Under a perpetual inventory system, when goods are purchased for resale by a company:

CHAPTER 5

ACCOUNTING FOR MERCHANDISING OPERATIONS

CHAPTER LEARNING OBJECTIVES

1.Describe merchandising operations and inventory systems. Because of inventory, a

merchandising company has sales revenue, cost of goods sold, and gross profit. To account

for inventory, a merchandising company must choose between a perpetual and a periodic

inventory system.

2.Record purchases under a perpetual inventory system. The company debits the Inventory

account for all purchases of merchandise and, freight-in, and credits it for purchase discounts

and purchase returns and allowances.

3.Record sales under a perpetual inventory system. When a merchandising company sells

inventory, it debits Accounts Receivable (or Cash) and credits Sales Revenue for the selling

price of the merchandise. At the same time, it debits Cost of Goods Sold and credits

Inventory for the cost of the inventory items sold. Sales Returns and Allowances and Sales

Discounts are debited and are contra revenue accounts.

4.Apply the steps in the accounting cycle to a merchandising company. Each of the

required steps in the accounting cycle for a service company applies to a merchandising

company. A worksheet is again an optional step. Under a perpetual inventory system, the

company must adjust the Inventory account to agree with the physical count.

5.Prepare financial statements for a merchandising company. The income statement has

the following components: sales revenues, cost of goods sold, gross profit, operating

expenses, other income and expense, and interest expense. A comprehensive income

statement adds or subtracts any items of other comprehensive income to net income to arrive

at other comprehensive income.

a6.Prepare a worksheet for a merchandising company. The steps in preparing a worksheet

for a merchandising company are the same as for a service company. The unique accounts

for a merchandiser are Inventory, Sales Revenue, Sales Returns and Allowances, Sales

Discounts, and Cost of Goods Sold.

a7.Record purchases and sales under a periodic inventory system. In recording purchases

under a periodic system, companies must make entries for (a) cash and credit purchases, (b)

purchase returns and allowances, (c) purchase discounts, and (d) freight costs. In recording

sales, companies must make entries for (a) cash and credit sales, (b) sales returns and

allowances, and (c) sales discounts.

When goods are purchased for resale by a company using the perpetual inventory system?

When the perpetual inventory system is used in what account are purchases recorded?

When goods are sold under the perpetual inventory system?

What is under the perpetual inventory system?