Accounting theory and practice, Volume 1 (of 3)

by Roy B. Kester

The Merchandise Account

(Merchandise)
Debit:	Credit:
(1) For merchandise on hand at the beginning.	(a) For sales of merchandise.
(2) For purchases of merchandise.	(b) For returns of merchandise purchased.
(3) For all costs necessary to bring the
merchandise from its place of
purchase to its place of sale.
(4) For goods returned by customers.

Entries in the Merchandise account require no explanation excepting the debit entry (3). The value of the asset Merchandise is not the price paid for it at the point where purchased, for it is of no value to the business until it is placed on the shelves ready for sale. Accordingly, the value of the asset Merchandise is not determined merely by the price paid the vendor, but by this price plus all of the costs necessary to bring the merchandise to the store. Inasmuch as the merchandise is sold normally for more than it cost, the credit entry in the Merchandise account includes two items: (1) the decrease of the asset, as indicated by the cost price of the goods sold; and (2) the amount of profit on the sale, that is, the amount of the increase in proprietorship.

The record of merchandise transactions is thus seen to be rather complex and will be explained fully in [Chapter XIII]. The above schedule is simply an indication of the types of transactions recorded in the Merchandise account and will be sufficient for the present. It will be seen that the sale of goods results in a debit to the customer’s account and a credit to Merchandise.

Accounts with Fixed Assets.—Accounts with fixed assets are those with land, buildings, and equipment of all sorts.

(Name of Account)
Debit:	Credit:
(1) For full cost to the business	(a) For sale or loss,
in position ready for use.	at cost price.

The debit to this account is not for invoice or first cost only, but should include all expenditures necessary to secure full title or to place the equipment in position for use by the business, such as abstract of title costs, freight, drayage, and, in the case of machinery, setting-up and placement costs. The corresponding credit is usually to Cash, or to Notes or Accounts Payable.

The account is credited for the sale of all or a portion of the asset at the same price at which it was originally charged, so that the balance in the account shows the pro rata cost of the part left. A loss from fire or otherwise is treated similarly. If the asset is sold at a profit (an unlikely occurrence), the account is credited with its cost price, while the excess of the sale price over the cost price is credited to a proprietorship account, such as Profit on Sale of Machinery. The debit corresponding to these two credits is usually to Cash or some other asset received in payment. Where the asset is sold at a loss, the account is credited with: (1) the sum received, and (2) the difference between this sum and the cost of the asset, which difference represents a loss. The loss or deficiency is debited to a proprietorship account, such as Loss on Sale of Machinery, and the additional debit is to Cash or some other asset received. This latter debit amount plus the debit to Loss on Sale of Machinery must, of course, equal the two amounts credited to the fixed asset account and representing the cost of the asset sold.

Fixed asset accounts are further considered in [Chapter XIII], where the manner of recording loss through depreciation is shown.

Accounts with Notes Payable.—When we issue our own note, the credit is to Notes Payable and the debit is either to the liability account reduced or to the asset account increased. When we call the note in, either by paying it or by canceling our claim against the person returning the note, Notes Payable is debited and Cash or the person returning the note is credited.