Retailers purchase merchandise and resell it to customers. Retailers need an effective inventory management system to account for inventory purchases, inventory stored on the shelves and inventory sold to customers. Retail accounting requires knowledge of the inventory and how each sale impacts the business.
Recording the Sale
The retailer records the sale of merchandise at the time it occurs. She records the sale in the general journal or in a sales journal, a subsidiary journal. In the general journal, the retailer follows standard journal entry format by debiting Cash and crediting Sales on two individual lines for the amount of the sale. If the retailer uses a sales journal, she records one dollar amount on one line. This amount represents a debit to Cash and a credit to Sales.
Recording the Inventory Change
When the retailer sells merchandise to customers, he needs to record the change in inventory in addition to the sale. The merchandise leaves the building with the customer and no longer belongs to the retailer. The sales entry does not account for the change in inventory. The retailer makes a separate entry in the general ledger. The retailer debits Cost of Merchandise Sold and credits Merchandise Inventory for the value of the inventory sold to the customer.
Sales Returns
Some customers change their mind about their purchase after bringing it home. The merchandise may be the wrong color, the wrong size or a duplicate of something they already own. These customers return the merchandise, and expect to receive their money back. The retailer needs to record this event in the accounting records. Both the sale entry and the inventory change entry need to be reversed. The retailer debits Sales Returns for the sale price of the merchandise and credits Cash. The retailer also debits Merchandise Inventory and credits Cost of Merchandise Sold for the value of the merchandise.
Income Statement
Income statements for retail businesses follow a different format than traditional income statements. Since the cost of inventory comprises a significant expense for the business, investors want to know if the sales price covers the cost of inventory. Also, retailers incur merchandise returns, which impact the company's net sales. The income statement starts by calculating Net Sales, which is gross sales minus sales returns. The Cost of Merchandise Sold is subtracted from Net Sales to determine Gross Profit. All other operating expenses are subtracted from Gross Profit to determine Net Income.
Tags: Cost Merchandise, Cost Merchandise Sold, Merchandise Sold, change inventory, cost inventory