Merchandise: Definition

Merchandise is the term used to refer to any goods purchased for the purpose of resale in the ordinary course of business. The term is regularly used in trading organizations.

Journal Entry

Merchandise are purchased either for cash or on account. The journal entries required to record the purchase of merchandise under both the cases are discussed below:

When Merchandise Are Purchased for Cash

If merchandise are purchased for cash, the accounts involved in the transaction are the purchases account and cash account. The purchases account is debited and the cash account is credited.

Example

On 1 January 2016, John Traders purchased merchandise for $15,000 in cash from Sam & Co. The journal entry for this purchase is shown below.
Journal Entry for Cash Purchase of Merchandise

When Merchandise Are Purchased on Account

If merchandise are purchased on account, the accounts involved in the transaction are the purchases account and accounts payable account. The purchases account is debited and the accounts payable account is credited.

Example

On 1 January 2016, John Traders purchased merchandise for $15,000 on account from Sam & Co. The journal entry for this purchase would be made as follows:
Journal Entry for Account Purchase of Merchandise

Frequently Asked Questions

What is a merchandise?

Merchandise is the term used to refer to any goods purchased for the purpose of resale in the ordinary course of business. The term is regularly used in trading organizations.

What is a journal entry?

Merchandise are purchased either for cash or on account. The journal entries required to record the purchase of merchandise.

What is the journal entry for purchase of merchandise on account?

The journal entry for purchase of merchandise on account is the same as the journal entry for purchase of merchandise for cash, except that the accounts payable account is credited instead of the cash account.

Why is the purchases account debited when merchandise is purchased on the account?

The purchases account is debited when merchandise are purchased on account to indicate that an asset (the merchandise) has been acquired. The debit increases the amount of assets owned by the company.

What is the difference between merchandise purchased for cash and merchandise purchased on account?

The only difference between merchandise purchased for cash and merchandise purchased on account is the accounts involved in the transaction. When merchandise are purchased for cash, the purchases account and cash account are involved. When merchandise are purchased on account, the purchases account and accounts payable account are involved.

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