Merchandise Purchases

The following example transactions and subsequent journal entries for

merchandise purchases are recognized using a periodic inventory system.

Basic Analysis of Purchase Transaction Journal Entries

To better illustrate merchandising activities under the periodic system, let’s use

this example of California Business Solutions (CBS). CBS is a retailer providing

electronic hardware packages to meet small business needs.

Cash and Credit Purchase Transaction Journal Entries

On April 1, CBS purchases 10 computer packages at a cost of ₱20,000 each.

CBS has enough cash-on-hand to pay immediately with cash. The following entry

occurs.

Date Account Debit Credit

Apr. 1 Purchases 200,000
Cash 200,000
To record purchase of 10 computer packages

Purchases increases (debit) by ₱200,000 (₱20,000 × 10), and Cash decreases

(credit) by the same amount because the company paid with cash. Under a periodic

system, Purchases account is used to record computer packages that were purchased.

Note that, since CBS buys and sells electronic gadgets such as computer, these

computer packages are considered goods or merchandise that are intended for sale

and not for office use. Thus, instead of the account Equipment, the Purchases account

was used.

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 On April 7, CBS purchases 30 desktop computers on credit at a cost of ₱10,000

each. The credit terms are n/15 with an invoice date of April 7. The following entry occurs.

Date Account Debit Credit

Apr. 7 Purchases 300,000
Accounts Payable 300,000
To record purchase of 30 computers on credit,
n/15

Purchases increases (debit) for the value of the computers, ₱300,000 (₱10,000 × 30).

Since the computers were purchased on credit by CBS, Accounts Payable increases

(credit) instead of cash.

On April 17, CBS makes full payment on the amount due from the April 7

purchase. The following entry occurs.

Date Account Debit Credit

Apr. 17 Accounts Payable 300,000
Cash 300,000
To record payment in full

Accounts Payable decreases (debit) and Cash decreases (credit) for the full

amount owed. The credit terms were n/15, which is net due in 15 days. No discount was

offered with this transaction. Thus, the full payment of ₱300,000 occurs.

Activity 3: Recording purchases transactions for cash and on account

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Target Skills: Analytical Skills

On October 13, Flower Company purchased for cash bouquet of flowers worth
₱2,300.

On October 20, Flower Company purchased 240 bouquet of flowers for ₱150 per
bouquet on credit. Terms of the purchase were n/30.

On October 30, Flower Company paid its account in full for the October 20
purchase.

Purchase Discount Transaction Journal Entries

On May 1, CBS purchases 60 tablet computers at a cost of ₱5,000 each on

credit. Terms are 5/10, n/30, and invoice dated May 1. The following entry occurs.

Date Account Debit Credit

May 1 Purchases 300,000
Accounts Payable 300,000
To record purchase of 60 tablets, 5/10, n/30

Purchases increases (debit) in the amount of ₱300,000 (60 × ₱5,000). Accounts

Payable also increases (credit), but the credit terms are a little different than the earlier

example. These credit terms include a discount opportunity (5/10). This means that

CBS has 10 days from the invoice date to pay on their account to receive a 5% discount

on their purchase.

On May 10, CBS pays their account in full. The following entry occurs.

Date Account Debit Credit

May 10 Accounts Payable 300,000
Purchase Discounts 15,000
Cash 285,000
To record full payment less purchase discount

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 Accounts Payable decreases (debit) for the original amount owed of ₱300,000

before any discounts are taken. Since CBS paid on May 10, they made the 10-day

window, thus receiving a discount of 5%. Cash decreases (credit) for the amount owed,

less the discount. Purchase Discounts increases (credit) for the amount of the discount

(₱300,000 × 5%). Purchase Discounts is considered a contra account and will reduce

Purchases at the end of the period.

Let’s take the same example purchase with the same credit terms, but now

assume that CBS paid their account on May 25. The following entry occurs.

Date Account Debit Credit

May 25 Accounts Payable 300,000
Cash 300,000
To record full payment of tablets, no discount

Accounts Payable decreases (debit) and Cash decreases (credit) for ₱300,000.

The company paid on their account outside of the discount window but within the total

allotted timeframe for payment. CBS does not receive a discount in this case but does

pay in full and on time.

Activity 4: Purchase Discount Transactions

Target Skills: Analytical and Mathematical Skills

On October 25, Flower Company purchased 50 bouquet of flowers for ₱20 per
bouquet on credit. Terms of the purchase were 2/10, n/30

On October 30, Flower Company paid its account in full for the October 25
purchase.

