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20 terms
accounts payable ledger
A subsidiary ledger that lists the individual accounts of creditors. Also called the creditor's ledger.

cash discounts
Discounts offered by a seller to encourage early payments by a buyer. To the seller, cash discounts are sales discounts; to the buyer, cash discounts are purchase discounts.

cash payments journal

A special journal used for recording all disbursements of cash. Also called the cash disbursement journal

controlling account
An account the the general ledger that summarized accounts in a related subsidiary ledger.

cost accounts
Accounts that are presented on the income statements; used to determine the cost of goods sold to customers.

credit memorandum
A written statement that indicates a seller's willingness to reduce the amount owed by a buyer.

debit memorandum
The buyer's written re uest to a seller for credit for a merchandise return or allowance.

FOB destination
A shipping term that means that the seller is responsible foe all freight costs until the goods reach their destination.

FOB shipping point

A shipping term that means tha the buyer is responsible for all freight costs while the goods are in transit.

Freight In account
A general ledger account in which charges for freight on incoming merchandise are recorded. Also call Transportaion !n.

general ledger
A ledger containing the financial statement accounts

invoice
A business document that contains the names and addresses of the buyer and the seller, the date and terms of the sale, a description of the goods, the price of the goods, and the mode of transportation used to ship the goods. The seller calls the invoice a sales invoice; the buyer calls it a purchase invoice

list price
The price appearing in a price catalog issued by the seller.

merchandise (or merchandise inventory)

"oods held for sale to customers. Also call stoc# in trade.

merchandising business
A business that earns it revenue by buying goods and then reselling those goods. Also called a trading business.

purchase order
A written order from a buyer of goods to the seller, listing items needed and a description of the goods.

purchase requisition
A written re uest for goods to be purchased. !t is usally prepared by a department head or manager and sent to a firm's purchasing department.

Purchases account
A temporary owner's e uity account that is used to record the cost of merchandise purchased for resale.

Purchase discounts accounts

A contra purchases account that records discounts received for prompt payment of merchandise

purchases jounal
A special journal used only to record credit purchases of merchandise.

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ccounting !or "erchandising #ompany

"erchandising companies# in contrast to ser$ice-t!pe businesses# earn re$enue b! selling goods rather than ser$ices. %he goods that a merchandising compan! sells to its customers are called in$entor! &or merchandise'# regardless of the t!pe of products that the compan! sells. %hus# the in$entor! of an automobile dealership consists of auto-mobiles offered for sale# (hereas the in$entor! of a grocer! store consists of a (ide $ariet! of food items.
"erchandising companies often ha$e large amounts of mone! in$ested in their in$entories. )n fact# in$entor! is one of the most costl! assets appearing in the balance sheets of most merchandising companies. *ortunatel!# in$entor! is a relati$el! +liquid, asset-that is# it usuall! (ill be sold (ithin a fe( (ee.s or months# thereb! generating accounts recei$able and cash receipts. *or this reason# the asset in$entor! appears near the top of the balance sheet# immediatel! belo( accounts recei$able.

$he %Operating #ycle& o! a "erchandising #ompany

%he series of transactions through (hich a business generates its re$enue and its cash receipts from customers is called the operating c!cle. %he operating c!cle of a merchandising compan! consists of the follo(ing basic transactions &1' purchases of merchandise/ &2' sales of the merchandise# often on account/ and &3' collection of the accounts recei$able from customer. %he (ord c!cle suggests# this sequence of transactions is repeated continuousl!. Some of the cash collected from the customer is used more merchandise# and the c!cle begins ane(. %his continuous sequence of merchandising transactions is illustrated in the follo(ing diagram:

"erchandising ctivities #ompared 'ith "anu!acturing

"ost rnerchandising companies purchase their in$entor! from other business organizations in a read!-to-sell condition. 0ompanies that manufacture their in$entories# such as 1eneral "otors# 2pple 0omputer# and 3oeing 2ircraft# are called manufacturers# rather than merchandisers. %he operating c!cle of a manufacturing compan! is longer and more comple4 than that of a merchandising compan!# because the first transaction- purchasing merchandise-is replaced b! the man! transactions in$ol$ed in manufacturing the merchandise.

Retailers and Wholesalers:

"erchandising companies include both retailers and (holesalers. 2 retailer is a business that sells merchandise directl! to the public. 5etailers ma! be large or small/ the! $ar! in size from giant department store chains# such as Sears and 6al-"art# to small neighborhood businesses# such as gas stations and gift shops. )n fact# more businesses engage in retail sales than in an! other t!pe of business acti$it!. %he other ma7or t!pe of merchandising compan! is the (holesaler. 6holesalers bu! large quantities of merchandise from se$eral different manufacturers and then# resell this merchandise to man! different retailers. 2s (holesalers do not sell directl! to the public# e$en the largest (holesalers are not (ell .no(n to most consumers. 8onetheless# (holesaling is a ma7or t!pe of merchandising acti$it!.

Income Statement of a Merchandising Company

Selling merchandise introduces a ne( and ma7or cost of doing business: the cost to the merchandising compan! of the goods (hich it resells to its customers. %his cost is termed the cost goods sold. )n essence/ the cost of goods sold is an e4pense/ ho(e$er# this item is of such importance to a merchandising compan! that it is sho(n separate from other e4penses in the income statement# 2 highl! condensed income statement for a merchandising business is sho(n on the follo(ing page. )n comparison (ith the income statement of a ser$ice-t!pe business# the different features of this statement are the inclusion of the cost of goods sold and a subtotal called gross profit.

5e$enue from sales represents the sales price of merchandise sold customers during the period. %he cost of goods sold# on the other hand represents the cost incurred b! the merchandising compan! in purchasing these goods from the compan!9s suppliers. %he difference bet(een re$enue from sales and the cost of goods sold is called gross profit &or gross margin'. 1ross profit is a useful means of measuring the profitabilit! of sales transactions but it does not represent the o$erall profitabilit! of the business. 2 merchandising compan! has man! e4penses other than the cost of goods sold. :4amples include salaries# rent# ad$ertising# and depreciation. %he 0ompan! onl! earns a net income if its gross profit e4ceeds the sum of these other e4penses