Fundamentals of

Accountancy, Business
and Management 1
Quarter 4 – Module 3:
Nature of Transactions in
Merchandising Business
Fundamentals of Accountancy, Business and Management 1
Alternative Delivery Mode
Quarter 4 – Module 3: Nature of Transactions in Merchandising Business
First Edition, 2021

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 Fundamentals of
Accountancy, Business
and Management 1
Quarter 4 – Module 3:
Nature of Transactions in
Merchandising Business
Introductory Message
This Self-Learning Module (SLM) is prepared so that you, our dear learners,
can continue your studies and learn while at home. Activities, questions, directions,
exercises, and discussions are carefully stated for you to understand each lesson.

Each SLM is composed of different parts. Each part shall guide you step-by-
step as you discover and understand the lesson prepared for you.

Pre-tests are provided to measure your prior knowledge on lessons in each

SLM. This will tell you if you need to proceed on completing this module or if you
need to ask your facilitator or your teacher’s assistance for better understanding of
the lesson. At the end of each module, you need to answer the post-test to self-check
your learning. Answer keys are provided for each activity and test. We trust that you
will be honest in using these.

In addition to the material in the main text, Notes to the Teacher are also
provided to our facilitators and parents for strategies and reminders on how they can
best help you on your home-based learning.

Please use this module with care. Do not put unnecessary marks on any part
of this SLM. Use a separate sheet of paper in answering the exercises and tests. And
read the instructions carefully before performing each task.

If you have any questions in using this SLM or any difficulty in answering the
tasks in this module, do not hesitate to consult your teacher or facilitator.

Thank you.
 What I Need to Know

This module was designed and written with you in mind. It is here to help you master
the nature of transactions in merchandising business. The scope of this module
permits it to be used in many different learning situations. The language used
recognizes the diverse vocabulary level of students. The lessons are arranged to follow
the standard sequence of the course. But the order in which you read them can be
changed to correspond with the textbook you are now using.

The module is divided into three lessons, namely:

• Lesson 1 – Nature of Merchandising Business
• Lesson 2 – Nature of Transactions in Merchandising Business
• Lesson 3 – Cash and Trade Discount

After going through this module, you are expected to:

1. define merchandising business;
2. explain the operating cycle of merchandising business;
3. explain selling and purchasing transactions;
4. explain cash and trade discount; and
5. describe the nature of transactions in merchandising business.

What I Know

I. Directions: Write SB if the business is a service business or MB if it is a

merchandising business. Write your answer on a separate sheet of paper.

__________1. National Bookstore

__________2. Lola Nena Sari-Sari Store
__________3. Bank of the Philippine Island
__________4. Royal Duty Free Shops
__________5. Philippine Airlines

II. Directions: Draw a happy face ( ) if the statement is correct or sad face( )
if it is incorrect. Write your answer on a separate sheet of paper.

1. Merchandising business renders skills and labor to generate revenue.

2. Sari-sari store is a merchandising business.
3. Merchandising business offers tangible products.

1
4. The normal operating cycle of merchandising business covers the transactions
of purchasing, selling, and collecting.
5. Collecting is the primary source of revenue in merchandising business.
6. Inventory is used to refer the products bought for resale in merchandising
business.
7. Wholesaling sells merchandise in bulk or volume.
8. Merchandising business is engaged in buying and selling of products.
9. Retailing sells merchandise in bulk or volume.
10. Merchandising business produce its own product to sells.

Lesson
Nature of Merchandising
1 Business
The lesson will discuss the nature, transactions involve and operation cycle of
merchandising business. Understanding of these is the fundamental step to help you
in analyzing the transactions for the preparation of financial statements of
merchandising business. These will also help you identify the difference between
service business and merchandising business. What do you think is the difference
of service business with merchandising business?

What’s In

I. Directions: Write T if the statement is correct and F if not.

1. Service business provides intangible products to customers.

2. A bus company is a service business.
3. Operating cycle of service business covers purchasing, selling, and collecting.
4. Sale of equipment is the primary source of revenue of service business.
5. Rendering of skills or labor is the primary source of service business.

II. Give 5 examples of service business and identify the product they offer.

Service Business Main Product

Ex. Globe Telecom Internet Service Provider
1.
2.
3.
4.
5.

2
 Notes to the Teacher
This module helps the learner understand merchandising business
in terms of activities, operating cycle, and economic transactions. The
lesson separately discussed cash discount and trade discount to give
the learners ample time to familiarize in computing the accurate
amount for recording.

What’s New

Directions: Complete the picture with the name of sari-sari store and usual products
offered to customers. Imagine that this is your sari-sari you are planning to establish
within your community.

“Sari-sari store” is an example of a merchandising business. Can you imagine the

usual activities occur during the operation of the business? What do you think the
key to successful merchandising business?

Yes! The key is accounting just like in service business. To start, you need to know
first the nature of merchandising business.

3
 What is It

Nature of Merchandising Business

Merchandising is a business engaged in purchasing or buying and selling of

products. No changes are made to the products or goods you are going to sell. This
is a business that purchased or buys product and resells them to consumer.

Inventory or merchandise is the term used to refer the products the business
bought for resell in merchandising business. They do not make any changes in the
product nor produce their own for sale.