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 Purchase Returns and Allowances Transaction Journal Entries

On June 1, CBS purchased 300 landline telephones with cash at a cost of ₱500

each. On June 3, CBS discovers that 25 of the phones are the wrong color and returns

the phones to the manufacturer for a full refund. The following entries occur with the

purchase and subsequent return.

Date Account Debit Credit

June 1 Purchases 150,000
Cash 150,000
To record purchased of 300 phones for cash

Purchases increases (debit) and Cash decreases (credit) by ₱150,000 (₱500 ×

300).

Date Account Debit Credit

June 3 Cash 12,500
Purchase Returns and Allowances 12,500
To record return of 25 phones, cash refund

Since CBS already paid in full for their purchase, a full cash refund is issued.

This increases Cash (debit) and increases (credit) Purchase Returns and Allowances.

Purchase Returns and Allowances is a contra account and decreases Purchases at the

end of a period.

On June 8, CBS discovers that 60 more phones from the June 1 purchase are

slightly damaged. CBS decides to keep the phones but receives a purchase allowance

from the manufacturer of ₱250 per phone. The following entry occurs for the allowance.

Date Account Debit Credit

June 8 Cash 15,000

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 Purchase Returns and Allowances 15,000
To record allowance for 60 phones

Since CBS already paid in full for their purchase, a cash refund of the allowance

is issued in the amount of ₱15,000 (60 × ₱250). This increases Cash (debit) and

increases Purchase Returns and Allowances.

CBS purchases 80 units of the 4-in-1 desktop printers at a cost of ₱4,000 each

on July 1 on credit. Terms of the purchase are 5/15, n/40, with an invoice date of July 1.

On July 6, CBS discovers 15 of the printers are damaged and returns them to the

manufacturer for a full refund. The following entries show the purchase and subsequent

return.

Date Account Debit Credit

July 1 Purchases 320,000
Accounts Payable 320,000
To record printer purchased on credit, 5/15, n/40

Purchases increases (debit) and Accounts Payable increases (credit) by

₱320,000 (₱4,000 × 80).

Date Account Debit Credit

July 6 Accounts Payable 60,000
Purchase Returns and Allowances 60,000
To record return of 15 printers, A/P reduction

Accounts Payable decreases (debit) and Purchase Returns and Allowances

increases (credit) by ₱60,000 (15 × ₱4,000). The purchase was on credit and the return

occurred before payment. Thus, Accounts Payable is debited.

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 On July 15, CBS pays their account in full, less purchase returns and allowances.

The following payment entry occurs.

Date Account Debit Credit

July 15 Accounts Payable 260,000
Purchase Discount 13,000
Cash 247,000
To record full payment less discount

Accounts Payable decreases (debit) for the amount owed, less the return of

₱60,000 (₱320,000 – ₱60,000). Since CBS paid on July 15, they made the 15-day

window and received a discount of 5%. Cash decreases (credit) for the amount owed,

less the discount. Purchase Discounts increases (credit) for the amount of the discount

(₱260,000 × 5%).

Activity 5: Purchase Returns and Allowances

Target Skills: Analytical and Mathematical Skills

Nov. 6 Purchased 24 computers on credit for ₱5,600 per computer. Terms of the
purchase are 4/10, n/60, invoice dated November 6.

Nov. 10 Returned 5 defective computers for a full refund from the manufacturer.

Merchandise Sales
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 The following example transactions and subsequent journal entries for

merchandise sales are recognized using a periodic inventory system.

Basic Analysis of Sales Transaction Journal Entries

Let’s continue to follow California Business Solutions (CBS) and the sale of

electronic hardware packages to business customers. As previously stated, each

package contains a desktop computer, tablet computer, landline telephone, and 4-in-1

printer.

Cash and Credit Sales Transaction Journal Entries

On July 1, CBS sells 10 electronic packages to a customer at a sales price of

₱30,000 each. The customer pays immediately with cash. The following entries occur.

Date Account Debit Credit

July 1 Cash 300,000
Sales 300,000
To record sales of 10 computer packages

Cash increases (debit) and Sales increases (credit) by the selling price of the

packages, ₱300,000 (₱30,000 × 10). Unlike the perpetual inventory system, there is no

entry for the cost of the sale. This recognition occurs at the end of the period with an

adjustment to Cost of Goods Sold.

On July 7, CBS sells 20 desktop computers to a customer on credit for ₱15,000

each. The credit terms are n/15 with an invoice date of July 7. The following entr ies

occur.

Date Account Debit Credit

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July 7 Accounts Receivable 300,000
Sales 300,000
To record sales of 20 desktop computers, n/15

Since the computers were purchased on credit by the customer, Accounts

Receivable increases (debit) and Sales increases (credit) by the selling price of the

computers, ₱300,000 (₱15,000 × 20).

