Accounting Cycle of A Merchandising Business.1 - 101140

ACCOUNTING CYCLE OF A
MERCHANDISING BUSINESS
ACCOUNTING CYCLE
MERCHANDISING BUSINESS
• ONE THAT BUYS AND SELLS

GOODS WITHOUT CHANGING
THEIR PHYSICAL FORM.
INVENTORY
• holds inventory of physical goods for
sale.
• refers to the goods that a merchandising
business has purchased and primarily
intended for resale, normally in their
original form and without any further
processing.
INVENTORY SYSTEMS
• PERPETUAL INVENTORY SYSTEM

• PERIODIC INVENTORY SYSTEM
PERPETUAL INVENTORY SYSTEM
• Continuing (“tuloy-tuloy or walang hanggan”)

• “Inventory” (Merchandise Inventory) account is updated
each time a purchase or sale is made.
• “Inventory” account shows a continuing or running balance
of the goods on hand.
• “stock cards” / stock ledger cards- maintained from which the

quantities and balances of goods on hand and goods sold can
be determined at any given point of time without the need of
performing a physical count of inventories.
• All increases and decreases in inventory, such as purchases,
freight-in, purchase returns, purchase discounts, cost of goods sold,
and sales returns are recorded in the “Inventory” (or
“Merchandise Inventory”) account.
• Cost of goods sold” is also updated each time a sale or sale

return is made.
• Commonly used for inventories that are specifically
identifiable and are relatively high valued, such as cars,
machineries, furniture and heavy equipment.
PERIODIC INVENTORY SYSTEM
• Occurring or recurring at a regular intervals (“pana-

panahon”)
• “Inventory” (Merchandise Inventory) account is
updated only when a physical count of inventory is
performed.
• the amounts of inventory and cost of goods sold are
determined only periodically.
• The business does not maintain records that show the

running balances of inventory on hand and cost of goods
sold as at any given point of time.
• A physical count of the quantity of goods on hand must be
performed periodically.
• The quantity counted is then multiplied by the unit cost to
get the balance of the “Inventory” account. This amount is
then used to compute for the “Cost of goods sold”, which is
the residual amount.
FORMULA
COST OF GOODS SOLD
Beginning inventory ₱ xx
Add: Net purchases xx
Total Goods Available for Sale xx
Less: Ending inventory (physical count) (xx)
Cost of Goods Sold ₱ xx
Purchases – the account used to record
FORMULA
purchases of inventory.
NET PURCHASES
Freight-in (transportation-in) – the account
used to record the shipping costs incurred
Purchases ₱ xx on purchases of inventory. (adjunct/addition
Add: Freight-in xx to purchases).
Less: Purchase returns xx Purchase returns – the account used to
record returns of purchased goods to the
Less: Purchase discounts xx supplier.
Net Purchases ₱ xx Purchase discounts – the account used to
record cash discounts availed of on the
purchased goods.
Commonly used for inventories that are normally interchangeable, relatively low
valued, and have a fast turnover rate, such as grocery items, medicines, electrical
parts, and office supplies.
EXAMPLE 1
FORMULA
At the start of the day, you COST OF GOODS SOLD
have 1 apple. During the day

you purchased 5 apples. If at Beginning inventory 1 apple
the end of the day, you have 2 Add: Net purchases 5 apples
apples left, how many apples Total Goods Available for Sale 6 apples
have you sold? Less: Ending inventory (2 apples)
Cost of Goods Sold 4 apples
Answer: 4 apples sold
ILLU S TRATION
PERPETUAL SYSTEM PERIODIC SYSTEM

1. You purchased goods worth ₱10,000 on account.
Inventory 10,000 Purchases 10,000
Accounts payable 10,000 Accounts Payable 10,000
2. You paid shipping costs of ₱1,000 on the purchase above
Inventory 1,000 Freight-in 1,000
Cash 1,000 Cash 1,000
3.You returned damaged goods worth ₱2,000 to the supplier.
Accounts payable 2,000 Accounts payable 2,000
Inventory 2,000 Purchase returns 2,000
ILLU S TRATION

4. You sold goods costing ₱5,000 for ₱20,000 on account.
Accounts receivable 20,000 Accounts receivable 20,000
Sales 20,000 Sales 20,000
Cost of goods sold 5,000 No entry

Inventory 5,000
5. A customer returned goods with sale price of ₱800 and cost of ₱200.
Sales returns 800 Sales returns 800

Accounts receivable 800 Accounts receivable 800
Inventory 200 No entry

Cost of goods sold 200
SUMMARY:

• All increases and decreases in inventory • Increases and decreases in inventory
are recorded in “Inventory” account. during the period are recorded in the
“Purchases,” “Freight-in”, Purchase
returns”, and “Purchase discounts”
accounts, as a appropriate.
• “Cost of goods sold” is debited when • “Cost of goods sold” is not recorded.
inventory is sold and credited for sales
returns.
• Physical count is performed only to • Physical count is necessary to determine
check the accuracy of the ledger the balances of inventory on hand and cost
balances. of goods sold.
SUMMARY:

• Does not require the use of any formula • Requires the use of the following formula
to determine cost of goods sold because when determining cost of goods sold:
this information is readily available from
the ledger. BI xx
Net Purchases xx
TGAS xx
EI (Physical count) (xx)
COGS xx
Balances of inventory on hand and cost of goods sold are readily determinable from the
ledger “T-accounts”
Balances of inventory on hand and cost

of goods sold are NOT readily
determinable without performing
first a physical count of the quantity
of goods on hand.
Assume that a physical count

revealed inventory on hand of
105 units costing ₱40 per unit.
Using the formula, the inventory
on hand and cost of goods sold
are determined as follows:

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ACCOUNTING CYCLE OF A

• ONE THAT BUYS AND SELLS

• PERPETUAL INVENTORY SYSTEM

• Continuing (“tuloy-tuloy or walang hanggan”)

• “stock cards” / stock ledger cards- maintained from which the

• Cost of goods sold” is also updated each time a sale or sale

• Occurring or recurring at a regular intervals (“pana-

• The business does not maintain records that show the

have 1 apple. During the day

PERPETUAL SYSTEM PERIODIC SYSTEM

PERPETUAL SYSTEM PERIODIC SYSTEM

Cost of goods sold 5,000 No entry

Sales returns 800 Sales returns 800

Inventory 200 No entry

PERPETUAL SYSTEM PERIODIC SYSTEM

PERPETUAL SYSTEM PERIODIC SYSTEM

Balances of inventory on hand and cost

Assume that a physical count

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