Selling is the primary source of revenue of merchandising

business. The seller will add a mark-up (tubo) to the cost
(puhunan) of merchandise to earn a profit. The merchandise can
be sold either in wholesale or retail.
Store-Customer-Groceries-Shop-Supermarket-Cashier-1791106.jpg (882×720) (maxpixel.net)

Wholesaling usually purchased merchandise directly from the

manufacturers to sold it at a lower price. For example, Puregold
has its wholesale section.
Retail-PNG-Picture.png (1024×615) (pngall.com)

Retailing is selling of merchandise in pieces or small or so called

“tingi-tingi” to the end customer. For example, sari-sari store near
you.
Grocery-PNG-Clipart.png (1235×1122) (pngall.com)

Merchandising business may sell food items such as those sold at grocery,
supermarket, and sari-sari store (SM Supermarket & 7/11), or non-food items like
appliances (Emilio S. Lim Appliances & Savers) or school supplies (Pandayan &
National Bookstore).

Major activities in Merchandising business

There are two major activities involved in merchandising business:

• Purchasing is the activity that buys products or goods intended for sale.
• Selling is the activity that generates revenue within the operating cycle of
the business.

4
Normal operating cycle of Merchandising business

The normal operating cycle of merchandising business revolves around the

stages from buying merchandise, selling it to the customer and using the cash to
buy more merchandise again. Once the merchandise you purchased have already
converted into cash, the cycle ends, but a new begins.

In the illustration below, the cycle for cash sales merchandise can easily be
converted into cash. On the other hand, for merchandise sold on account, the cycle
will only end if the accounts receivables are collected.

Cash
Cash

Collecting Purchasing

Selling Purchasing

Selling

Cash sales Sales on account

Operating cycle of merchandising business

Imagine how your sari-sari store will operate.

Let us say, your grandmother gave you a business capital as her gift. Now, you
have already your capital to start your sari-sari store. You used the available cash
to buy your merchandise from Puregold because you learned that they are giving
wholesale price to retailers like sari-sari-stores. When you got all your
merchandise and displayed, the sari-sari store is ready for the opening. Your
prospective customers are the people within your barangay. During the operation,
some of your customers buy in cash, others request on credit or “utang muna”
promising to pay on their payday. Then, you will collect it on the day they have
promised. Because you have again the available cash, you will use it to buy a new
set of merchandise.

5
 What’s More

Activity 1.1.1 Understanding the difference between Service business and

Merchandising business.

Directions: Recall the nature of service business in our previous lesson. Use this
Venn diagram to differentiate merchandising business and service business. Write
the difference in terms of the following:

a. Source of revenue
b. Operating cycle
c. Product offered

SERVICE BUSINESS MERCHANDISING

BUSINESS
Both are offering products
to earn profit.

Activity 1.1.2 Identifying different merchandising business.

Give 10 merchandising business you know and identify the main product they sell.

Merchandising Business Main Product

Ex. National Bookstore Books
1.
2.
3.
4.

6
 5.
6.
7.
8
9.
10.

What I Have Learned

1. Merchandising business have two major activities namely buying and selling.
2. Selling is the primary source of revenue.
3. Merchandising business do not produce own product to sell.
4. In merchandising business, to earn profit mark-up is added to the cost of the
merchandise.
5. Inventory or merchandise is the term use for the products for sale.
6. Merchandising business can be either wholesaling or retailing or both.
7. The normal operating cycle in merchandising revolve around stages of buying
of merchandise, selling, and using again the cash to buy more merchandise.
8. The main difference of between a merchandising business and a service
business is the nature of product they are selling. Merchandising business is
selling physical products or tangible products while servicing business is
selling intangible products like labor and skills.

What I Can Do

I. Directions: Arrange the following well-known businesses inside the box according
to their type. Draw a column as shown below on a separate sheet of paper.

Mekeni Food Mercury Drug Healthy Option

Silicon Valley Mini Stop Globe Telecom
Mr. Quikie Flawless Face and Body Clinic Air Asia Philippines
Goldilocks Bakeshop Bataan Pulp and Paper Mills H&M
Merchandising Business Service Business
1. 1.

7
 2. 2.
3 3.
4. 4.
5. 5.

II. Directions: Write AGREE if the statement is correct and DISAGREE if not, then
write ashort explanation of your answer.

1. Myra E. is a Senior High School student under TVL specializing Food Processing.
During ECQ, she decided to make longganisa that she would sell online. When
she received the cash assistance from SAP, she bought ground pork and spices to
produce longganisa. Her first production of 50 packs were sold out worth P3,000.
Myra E. is doing merchandising business. Do you agree? Why?

2. Consider transaction no. 2. If Ms. Flanax ordered 10 packs of longganisa from

Myra E. for P45 each and sold it for P60.00 to her neighbors. Do you agree that
Ms. Flanax is doing the merchandising business? Why?

3. Lay-Sol started a business selling school and office supplies. Most of her
customers are buying in bulk because they are also reselling it. Lay-Sol is engaged
in a retailing business. Do you agree?

4. When you sell a merchandise on account, the operating cycle ends, and a new
cycle begins. Do you agree?

5. Inventory is called to the tables you bought from a manufacturer to be used in

the operation of the business. Do you agree?

What I Know

I. Directions: Write YES if you agree and NO if you disagree with the given statement.

1. You can sell merchandise on account.

2. Seller has the sole responsibility in paying the delivery charge.
3. Buyer can return merchandise if it is defective.
4. If you are engaged in selling of appliances, you can record the sale of delivery van
in the sales account.
5. If Fresh Option bought frozen foods to resell, the transaction will be recorded in
the purchase account.

