ACCOUNTING FOR MERCHANDISING BUSINESS

A. SERVICE VS. MERCHANDISING

SERVICE BUSINESS MERCHANDISING BUSINESS
-renders SERVICE to generate -sell GOODS/PRODUCTS to
revenues generate revenue

B. MERCHANDISING VS.MANUFACTURING
MERCHANDISING BUSINESS MANUFACTURING BUSINESS
- Produces or makes the -it obtains products from a
product to be sold supplier either at the retail
level or wholesale level

C. NOMINAL ACCOUNTS OF MERCHANDISING BUSINESS

XYZ MERCHANDISING
Income statement
For the period ended December 31, 200x

Sales 100 000

Less: Sales allowance 10 000
Sales Returns 10 000 Selling Activities
Sales Discount 5 000 25 000
Net Sales 75 000
Less: Cost of Goods Sold 60 000 Purchasing Activities
Gross Profit 15 000
Less: Operating expense
Salaries Expense 6 000
Supplies Expense 1 500 Administrative and
Freight out 500 8 000 Operating Activities
Net Income 7 000

D. COST OF GOODS SOLD COMPUTATION(COGS)

Merchandise Inventory, Beg 10 000

Add: Net purchases
Purchases 75 000
Freight In 2 000
Purchase Returns (5 000)
Purchase Allowance (1 000)
Purchase Discount (1 000) 70 000
Cost of Goods Available for Sale(COGAS) 80 000
Less: Merchandise Inventory, End (20 000)
Cost of Goods Sold(COGS) 60 000

E. 2 MAJOR BUSINESS ACTIVITIES

1. Purchasing Activity- refers to the buying, procurement or acquisition
of finished products intended for sale.

2. Selling Activity- pertains to the act of transferring the title of

ownership over the merchandise from the seller to the buyer for a
consideration either in money or any other thing of value
F. PERIODIC VS. PERPETUAL
PERIODIC PERPETUAL

-when merchandise is purchased, its cost -An entity keeps a continual record of
is debited to an account entitled the transaction affecting the quantity
“Purchase” and amount of inventory

-when merchandise is sold, an entry is -purchases of merchandise are recorded

made to recognize the sales revenue, but by debiting an asset account entitled
no entry is is made to record the Cost “Merchandise Inventory”
of Goods Sold
-when merchandise are sold two entries
-at year end, a complete physical count are necessary; one to recognize the
of the merchandise on hand is conducted. revenue earned and the second is to
The COGS for the entire year is then recognize the related Cost of Goods
determined by short computation as Sold. This second entry also reduces the
balance of the Merchandise inventory
Merchandise Inventory, beg xx account to reflect the sales of
Add: Purchases xx inventory Account
GOGAS xx
Less: Merchandise Inventory, End(xx)
COGS xx

G. RECORDING OF PURCHASES AND RELATED TRANSACTION

TRANSACTION PERIODIC PERPETUAL

Purchase of Merchandise Purchases xx Merchandise Inventory xx

for Cash Cash xx Cash xx

Purchase of merchandise on Purchases xx Merchandise Inventory xx

account, the freight Freight-in xx Accounts Payable xx
charges to be shouldered Accounts payable xx
by the buyer
Return of Merchandise to *if cash purchase *if cash purchase
seller due to defect or Cash Cash
damage Purchase Return & allowance Merchandise Inventory
To record cash refund for cash
To record cash refund for cash
purchases
purchases
#
#
*if credit purchase *if credit purchase
Accounts payable Accounts payable
Purchase Return & allowance
Merchandise Inventory
To record Debit memo for credit
purchase To record Debit memo for credit
# purchase
#

Payment of accounts Accounts Payable xx Accounts Payable xx

payable, *Purchase Purchase Discount xx Merchandise Inventory xx
Discount taken Cash xx Cash xx
Payment of accounts Accounts Payable xx Accounts Payable xx
payable, * NO Purchase Cash xx Cash xx
Discount taken
 H. RECORDING OF SALES AND RELATED TRANSACTION
TRANSACTION PERIODIC PERPETUAL
Sale of merchandise for Cash xx Cash xx
cash Sales xx Sales xx

Recording of cost of No entry Cost of Goods Sold

merchandise sold Merchandise Inventory

Sale of merchandise on Accounts Receivable xx Accounts Receivable xx

account Sales xx Sales xx

Recording of cost of No entry Cost of Goods Sold

merchandise sold Merchandise Inventory

Payment of freight charges Freight out xx Freight out xx

on the goods Cash xx Cash xx

Return of defective or *if cash sale *if cash sale

damaged merchandise by Sales Return & allowance Sales Return & allowance
buyer Cash Cash
To record cash refund for cash To record cash refund for cash
Sales Sales
# #

*if credit Sales *if credit Sales

Sales Return & allowance Sales Return & allowance
Accounts receivable Accounts receivable

To record credit memo for credit To record credit memo for credit
sale sale
# #

Recording the cost of the No entry Merchandise Inventory

returned merchandise Cost of Goods Sold

Collection from customer Cash Cash

**Sales Discount granted Sales Discount Sales Discount
Account Receivable Account Receivable
Collection from Customer Cash Cash
Beyond the discount period Accounts Receivable Accounts Receivable

