How are journal entries prepared for merchandising transactions? What accounts are involved in recording these transactions?

Question

Hudson · Answer

Recording Merchandising Transactions

To record the merchandising transactions of Lowe's, journal entries need to be prepared for each transaction. The entries include debiting and crediting various accounts such as Merchandise Inventory, Accounts Payable, Accounts Receivable, Sales Revenue, Cost of Goods Sold, Cash, and Sales Returns and Allowances.

Explanation

These entries ensure accurate recording of purchases, sales, and related expenses. It is important to consider credit terms, FOB shipping point, FOB destination, and price allowances when preparing these entries. To record the merchandising transactions of Lowe's, we need to prepare journal entries for each transaction. Let's go through each transaction and record the necessary entries:

August 1

Purchased merchandise from Aron Company for $7,500 under credit terms of 1/10, n/30, FOB destination, invoice dated August 1.

Debit: Merchandise Inventory ($7,500)

Credit: Accounts Payable ($7,500)

August 5

Sold merchandise to Baird Corp. for $5,200 under credit terms of 2/10, n/60, FOB destination, invoice dated August 5. The merchandise had cost $4,000.

Debit: Accounts Receivable ($5,200)

Credit: Sales Revenue ($5,200)

Debit: Cost of Goods Sold ($4,000)

Credit: Merchandise Inventory ($4,000)

August 8

Purchased merchandise from Waters Corporation for $5,400 under credit terms of 1/10, n/45, FOB shipping point, invoice dated August 8.

Debit: Merchandise Inventory ($5,400)

Credit: Accounts Payable ($5,400)

August 9

Paid $125 cash for shipping charges.

Debit: Shipping Charges ($125)

Credit: Cash ($125)

August 12

Lowe's received a price reduction from Waters of $400 off the $5,400 of goods purchased. Lowe's debited accounts payable for $400.

Debit: Accounts Payable ($400)

Credit: Merchandise Inventory ($400)

August 14

At Aron's request, Lowe's paid $200 cash for freight charges on the August 1 purchase, reducing the amount owed (accounts payable) to Aron.

Debit: Freight Charges ($200)

Credit: Cash ($200)

August 15

Received balance due from Baird Corp. for the August 5 sale less the return on August 10.

Debit: Cash (amount received)

Credit: Accounts Receivable (amount received)

August 18

Paid the amount due Waters Corporation for the August 8 purchase less the price allowance from August 12.

Debit: Accounts Payable (amount paid)

Credit: Cash (amount paid)

August 19

Sold merchandise to Tux Co. for $4,800 under credit terms of n/10, FOB shipping point.

Debit: Accounts Receivable ($4,800)

Credit: Sales Revenue ($4,800)

Debit: Cost of Goods Sold ($2,400)

Credit: Merchandise Inventory ($2,400)

August 22

Tux requested a price reduction on the August 19 sale. Lowe's gave a price reduction of $500 to Tux and credited Tux's accounts receivable for that amount.

Debit: Sales Returns and Allowances ($500)

Credit: Accounts Receivable - Tux Co. ($500)

August 29

Received Tux's cash payment for the amount due from the August 19 sale.