8
II. Match the following description in Column A with the account titles in column B.
Write the letter of the correct answer on a separate sheet.

COLUMN A COLUMN B

1. The account title used for cash discount granted by a. Purchases

the seller for paying within the term of payment b. Sales Discount
2. The account title used for the transportation cost paid c. Sales Return and
by the seller Allowances
3. The account title used by the buyer for the d. Freight – out
merchandise return due to defects or incorrect e. Sales
specification. f. Accounts Payable
4. The account title used to describe the selling of g. Purchase
merchandise. discount
5. The accounts title for the cash discount from the h. Freight-in
buyer’s point of view. i. Purchase Return
6. The account title used for the transportation cost paid and Allowance
by the buyer. j. Accounts
7. The account used for the buying of merchandise for Receivable
resale.
8. The account title used by the seller for the merchandise
return due to defects or incorrect specification.
9. The account title used for the purchases of
merchandise on account.
10. The account title used for the sale of merchandise on
account

Lesson
Transactions in
2 Merchandising Business
Transaction is a particular kind of event that involves the transfer of
something of value between two entities. In merchandising business, the
transactions’ majority involved the purchasing and selling of merchandise. As you go
over with the lesson, you will discover more about purchasing and selling activities.

What’s In

Give 10 transactions occurring in a service business. Write your answer on a

separate sheet of paper.

9
 1. Owner’s investment 6.
2. 7.
3. 8.
4. 9.
5. 10.

What’s New

Let us have the story of Lola Nena’s Sari-Sari Store.

Lola Nena’s Sari-Sari Store started in 2012 which was owned by
Ibyang. She started the business with P5,000 capital. Her
merchandise of the store is usually purchase at Puregold and
wholesaler of poultry products and rice at Balanga Public Market.
Her neighbors become of her “suki” because of her friendly attitude
and of course, low prices. She usually purchased the merchandise
every other day to replenish the sold merchandise.
We do understand that sari-sari store is a merchandising business. Imagining Lola
Nena’s Sari-Sari Store, it clearly showed that purchasing and selling are the major
transactions involve in merchandising business. But are there other transactions
occurred in merchandising business? What is purchasing? What is selling?

What is It

Purchase of merchandise
In the previous lesson it is said that purchasing or buying is the activity that buys
goods intended for sale. The purchases must be merchandise
intended for resale. Purchases of assets other than merchandise like
equipment, machineries or supplies intended for the use in the
operation are not recorded as purchases.

Thus, when Ibyang bought one ream of coupon bond intended for resale, it is
recorded as purchases but if she bought it to use in price tagging, it should be treated
as purchases.

Purchases is the account title to use in recording purchasing merchandise intended

for sale.

10
Sales of merchandise
As we have learned, selling of merchandise is the primary source
of revenue in merchandising business. Only sales of merchandise
held for resale are recorded in the sales account. On the other
hand, sale of an asset other than merchandise like equipment,
machineries, or supplies use in the operation of the business is not included in sales
account.

Let us consider Lola Nena’s Sari-Sari Store, the store is engaged in selling of food
and non-food items like canned goods, cooking oil, shampoo, etc. Selling of those
items are primary source of their revenue – recorded as sales. But when Lola Nena
sold the refrigerator, it is not included in the sales account. Because refrigerator
is an asset of Lola Nena’s Sari-sari Store used in the operation of their business.
However, if Emilio S. Appliances sold refrigerators, it is recorded as sales because
the selling of appliances is the primary merchandise of the entity.

Sales is the account title used in recording for selling of merchandise.

Terms of payment for purchases and sales

Transactions for purchases and sales can be done in cash, on account or “utang
muna” or both in cash and on account.

Related transactions to purchases and sales

• Payment of transportation cost or freight
• Merchandise return
• Discounts

Payment of transportation cost

Buyers and Sellers sometimes pay delivery cost in transporting the
merchandise. It is commonly referred to as shipping cost. They
sometimes use freight forwarder via land, sea and air like LBC, FedEx,
and 2Go. Payment of the shipping cost is depending on the agreement
between buyer and seller found in the invoice indicating the shipment
terms.

The shipment term will tell us the following:

a. Who has the obligation to pay the transportation cost or delivery cost?
b. Who owns the merchandise while in transit?
c. Who is responsible with the merchandise while in transit?

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Terms of shipment:

Description FOB Shipping point or FOB Destination or Free on

Free on Board Shipping Board Destination Point
Point

Obligation to pay the Buyer Seller

transportation cost.

Ownership of Buyer acquires the Seller is still the ownership

merchandise. ownership upon delivery while in transit

Responsibility to the Buyer assumes the Seller has the responsibility

merchandise in responsibility to preserve to the merchandise while in
transit. the goods while in transit. transit.

Freight-in is the account title use for the transportation cost paid and recorded by
the buyer.

Freight-out is the account title use for transportation cost paid and recorded by the
seller.

Merchandise Return
A merchandise can be returned to the seller if it is defective or damaged,
incorrect specification in terms of brand name, model type or other
details indicated in buyer’s purchase order.

In the return of merchandise, the buyer may ask for the replacement of
better or correct one. However, if there is no replacement available, the
buyer may request for a refund or reduction in liability.

To acknowledge the return of merchandise the seller will issue a credit

memorandum or credit memo indicating the amount, items, and reason for
returns.

On the other hand, the buyer will issue a debit memorandum or debit memo
informing the seller about the reason, amount, and items of the merchandise.

