ACCTG102 · Accounting Concepts
Merchandising Operations & GST
Week 4 of ACCTG 102 Accounting Concepts at the University of Auckland moves from service firms to merchandisers: businesses that buy and re-sell inventory, so a new line — cost of sales — appears between revenue and expenses. This chapter covers the perpetual inventory system's purchase and sales entries, the discounts / returns / allowances distinctions, the fully classified Statement of Profit or Loss, and the GST process. It is core territory for the 20% mid-semester test (open-book on Inspera, Chapters 1–5), where a recent paper carried a ~9-mark merchandising-with-GST journal question.
What this chapter covers
- 01Perpetual vs periodic inventory systems — the key difference is WHEN cost of sales is calculated (each sale vs period-end stocktake)
- 02Purchaser entries (perpetual): purchases to Inventory, purchase returns, freight-in vs freight-out, credit terms like 2/7, n/30
- 03Trade discounts (never recorded — record the net price) vs settlement discounts (recorded: Discount received / Discount allowed)
- 04Seller entries: every perpetual sale needs TWO entries — revenue at selling price AND Dr Cost of sales / Cr Inventory at cost
- 05Sales returns vs allowances: a return puts inventory back (second entry at cost); an allowance has NO inventory entry — the tested trap
- 06The fully classified Statement of Profit or Loss: net sales, gross profit, then selling / administrative / financial expense classes
- 07Ch 4 ratios (no formula sheet in the test): Gross profit ratio = Gross profit ÷ Net sales; Operating expenses to sales = Operating expenses ÷ Net sales
- 08The GST process: NZ statutory rate 15%, but course worked examples assume 10% (the textbook convention) — GST paid is an asset, GST collected a liability, settled net with the tax authority
Perpetual sale and purchase with GST — then settle with the tax authority
- +1(a) Decompose the selling price: 20 × $44 = $880 GST-inclusive; 880 ÷ 1.10 = $800 sales revenue, so GST = $80. Entry 1: Dr Accounts receivable 880 / Cr Sales revenue 800 / Cr GST collected 80.
- +1(a) Second entry at cost — always ex-GST: 20 × $18 = $360. Entry 2: Dr Cost of sales 360 / Cr Inventory 360.
- +1(b) Decompose the purchase: 50 × $11 = $550 GST-inclusive; 550 ÷ 1.10 = $500 to Inventory, GST paid = $50. Entry: Dr Inventory 500 / Dr GST paid 50 / Cr Accounts payable 550.
- +1(c) Work out the net GST position: GST collected 2,400 (liability) − GST paid 1,750 (asset) = $650 owing to the tax authority.
- +1(c) Settlement entry: Dr GST collected 2,400 / Cr GST paid 1,750 / Cr Cash 650 — both GST accounts close, and debits (2,400) equal credits (1,750 + 650).
- +1State the direction rule: collected > paid → pay the difference; paid > collected → claim a refund (Dr GST collected + Dr Cash / Cr GST paid).
Key terms
- Perpetual inventory system
- Keeps a continuous per-item record of inventory cost, so cost of sales is determined at each sale — every sale needs two entries (revenue and cost). The course's default for Chapter 4 journal questions.
- Periodic inventory system
- No continuous cost record: purchases go to a temporary Purchases account and cost of sales is computed once at period end from a stocktake (developed in Chapter 5).
- Gross profit
- Sales revenue less cost of sales — the merchandiser's measure of purchasing and pricing effectiveness. Gross profit ratio = Gross profit ÷ Net sales.
- Sales returns and allowances
- A contra-revenue account (normal debit balance) for goods returned or price concessions granted. A return also puts inventory back at cost; an allowance does not — the customer keeps the goods.
- Settlement (cash) discount
- A discount for early payment under terms like 2/7, n/30. The purchaser records Discount received (revenue); the seller records Discount allowed (a financial expense). Trade discounts, by contrast, are never recorded.
- GST collected
- A liability account: GST charged on sales, owed to the tax authority until remitted. Its mirror, GST paid, is an asset — input tax credits claimable on purchases. The two are offset and settled net.
- Freight-in vs freight-out
- Freight-in (buyer pays to receive goods) is part of the cost of inventory and flows into cost of sales; freight-out (seller pays to deliver) is the seller's selling expense.
Merchandising Operations & GST FAQ
Is Merchandising & GST in the ACCTG 102 mid-semester test?
Yes — the mid-semester test (20%, 50 marks in 90 minutes, open-book on Inspera) covers Chapters 1–5, and Chapter 4 is a staple: a recent paper carried a ~9-mark perpetual merchandising journal question with GST on both the sale and purchase sides, including the return-vs-allowance distinction. No formula sheet is provided, so memorise the Chapter 4 ratios.
What GST rate should I use — 10% or New Zealand's 15%?
New Zealand's statutory rate is 15%, but the course's worked examples and test questions assume 10% (the textbook's convention, for arithmetic simplicity) — the practice mid-semester paper explicitly says to assume 10%. Always use the rate stated in the question, and note the practice final exam instructs candidates to ignore GST entirely.
Can AI help me with merchandising entries and GST in ACCTG 102?
Yes — Sia can explain merchandising journal entries step by step: decomposing GST-inclusive prices, why a perpetual sale needs two entries, and how a return differs from an allowance, using your own practice numbers. Sia is a study aid that teaches the method — it won't complete graded quizzes, assignments or tests for you (the test rules prohibit AI use during the sitting), and no tool can promise you a particular grade.
Exam move
Drill the entry patterns until they are reflexes, because the mid-semester test prices this chapter at roughly 1.8 minutes per mark: a 9-mark journal run deserves about 16 minutes. Work in a fixed order — decompose any GST-inclusive figure first (÷ 1.10 at the worked rate), then journalise, then check that each entry's debits equal its credits. Rehearse the three forks that carry the marks: return vs allowance (only a return re-instates inventory), freight-in vs freight-out (buyer's cost vs seller's selling expense), and trade vs settlement discounts (only the settlement discount is recorded). Memorise the gross profit ratio and operating-expenses-to-sales ratio along with the classified Statement of Profit or Loss skeleton, since no formula sheet is provided. Open-book does not buy you time — build a one-page summary of the journal set so you never need to search your notes mid-question, and confirm all test dates and exam rules for your semester on Canvas.
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