Unit 11:

Accounting for
Merchandising
Operations

John Mark Arguelles

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Learning objectives
 What is
Merchandising?
Overview of Merchandising

• Merchandising operations involve

activities related to buying and
selling goods. The primary aim is to
earn a profit by acquiring products
at a low price and selling them at a
higher price.

• The items for sale are represented

by an account title called
“Merchandise Inventory” which is
included among the current assets.
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Merchandising Operations

Merchandising Companies
Buy and Sell Goods

The primary source of revenues is referred to as sales revenue or

sales.

LO 1 Identify the differences between service and merchandising companies.

Manufacturing Product
Manufacturing Wholesaler

Consumer Retailer
Operating Cycle
Operating
Cycle of
Merchandising
Business
Statement of Comprehensive Income
Service Concern: Merchandising:
Service Revenue xx Net Sales xx
Less: Expenses (xx) Less: Cost of Sales (xx)
Profit xx Gross profit xx
Less: Expenses (xx)
Profit xx
Merchandising Revenue and
Expense Accounts

When the seller sells goods to

the customers (whether paid or
not), an income has to be
recognized (under accrual basis
of accounting).

Such income is called “sales

revenue” or simply “sales”.
Merchandising Operations

Income Measurement
Not used in a service
business.

Cost of goods sold is the total

cost of merchandise sold during
the period.
 EXAMPLE
A. The seller sold goods costing ₱10,000 to a customer at a price
of ₱15,000. The sale was on account and the seller paid for the
P ₱2,000.
freight worth
Account receivable 15,000.00
Sales 15,000.00

Freight-out 2,000.00
Cash 2,000.00
B. Collected
P half of the amount due from the customer
Cash 7,500.00
Accounts Receivable 7,500.00 14
Merchandising Operations
Illustration 5-4
Flow of Costs

Companies use either a perpetual inventory system or a periodic inventory system to

account for inventory.
•Periodic
•Perpetual
INVENTORY SYSTEM

1. Periodic Inventory System

The periodic inventory system is
often used by smaller businesses
that have easy-to-manage inventory
and may not have a lot of money or
the opportunity to implement
computerized systems into their
workflow.
INVENTORY SYSTEM

2. Perpetual Inventory System

The perpetual inventory system keeps
track of inventory balances
continuously. This is done through
computerized systems using point-of-
sale (POS) and enterprise asset
management technology that record
inventory purchases and sales.
Stock Card

Cost of Goods Ending

Sold Inventory

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Advantage and Disadvantage:

Inventory
System Advantages Disadvantage

1. Periodic • Low cost • Limited accuracy

• Simple • No real-time
implementation visibility
• Suitable for certain • Time-consuming
industries counts
• Limited data for
analysis
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Advantage and Disadvantage:
Inventory
System Advantages Disadvantages

1. Perpetual • Real-time • Higher cost

accuracy
• Improved order • Complex implementation
management
• Better inventory • Increased data maintenance
control
• Reduced manual • Susceptible to errors
counting
• Not suitable for all businesses
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 BUYER
SELLER
SELLER’s
Perspective

Income Accounts

• Sales- this account is

credited for merchandise
that are sold either in cash
or on credit. This recorded
as follows:
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UNDER PERIODIC VS PERPETUAL INVENTORY SYSTEM
Example:
1/9 Inventories costing ₱15,000 were sold at a price of ₱25,000 on account
to the customer P
1. Periodic Account receivable 25,000.00
Sales 25,000.00

2. Perpetual Account receivable 25,000.00

Sales 25,000.00

Cost of Sales 15,000.00

Merchandise Inventory 15,000.00
XX
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UNDER PERIODIC VS PERPETUAL INVENTORY SYSTEM

Sales return and allowances

this account is debited for merchandise sold either cash or on credit but
were returned by the customer for reason of bad order or does not fit
the description of the merchandise ordered and were not replaced due
to non-availability of stocks. This is recorded as follows:

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UNDER PERIODIC VS PERPETUAL INVENTORY SYSTEM
Example:
1/12 Goods costing ₱3,300 with a selling price of ₱5,500 were returned by
the buyer due to minor damage.
P
1. Periodic Sales return and allowances 5,500.00
Account receivable 5,500.00

2. Perpetual Sales return and allowances 5,500.00

Account receivable 5,500.00

Merchandise Inventory 3,300.00

Cost of Sales 3,300.00
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BUYER’S
PERSPECTIVE
Cost Accounts

• Purchases and
Merchandise Inventory-
this account is debited
when merchandise are
purchased either in cash or
on credit. This is recorded as
follows: 27
UNDER PERIODIC VS PERPETUAL INVENTORY SYSTEM
Example:
1/9 Inventories worth ₱25,000 were purchased on account from the
supplier.
P
1. Periodic Purchases 25,000.00
Account payable 25,000.00

2. Perpetual
Merchandise Inventory 25,000.00
Account payable 25,000.00

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UNDER PERIODIC VS PERPETUAL INVENTORY SYSTEM

Purchase return and allowances- this account is credited for

merchandise purchased either cash or credit that were returned to
the supplier for reason of bad order or does not fit the description
of the merchandise ordered and were not replaced due to non-
availability of stocks by the supplier. This is recorded as follows:

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UNDER PERIODIC VS PERPETUAL INVENTORY SYSTEM
Example:
1/12 Goods worth ₱5,500 were returned to the supplier due to minor
damage.

1. Periodic Accounts payable 5,500.00

Purchase return and allowances 5,500.00

2. Perpetual
Accounts Payable 5,500.00
Merchandise Inventory 5,500.00

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DISCOUNTS

➢Cash Discounts

When a seller wants its customers to

pay promptly but without
compromising the profits of the
business, a cash discount may be
offered to customers.