For example, Ibyang ordered 50g Corned Beef but the seller sent 150g Corned Beef.
There is an incorrect delivery which the buyer has the right to return the
merchandise. In this case, the buyer will issue a debit memo to inform the seller
about the details if merchandise return.

Purchase return and allowances is the account title to use in recording the
merchandise return of the buyer.

On the part of the seller, Sales return and allowances is the account title to use in
recording.

12
Discounts
There are two kinds of discount can be availed by the buyer namely cash discount
and trade discount.

Cash discount is given to encourage the buyer to pay promptly for their purchases
on account. It is the amount deducted from the invoice price if it is
paid within the specified period or within the terms of payments.
Credit terms is the term of payment informing the buyer when the
account is due with possible discount.

For example, on December 10 Ibyang purchased white eggs, brown eggs, and salted
eggs on account. She was given a credit term of 3/10, n/30, this means that the
seller is giving her 30- days to pay the account, but she can avail a 3% discount if
she will pay her account within the discount period of 10 days. To avail the cash
discounts Ibyang need to pay the account on December 20.

Cash discount is recorded in the books of the buyer and seller.

Purchase discount is the account title to use in recording cash discount availed by
the buyer. On the other hand, Sales Discount is the account title to use by the seller
in recording cash discount granted to the customers or buyers.

Trade discount is offered to attract buyers to make bulk buying or volume purchases
(bultuhang pamimili). It is the amount deducted from the list price
of the seller. List price is the original price of the merchandise.
Trade discount is deducted upon the preparation of invoice to obtain
the invoice price or actual selling price (actual na halaga o halagang
utang ng buyer).

Trade discounts are never recorded in the books of both parties.

What’s More

Activity 1.2.1 Identifying the other transactions occurring in merchandising

business.

In 2019, Ibyang started her sari-sari store named it after her grandmother’s name,
Lola Nena’s Sari-sari Store investing P5,000. She bought refrigerator on account to
use for her sari-sari store. She purchased her merchandise from Puregold and
wholesaler in a public market. She also bought ballpen and notebook to use in listing
the merchandise she needs. After a month of operation, Lola Nena Sari-sari store
received electric and water bill. Also, withdraw P5,000 cash for personal use.

Required: Identify transaction occurred during operation of Lola Nena’s Sari-sari

Store

13
Activity 1.2.2 Identify the similarities of transaction between service business
and merchandising business.

From the identified transactions in activity 2.1, indicate in the Venn diagram the
similarities of transaction between service business and merchandising business.

SERVICE BUSINESS MERCHANDISING

BUSINESS

Transactions: Transactions:
1.
• Render service to 2. • Sale of
earn revenue. 3. merchandise to
• Product - services 4. earn revenue.
5. • Product-
merchandise

What I Have Learned

1. There are similar transactions between service business and merchandising

business like
• Purchase of asset like store equipment
• Purchases of supplies like notebook and ballpen to be use in the operation of
the business.
• Incurrence of expenses utilities which include water and electric bill.
• Owner’s investment and withdrawal
2. Transactions related to acquisition and disposing of merchandising business are:
• Purchase of merchandise in cash
• Purchase of merchandise on account
• Sale of merchandise in cash
• Sale of merchandise on account
• Payment of transportation cost
• Merchandise returns
• Cash discount

14
3. The account title for transactions mentioned above are:
Account Title Transactions
Purchases Purchase of merchandise both in cash or on
account
Sales Sales of merchandise both in cash or on
account
Freight-in Payment transportation cost by the buyer
Freight-out Payment of transportation cost by the seller
Purchase Return and Allowances Merchandise return made by the buyer
Sales Return and Allowances Merchandise return accepted by the seller
Purchase discount Cash discount on the part of the buyer
Sales discount Cash discount on the part of the seller

4. Purchases of merchandise is recorded in purchase account if the merchandise is

intended for resale.
5. Sales of merchandise is recorded in sales account if the merchandise is held for
resale.
6. There are two types of shipment terms:
• FOB Destination seller has the obligation to pay the transportation cost.
• FOB Shipping Point the buyer has the obligation to pay the transportation cost.
7. Merchandise can be return to the seller if it is defective or damage, the items
delivered is incorrect specification based on the buyer’s purchase order.
8. The seller will issue credit memo acknowledge the return of merchandise.
9. The buyer will issue debit memo to inform the seller about the details of
merchandise return.
10. A cash discount is given to buyer who paid their purchase on account within the
specified period or within the terms of payment.
11. A trade discount is offered to attract the buyers to buy in volume or bulk.
12. Cash discounts are recorded while trade discounts are never recorded in the
books of buyer and seller.