On July 17, the customer makes full payment on the amount due from the July 7

sale. The following entry occurs.

Date Account Debit Credit

July 17 Cash 300,000
Accounts Receivable 300,000
To record collection of account in full

Accounts Receivable decreases (credit) and Cash increases (debit) by the full

amount owed. The credit terms were n/15, which is net due in 15 days. No discount was

offered with this transaction, thus the full payment of ₱300,000 occurs.

Activity 6: Sales Transactions for Cash and on Credit

Target Skills: Analytical and Mathematical Skills

Nov. 7 Sold 10 tables for cash for ₱3,700 per table.

Nov. 14 Sold 20 tables on account, ₱2,500 per table Terms of the sale are 5/10, n/60.
Nov. 26 The customer paid her account in full from the November 14 sale.

Sales Discount Transaction Journal Entries

On August 1, a customer purchases 56 tablet computers on credit for ₱7,500

each. Terms are 2/10, n/30, and invoice dated August 1. The following entries occur.
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 Date Account Debit Credit
August 1 Accounts Receivable 420,000
Sales 420,000
To record sales of 56 tablet computers, 2/10,
n/30

Accounts Receivable increases (debit) and Sales increases (credit) by ₱420,000

(₱7,500 × 56). These credit terms are a little different than the earlier example. These

credit terms include a discount opportunity (2/10). This means that the customer has 10

days from the invoice date to pay on their account to receive a 2% discount on their

purchase.

On August 10, the customer pays their account in full. The following entry occurs.

Date Account Debit Credit

August 10 Cash 411,600
Sales Discount 8,400
Accounts Receivable 420,000
To record full collection of account, less discount

Since the customer paid on August 10, they made the 10-day window, thus

receiving a discount of 2%. Cash increases (debit) for the amount paid to CBS, less the

discount. Sales Discounts increases (debit) by the amount of the discount (₱420,000 ×

2%), and Accounts Receivable decreases (credit) by the original amount owed, before

discount. Sales Discounts will reduce Sales at the end of the period to produce net

sales.

Let’s take the same example sale with the same credit terms, but now assume that the

customer paid their account on August 25. The following entry occurs.

Date Account Debit Credit

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August 25 Cash 420,000
Accounts Receivable 420,000
To record full collection of account, no discount

Cash increases (debit) and Accounts Receivable decreases (credit) by

₱420,000. The customer paid on their account outside of the discount window but within

the total allotted timeframe for payment. The customer does not receive a discount in

this case but does pay in full and on time.

Activity 7: Sales Discount Transactions

Target Skills: Analytical and Mathematical Skills

Oct. 5 April Anglers sold 116 fishing poles at ₱150 each on credit. Terms of the sale
are 3/15, n/30.

Oct. 20 April Anglers collected the account in full from the October 5 sales.

Sales Returns and Allowances Transaction Journal Entries

On September 1, CBS sold 250 landline telephones to a customer for ₱750 each

who paid with cash. On September 3, the customer discovers that 40 of the phones are the

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wrong color and returns the phones to CBS in exchange for a full refund. The following entries

occur for the sale and subsequent return.

Date Account Debit Credit

Sept. 1 Cash 187,500
Accounts Receivable 187,500
To record sale of 250 telephones for cash

Cash increases (debit) and Sales increases (credit) by ₱187,500 (250 × ₱750),

the sales price of the phones.

Date Account Debit Credit

Sept. 3 Sales Returns and Allowances 30,000
Cash 30,000
To record return of telephones, cash refund

Since the customer already paid in full for their purchase, a full cash refund is

issued on September 3. This increases Sales Returns and Allowances (debit) and

decreases Cash (credit) by ₱30,000 (40 × ₱750).

On September 8, the customer discovers that 20 more phones from the

September 1 purchase are slightly damaged. The customer decides to keep the phones

but receives a sales allowance from CBS of ₱250 per phone. The following entry occurs

for the allowance.

Date Account Debit Credit

Sept. 8 Sales Returns and Allowances 5,000
Cash 5,000
To record allowance for 20 telephones

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 Since the customer already paid in full for their purchase, a cash refund of the

allowance is issued in the amount of ₱5,000 (20 × ₱250). This increases (debit) Sales

Returns and Allowances and decreases (credit) Cash.

A customer purchases 55 units of the 4-in-1 desktop printers on October 1 on

credit for ₱6,000 each. Terms of the sale are 10/15, n/40, with an invoice date of

October 1. On October 6, the customer discovers 10 of the printers are damaged and

returns them to CBS for a full refund. The following entries show the sale and subsequent

return.