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The following are the common discounts terms both purchases and
sales:
a. 2/10,N/30 -This means that if account is
paid/collected within 10 days from the date of the
invoice, 2% discount can be availed or given an no
discount if account is paid/ collected after 10th day or
from 11th to 30th day.

b. 2/10, 1/20, N/30 -This means that a 2% discount can

be availed or given if the account is being
paid/collected within 10 days from the invoice date,
1% if paid/collected from 11th to 20th day and no
discount if paid/collected from 21st to 30th day 34
c) 2/10, EOM -This means that
2% discount can be availed if
account is paid/collected
within 10 days after End Of
the Month

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BUYER’S POINT OF VIEW

Example:
1/9 Inventories costing ₱15,000 were bought at ₱25,000 on
account, 2/12-n/30.
P
1. Periodic Purchases 25,000.00
Accounts Payable 25,000.00

2. Perpetual Merchandise inventory 25,000.00

Accounts Payable 25,000.00

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BUYER’S POINT OF VIEW

Example:
1/17 Paid for the account to the supplier in full
P
1. Periodic Accounts payable 25,000.00
Purchase discount 500.00
Cash 24,500.00
25,000.00
2. Perpetual Accounts payable 25,000.00
Merchandise Inventory 500.00
Cash 24,500.00

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SELLER'S POINT OF VIEW

Example:
1/9 Inventories costing ₱15,000 were sold at ₱25,000 on account,
2/12-n/30.
P
1. Periodic Accounts receivable 25,000.00
Sales 25,000.00

2. Perpetual Accounts receivable 25,000.00

Sales 25,000.00

Cost of Sales 15,000.00

Merchandise inventory 15,000.00 38
SELLER'S POINT OF VIEW

Example:
1/17 Received full payment from the customer
P
1. Periodic Cash 24,500.00
Sales discount 500.00
Accounts Receivable 25,000.00
25,000.00
2. Perpetual Cash 24,500.00
Sales discount 500.00
Accounts Receivable 25,000.00

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DISCOUNTS

➢ Trade discounts

a discount on the retail price of

something allowed or agreed
between traders or to a
retailer by a wholesaler.
GROSS INVOICE PRICE

In accounting for merchandising

operations, we always record the
Gross Invoice Price in the books.
Merchandising are always quoted in
the original price, called List Price and
deductions are given by the seller to
encourage the buyer to buy more ,
called Trade Discount.

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GROSS INVOICE PRICE- LET’S TRY

1. Find the amount that will be recorded in the book of

Justine trading regarding their purchase of merchandise,
listed as P6,000.00 and is given a trade discount of P20%.

2. Find the amount that will be recorded in the books of

Justine Trading regarding their purchases of merchandise,
listed as P7,000.00 and is given chain discounts of 5%, 8% and
10%
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Computation of Cost of Goods
Sold and Gross Margin

➢ Cost of Goods Sold

represents the value of goods

already sold to customers. This
account is an expense and
therefore deducted from the
revenues in computing for the net
income/ net loss
PERIODIC INVENTORY SYSTEM

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Computation of Cost of Goods Sold and Gross
Margin

➢ Gross Margin

is the result AFTER deducting the cost of goods sold from the
net sales. This is the part of income BEFORE deducting the
operating expenses, finance charge and income tax.
GROSS MARGIN

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Forms of Financial Statements

Income Statement
Key Items:
◆ Net sales
◆ Gross profit
◆ Operating
expenses
◆ Other income
and expense
◆ Interest expense
◆ Net income
EXAMPLE
The records of Diwata Enterprises show the following:

Beginning Inventory ₱ 15,000.00

Purchases 46,000.00
Purchases Returns 7,000.00
Freight-in 4,500.00
Sales (gross) 70,000.00
Sales Discount 1,700.00

The inventory count at the end of the accounting period

determined the ending inventory to be at ₱16,000. Determine the
Cost of Goods Sold and compute for the Gross Margin.
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 any type of goods, items or
commodities that are transported in
Freight bulk via air transport, surface
transport or sea/ocean transport
FREIGHT
➢ Freight-in

is recorded by the buyer. This is

an adjunct account and is
considered as capitalizable cost—
meaning, it is added as part of the
cost/value of the item for which it
was incurred.
FREIGHT
➢ Freight-out

is recorded as an expense by the

seller. Being an expense, it is
placed on the debit side every
time the seller incurs it. This
shall also be deducted from the
revenues in computing for the
net income or net loss.
Who Shoulders
and Records the
Freight?
Recording Purchases of Merchandise
Freight Costs – Terms of Sale Illustration 5-7
Shipping terms

Seller places goods Free On

Board the carrier, and buyer
pays freight costs.

Seller places goods Free On

Board to the buyer’s place of
business, and seller pays freight
costs.

Freight costs incurred by the seller are an operating expense.

LO 2
➢ Freight prepaid
means that the freight cost is paid in advance to the courier
even before the goods are delivered. This means that it is the
seller that ACTUALLY pays for the shipping fee since it is the
seller whom the courier meets first. The seller, therefore,
records a credit entry to cash account

➢ Freight collect
means that the delivery/shipping cost is paid once the goods
arrive to the buyer. It is therefore the buyer that ACTUALLY
pays for the freight. The buyer, therefore, records a credit
entry to cash account
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➢ We can combine all these by having four (4) different scenarios:

• FOB Shipping Point (freight prepaid)

• FOB Shipping Point (freight collect)
• FOB Destination Point (freight prepaid)
• FOB Destination Point (freight collect)

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THANK YOU!