Accounting for

Merchandising
Business
Merchandising Business
An entity that earns profit by buying and selling of
goods. A person who buys and sells goods or
merchandise is called merchandiser. He/She may be
a wholesaler or retailer.

A wholesaler is one who buys in bulk from a

manufacturer or another wholesaler and sells them
in bulk to other wholesaler or retailers. A retailer buys
merchandise from the manufacturer or wholesaler
and sells them by pieces to ultimate consumers.

Accounting for Merchandising Business

 Operating Cycle of a Merchandiser
Cash Cash
Collections

Purchases

Purchases
Cash Sales

Accounts
Receivable

Sales on Account
Inventory Inventory

Cash Sales Sales on Account

Accounting for Merchandising Business
 Flow of Transactions in
Merchandising Business
Purchases Sales
- Returns - Returns
- Allowances - Allowances
- Discounts - Discounts
- Freight - Freight
Supplier Business Customer
Buy Sell

Accounting for Merchandising Business

QUICK OVERVIEW

Accounting for Merchandising Business

 Discounts, Credit Period and
Discount Period
Trade Discount Cash Discount Credit Period Discount Period

Deductions from Deductions from the

Period of time Period of time
invoice price when
the list price or allowed for covered by the
payment is made within
catalog price in the discount period. The payment discount
order to arrive at purpose of discount is to
the invoice price encourage prompt Usually, it is Usually, it is
which is the payment
representing as representing as
amount actually
Purchase Discount – point
charged to the of view of the buyer n/30; n/20 2/10;1/15;
buyer 2/10,1/15
Sales Discount – point of
view of the seller
Accounting for Merchandising Business
QUICK REVIEW

Accounting for Merchandising Business

Trade Discount
Illustration: Pinnacle Technologies Seller Books
quoted a list price of P2,500 for each 64
gigabyte flash drive, less a trade Cash 14,000
discount of 20%. If Video Fantastic Sales 14,000
ordered and paid seven units, the
computation of the invoice price would
be as follows:
Buyer Books
List Price (P2,500 x 7) P17,500
Less: 20% Trade Discount 3,500 Purchases 14,000
Invoice Price P14,000 Cash 14,000

Accounting for Merchandising Business

Trade Discount
Trade discounts may be stated in a Seller Books
series. Assume instead that the trade
discount given is 20% and 10%, the Cash 12,600
invoice price will be: Sales 12,600

List Price (P2,500 x 7) P17,500

Less: 20% Trade Discount 3,500
Balance P14,000 Buyer Books
Less: 10% Trade Discount 1,400
Invoice Price 12,600 Purchases 12,600
Cash 12,600

Accounting for Merchandising Business

Cash Discount
Illustration: Assume that T. Calaguas Traders sold merchandise on Sept. 20 for
P3,000; terms 2/10, n/60.

Assuming the customer paid on Sept. 30 which is within the discount period, the entry
would be:

Accounting for Merchandising Business

Cash Discount
Assuming the customer paid on Oct. 1 which is not within the discount period, the
entry would be:

Sales Discounts account is considered a contra-income account and deducted from

Gross Sales in the income statement.

Accounting for Merchandising Business

QUICK OVERVIEW

Accounting for Merchandising Business

Sales Returns and Allowances
Assume that on Sept. 26 client returned a damaged merchandise
amounting to P760, the entry should be:

Sales Returns and Allowances account is also considered a contra-income account

and deducted from Gross Sales in the income statement.

Accounting for Merchandising Business

QUICK OVERVIEW

Accounting for Merchandising Business

PARTIAL INCOME STATEMENT

Accounting for Merchandising Business

 TRANSPORTATION COSTS
FOB – Free on Board
FOB Shipping Point – ownership of goods purchased is transferred
upon shipment of the goods and therefore, the goods in transit are the
property of the buyer.
FOB Destination – ownership of goods purchased is transferred only
upon receipt of the goods by the buyer at the point of destination and
therefore the goods in transit are property of the seller.
Freight Prepaid – this means that the freight charge on the goods
shipped is already paid by the seller.
Freight Collect – this means that the freight charge on the goods
shipped is not yet paid. The common carrier shall collect the freight
from the buyer.
Accounting for Merchandising Business
 Case No. 1
Assume that T. Calaguas Traders sold merchandise on November 25
totaling P17,000 FOB destination, freight prepaid; terms 2/10, n/30. The
transportation costs amounted to P1,900. The entry to record this
transaction would be:

Transportation out is part of the operating expense of the seller.