I. CLOSING ENTRIES
PERIODIC PERPETUAL
A. To set up the inventory at the end of -a merchandising business with a
the period perpetual invenoty system, makes closing
entries that parallel those of a service
Merchandise Inventory(end) xx type business.
Income Summary xx
# Accounts to be closed:
1. sales together with other revenue
B. To close the nominal Accounts with accounts
credit balance
Sales xx 2. cost of goods sold together with
Purchases returns and allowance xx other expense accounts
Purchase discount xx
Income Summary xx
#

C. To close the nominal Accounts with

debit balance
Income Summary xx
Purchases xx
Freight in xx
Sales returns and allowance xx
Sales discount xx
 OPEX xx

**If income summary is on the

CREDIT SIDE—result of operation is NET
INCOME
DEBIT SIDE-- result of operation is NET
LOSS

D. to close the income summary account

If net income
Income Summary
Capital(or retained Earnings if Corp)

If net loss
Capital(or retained Earnings if Corp)
Income Summary

J. TRADE DISCOUNT VS. CASH DISCOUNT

TRADE DISCOUNT CASH DISCOUNT

-is a type of discount that will -is a type of discount that will
motivate the customers to buy in motivate the customers to pay their
commercial quantity or in bulk. account on time. The settlement of
account within the discount period can
-this discount will not be recorded in help the customers avail of cash
the books. discount.

-a.k.a quantity discounts a. 2/10- means that 2% discount is given

to the customers if the customers can
List price xx pay within 10 days
Less trade discount (xx)
Invoice price xx b. n/30- means no discount but
collectible within 30 days

c. eom- means that the account is

collectible at the end of the month.

Invoice price xx
Less: **Cash Discount (xx)
Actual Cash Payment xx

**Cash Discount=invoice price*discount %

K. ACCOUNTING FOR CASH DISCOUNTS (GROSS METHOD VS NET METHOD)

Gross method- the cost of Net method- the cost of inventory

inventory and accounts payable are and accounts payable are initially
recorded gross of cash discounts. recorded net of cash discounts
regardless such discounts are
taken or not.

SAMPLE PROBLEM:
XYZ purchase inventory with a list price of 10 000 on account
under credit terms of 20%, 10%, 2/10, n/30.

BUYER’S POINT OF VIEW

GROSS METHOD NET METHOD
A. To record the purchase A. To record the purchase
Purchase 7 200 Purchase 7056
Accounts payable 7 200 Accounts payable 7056
B. Assume payment is made within the B. Assume payment is made within the
discount period discount period
Accounts payable 7 200 Accounts payable 7056
Purchase discount 144 Cash 7056
Cash 7056

C. Assume payment is made beyond the C. Assume payment is made beyond the
discount period discount period
Accounts payable 7 200 Accounts payable 7056
Cash 7 200 Purchase discount lost 144
Cash 7 200

SELLER’S POINT OF VIEW

GROSS METHOD NET METHOD
A. To record the sale A. To record the sale
Accounts Receivable 7 200 Accounts Receivable 7 056
Sale 7 200 Sale 7 056

B. Assume collection is made within the B. Assume collection is made within the
discount period discount period
Cash 7056 Cash 7056
Sales discount 144 Accounts Receivable 7056
Accounts receivable 7 200

C. Assume collection is made beyond the C. Assume collection is made beyond the
discount period discount period

Cash 7 200 Cash 7 200

Accounts Receivable 7 200 Accounts Receivable 7 056
Sales Discount Forfeited 144

FOB SHIPPING POINT FOB DESTINATION

-Refers to the freight on board, Shipping - Refers to the freight on board,
point which means that ownership of product destination which means that
is transferred to the buyer upon shipment ownership of product is transferred
 to the buyer only upon reaching the
-consequently, the buyer becomes responsible specified place of destination.
for the cost of transportation because he
practically owned the merchandise while in - consequently, the seller still
transit owns the products transported which
makes him responsible for the cost
of
transportation while the products
are still in transit
L. TRANSPORTATION COST (FOB SHIPPING POINT VS. FOB DESTINATION)

M. FREIGHT PREPAID VS. FREIGHT COLLECT

FREIGHT PREPAID FREIGHT COLLECT

-this term means that the actual payment -this term means that the buyer make the
of transportation cost shall be made by actual payment of transaction cost to
the seller to the common carrier the carrier.

SUMMARY:
Who owns the Who should Who actually Seller’s POV Buyer’s POV
goods? pay the paid the
freight? freight?

