Sold Merchandise Journal Entry: What is the Cost of Merchandise Sold? And How to Record It

Companies use various business models to generate revenues from several income sources. This model dictates the company’s revenues, expenses, suppliers, customers, and activities. In the past, companies used one model to succeed in a market.

Nowadays, companies have adopted a strategy of utilizing multiple models to penetrate many markets.

One of the oldest business models that companies used was merchandising. This business model involved presenting and promoting goods available for sale.

Similarly, it could fall under the wholesale or retail business models. Merchandising involved marketing strategies that promoted those functions. Over the years, however, the term has evolved to mean various things.

People may often confuse merchandising with merchandise. While both have similarities, they may also refer to different things within a business environment.

The term merchandise also often relates to sold merchandise and its journal entries. Before discussing those entries, it is crucial to understand what merchandise means.

What does Merchandise mean?

In business terms, merchandise refers to any goods sold by a company. It may include commercial or personal products. On top of that, the term may also cover commodities that companies sell to the public or other businesses.

The former falls under retail while the latter relates to wholesales. In some cases, merchandise also covers promotional items that companies may distribute for free.

Merchandise may include various items. These can consist of groceries, electronics, equipment, clothes, footwear, etc. Essentially, the term does not cover a specific range of goods or products. It may refer to different items based on the business environment.

Therefore, clothes will be considered merchandise for a retail store. However, it may not be the same for a company that sells electronics.

Merchandise exists for every company or business. It is one of the most critical items for any company.

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 Essentially, it is what enables them to survive in the economy. Merchandise is also the goods that make money for companies. However, it only covers products or goods. For service firms, the merchandise does not exist. These firms may consider freebies distributed as merchandise.

Overall, merchandise refers to the goods or products that companies sell as a part of their operations.

However, it is not the same as merchandising, the business model. Merchandise exists for all companies. When companies sell their goods, it falls under sold merchandise. The accounting for these items is a prevalent treatment for companies in all areas.

What is the accounting treatment of Sold Merchandise?

The accounting treatment for sold merchandise is straightforward. However, it may involve various stages. Usually, companies sell their goods on credit. In those cases, companies record the sold merchandise as a receivable balance.

However, companies may also sell these for cash. Therefore, they will recognize it through cash or bank account. On top of that, other factors can impact the accounting treatment of sold merchandise.

When companies sell their merchandise, they must also record a corresponding reduction in inventory. This process is in line with the sales accounting entries. Essentially, companies must reduce their stock balance to ensure an accurate balance.

When companies sell goods, they send out their inventory to customers. Thus, the balance in that account decreases. Therefore, companies must also update their inventory account.

However, the above requirement only applies when companies use a perpetual inventory system. Under this system, they only record the inventory reduction when making a sale. If they use a periodic system, the same will not apply.

In that case, they will account for inventory fluctuations after each period ends. In this case, the physical inventory will still decrease. However, companies account for it later.

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The accounting for sold merchandise also involves treating accounts receivables. In that case, companies increase their debtor balances when they sell merchandise.

This balance remains until that party decides to repay their owed amount. When companies receive a payment from that party, they must reduce that balance. In exchange, they record a receipt in the cash or bank account.

Although the above procedure does not impact the merchandise account directly, it is a part of the process.

Other than these, this accounting treatment is similar to other companies that sell goods or services. It involves recording revenues when selling goods. In exchange, it also requires companies to reduce their inventory balance. On the other hand, it will also include increasing the cost of sales or services.

How to record the journal entries for Sold Merchandise?

The journal entries for sold merchandise are straightforward. However, these may involve various stages, as mentioned above. When a company initially sells its merchandise, it must decide whether to receive cash or allow a credit.

The accounting treatment will differ based on that decision. However, the underlying journal entries will remain the same.

In that transaction, companies can use the following journal entries to record the sale of merchandise.

DateParticularsDrCr
 Cash or Bank or Accounts ReceivableXXXX 
 Merchandise sales XXXX

As stated above, this process will also involve reducing the balance in the inventory account. However, this process only occurs if companies use a perpetual inventory system. Nonetheless, the journal entries under that method will be as follows.

DateParticularsDrCr
 Cost of merchandise soldXXXX 
 Merchandise inventory XXXX

The above journal entries reduce the merchandise inventory balance. Simultaneously, it also increases the cost of goods sold.

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In a periodic inventory system, the same does not apply. Companies calculate these amounts after the period ends. Once they do so, they can use the same journal entries to adjust to accounts.

Lastly, the accounting for sold merchandise also involves recording any cash received subsequently.

However, this process only occurs if companies sell those goods on credit. This accounting treatment is the same as when companies receive payments from debtors in other businesses. Nonetheless, it still constitutes a part of the accounting for sold merchandise.

Therefore, the journal entries for any cash received will be as below.

DateParticularsDrCr
 Cash or BankXXXX 
 Accounts receivable XXXX

Overall, the journal entries for sold merchandise are similar to when companies sell other goods. However, companies may classify them as separate accounts.

Example

A company, ABC Co., sold its merchandise worth $10,000 on credit to a customer. The company records this amount in two stages.

Since ABC Co. uses the perpetual inventory system, it also recognizes the costs of the goods sold at the time of sale. Therefore, the company uses the following journal entries to record the sold merchandise.

DateParticularsDrCr
 Accounts Receivable$10,000 
 Merchandise sales $10,000

ABC Co. estimates the cost of the sold merchandise to be 80% of its sale value. Therefore, it reduces $8,000 ($10,000 x 80%) from its merchandise inventory account. ABC Co. uses the following journal entries to record this amount.

DateParticularsDrCr
 Cost of merchandise sold$8,000 
 Merchandise inventory $8,000

One month later, the customer repays ABC Co. their owed amount through the bank. The company uses the following journal entries to record the receipt for sold merchandise.

DateParticularsDrCr
 Bank$10,000 
 Accounts receivable $10,000

Conclusion

Merchandise includes any goods or items that companies sell as a part of their activities. Usually, the definition differs based on the underlying operations that companies perform. The accounting treatment for sold merchandise is straightforward. However, it may involve various stages. Based on that, the journal entries will also vary.