Accounting for Merchandising Business

If the invoice is collected on Dec. 5, the sales discount will be P340
(17,000 x 2%).

Accounting for Merchandising Business

 Case No. 2
Assume that T. Calaguas Traders sold merchandise on November 25
totaling P17,000 FOB shipping point, freight collect; terms 2/10, n/30.
The transportation costs amounted to P1,900. The entry to record this
transaction would be:

Accounting for Merchandising Business

If the invoice is collected on Dec. 5, the sales discount will be P340
(17,000 x 2%).

Accounting for Merchandising Business

 Case No. 3
Now, assume that T. Calaguas Traders sold merchandise on November
25 totaling P17,000 FOB destination, freight collect; terms 2/10, n/30.
The transportation costs amounted to P1,900. The entry to record this
transaction would be:

Accounting for Merchandising Business

If the invoice is collected on Dec. 5, the sales discount will be P340
(17,000 x 2%).

Accounting for Merchandising Business

 Case No. 4
Assume further that T. Calaguas Traders sold merchandise on
November 25 totaling P17,000 FOB shipping point, freight prepaid;
terms 2/10, n/30. The transportation costs amounted to P1,900. The
entry to record this transaction would be:

Accounting for Merchandising Business

If the invoice is collected on Dec. 5, the sales discount will be P340
(17,000 x 2%).

Accounting for Merchandising Business

Accounting for Merchandising Business
Accounting for Merchandising Business
COST OF SALES
Cost of Sales or Cost of Good Sold is the largest single expense of the
merchandising expense. It is the cost of inventory that the entity sold to customers.
Every merchandising business has goods available for sale to customers. The
goods available for sale during the year is the sum of two factors – merchandise
inventory at the beginning of the year and net cost of purchases during the period.

Accounting for Merchandising Business

 Merchandise Inventory
Merchandise Inventory at the beginning of the accounting period is called the
beginning inventory. Conversely, the merchandise inventory at the end of the
accounting period is called the ending inventory.

Accounting for Merchandising Business

 Net Cost of Purchases
Under the periodic inventory method, net cost of purchases consist of gross
purchases minus purchases discounts and purchases returns and allowances
equals net purchases plus transportation cost.

When the periodic inventory method is used, all purchases of merchandise are
debited to purchases account as shown below:

Accounting for Merchandising Business

 Purchases Returns and Allowances
Sales Returns and Allowances in the seller’s books are recorded as purchase
returns and allowances in the books of the buyer. This should be recorded as
follows:

Accounting for Merchandising Business

 Purchases Discounts
If the invoice is paid on November 22, the purchase discount will be
P260 (13,000 x 2%).

Accounting for Merchandising Business

 Case No. 1
Assume that T. Calaguas Traders made purchases on November 25
totaling P17,000 FOB destination, freight prepaid; terms 2/10, n/30. The
transportation costs amounted to P1,900. The entry to record this
transaction would be:

Transportation in is part of the Cost of Sales of the buyer.

Accounting for Merchandising Business

If the invoice is paid on Dec. 5, the purchases discount will be P340
(17,000 x 2%).

Accounting for Merchandising Business

 Case No. 2
Assume that T. Calaguas Traders made purchases on November 25
totaling P17,000 FOB shipping point, freight collect; terms 2/10, n/30.
The transportation costs amounted to P1,900. The entry to record this
transaction would be:

Accounting for Merchandising Business

If the invoice is paid on Dec. 5, the purchases discount will be P340
(17,000 x 2%).

Accounting for Merchandising Business

 Case No. 3
Now, assume that T. Calaguas Traders made purchases on November
25 totaling P17,000 FOB destination, freight collect; terms 2/10, n/30.
The transportation costs amounted to P1,900. The entry to record this
transaction would be:

Accounting for Merchandising Business

If the invoice is paid on Dec. 5, the purchases discount will be P340
(17,000 x 2%).

Accounting for Merchandising Business

 Case No. 4
Assume further that T. Calaguas Traders made purchases on November
25 totaling P17,000 FOB shipping point, freight prepaid; terms 2/10,
n/30. The transportation costs amounted to P1,900. The entry to record
this transaction would be:

Accounting for Merchandising Business

If the invoice is paid on Dec. 5, the purchases discount will be P340
(17,000 x 2%).

Accounting for Merchandising Business