanst hesel l
erpay st ranspor t
at ioncost .FOBDest i
nationmeans
goodsar eshi ppedt otheirdest i
nat i
on( tot hebuy er )withoutt ransportati
onchar get othe
buy er.
 FOBshi ppi ngPoi nt–means“ freeonboar datshi ppi ngpoi nt”.Thati s,goodsar eloaded( ona
truckort rain)orshi pped f reeofchar ge. I ti s,ther ef
or e,t hebuy er,whi chpay st othe
transpor tationcompanywhent hegoodsr eacht hebuy er(thei rdest i
nati
on)br i
efl
y,whent he
termsar eFOBShi ppingPoi ntt hebuy erpay stranspor t at
ioncost s.
Tr anspor t
ationcost spai dbyabuy erofmer chandi sei ncreaset hecostofmer chandise.Theyar e
recor dedi nasepar ateTr ansportation- I
naccountt hatisusedt or ecor df reightcostsincurredinthe
acqui si
tionofmer chandi se.
Exampl e:IKACompanyboughtgoodswor thBi r
r85, 000onaccount ,t erms2/ 10,n/60FOBshi ppi
ng
poi ntonMar ch2,2009.Tr anspir
at i
oncostofBi rr1,500waspai donMar ch2.I kaCompanypai don
Mar ch31, 2009.Recor dthenecessar yj ournal ent
ries
Sol ution:Her e,sincet hetermsareFOBShi ppingPoi nt,thebuy er(I
ka)pay st r
ansportati
on.
Mar ch2 Purchase…………………. .85,
000
Page7of7
 A/P…………………………. .85,000
Transportat
ionI n………...
..1500
Cash…………………………1500
March31 A/P…………………………85, 000
Cash…………………………. .
85,000
Exerci
se- 9:Whatwoul dhavebeenr ecordedbyI KA, i
fitpai
donMarch12,2009?Whatift
heter
ms
wereFOBdest i
nati
on?
Example:IKACompanysol dgoodswor thBirr135, 000terms1/15,
n/EOM onFebruar
y1,
2009.FOB
Desti
nati
on.I talsopaidt r
anspor t
at i
oncost sofBi rr800onFeb.1. ThecustomerpaidIKA on
Febr
uary16, 2009.Recor dtherelevantJour nalent ri
es.
Feb1 A/ R…………………………. .135,000
Sales………………………. ……..135,000
Deliv
eryExpense…………………800
Cash……………………. …………800
Feb16 Salesdiscount…………………. 1, 350
Cash………………. .…………. 133,650
A/R………………………………135, 000

TheDeli
veryExpenseaccountshowshowmuchwasincur
redtodeli
vergoodssol
dtocust
omer
s.I
t
i
s,t
heref
ore,shownontheincomestat
ementasasel
l
ingexpense.

Exer
cise-
10:Whatwoul
dthecust
omer(
buy
er)r
ecor
d,i
ntheabov
eexampl
e,onFebr
uar
y1,
and13,
2009?

Sometimes,t hesel l
erpr epayst hefr
eightasaconv eni
encet othebuy erandl at
ercoll
ect
sitont he
duedateoft heinv oiceev enthoughthetermsareFOBshi ppingPoint.
Example:RaeyCo.sol dgoodswor thBirr40,
000onApr il1,2009t oIKAcompanyt er
ms2/ 10,n/30
FOBShippi ngPoi nt.Italsopai dBir
r2,500toErgibMov ersf ortr
anspor ti
ngt hegoodsandaddedt he
amountt ot hei nvoice.Whatwoul deachoft hesecompani esrecordassumi ngIKApaidonApr i
l31,
2009
RaeyCo.( sel
ler) IKaCo( Buy er)
Apri
l1-A/R……………. 40,000 Apri
l1-Purchases…………40, 000
Sales………………40, 000 A/P…………………. 40,000
A/ R……………. 2500 Tr
anspor t
-in………2500
Cash……………. 2500 A/ P………………2500
Apri
l31-Cash……………42, 500 Apri
l31-A/ P…………………42, 500
A/R………………42500 Cash…………………42, 500