Date Account Debit Credit

October 1 Accounts Receivable 330,000
Sales 330,000
To record sale of 55 printers on credit, 10/15,
n/40

Accounts Receivable increases (debit) and Sales increases (credit) by ₱330,000

(55 × ₱6,000), the sales price of the printers. Accounts Receivable is used instead of

Cash because the customer purchased on credit.

Date Account Debit Credit

October 6 Sales Returns and Allowances 60,000
Accounts Receivable 60,000
To record return of 10 printers

The customer has not yet paid for their purchase as of October 6. This increases

Sales Returns and Allowances (debit) and decreases Accounts Receivable (credit) by

₱60,000 (10 × ₱6,000).

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 On October 10, the customer discovers that 5 more printers from the October 1

purchase are slightly damaged, but decides to keep them because CBS issues an

allowance of ₱1,000 per printer. The following entry recognizes the allowance.

Date Account Debit Credit

Oct. 10 Sales Returns and Allowances 5,000
Accounts Receivable 5,000
To record allowance for 5 printers

Sales Returns and Allowances increases (debit) and Accounts Receivable

decreases (credit) by ₱5,000 (5 × ₱1,000). A reduction to Accounts Receivable occurs

because the customer has yet to pay their account on October 10.

On October 15, the customer pays their account in full, less sales returns and allowances.
The following payment entry occurs.

Date Account Debit Credit

Oct. 15 Cash 238,500
Sales Discounts 26,500
Accounts Receivable 265,000
To record collection of account in full (less the
returns and allowances), less the discount

Accounts Receivable decreases (credit) for the original amount owed, less the

return of ₱60,000 and the allowance of ₱5,000 (₱330,000 – ₱60,000 – ₱5,000). Since

the customer paid on October 15, they made the 15-day window and receiving a

discount of 10%. Sales Discounts increases (debit) for the discount amount (₱265,000 ×

10%). Cash increases (debit) for the amount owed to CBS, less the discount.

Activity 8: Sales Returns and Allowances Transactions

Target Skills: Analytical and Mathematical Skills

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Feb 8 Sold 3,000 balloon bundles on credit for ₱250 per bundle. Terms: 2/10,
n/30

Feb. 11 The customer returned 450 defective bundles for a full refund.

Feb. 18 Collected the account in full from the Feb. 08 sales.

Terms of Shipments: FOB Shipping Point and FOB Destination

If goods are sold F.O.B. shipping point, the purchaser is responsible for paying

freight costs incurred in transporting the merchandise from the point of shipment to its

destination.  Freight cost incurred by a purchaser is called freight-in, and is added to

purchases in calculating net purchases:

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 Example: Purchased on June 15, ₱12,000 of inventory for cash, terms: FOB

Shipping Point, and paid the shipping freight bill of ₱1,500. The following entry occurs.

Date Account Debit Credit

June 15 Purchases 12,000
Freight - in 1,500
Cash 13,500
To record purchases and freight for cash

Purchases increases (debit) and Freight-in increases too (debit) and decreases

Cash (credit). Freight – in is an adjunct account being added to the account Purchases

at the end.

If goods are sold F.O.B. destination, the seller is responsible for costs incurred in

moving the goods to their desired destination.  Freight cost incurred by the seller is

called freight-out, and is reported as a selling expense which is subtracted from gross

profit in calculating net income.

Example: On June 30, sold merchandise on account for ₱7,000. Terms: F.O.B

destination, and paid the freight bill of ₱400. The following entry occurs.

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 Date Account Debit Credit
June 30 Accounts Receivable 7,000
Freight – out 400
Sales 7,000
Cash 400
To record sale of merchandise on account,
F.O.B. Destination

Accounts Receivables and Freight out increase (debit) and Sales and Cash

decrease (credit). Freight out is an expense account and reported as one of the

operating expenses of a merchandiser at the end.

Note that the accounts Freight-in or Freight-out can be used when recording the

freight or delivery costs of merchandise only. If what was purchased is a non-

merchandise items such as the freight cost for transporting computer for office use, not

intended to be sold in the future, the two aforementioned accounts (Freight –in or

Freight –out) cannot be used.

Activity 9: Recording of Freight Costs for Merchandise Purchased or Sold

Target Skills: Analytical Skills

On December 1, Kookie Trading in Manila purchased goods for P20,000 in Davao on

credit. Freight charges amount to ₱5,000. Terms: FOB Shipping Point

On December 10, Kookie Trading sold goods for P20,000 to a customer from Cebu for

cash. Freight charges amounts to ₱4,500. Terms: FOB Destination.

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