What I Can Do
Please give one example for this
activity

I. Below are merchandising business transaction and account titles. Identify the
transactions and the account title appropriate in the given situation. Write your
answer on a separate sheet of paper. Letter A situation is given as example.
Sales on account Purchases Purchase Discount
Sales in cash Sales Sales Discount
Purchase in cash Freight-in
Purchase on account Freight-out
Merchandise return Purchase return and allowance
Payment of transportation cost Sales return and allowances
Availing Cash Discount

15
a. Tabla Marketing is engaged in selling of office and home furniture. On June 1, Mr.
Tabla bought table and chairs from the well-known furniture makers in
Pampanga. Because he is a regular client the company gave him 15 days to pay
the account.
1. Transaction: Purchase on account
2. Account Title: Purchases

b. Maskara Store Supply purchased N95 face mask from 3M Medical Supply. After 3
days, they received and checked the deliveries. They found out that the items
delivered are surgical mask. Maskara Trading issued debit memo to the seller
informing them about the incorrect delivery.
1. Transaction: _________________________________
2. Account Title: ________________________________

c. Ma-Botehan Enterprise purchased coke, sprite, and mountain dew from Coca Cola
Bottling Corp. The shipment agreement between them is FOB Destination.
1. Transaction: ________________________________
2. Account Title: _______________________________

d. Pinanday School and Office Supply sold office supplies worth P5,000 for cash.
1. Transaction: ______________________________
2. Account Title: _____________________________

e. Demi Tan started her boutique in January 2000 offering branded apparel and
shoes like Levis, Nike, Adidas and the like. Because of limited cash she asked the
supplier if she will be given payment term. Her requested is granted and make
payments on or before end of the discount period.
1. Transaction: ____________________________
2. Account Title: ____________________________

What I Know

Write the letter of the correct answer on a separate sheet of paper.

1. This refers to source document where you can find the credit terms for the
purchase on account.
a. Purchase Order c. Official Receipt
b. Delivery Receipt d. Invoice

2. This refers to the period of time which the customer is allowed for payment of
purchases on account.
a. discount period c. credit term
b. credit period d. term of payment

16
3. This refers to the original price from which trade discount is deducted.
a. discount price c. invoice price
b. list price d. suggested retail price

4. This refers to the price of merchandise after deducting the trade discount.
a. discount price c. invoice price
b. list price d. suggested retail price

5. What does EOM mean?

a. End of the month c. End of message
b. Extraocular muscle d. End of Monday

6. Credit term is stated in this format 2/15, n/30. What does “n” mean?
a. none c. net
b. notes d. number

7. Referring to item no. 6, which statement is true in the statement below?

a. 2% is the discount rate, 15 is the credit period and 30 is the discount period.
b. 2% is the discount rate, 15 is the discount period and 30 is the credit period
c. 2% is the trade discount, 15 and n/30 is the credit term
d. 2% is the trade discount, 15 is the credit term only

8. You are given the credit term of 2/10, n/30, which is true in the statement below?
a. I can avail 2% discount if I pay within 10 days from the date of sale.
b. I can only pay the account within 10 days.
c. I can avail the 2% discount within 30 days
d. I can avail the 2% discount after 10 days from the date of sale.

9. Referring to item no. 8, if you bought the merchandise on Dec. 10, when is the
last day of payment to avail the discount?
a. January 10 c. December 20
b. December 22 d. December 31

10. Ibyang is given the credit term of 2/15, EOM, which is true in the statement
below?
a. She can avail the 2% discount if she will pay within 15 days from the end of
the month.
b. She can avail the 2% discount if she will pay within 15 days after the end of
the month.
c. She can avail the 2% discount if she will pay after 15 days from the end of the
month.
d. She can avail the 2% discount if she will pay from the end of the month plus
15 days.

17
 Lesson
Cash Discount and Trade
3 Discount
In previous lesson, we have learned cash discounts and trade discounts are given to
customers. This lesson will help you how to compute cash discount and trade
discount which is important for the accurate recording and preparation of financial
statement.

What’s In

Write TRUE if the statement is correct or FALSE if it is incorrect.

1. Trade discounts are recorded in the books.

2. Cash discount are recorded in the books.
3. Purchase discount is the cash discount from the buyer’s point of view.
4. Sales discount is the cash discount from the seller’s point of view.
5. Cash discount is given to cash purchases.
6. Cash discounts encourage the buyer to pay make early payment of their account.
7. Trade discounts attract the buyer to buy in bulk.
8. Trade discount is given to customers who bought in bulk.
9. Purchase discount and sales discount are cash discount.
10. Cash discount is given when you pay in specified period of time.

What’s New

Lola Nena’s Sar-sari Store Story: Credit terms

Lola Nena Sari-Sari Store started to become known in their community. Because of
the increasing number of customers Ibyang needs to increase the
merchandise of the store. Due to limited cash her “suki” store give
terms of payment so that she can be able to buy the demand for
the sari-sari store. She agreed for the credit period of 30 days, but
she can also avail cash discount of 2% if she will pay within 15
days.

What is credit period? How do we compute cash discount? How

do we know when is the due date of the cash discount?

18
 What is It

Cash Discount
Cash discount reduces the acquisition price of merchandise purchased. Upon the
purchases on account, a credit term is indicated in the invoice. Invoice is a
document prepared and issued by the seller. The credit term is commonly stated in
this format 2/10, n/30

What does it mean?

2/10, n/30
Credit period
Discount rate
“n” or net
Discount period

Credit period is the number of days given to the buyer to pay its account from the
date of purchase. (Ang credit period ay bilang ng araw o palugit na ibinigay sa buyer
para mabayaran ang kanyang utang mula sa araw ng pagbili.)

How do we interpret?

2/10, n/30 means the seller will give 2% discount if the buyer will pay within 10
days from the date of sale. If not paid within 10 days, net amount (n) without the 2%
discount must be paid within 30 days.

What about EOM?

EOM means “end of the month” (sa dulo ng buwan na iyon).

If the credit term is 3/10 EOM. This means the seller will give 3% discount if the
buyer will pay within 10 days from the end of the month. (Ibig sabihin ang seller ay
magbibigay ng 3% discount kung ang buyer ay magbabayad “within 10 days” from
the end of the month).