Exer
cise–11:Whatwoul
dhav
ebeenr
ecor
dedont
heabov
edat
esi
fIKaCo.Pai
donApr
il11,
2009?
Ifthebuyerpaysthet r
ansportat
ioncostsfort
hesell
er(whent heter
msar eFOBDestinat
ion)the
buyersi
mplydeductsthefrei
ghtpaidfrom t
heamounttobepaidtothesel
l
er.
Example:XCompanyboughtmer chandi
seworthBir
r14,000ter
msFOBdest i
nati
onfr
om YCo.on
account
.Itpai
dBirr350transport
ati
oncosts.Whatwouldberecordedonthebooksoft
hebuy erand
sel
leronthedateofthesale?

Buyer(XCo.) Sel
ler
(YCo.
)
Pur
chase……….14,
000 A/
R……………….14,
000

Page8of8
 A/P………………14,000 Sal
es………………….14,
000
A/
P……………350 Del
i
ver
yexp……….350
Cash……….
.350 A/R………………350

Tr
ansf
erofTi
tl
e:
Shippingt ermsdet er minenotonl ywhopay sf ort r
anspor t
at i
on.Theyal sodet ermineatwhatpoi nt
owner shipt i
tl
eoft hegoodssol dtransferstot hebuy er. Putbr i
efl
y ,whosepr oper t
yi sitwhen
mer chandiseisint ransit?
1.Whent ermsar eFOBDest inati
onwehav eseent hatt hesel l
ercov erst ranspor t
ationcost s.By
i
mpl icati
ont hesel l
ert akesther esponsibili
tyofsaf elymov inganddel i
ver i
ngt hegoodst othebuy er .
Thebuy erisnotr esponsi bleforanydamaget hatcanhappent othesegoodsi nt ransit.Ther efor e,
thegoodsbecomet hebuy er’spropertyonl ywhent heyar edeli
veredt o him / her.Concl usion:
Owner shipt i
tl
eoft hegoodst ransferstot hebuy eratdest inat i
onwhent het ermsar eFOBdest ination.
2. Whent het ermsar eFOB shi ppingpoi ntthebuy erpay sfrei
ghtcost s. Thebuy ertakest he
responsibili
tyofsaf elymov i
ngt hesegoodst ohi s/ herownpl ace. Themer chandise,t herefor e,
becomeshi s/herpr oper tyassoonast heyarel oadedonat r
uckorat rain.Concl usion:Owner ship
ti
tleofgoodst r
ansf erstot hebuy eratshippingpoi ntwhent er msareFOBshi ppi
ngpoi nt.
Thef oll
owi ngtablesummar izesitall
.
Sippingt erms: Tr anspor t
ati
onpai dby : Ti tl
eTr ansf ers Whengoodsar eDel i
v er
ed
to:
FOBDest inati
on Sel l
er Buy er
FOB shipping Buy er Freighter(transpor
tati
oncompany )
point

