Merchandising Business

Merchandising Business is a business engaged in a buying and selling of goods or

products. Also, "trading" and "retailing" describes a merchandising business. The
primary product of this business is the "merchandise" items it sells. Meaning there is
a presence of physical products which are being purchased and sold. This business to
earn, the entity buys goods and adds markup or profit to the cost of goods then sells
them to the customers.

Major Business Activities of a Merchandising Firm

Purchasing Activities – refer to the buying, procurement or acquisition of finished
products intended for sale. In accordance with the historical cost principle, the cost of
the product acquired includes the purchase price plus all other incidental costs related
to the acquisition of the product.
Selling Activities – pertains to the act of transferring the title of ownership over the
merchandise from the seller to the buyer for a consideration in money of any other
thing of value.

Costs of Transportation
Freight out= the cost of transporting goods to customers.
Freight in= the cost of transporting items or goods bought for resale.
F.O.B. Shipping Point – ownership of the product is transferred to the buyer upon
shipment. Consequently, the buyer becomes responsible of the transportation
because he practically owns the merchandise while in transit.
F.O.B. Point of Destination – ownership of product is transferred to the buyer only
upon reaching the specified place of destination.
Freight Prepaid – the actual payment of the transportation cost shall be made by
the seller to the common carrier.
Freight Collect – the buyer shall make the actual payment of the transportation cost
to the common carrier.

Credit Terms or Discounting Terms

The agreement between a seller and buyer that lists the timing and amount of
payments the buyer will make in the future.
2/10, N/30 = this means customer can receive a 2 percent discount on purchase
made if payment of the entire balance is received in cash within 10 days. If the
discount is not taken, the customer must pay the full invoice amount within 30 days of
the purchase.
5/10, 2/15, n/30 = this means a 5 percent discount will be given if payment will be
made within 10 days, if not, a 2 percent discount will be given if payment will be
made within 15 days. If the discount is not taken, the customer must pay the full
invoice amount within 30 days of the purchase.
3/eom, n/30 = this means a 3 percent discount will be given if payment will be made
at the end of the month. If the discount is not taken, the customer must pay the full
invoice amount within 30 days of the purchase.
Eom = this means payment will be made at the end of the month.
n/30 = this means the customer must pay the full invoice amount within 30 days of
the purchase.
COD = this means payment in cash, without discount, upon delivery of the
merchandise.
Inventory Accounting System
Periodic Inventory System – does not maintain a continuous record of the physical
quantities (or costs) of inventory on hand.
Under the periodic inventory system, the account title “purchases” is used to
describe the products that have been purchased and intended for sale.

Perpetual Inventory System - maintains a continuous record of the changes of the

physical quantities in its inventory.
Under the perpetual inventory system, the account title used to describe the product
for sale is “merchandise inventory”.

COMPARATIVE ENTRIES
1. When goods amounting to P50,000 are purchased from supplier.
Periodic Inventory System Perpetual Inventory System
Purchases 50,000 Merchandise Inventory 50,000
Cash or Accounts Payable 50,000 Cash or Accounts Payable 50,000
To record purchased of To record purchased of
merchandise. merchandise.

2. When transportation expenses are incurred to obtain goods for sale, (P1,500)
Periodic Inventory System Perpetual Inventory System
Freight-in 1,500 Merchandise Inventory 1,500
Cash 1,500 Cash 1,500
To record payment of To record payment of
freight-in freight-in
OR
Periodic Inventory System Perpetual Inventory System
Freight-out 1,500 Freight-out 1,500
Cash 1,500 Cash 1,500
To record payment of To record payment of
freight-out freight-out

3. When goods amounting to P1,000 are returned to supplier.

Periodic Inventory System Perpetual Inventory System
Cash or Accounts Payable 1,000 Cash or Accounts Payable 1,000
Purchase Returns 1,000 Merchandise Inventory 1,000
To record return of To record return of
merchandise. merchandise.

4. When goods amounting to P25,000 are sold for P31,250 (25% mark-up) to customers.
Periodic Inventory System Perpetual Inventory System
Cash or Accounts Receivable 31,250 Cash or Accounts Receivable 31,250
Sales 31,250 Sales 31,250
To record merchandise To record merchandise
sold. sold.

Cost of Goods Sold 25,000

 Merchandise Inventory 25,000
To record cost of
merchandise sold.

5. When discount is applied to payables – P20,000, 2/10.

Periodic Inventory System Perpetual Inventory System
Accounts Payable 20,000 Accounts Payable 20,000
Cash 16,000 Cash 16,000
Purchase Discount 4,000 Merchandise Inventory 4,000
To record payment of To record payment of
goods on account. goods on account.

6. When discount is applied to receivables – P25,000, 2/10.

Periodic Inventory System Perpetual Inventory System
Cash 20,000 Cash 20,000
Sales Discount 5,000 Sales Discount 5,000
Accounts Receivable 25,000 Accounts Receivable 25,000
To record payment of To record payment of
goods on account. goods on account.

7. When goods amounting to P3,750 (with 20% mark-up) are returned by customers.
Periodic Inventory System Perpetual Inventory System
Sales Returns 3,750 Sales Returns 3,750
Cash or Accounts 3,750 Cash or Accounts 3,750
Receivable Receivable
To record return of To record return of
merchandise sold. merchandise sold.
3, 000
Merchandise Inventory 3,000
Cost of Goods Sold
To record cost of
merchandise returned.

8. Ending inventory
Periodic Inventory System Perpetual Inventory System
Merchandise Inventory, End Inventory Short/Over
Income Summary Merchandise Inventory
 Computation of ending inventory will be included in your adjusting entries.