How do we determine the date that falls within the discount period?

Illustration:

Assuming on June 1 Dole Wholesale sold to Lola Nena Sari-sari Store pineapple juice
and fruit cocktail worth P30,000. Terms: 2/10, n/30. When should Dole Wholesale
expect payment?

Step 1: Date of sale is June 1.

Step 2: Analyze the terms of payment: 2/10, n/30 (discount rate 2%; discount
period within 10 days)

19
 Step 3: From June 1 you will count 10 days. Counting will start from June 2 or
you may just add 10 days to the date of sale.

Answer: The payment date to expect collection is on June 11.

How do we compute the cash discount?

Formula: Invoice price x discount rate = cash discount

Invoice Price P30,000

Cash discount rate x 2%
Cash discount P 600
=======
Let us have another illustration:

Assuming on Aug. 25 Nova Oishi sold to Lola Nena Sari-sari-store P15,000 worth of
merchandise. Terms: 2/10 EOM.

Step 1: Date of sale is Aug. 25.

Step 2: Terms of payment: 2/10 EOM
Step 3: EOM means end of month. In this case, “month” is referring to August
while “the end” is referring to 31. Thus, from August 31 the buyer have
10 days allowance so that buyer can avail the cash discount. The
counting will start from September 1.
Answer: The payment to expect collection is on September 10.

Invoice Price P15,000

Cash discount rate x 2%
Cash discount P 300
=======
Assuming the buyer fail to pay within the discount period with the credit term is
2/10, n/30 invoice dated June 1, what is the maturity date?

Step 1: Date of sale is June 1

Step 2: Terms of payment: 2/10, n/30
Step 3: From June 1 you will count 30 days. Counting will start from June 2 or
you may just add 30 days from June 1. (In this case, since month of June
has only 30 days, thus the 30th day will be first day of the following month.)
Answer: The maturity date to expect collection is on July 1.

Trade discount
Trade discount is computed upon the issuance of invoice by the seller, it will be
automatically deducted from the list price to give the invoice price.
List price is the original price of the merchandise.

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How to compute invoice price?

Formula: List Price - Trade discount amount = Invoice price

Trade discount is stated like this: 5%, 2/10, n/30.

5% 2/10, n/30

Trade discount Cash discount

Illustration:

1. Assume that on June 1, Anik Anik Stire sold pasalubong products worth P30,000.
2%, 2/10, n/30. How much is the invoice price?
Given: List Price: P30,000
Trade discount rate: 5%
Step 1: Multiply the trade discount with the list price.
Step 2: Deduct the trade discount amount from list price.

List price P30,000

Less: Trade discount (30,000 x 5%) 1,500
Invoice Price P28,500
=======
2. Assuming multiple trade discount is given by the seller to the purchases worth
P30,000. Terms 8%,5% 10%, 2/10, n/30.

List price P30,000

Less: Trade discount (8%) 2,400 (30,000 x 8%)
New selling Price 27,600
Less: Trade discount (5%) 1,380 (27,600 x 5%)
New selling Price 26, 220
Less: Trade discount(10%) 2,622 (26,220 x 10%)
Actual selling Price/ P23,598
Invoice Price =======

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 What’s More

Activity 1.3.1 Familiarize with the computation of cash discount and invoice
price.

I. Compute and complete the missing column. Give all the collection date and cash
discount if stated in 2 or more credit terms.

Expected
collection
Invoice Invoice Cash
Credit term date for
date price Discount
cash
discount

Sept. 3 P500,000 3/15, EOM

Sept. 5 P250,000 2/15, n/45

Sept.10 P350,000 2/10, n/60

Sept. 15 P155,000 2/10, n/30

Sept. 21 P450,000 3/10, n/30

II. Compute the invoice price.

List Price Trade discount Invoice Price

P235,000 3%, 5%

P156,000 2%

P455,000 2%,3%,5%

P350,000 4%,3%

P650,000 5%,3%,6%

What I Have Learned

1. Cash discount is computed based on the invoice price.

22
2. If there is a trade discount offered, invoice price is computed by deducting the
trade discount from the list price.
3. Discount period is the period covered by the discount which starts the counting
from the date of sale.
4. “n/30” means net of amount of the account is due within 30 which starts the
counting from date of sale.
5. EOM means end of the month.

What I Can Do

Analyze the following independent problem. Write the letter of the correct answer on
a separate sheet.

1. On May 10 Olive Oyl Company sold merchandise inventory with invoice price of
P19,450 to Kanola Oil Company . Terms: 3/15,n/30. How much is the sales
discount if the company paid their account on May 25?
a. P583.50 b. P585.30 c. P2,917.50 d. P0

2. Wesson Merchandising purchased merchandise at a list price of P100,000 to

Minola Koh. Terms: 10%;5%; 1/10,n/30. How much is the invoice price?
a. P90,000 b. P95,000 c. P85,000 d. P85,500

3. On March 15 BagU-oyl Company sold merchandise at a list price P50,000 subject

to a trade discount of 10% from Marc Leon. Terms: 3/10, 2/15,n/30 wherein upon
delivery Marc Leon paid P500 for transportation cost. How much collection will
expect by Bag-U-oyl if Marc Leon pay on April 1.
a. P45,000 b. P43,600 c. 48,600 d. 44,100

4. Consider transaction no. 3, what is the last payment date to BagU-oyl if Marc Leon
will avail the 3% cash discount?
a. March 24 b. March 20 c. March 25 d. March 15

5. Barako Merchandise sold coffee beans to Starbaks Coffee shop at a list price of
P200,000 . Terms: 2%, 1%, 5%, 3/10, n/60. How much is the invoice price?
a. P184,338 b. P196,000 c. P194,040 d. P178,807.86

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 Assessment

Multiple Choice: Write the letter of the correct answer.