Summar
yofI
mpor
tantRel
ati
onshi
psont
heI
ncomeSt
atement
1.Netsal es=Gr osssales-(
SalesDi scounts+Sal esReturnsandal l
owances)
2.Netpur chases=Pur chases–( Pur chaseDi sc.+Pur chaseRet .&al l
owance)
3.Tot alcostofPurchase=Netpur chase+Tr anspor t
ati
on–I n
4.Costofgoodssol d=openinginv ent ory+Tot alcostofpur chase–cl osingi
nventor
y
5.Gr ossprofi
t=Netsal es–Costofgoodssol d
6.NetI ncome=Gr ossProfi
t–oper at i
ng( i
.e.
,sel l
i
ng&admi nistrati
ve)expenses.
XYZMer chandi si
ngCo.
Incomest atement
Forthey earendedDec.31, 2009
GrossSal es………………………………………………… 400,000
Less:SalesDiscounts(15,
000)
SalesRet&Al l(25,000)……………………………. (40,000)
Netsal
es……………………………. ………………………………………. 360, 000
Costofgoodssol d:
Beginningmer chandiseinventor
y(January1, 2009)………………10, 000
Add: Purchases………………………………………. .
210,000
Less:PurchaseDi sc…………………………. .
..(5,000)
Pur chaseRet&Al l
……………………. .(5,000)
Netpur chase……………………………………. ..
..
.200,000
Add:Tr anspor t
ati
on–In…………………………………. ….66,000
TotalcostofgoodsAv ai
l
ableforsal
e……………………………. .
..
..276,
000
Less:Endi ngM. I(Dec.31,2009)……………………………. ………( 20.000)
Page9of9
 Costofgoodssol d……………………………………………256, 000………. (256,000)
Gr osspr of i
t…………………………………………………………………………… 104, 000
Less:Var iousSel li
ngandAdmi nistrativeExpenses ……………………………………( 79, 400)
NetI ncome…………………………………………. ……………………24, 600
Not e:Underaper i
odi ci nv entor ysy stem,t hecostofgoodssol ddur ingaper iodi sdet er
mi nedonl y
i
ndir ect lyaf tercompar ingwhatwasonhandatt hebegi nningoft heper i
od,andt hecostofgoods
purchaseddur i
ngt heper i
odwi thwhati sl eftonhandatt heendoft heper iod.Thati s,Begi nventory+
Totalcostofpur chase–Endi ngi nv entory=CostofGoodsSol d.Underper iodi
ci nv entor yprocedures
noat tempti smadet odet ermi net hecostofgoodssol datt het imeofeachsal e.I nstead,thecostof
allt
hegoodssol ddur i
ngt heaccount i
ngper i
odi sdetermi nedatt heendoft heper iod.
3.5COMPLETI NGTHEWORKSHEETFORAMERCHANDI SINGCOMPANY
Theuseofawor ksheet ,asy our emember ,assistsinpr eparingadj usti
ngandcl osingent ries. I
n
addit i
oni tcont ainsal loft hei nfor mat i
onneededf orthepr eparationoft hef inanci alstatement s.
Exceptf ort hemer chandi se–r elat edaccount s,thewor ksheetf oramer chandi singCo.i sthesame
asf oraser vi
cegi vingcompany .Thef ollowingi ll
ustration,therefore,assumest hatal lselli
ngand
admi nistrativeexpenseshav ebeenadj usted.Thataccompl i
shed, theonl yaccount ,whi chremai nsto
beadj ust ed, i
st heMer chandi seI nv entoryaccount .
Il
lust ration:Thef ol l
owi ngi st het rialbalanceofHar dWor ks,amer chandi si
ngbusi nessownedby
Yibelt al.All account shav ebeenadj ustedexceptt heMer chandi seInventoryaccount .
HardWor ks
TrialBalance
December31, 2009

Accountt i
tl
e Dr CR
Cash 19,
663
AccountRecei vable 1,
880
Mer chandiseI nventor
y 7,
000
Account sPay able 700
Yi
bel t
al,Capital 25,
000
Yi
bel t
al,Drawings 2,
000
Sales 14,
600
SalesDi scount s 44
SalesRet urnsandAl l
owances 20
Purchases 6,
000
Purchasedi scount s 82
PurchaseRet urnsandallowances 100
Transpor t
ation–I n 75
Sell
ingexpenses 2,
650
Admi nistr
ativeexpenses 1,
150 _
____
___
40,
482 40,
482
 Aphysi
cali
nvent
oryofmer
chandi
secar
ri
edoutonDecember31,
2009showedBi
rr10,
000ofgoods
onhand.
Requi
red:
a.Prepar
eawor ksheetf orHar
dWorks.
b.Prepar
ef i
nanci
alstatementsfr
om t
heworksheet
c.Recordthenecessaryadjust
mentj
ournal
entryi
nrel
ati
ont
omer
chandi
sei
nvent
ory
d.Recordclosi
ngentri
es
Har
dWor
ksCo.
Page10of10
 Wor
ksheetf
ort
hey
earendedDecember31,
2009
Tri
alBal
ance Adj
ust
ment Adj
ust
edTri
albal
anceI
ncomest
atement Balancesheet
Accountt
it
le Dr. Cr. Dr
. Cr
. Dr. Cr
. Dr. Cr. Dr. Cr.
Cash 19,
663 19,
663 19,663
Account 1,
880 1,
880 1,880
Recei
vable
Merchandise 7,
000 10,
000 7,
000 10,
000 10,
000
I
nventor
y
AccountsPayable 700 700 700
Yi
belt
al,Capit
al 25,
000 25,
000 2,
5000
Yi
belt
al,Drawings 2,
000 2,
000 2,
000
I
ncomesummer y 7,
000 10,
000 7,
000 10,
000 7,
000 1000
0
Sal
es 14,
600 14,
600 1460
0
SalesDi scounts 44 44 44
SalesRet urnsand 20 20 20
Allowances
Pur chases 6,
000 6,
000 6,
000
Pur chase 82 82 82
discount s
Pur chaseRet urns 100 100 100
andal l
owances
Transpor tat
ion 75 75 75
–In
Sellingexpenses 2,
650 2,
650 2,
650
Admi ni
str
ative 1,
150 1,
150 1,
150
expenses
40,
482 40,
482 17,
000 17,
000 50,
482 50,
482 16,
939 2478 33,
543 25,
700
2
7,
843 78,
43
24,
782 2478 33,
543 33,
543
2

