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🧾financial accounting i review

Merchandise Purchases

Written by the Fiveable Content Team • Last updated September 2025
Written by the Fiveable Content Team • Last updated September 2025

Definition

Merchandise purchases refer to the acquisition of goods or products held for resale in the normal course of a retail or wholesale business. These purchases are a fundamental component of the periodic inventory system, where the cost of goods sold is determined at the end of an accounting period rather than with each individual sale.

5 Must Know Facts For Your Next Test

  1. Merchandise purchases are recorded as debits to the Purchases account and credits to the Accounts Payable or Cash account, depending on the payment method.
  2. The Purchases account is a temporary account that is closed to the Cost of Goods Sold account at the end of the accounting period.
  3. Merchandise purchases are a key component of the cost of goods sold calculation, which is essential for determining a company's gross profit.
  4. Accurate tracking and recording of merchandise purchases are crucial for maintaining proper inventory levels and ensuring the financial statements accurately reflect a company's financial position.
  5. Merchandise purchases are subject to various discounts, returns, and allowances, which must be properly accounted for to reflect the true cost of the goods acquired.

Review Questions

  • Explain how merchandise purchases are recorded in the periodic inventory system.
    • In the periodic inventory system, merchandise purchases are recorded as debits to the Purchases account and credits to either Accounts Payable or Cash, depending on whether the purchase was made on credit or with immediate payment. The Purchases account is a temporary account that is closed to the Cost of Goods Sold account at the end of the accounting period, allowing the company to determine the total cost of goods sold during that period.
  • Describe the role of merchandise purchases in the calculation of cost of goods sold.
    • Merchandise purchases are a crucial component of the cost of goods sold calculation, which is essential for determining a company's gross profit. The cost of goods sold is calculated as the beginning inventory plus merchandise purchases less the ending inventory. Accurately tracking and recording merchandise purchases is vital for maintaining proper inventory levels and ensuring the financial statements accurately reflect the company's financial position.
  • Analyze the impact of discounts, returns, and allowances on the accounting for merchandise purchases.
    • Merchandise purchases are subject to various discounts, returns, and allowances, which must be properly accounted for to reflect the true cost of the goods acquired. These adjustments are recorded as reductions to the Purchases account, ensuring that the cost of goods sold and the value of the ending inventory are accurately reported. Properly accounting for these transactions is crucial for maintaining the integrity of the company's financial records and providing stakeholders with reliable financial information.