In this section, the most essential terms peculiar for a merchandising concern type of business is

presented in order to have a common understanding as to how these terms are being used.
Please refer to these definitions in case you will encounter difficulty in understanding these terms.
1. Merchandise – refers to the goods that are intended for sale of a trading concern.
2. Sales – is a revenue account used to record income derived from the sale of goods or
merchandise of a merchandising or trading concern.
3. Sales Returns and Allowances/Purchase Returns and Allowances – refers to an account
used to record merchandise returned by the customer or buyer, or an adjustment to the price
of the goods sold/bought. This is called sales returns and allowances from the point of view
of the seller, purchase returns and allowances from the point from of view of the buyer.
4. Sales Discount/Purchase Discount –an account title use to record the amount deducted
from the price of the goods as an incentive for prompt payment. This is also called in
accounting as cash discount. From the point of view of the seller it’s called sales discount,
but from the point of view of the buyer it’s called purchase discount. Normally these documents
is recorded in the “General Journal”.
5. Credit period – refers to the term of sale normally express in number of days. Example if the
credit terms is 2/10, n/30, this means that the credit terms is 30 days.
6. Discount period – refers to the period stated in the credit period where a customer or buyer
is given a discount if the account is collected/paid within the agreed discount period. Example
in the terms 2/10, n/30 means a customer or buyer is given 10 days to pay in order to avail of
a 2% discount, if not a customer has to pay the full amount within 30 days.
7. Purchases – is a temporary account used to record the cost of merchandise bought during
the period if the entity uses the periodic method of accounting for inventory.
8. Trade Discounts – refers to discounts given to customers/buyers to encourage them to buy
the products because of low price due to discounts. There is no special accounting treatment
of trade discounts because this is not being recorded unlike cash discounts.
9. Transportation costs – refers to the cost of transporting goods from the seller to the buyer.
If the buyer shoulders the cost the account title use is “Freight In” or “Transportation In”, if the
seller shoulders the cost the account title use is “Freight Out” or “Transportation Out” or
“Delivery Expense”.
10. FOB Destination – (FOB means “Free on Board”) means the seller is responsible of the
shipping costs and the title of goods passes to the buyer at the point of destination.
11. FOB Shipping point – means the buyer is responsible of the shipping costs and the title of
goods passes to the buyer at the point of shipment which means when the goods are shipped
from the seller’s place of business.
12. Merchandise Inventory – an account title used to record the cost of goods that are not sold
at the end of the accounting period.
13. Cost of Goods Sold/Cost of Sales- represents the cost of inventory the entity has sold to
customers.
14. Gross profit – refers to the difference between net sales and cost of goods sold.
15. Distribution Cost- refers to expenses incurred in the distribution or selling the products such
as; salaries of salesmen, commission of salesmen, freight out, advertising expense, rentals
of marketing department and other related expenses in relation with selling the products.
16. Administrative Cost – refers to all other expenses incurred in carrying out business
operations such as salaries of admin employees, Light and water of administration office and
many more that are not related in the distribution of the products.
17. Sales Invoice – is a source documents prepared by the seller of goods and sent to the buyer
to document the revenue of the entity. Normally this is recorded in the “Sales Journal”.
18. Bill of lading – is a source document issued by the carrier (trucking, shipping or airline) that
details the agreement and terms of delivery such as freight terms, time place and the person
authorize to receive the goods.
19. Statement of Account (SOA) – is a written notice to the debtor specifying the accounts that
are already due. Another form of source documents.
20. Official Receipt – is a source document that supports the receipt of cash by the seller and
normally recorded in the cash receipts journal.
21. Deposit Slips – these are forms owned by the bank to be filled-up by depositor stipulating
the depositor’s name, account number, date and the details of the deposit. These deposit slips
when validated by bank indicates that cash and checks were actually deposited or credited to
the account of the holder (company). This is also a source document.
22. Check – is a source document issued by a depositor ordering the bank to pay the amount
stated in the check from the depositor’s demand deposit to the person indicated in the check
(called payee). The entity issuing the check is the payor. A check is a document that supports
the cash voucher as a proof that something is being paid. Normally the check is recorded in
the “Cash Disbursement Journal”.
23. Purchase Requisition – is a source document that supports the purchase order requesting
the purchaser of the entity to purchase the requested goods from an employee user.
24. Purchase order (PO)– is a source document made by the buyer authorizing the seller to
deliver the merchandise as detailed in the form.
25. Receiving Report – is a source document containing information about the goods received
from a vendor. This source document is normally supported with vendor’s invoice and the PO
of the entity who made the purchased. This is recorded in the “Purchase Journal”.
26. Credit Memorandum –this is a source document issued by the seller to inform the buyer of
any adjustment made of the buyer’s account which might be caused by return of goods or
price adjustment. This normally recorded in the “general journal”.
27. Debit Memorandum- this is a source document issued by the buyer to inform the seller of
any adjustment which might be caused by return of goods or price adjustment. This is normally
recorded in the general journal.