Not
e:Themer
chandi
sei
nvent
oryaccountbef
oreadj
ust
mentshowst
hei
nvent
oryonhandatt
he
beginningoftheper i
od.Thi si sbecause,si ncepur chasesandsal esofmer chandisehavenotbeen
debitedorcredit
edt ot hemer chandisei nventoryaccount ,
thisaccountwoul dsti
llshowthebeginni
ng
i
nvent oryamountatt heendoft heper iod.Ther ef
ore,anadj ust
mentj ournalentr
yisneededtoupdat e
thi
saccount .Att heendoft heperiod,aphy si
calinventorywouldbeconduct edt odeter
minet he
amountofi nventoryonhand.
Theadj ustmentjournalent r
yr emov esbegi nni nginventoryamountf rom themer chandiseinv
entory
accountand r eplaces i twitht he (ending)act ualv al
ue ofmer chandise i
nventoryon hand as
determinedbythephy sical
inventory.Theadj ustmentis:
I
ncomesummar y(beginninginventory) …………..XXX
Merchandi seamounti nv entory……………………XXX

MerchandiseInventor
y…………………………….XXX
I
ncomeSummar y…………………………………. .
XXX
Anadj
ustmentjournalentr
yforHardWorksi
spresentedlat
terin(
c).
3.
6PREPARINGFI NANCIALSTATEMENTSFORMERCHANDI SINGBUSINESSES
Wewilldi
scussf inanci
alstatement
saswewor konr equir
ement(b)ofouril
lust
rat
ion.Oncet
he
Page11of11
worksheethasbeencomplet
ed,thefi
nanci
alst
atement
sareprepar
ed.Next
,anyadj
ust
ingand
cl
osingentr
iesar
eent
eredi
nthej
ournal
andpost
edtothel
edger
.
I
ncomeSt
atement
Ther
ear
etwowi
del
yusedf
ormat
soft
hei
ncomest
atement
.Thesear
e:
Thesi
ngl
e–St
epI
ncomeSt
atement
Thi
sf or
matisshownbelowforHardWorksCo.I
tshowscostofgoodssol
dandoper
ati
ngexpense
buthasonl
yonesubtot
alfort
otal
expenses.

Har
dWor ksCo.
Incomestatement
FortheyearendedDecember31,
2009
Netsales…………………………………………………. .
Br.14536
Expenses:
Costofgoodssold………………………2893
Operati
ngExpenses…………………….3800 (
6693)
NetIncome………………………………………. 7843