1. Statement I: Wholesaling sells merchandise in bulk.

Statement II: Retailing sells merchandise in pieces.
a. Both statements are true c. Only statement II is true
b. Only statement I is true d. Both statements are false

2. Statement I: SM appliance sold chairs and tables it is to record in sales account.

Statement II: Guiao Furniture bought chairs and tables for office use is to record
in purchase account.
a. Both statements are true c. Only statement II is true
b. Only statement I is true d. Both statements are false

3. Statement I: Credit memo is issued for the defective merchandise by the buyer.
Statement II: Debit memo is issued for the defective merchandise by the seller.
a. Both statements are true c. Only statement II is true
b. Only statement I is true d. Both statements are false

4. Statement I: Invoice price is the original price of a product.

Statement II: List price is the original price of a product.
a. Both statements are true c. Only statement II is true
b. Only statement I is true d. Both statements are false

5. Statement I: FOB Destination means the seller will pay the transportation cost.
Statement II: FOB Shipping means the buyer will pay the transportation cost.
a. Both statements are true c. Only statement II is true
b. Only statement I is true d. Both statements are false

6. Statement I: Trade discount is recorded in the books.

Statement II. Cash discount is recorded in the books.
a. Both statements are true c. Only statement II is true
b. Only statement I is true d. Both statements are false

7. Statement I: Cash discounts encourage the buyer an early payment.

Statement II: Trade discounts encourage the buyer in bulk buying.
a. Both statements are true c. Only statement II is true
b. Only statement I is true d. Both statements are false

8. Statement I: Freight- out is the account title for transportation cost paid by the
seller.

Statement II: Freight-in is the account title for transportation cost paid by the
buyer.

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 a. Both statements are true c. Only statement II is true
b. Only statement I is true d. Both statements are false

9. Statement I: Sales return and allowances is the account title for merchandise
from point of view of the seller.
Statement II: Purchase return and allowances is the account title for merchandise
return from the point of view of the seller.
a. Both statements are true c. Only statement II is true
b. Only statement I is true d. Both statements are false

10. Statement I: Purchases can be transacted both in cash and on account.

Statement II: Sales can be transacted both in cash and on account.
a. Both statements are true c. Only statement II is true
b. Only statement I is true d. Both statements are false

11. JCW Clothing have various customers in different areas of Luzon, Visayas and
Mindanao. During the month of July the following shipment are made:
Courier Terms Amount
2Go FOB Destination P1,555
2Go FOB Destination P1,000
LBC FOB Destination P2,200
LBC FOB Shipping Point P1,240
2Go FOB Shipping Point P1,450
How much is the freight-out of JCW Clothing for the month of July?
a. 4,755 b. 2,690 c. 7,455 d. 0

12. Popeye purchased spinach worth P20,000 for his Spinach Store. Terms: 2/10,
n/30. How much Popeye will pay if paid within the discount period?
a. P20,300 b. P19,100 c. P19, 600 d. P19,500

13. Bunny purchased carrots juice at a list price of P35,000 for his Beta-Carotene
Grocery on May 1. Terms: 2%, 3/10, n/60. How much is the invoice price?
a. P34,300 b. P33, 957 c. P32, 259.15 d. 35,000

14. Betty Pooh Doll House bought merchandise from Barbie Toy Supply worth
P100,000 on Aug.16. Terms: 2/20, n/60. What is the last day of payment of the
account to avail the cash discount?
a. August 31 b. September 5 c. October 15 d. September 1

15. PSJ & PMY Merchandising sold merchandise to Yellow Ribbon worth, P200,000.
Terms: 3/15; n/30. But the business received return merchandise due incorrect
brand and sizes of items worth P5,000. They also received damaged item due to
customer’s negligence worth P1,000. How much is the sales return of PCJ & PMY
Merchandising.
a. P6,000 b. P5,000 c. P1,000 d. P4,000

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 Additional Activities

I. Write A if you agree with the statement or D if you disagree on a separate sheet
of paper.

1. Ms. AY sold a merchandise to ME Trading for P30,000. FOB Shipping Point,

2/10, n/30. In this case, seller has the obligation to pay the transportation cost.

2. On March 03 LUV Trading sold merchandise MORE Enterprise, P100, 000.

Terms: 3/10, 2/15, n/30. On March 18, the seller collected the account. In this
case, the seller is obliged to grant the cash discount because the buyer paid the
account within the credit period.

3. U sold merchandise to HOPE Merchandising at a list price of P25,000 subject

to a trade discount of 8%. List price of the merchandise should be written in the
invoice.

4. ALL Good Choice sold merchandise to Day Supermarket. But on the next day,
Day Supermarket issued a debit memo to inform the seller about the return. In
recording the transaction, the seller should it record as sales return and
allowances.

5. FOREVER Young Beauty Supplies sold merchandise to Kapamilya Trading.

Aside from merchandise, they also sold their computer to Kapuso
Merchandising. To record the transaction, sale of computer should be included
in the sales account.