FOB SHIPPING
POINT, A/R Freight in
BUYER BUYER SELLER
FREIGHT Cash A/P
PREPAID
FOB SHIPPING
POINT, Freight in
BUYER BUYER BUYER NO ENTRY
FREIGHT Cash
COLLECT
FOB
DESTINATION, Freight out
SELLER SELLER SELLER NO ENTRY
FREIGHT Cash
PREPAID
FOB
DESTINATION, Freight out A/P
SELLER SELLER BUYER
FREIGHT A/R Cash
COLLECT

CONCLUSION: There is no increase or decrease in accounts receivable or

accounts payable if the agreement is

1. FOB Shipping point; Freight collect

2. FOB Destination; Freight Prepaid

Source: Basic Accounting by Edwin Valencia

 DRILL

1. (Periodic vs. Perpetual) Assume that Dipolog Company provided the following
summary of inventory transactions for the year 200x.

a. Beginning Inventory; 10 000 units at 50 per unit

b. Purchases on Account: 2 000 units @ 50 per unit
c. Freight on purchase; 2 000
d. Purchase returns; 20 units
e. Units sold; 2 100 @ 100 each
f. Sales Return: 10 units
g. Number of Units per count (end of year); 800 units

PERIODIC PERPETUAL
a. Purchases 100 000 a. Merchandise inventory 100 000
Accounts Payable 100 000 Accounts Payable 100 000

to record purchase on account to record purchase on account

# #

b. Freight in 2 000 b. Merchandise inventory 2 000

Cash 2 000 Cash 2 000

To record freight on purchase To record freight on purchase

# #

c. Accounts Payable 1 000 c. Accounts Payable 1 000

Purchase Returns 1 000 Merchandise inventory 1 000

to record purchase returns, P1000 (20 to record purchase returns, 1000 (20
units * 50) units * 50)
# #

d. Accounts Receivable 210 000 d. Accounts Receivable 210 000

Sales 210 000 Sales 210 000

To record P210 000 sales(2100 units at Cost of goods Sold 105 000
100 each) Merchandise inventory 105 000
#
To record 210 000 sales(2100 units at
100 each)
#
e. Sales return 1 000
Accounts Receivable 1 000 e. Sales return 1 000
Accounts Receivable 1 000
To record sales return, P1 000(10 units
* 100) Merchandise inventory 500
# Cost of Goods Sold 500

To record sales return, P1 000(10 units

f. merchandise inventory, end 40 000 * 100)
income summary 40 000 #

Inventory short or over 6500

. merchandise inventory 6500
2.(FREIGHT PREPAID) Mabenta Dry Goods sold 50 000 worth of merchandise to
Zamboanga Bazaar. The terms of sales contract are 2/10, n/30;FOB shipping
point, freight prepaid, 2 500.

3.(FREIGHT COLLECT)Bombay Bazaar sold 150 000 worth of merchandise to Mindanao

Enterprise. The terms of sale contract are 2/10, n/30; FOB Destination, freight
collect, 10 000.

4. (Journal entries for Purchases)

Transactions: (use Gross method)
1. Purchase merchandise on Account, 200 000;terms 20%; 3/15, n/30, FOB Shipping
point, freight collect 5 000
2. Purchase merchandise for cash, 150 000, FOB destination, freight prepaid 1 500
3. Purchase merchandise on account, 300 000, terms 20, 10;5/10, n/30.FOB
Destination , Freight collect, 10 000
4. Purchase on Account 100 000. FOB Shipping point, freight prepaid, 1 000
5. Paid the account in number 1 within the discount period
6. Paid the account in number 3 after the cash discount period

REQUIREMENT:
A. Journalize the following transactions
B. Answer the correct amount

a. Net Purchases __________

b. Accounts Payable
c. Total freight in
5. (Journal entries for Sales Transaction)
May 6 Sold merchandise on account, list price 500 000. Terms 10; 5/15, n/30,
FOB destination, freight collect, 25 000

May 8 Sold goods for cash, 300 000. Transportation cost is 3 000, FOB
Shipping Point, freight collect

May 10 Sold goods 600 000. Terms 20, 10; 5/10,n/30 FOB destination, Freight
Prepaid , 60 000

May 12 Sold 400 000. Terms 3/10, n/30; FOB shipping point, freight prepaid 4
000

May 21 Collected sales for May 6

A. journalize the transactions

B. Give the correct amount of the following items
1. Total net sales
2. Total Accounts Receivable
3. Total freight out
4. Total sales discount
5. (Comprehensive Problem)
Ace store completed the following merchandising transaction in the month of May.
At the beginning of May, the ledger of Ace showed cash of 50 000 and ace, capital
of 50 000.

May 1 Purchased merchandise on account from dare amounting to 50 000, terms

2/10, n/30

2 Sold merchandise on account 8 000, terms, 2/10, n/30

5 Received credit from Dare for merchandise returned, 2 000

8 Received collections in full, less discounts, from customers billed on

sales of 4 000 on May 2

10 Paid Dare in full, less discount

11 Purchased supplies for cash

13 Purchased merchandise for cash

15 Received refund for poor quality merchandise from supplier on cash

purchase, 2 000

17 Purchased merchandise form Hark, 19 000, FOB shipping point, terms

2/10, n/30

19 Paid freight for May 17 purchases, 500

24 Sold merchandise for cash, 9600

25 Purchase merchandise from Corn, 10 000, FOB Destination, terms 2/10,

n/30

27 Paid Hark in full, less discount

28 Made refunds to cash customers for defective merchandise, 1 000

31 Sold merchandise on Account, 30 000, terms n/30