TheMul
ti
ple–St
epI
ncomeSt
atement
Har
dWor ksCo.
I
ncomestatement
Fort
hey
earendedDecember31,
2009
Rev
enue:
GrossSales……………………………………………… Br
.14,600
Less:SalesDi scounts………. .
44
SalesReturns&Al l
……20……………… (
64)
NetSales 14,
536………….
14,
536
Less:Costofgoodssol d:
Beg.Inventory(Jan1) ………………………………. .7,
000
Add:Pur chase………………………. …6,000
Less:Pur chasediscount.………..(
82)
PurchaseRet&al l
……….(100)
NetPur chases……….5818
Add:Tr ansportati
on–In………75
Totalcostofpurchase……..
5893…….
.….
5893
TotalcostofGoodsAv ai
l
ablef
orsal
e………………………..….12,893
Less:cl
osingInvent
ory(Dec.
31)…………………………………….…(10,000)
CostofGoodssold…………………………………….. 2893………. .…….
(2893)
GrossProfi
t……………………………………………………. ………11,
643
Oper
ati
ngExpenses:
Sel
l
ingExpenses………………. 2,
650
Admin.Exp……………………. 1,
150
Tot
aloper
atingexpenses……………….3800…………………………………………………. .
(3800)
NetI
ncome……………………………………………………………………………. …… 7,843
Har
dWorksCo.
Stat
ementofOwner
’sEqui
ty
Page12of12
 Fort heyearendedDecember31, 2009
Yi
beltalCapit
al(Jan1,2009) …………………. ……Br .
.25,
000
Add:NetI ncomef orthey ear …………………………7843
Deduct:Owner ’
swi t
hdr awal duri
ngtheyear………. .
..(2,
000)
Yi
beltalCapit
al(December31, 2009)………………. .
…30, 843
HardWor ksCo.
Stat
ementoff i
nancialposi t
ion
AsDecember31, 2009
Assets: Liabi
li
ti
es&capital
Liabili
ti
es:
Cash…………………. .19663 A/P……………………700
A/R……………………1880 Owner ’
sEquity:
Merch.Inventory
……. 10,000 Yibel
talCapi
tal … .
30843
TotalAssets…………. 31,843 Tot alLi
ab.&O/ E……31,
843
C.AdjustmentJour nalent r
y
I
ncomesummar y…………………. .7,
000
MerchandiseInv entory……….…………7,000
MerchandiseInventory……………. 10,000
I
ncomeSummar y……………………. 10,000

D.Closingentri
es
Sales………………………………. .14,
600
Incomesummar y
………………………. .
14,600
I
ncomesummar y……………………66
Salesdiscount
……………………………. .…44
SalesReturnsandAll
owances……………..20

Incomesummar y………………………………6, 075

Purchases……………………………………………. 6,
000
Transport
ati
on-In………………………………………. .
75
PurchaseDiscounts………………………………. .
82
PurchaseRet.&Al l
……………………………...
100
IncomeSummar y………………………………………. 182

I
ncomesummar y………………………………. 3,
800
Sel
l
ingExpenses……………………………………2650
Admini
str
ati
veexpense…………………………….
.1150
I
ncomesummar y
…………………………………. 7,843
Yibel
talCapi
tal…………………….
…………………7, 843
Yi
bel
talCapt
al……………………………………. .
2,000
Yi
belt
alDrawings………………………………………2, 000

