1. FOB shipping point—title transfers at shipping point and
buyer bears any loss and pays shipping costs.
a. Increases cost of merchandise (cost principle)
b. Debit Inventory, credit Cash or Accounts Payable (if to be
paid for with merchandise later)
2. FOB destination—title transfers at destination and seller bears
any loss and pays shipping costs.
a. Operating expense for seller
b. Debit Delivery Expense (or Transportation-Out or Freight-
Out), credit Cash.
E. Recording Purchases Information
The net cost of purchased merchandise according to the cost
principle is recorded in the Inventory account. (Inventory is
debited (increased) for invoice and transportation costs, and
credited (decreased) for returns, allowances, and purchase
discounts. Supplemental records are often used to collect
information about each of these cost elements for management to
evaluate and control.
III. Accounting for Merchandise Sales—involves sales, sales discount,
sales returns and allowances and cost of goods sold
A. Each sale of merchandise transaction involves two parts (resulting
in two journal entries; the revenue entry and the cost entry.
1. Recognize revenue—debit Accounts Receivable (or cash),
credit Sales (both for the invoice amount).
2. Recognize cost—debit Cost of Goods Sold, credit Inventory
(both for the cost of the inventory sold).
B. Sales Discounts
Cash discounts awarded to customers for payment within the
discount period. Recorded upon collection for sale.
1. Collection after discount period—Debit Cash, Credit Accounts
Receivable (full invoice amount).
2. Collection within discount period—debit Cash (invoice
amount less discount), debit Sales Discount (discount
amount), credit Accounts Receivable (invoice amount).
3. Sales Discounts is a contra-revenue account—subtraction
C. Sales Returns and Allowances
1. Sales returns—merchandise that a customer returned to the
seller after a sale.
2. Sales allowances—reductions in the selling price of
merchandise sold to customers (usually for damaged
merchandise that a customer is willing to keep at a reduced