The Old Merchandise Account, Its Content and Significance.—It is impracticable, however, to compute and record the cost of every unit sold. Using the above illustration, instead of crediting Merchandise with $10 and Profit with $2, the entire $12 may be credited to the Merchandise account. There is a disadvantage in this procedure, in that the Merchandise account then no longer represents the one asset Merchandise, but is a mixture of an asset element, merchandise, and a proprietorship element, profit; two elements which must be separated at the close of the period.
Originally, the Merchandise account was kept in this way; it was a mixed account and followed the rules of debit and credit as shown below, the amounts being given for purposes of illustration:
| (A) | |||
| Merchandise | |||
| Debit: | Credit: | ||
| (1) For goods on hand at beginning. | 10,000.00 | (a) For sales. | 25,000.00 |
| (2) For purchases, sometimes including | (b) For returned purchases. | 2,000.00 | |
| freight-in, drayage-in, etc. | 20,000.00 | ||
| (3) For returned sales | 1,000.00 | (c) For purchases rebates and allowances. | 100.00 |
| (4) For sales rebates and allowances. | 500.00 | ||
Where the account is kept in this manner it is usually burdened with the additional data listed under (3), (4), (b), and (c). Sales being a credit item, it is plain that subtractions from sales (3) and (4), must appear on the debit side, and, purchases being a debit item, subtractions from purchases (b) and (c) must appear on the credit side. If these subtractions were actually performed instead of being indicated in the account, the debit side would show net goods to be accounted for, viz., goods on hand at the beginning, $10,000, plus net purchases, $17,900, making a total of $27,900; and the credit side would show net sales, $25,000 minus $1,500, or $23,500.
If, now, the cost value of the goods on hand at the close of the period (as determined by a physical inventory) equals $8,000, it is evident that the cost price of the goods sold is equal to the cost value of the goods to be accounted for, minus the cost value of the goods left on hand, that is, $27,900 minus $8,000, or $19,900. To secure this subtraction within the account, it is necessary to enter on the credit side this $8,000, the cost value of the final inventory. Accordingly, an additional credit item (d) is inserted, after which the account will show:
| (B) | |||
| Merchandise | |||
| Debit: | Credit: | ||
| (1) For goods on hand at beginning. | 10,000.00 | (a) For sales. | 25,000.00 |
| (2) For purchases, sometimes including | (b) For returned purchases. | 2,000.00 | |
| freight-in, drayage-in, etc. | 20,000.00 | ||
| (3) For returned sales | 1,000.00 | (c) For purchases rebates and allowances. | 100.00 |
| (4) For sales rebates and allowances. | 500.;00 | (d) For goods on hand at end. | 8,000.00 |
The account is now a pure proprietorship account, the balance showing the gross profit on sales, amounting to $3,600.
Modern Practice in Showing Merchandising Transactions.—Actual subtraction, however, within the account is contrary to the method of showing subtractions in the account. Therefore, the mixed Merchandise account cannot show the figures representing “net purchases,” “net sales,” “total goods to be accounted for,” and “cost of goods sold”—information which is very essential to proper management. While containing all the data necessary to give the final information, viz., the “gross profit,” the mixed account does not show the separate factors leading up to it. Analysis of the mixed account is necessary to find the elements of which it is composed. The best accounting practice provides for this analysis as the transaction takes place. The old Merchandise account is no longer used; in its place separate accounts are set up to represent the various elements mentioned above. Each account thus contains only one kind of item as indicated by its title. These accounts are:
| (1) | ||
| Merchandise Inventory | ||
| (2) | ||
| Purchases | ||
| (3) | ||
| Inward Freight and Drayage | ||
| (4) | ||
| Returned Purchases | ||
| (5) | ||
| Purchases Rebates and Allowances | ||
| (6) | ||
| Sales | ||
| (7) | ||
| Returned Sales | ||
| (8) | ||
| Sales Rebates and Allowances | ||
Accounts (1), (2), (3), (7), and (8) correspond to the four classes of debits shown above in the mixed Merchandise account, and accounts (1), (4), (5), and (6) correspond to the credits. Explanation of the use of account (1) for both the initial and final inventories is given in detail in [Chapter XV].