Exer
cise:
1.Youareprovi
dedwiththefol
l
owingdatafr
om t
herecor
dsofthr
eemerchandi
singcompani
es:(
a),
(b)and(
c).Deter
mineeachofthemissi
ngnumber
sforeachcompany
.
a b c
I
nvoi
cecostofmer
chandi
sepur
chase Br.
90,
000 Br.
40,
000 Br
.30,
500
Page13of13
Purchasediscounts 4000 ? 650
Purchasereturnsandallowances 3,
000 1,500 1,
100
Transport
ati
ln-In ? 3,500 4,
000
Merchandiseinventory(
beginningofperiod) 7,
000 ? 9,000
Totalcostofmer chandi
sepurchases 89,400 39,500 ?
Merchandiseinventory(
endofper iod) 4,400 7,
500 ?
Costofgoodssol d ? 41,600 34,
130
2.Pr eparejournalentr
iestor ecordthefoll
owingmer chandi
singtransact
ionsofShiachCompany
.
Thecompanyusest heperiodicinv
entorysystem.
Jul
y 1 Pur chasedmer chandi sef orm Gi zhyCompanyf or$6, 000undercr editter msof1/ 15,n/30,
FOBshippingpoi nt.
2 Sol dmer chandi set oTer r
aCo.f or$800undercr edi ttermsof2/ 10,n/ 60,FOBshi pping
point .
3 Pai d$100f orfreight( transpor t
at i
on)char gesont hepur chaseofJul y1.
8 Sol dmer chandi sef or$1,600cash.
9 Pur chasedmer chandi sef rom Chi laloCo.f or$2,300undercr edittermsof2/ 15,n/60,FOB
dest inat i
on.
12Recei v eda$200cr editmemor andum acknowl edgi ngt hereturnofmer chandi sepurchased
onJul y9.
12Recei v edt hebal anceduef rom Ter raCo.f orthecr edi tsaledat edJul y2, netoft hediscount.
16Pai dt hebal anceduet oGizhyCompanywi t
hinthedi scountper i
od.
19Sol dmer chandiset oUr banCo.f or$1, 250undercr edi ttermsof2/ 15,n/ 60,FOBshi pping
point .
21I ssueda$150cr edi tmemor andum t oUr banCo.f oranal l
owanceongoodssol donJul y19.
22Recei v edadebi tmemor andum f r
om Ur banCo.f oraner rorthatov erst atedt hetotalsales
invoiceby$50.
24Pai dChi l
aloCo.t hebal ancedueaf terdeduct ingt hedi scount.
30Recei v edt hebal anceduef rom Ur banCo.f ort hecr editsaledat edJul y19,netoft he
discount .
31Sol dmer chandiset oTer raCo.f or$5, 000undercr edi ttermsof2/ 10,n/ 60,FOBshi pping
point .
3.Thef ollowingunadj ust edt r
ialbal ancewaspr epar edatt heendoft hef iscaly earf orTenkir
Company :
TENKI RCOMPANY
Unadj ust edTr ailBal ance
Jul y31, 2010
Cash………………………………………………. .$4, 200
Merchandi seI nventor y…………………………… 11, 500
Storesuppl ies……………………………………. . 4, 800
PrepaidI nsur ance………………………………… 2, 300
Storeequi pment …………………………………. .41, 900
Accumul ateddepr ecat ion-StoreEqui pment …
$15, 000
Account spay able…………………………………. 9,000
GideyTi nker ,capital……………………………. .
35, 200
GideyTenki r,wi t
hdrawal s……………………. 3, 200

Page14of14
 Sal
es……………………………………………….
.
104,
000
Salesdi scounts…………………………………… 1, 000
Salesr eturnsandallowances…………………… 2, 000
Costofgoodssol d………………………………. .
.37,400
Depr eciati
onexpense–St oreequi
pment…….. -
Salariesexpense…………………………………. .31,000
I
nsur anceexpense………………………………. -
Rentexpense…………………………………. ….
.14,000
Storesuppl i
esexpense…………………………. -
Adv erti
singexpense……………………………. . 9, 900

.
Tot
als…………………………………………….
..
$163,
200
$163,
20
0
Rentandsalariesexpensear
eequal
l
ydivi
dedbetweenthesell
ingandt
hegener
alandadmi
nist
rat
ive
funct
ions.TenkirCompanyusest
heper
iodi
cinv
entorysyst
em.
Requi
red:
1.Pr
epar
eadj
ust
ingj
ournalentri
esforthefol
lowing:
a.Stor
esuppliesonhandaty ear-
endamountt o$1,650.
b.Expi
redinsurance,
anadmi nist
rati
veexpense, f
ortheyeari
s$1,500.
c.Depreci
ati
onexpense, asell
i
ngexpense, fortheyeari
s$1,400.
d.Aphy si
calcountoft heendingmer chandiseinvent
oryshows$11,100ofgoodson
hand.
2.Pr
epar
eamul t
ipl
e-st
epincomestatement.
3.Pr
epar
easingl
e-st
epincomest at
ement .
4.Pr
epar
eal
lthenecessaryclosi
ngentr
ies.

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