II. Compute the amount for the following sales transactions. Write your answer
showing the computation in a separate sheet.

1. Ji-Ji Couple Boutique is engaged in selling Kpop-merchandise. They offered their

merchandise through online. During the month of March 2020, they sold P10,500
through online. Some of her friends also asked them to deliver items worth P2,500
to be paid on April 15. How much is the total sales of Ji-ji Couple Boutique for the
month of March?

2. LizQuen Medical Supply sold to BGH their surgical mask and scrub suit worth
P15,000 in cash. They also sold to SJH a shoe cover, hazmat suit and facemask
worth P25,000 on account. They also traded their two units of computer worth
P10,000 to replace with an upgraded system of computer. How much is the total
sales of LizQuen Medical Supply.

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3. Park-Park Enterprise sold to Pandikit Commercial, at a list price of P160,000.
Terms: 6%; 5/10, 2/20, n/30. How much is the sales of Park-Park Enterprise.

4. Consider the transaction # 3, how much is the trade discount given to Pandikit
Commercial.

5. KathNiel Super Store sold to Choco8 Trading P20,000 worth of merchandise,

P5,000 downpayment and the balance on account. Terms: 2/10, n/30. How much
would be the sales discount?

6. W Marketing purchased merchandise worth P100,000, 20% downpayment and

the balance is on account. Terms: 3/10, n/30. How is the cash purchases?

7. WWWSK Enterprise bought merchandise worthP35,000 paid in cash. They also

purchased thermal scanner and surgical mask from PPE Store Supply for their
employees. How much is the purchases of WWWSK Enterprise?

8. Meteor Garden Merchandising bought P60,000 worth of merchandise, paid

P10,000 in cash downpayment and the balance on account. Terms: 3/10, n/30.
How much is the purchases on account of Meteor Garden Merchandising?

9. Hway-Ugi Medical Supplies purchased PPE’s and face mask worth P130,000 on
May 2. Terms: 3/10, 2/15, EOM. Upon checking and counting of the delivery, the
item N95 mask has an excess of 5 boxes worth P2,500. They also checked that
some items are damaged with an amount of P1,450. How much is the purchase
return of Hway-Ugi Medical Supplies?

10. Yanxi Trading purchased merchandise from different supplier in Divisoria.

During the month of May the following deliveries were made:

FOB Shipping Point P500

FOB Destination P450
FOB Shipping Point P300
FOB Shipping Point P300

How much is the freight-in of Yanxi Trading for the month of May?

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 28
What I Know What's More
Activity I: Activity I:
1. Yes 1. Owner’s investment
2. Purchase of equipment
2. No 3. Purchase of supplies
3. Yes 4. Incurrence of expenses
4. No 5. Owner’s withdrawal
5. Yes
Activity II:
Activity II:
1. Sales discount 6. Freight-in
2. Freight-out 7. Purchases
3. Purchase Return 8. Sales Return &
& Allowances Allowances
4. Sales 9. Accounts Payable
5. Purchase Discount 10.Accounts Receivable
Lesson 2:
What I Know What's More
Activity I: Activity I:
1. MB
2. MB
3. SB
4. MB
5. SB
Activity II:
Activity II:
1. 6.
Answers may vary
2. 7.
3. 8.
4. 9.
5. 10.
Lesson 1:
Answer Key
 29
What's More
I:
Expected
Cash
Invoice date Invoice price Credit term collection date for
Discount
cash discount
Sept. 3 P500,000 3/15, EOM Oct. 03 15,000
Sept. 5 P250,000 2/15, n/45 Sept. 20 5,000
Sept.10 P350,000 2/10, n/60 Sept. 20 7,000
Sept. 15 P155,000 2/10, n/30 Sept. 25 3,100
Sept. 21 P450,000 3/10, n/30 Oct. 01 13,500
II:
List Price Trade discount Invoice Price
P235,000 3%, 5% P156,275.00
P156,000 2% P152,880
P455,000 2%,3%,5% P410,896.50
P350,000 4%,3% P325,920.00
P650,000 5%,3%,6% P563,036.50
What I Know
Activity I:
1. D
2. C
3. B
4. C
5. A
6. C
7. B
8. A
9. C
10. C
Lesson 3:
 30
Assessment
1. A 6. C 11. B
2. D 7. A 12. C
3. D 8. A 13. A
4. C 9. B 14. B
5. A 10.A 15. B
References
Ballada, Win. Basic Financial Accounting and Reporting Made Easy. DomDane
Publisher & Made Easy. Sampaloc, Manila. 2018.

Department of Education Bureau of Learning Resources: Fundamentals of

Accountancy, Business and Management I. Pasig City: DepEd. 2016.

Florendo, Joselito G. Fundamentals of Accountancy, Business and Management I. Rex

Bookstore. Manila.2016

Valencia, Edwin G., Roxas, Gregorio F. Basic Accounting Concepts, Principles,

Procedures and Applications 4 th Edition. Valencia Educational Supply. Baguio
City. 2014

Domingo, James Christopher D. Bentahan Basic Accounting – Kindergarten Approach

Volume II. 2014

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For inquiries or feedback, please write or call:

Department of Education – Region III,

Schools Division of Bataan - Curriculum Implementation Division
Learning Resources Management and Development Section (LRMDS)

Provincial Capitol Compound, Balanga City, Bataan

Telefax: (047) 237-2102

Email Address: [email protected]