Bookkeeping Guide to Merchandising: Income Statements, Sales Discounts & Purchase Discounts Explained

Merchandising in Accounting

Merchandising plays a vital role in the financial success of any retail or wholesale business. Whether you’re running a small store or a large trading company, understanding how merchandising works in accounting helps you measure profitability, track costs, and maintain accurate books. In this blog, we’ll dive deep into the concept of merchandising, explore how it reflects on the income statement, and explain sales and purchase discounts with practical examples.

What is Merchandising in Accounting?

In accounting, merchandising refers to the process of buying goods with the intention to sell them at a profit. Unlike manufacturing companies that produce goods, merchandising businesses purchase finished products and resell them.
There are two main types of merchandising companies:

Retailers – Sell goods directly to consumers (e.g., clothing stores, supermarkets).
Wholesalers – Buy goods in bulk from manufacturers and sell them to retailers.

For bookkeeping purposes, merchandising companies record their income and expenses differently from service companies. The Cost of Goods Sold (COGS) is one of the most critical components in measuring profit.

Structure of a Merchandising Income Statement

A merchandising income statement differs from a service business income statement because it includes Net Sales, Cost of Goods Sold, and Gross Profit.
Here’s the structure:
Merchandising Income Statement Example:

XYZ Retail Store Income Statement
For the year ended 31st December 2024

Sales Revenue: $200,000
Less: Sales Discounts: $2,000
Less: Sales Returns & Allowances: $3,000
= Net Sales: $195,000
Cost of Goods Sold (COGS):
Beginning Inventory: $20,000
Purchases: $120,000
Less: Purchase Discounts: $2,000
Net Purchases: $118,000
Add: Freight-In: $5,000
Goods Available for Sale: $143,000
(Beginning Inventory + Net purchase + Freight-In)
Less: Ending Inventory: $25,000
COGS = $118,000

Gross Profit = Net Sales – COGS = $195,000 – $118,000 = $77,000
Operating Expenses:

Net Income = $77,000 – $50,000 = $27,000
(Net Income = Gross Profit - Total Operating Expenses)

👉 This example shows how merchandising income statements emphasize sales, discounts, and COGS.

Understanding Sales Discounts

Sales discounts are price reductions offered by sellers to customers for early payment or bulk orders. They encourage faster cash flow and reduce credit risk.

Example of Sales Discount:

A retailer sells goods worth $10,000 on credit terms 2/10, n/30.

This means the buyer can take a 2% discount if they pay within 10 days; otherwise, the full amount is due in 30 days.
If the customer pays within 10 days, they pay $9,800 ($10,000 – $200 discount).

Journal Entry for Sales Discount:

Debit Cash: $9,800
Debit Sales Discount: $200
Credit Accounts Receivable: $10,000

This reduces revenue slightly but benefits cash flow and minimizes collection risk.

Understanding Purchase Discounts

Purchase discounts are price reductions given by suppliers to businesses that pay invoices early. This reduces the cost of purchases and increases profit margins.

Example of Purchase Discount:

A retailer purchases goods worth $20,000 from a supplier with terms 2/10, n/30.
If the retailer pays within 10 days, they pay $19,600 ($20,000 – $400 discount).

Journal Entry for Purchase Discount:

Debit Accounts Payable: $20,000
Credit Cash: $19,600
Credit Purchase Discounts: $400

By utilizing purchase discounts, merchandising companies save costs and improve efficiency.

Key Benefits of Merchandising Accounting

Accurate Profit Measurement – By tracking sales, COGS, and discounts, businesses know their true profit margins.
Cash Flow Management – Sales discounts encourage faster payments, while purchase discounts reduce costs.
Better Inventory Management – The income statement shows how well inventory is being used.
Improved Decision-Making – Helps managers decide on pricing strategies, discounts, and purchasing policies.

Merchandising vs. Service Business Income Statement

Service Business: Shows only Revenues – Expenses = Net Income.
Merchandising Business: Includes Net Sales, COGS, Gross Profit, and then Operating Expenses.

👉 This highlights how merchandising involves an extra step in calculating profit, making bookkeeping practices more detailed.

Conclusion

Merchandising is the backbone of many businesses worldwide, especially in retail and wholesale industries. Proper bookkeeping of merchandising activities ensures that businesses maintain healthy profit margins and cash flows.

By understanding merchandising income statements, sales discounts, and purchase discounts, businesses can optimize financial performance, strengthen vendor and customer relationships, and make informed decisions.

If you’re a bookkeeper, mastering merchandising transactions will set you apart as a skilled professional who can help businesses grow profitably.

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