Notes:
Under the periodic system, the correct amount of inventory per count at the end of
accounting period is debited to Merchandise Inventory, end account to set-up the
adjusted amount of ending inventory.
Under the perpetual system, the difference between the inventory per record and the
actual inventory is debited.
The inventory short or over account is the account that absorbs inventory
shortage or overage resulting from shrinkage, breakage, shoplifting, incorrect
recording, and the like. This account is eventually closed to the cost of goods sold
account. However, if the inventory shortage is material in amount, it should be
reported separately in the Statement of Comprehensive Income.
Complete the accounting cycle of Briana Botique under periodic inventory
system.

The following are business transactions of Briana Boutique owned by Briana Choi for
the Month of March 2019

March 1 Briana invested 100,000 cash, 35,000 worth of furniture and fixtures and
office equipment for 65,000.
2 Paid licenses and permits, 4,600.
3 Purchased supplies, 1,900.
4 Purchased goods for 60,000, terms, FOB Shipping point, 4/15,
n/30.
5 Paid freight on goods purchased, 900.
6 Returned goods amounting to 4,500 purchased on March 4.
9 Sold goods for 70,000.
10 Purchased goods for cash amounting to 40,000.
11 Sold goods on account, 90,000. Terms, FOB destination 2/10, n/30.
12 Paid freight on goods sold, 600.
13 Issued credit memo on goods returned amounting to 600 from the goods
sold on March 11.
14 Paid goods purchased last March 4.
15 Paid salaries, 9,000.
20 Received payment on goods sold last March 11.
23 Purchased goods on account, 45,000. FOB Shipping point, n/30.
24 Sold goods for cash, 80,000.
25 Received a credit from supplier for issuing 1,200 worth of defective
merchandise on March 23.
27 Briana withdrew cash amounting to 10,000 for personal use.
29 Borrowed 20,000 from the bank.
30 Paid the following expenses: Salaries, 9,000; taxes, 6,800; utilities,
4,850.
30 The ending inventory on hand is 25,000.

Adjustment:
1. Supplies on hand is 750.
2. Furniture and Fixture has an estimated useful life of 10 years with residual value of
7,000 and equipment has an estimated useful life of 15 years with residual value of
12,000.
3. Loan is payable within 2 years with an 11% interest. Compute monthly interest.
 CHART OF ACCOUNTS

Cash 101
Accounts Receivable 102
Merchandise Inventory, End 103
Supplies 104
Equipment 105
Accumulated Depreciation – Equipment 106
Furnitures and Fixtures 107
Accumulated Depreciation – Furniture and Fixture 108
Accounts Payable 201
Interest Payable 202
Loans Payable 203
Choi, Capital 301
Choi, Drawings 302
Purchases 401
Purchase Discount 402
Purchase Return 403
Sales 501
Sales Discount 502
Sales Returns 503
Freight in 601
Freight-out 602
Taxes and Licenses Expense 603
Salaries Expense 604
Utilities Expense 605
Supplies Expense 606
Depreciation Expense 607
Interest Expense 608
Income Summary 609
Complete the accounting cycle of Briana Botique under perpetual inventory
system.

The following are business transactions of Briana Boutique owned by Briana Choi for
the Month of March 2019

March 1 Briana invested 100,000 cash, 35,000 worth of furniture and fixtures and
office equipment for 65,000.
2 Paid licenses and permits, 4,600.
3 Purchased supplies, 1,900.
4 Purchased goods for 60,000, terms, FOB Shipping point, 4/15,
n/30.
5 Paid freight on goods purchased, 900.
6 Returned goods amounting to 4,500 purchased on March 4.
9 Sold goods for 70,000. Cost of goods sold, 35,000.
10 Purchased goods for cash amounting to 40,000.
11 Sold goods on account, 90,000. Cost of goods, 40,000. Terms, FOB
destination 2/10, n/30.
12 Paid freight on goods sold, 600.
13 Issued credit memo on goods returned amounting to 600 from the goods
sold on March 11.
14 Paid goods purchased last March 3.
15 Paid salaries, 9,000.
20 Received payment on goods sold last March 11.
23 Purchased goods on account, 45,000. FOB Shipping point, n/30.
24 Sold goods for cash, 80,000. Cost, 30,000.
25 Received a credit from supplier for issuing 1,200 worth of defective
merchandise on March 23.
27 Briana withdrew cash amounting to 10,000 for personal use.
29 Borrowed 20,000 from the bank.
30 Paid the following expenses: Salaries, 9,000; taxes, 6,800; utilities,
4,850.
30 The ending inventory on hand is 25,000.

Adjustment:
4. Compute the inventory short/over.
5. Supply on hand is 750.
6. Furniture and Fixture has an estimated useful life of 10 years with residual
value of 7,000 and equipment has an estimated useful life of 15 years with
residual value of 12,000. Compute monthly depreciation.
7. Loan is payable within 2 years with an 11% interest. Compute monthly
interest.
 CHART OF ACCOUNTS

Cash 101
Accounts Receivable 102
Merchandise Inventory 103
Supplies 104
Equipment 105
Accumulated Depreciation – Equipment 106
Furnitures and Fixtures 107
Accumulated Depreciation – Furniture and Fixture 108
Accounts Payable 201
Interest Payable 202
Loans Payable 203
Choi, Capital 301
Choi, Drawings 302
Sales 401
Sales Discount 402
Sales Returns 403
Freight-out 501
Taxes and Licenses Expense 502
Salaries Expense 503
Utilities Expense 504
Supplies Expense 505
Depreciation Expense 506
Interest Expense 507
Cost of Goods Sold 508
Income Summary 509