Accounting for Merchandising

Business
Reporters:

Julia Marie T. Garet

Deborah Zayne A. Lim
Novelyn A. Dayot
Prestine Lope
Junnel E. Katipunan
Diane Kimberly V. Esmade
 Merchandising Business
• An organization that is engaged in the buying and selling of
goods or merchandise is a merchandising or trading concern.
Merchandise refers to goods purchased for resale in the same
form.
 Activities of a Merchandising Business
• Purchasing. Information as to the kind, quality, quantity, and cost of goods bought should be maintained for
the use of management. Records as to supplies or merchandise bought are also maintained.
• Handling. The costs of transporting and sorting of goods bear an important relation to the prices of goods
bought. These should be recorded properly. Transportation costs include freight, express, drayage, and cartage.
• Returning Of Goods Purchased. Some of the merchandise received may prove unsatisfactory and must be
returned to the vendors, or if not returned, may be allowed some deductions from the original purchase price.
• Selling. Goods purchased are sold at prices above the cost in order to provide adequate margin of profit. It is
therefore imperative that the cost of goods bought should be known from the accounting records so that
desirable selling prices may be set.
• Returning Of Goods Sold. The customers may return some of the merchandise sold. Deductions from the
original selling prices must be allowed for sales returns. If the goods delivered are defective and no return is
made, the customers are granted reduction on the sales price.
• Maintaining Adequate Stocks On Hand. In order to satisfy orders of customers at all times, a stock of
merchandise must be maintained on hand. This is called Merchandise Inventory or Inventory on Hand
 Inventory Systems
• Perpetual inventory system ; or
• Periodic inventory system
 Perpetual Inventory System
- In Layman's terms, the word perpetual means continuing forever.
- Under this system, the "inventory" account or "merchandise account" is
updated each time a purchase or sale is made.

- All increases and decreases in inventory, such as purchases, freight- in,

purchase returns and purchase discounts, cost of goods sold and sales return
are recorded in the "inventory or "merchandise" account.
--"Cost of goods sold is debited" when inventory is sold and credited for sales
returns.
- Requires maintenance of records called stock cards that usually offer a
running summary of inflow and outflow.
 Periodic Inventory System
- In Layman's terms the word "periodic" means occurring or
recurring at regular intervals.
- Under this system, the "inventory" account or "merchandising
account is updated only when a physical count of inventory is
performed.
- Does not maintain records that show running balances of inventory
on hand and COGS at any given point of time.
- "Cost of goods sold" is not recorded.
Periodic inventory system requires a physical count
periodically to determine the balances of inventory on hand and
cost of goods sold.

In determining the COGS we need to apply this formula:

Beginning inventory ₱ XX
Add: Net purchases XX
Total Goods Available for Sale (XX)
Less: Ending inventory (physical count) (XX)
Cost of goods sold ₱XX
 Perpetual VS. Periodic
PERPETUAL SYSTEM PERIODIC SYSTEM
1. You purchased goods worth ₱10,000 on account
Inventory 10,000 Purchases 10,000
Accounts payable 10,000 Acoounts 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
4. You sold goods costing ₱5,000 for ₱ 20,000 on account.
Accounts receivable 20,000 Acoounts 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
• Purchases - the account use to record purchases of inventory under the
periodic system.

• Freight-in (Transportation in)- the acount us to record the shipping

costs incurrred on purchases of inventory under the periodic system.

• Purchase returns- the account used to record returns of purchased

goods to the supplier.

• Purchase discounts- account used to record discounts aviled of on the

purchased of goods.
 Merchandise of Accounts
• Sales. Sales of merchandise are recorded in this account at selling prices.
• Sales Returns and Allowances. This account is debited for all the merchandise returned by
customers. The debit entry is at the original selling price of the merchandise.
• Sales Discount. This account is debited in the book of the seller whenever the buyer avails of
the cash discounts provided by the seller.
• Purchases. This is a temporary account to which the cost of goods bought during the period
is debited.
• Purchase Returns and Allowances. Goods bought and returned to supplier, or goods bought
and received as defective, or not as ordered, when not returned to the supplier but is
subjected to a certain reductions from their acquisition prices.
• Merchandise Inventory. At the end of every accounting period, a physical count of the unsold
merchandise on hand is taken.
• Purchase Discount. This account is credited in the books of the buyer whenever the
purchaser avails of the cash discount given by the seller.
• Freight In or Transportation In. If the buyer pays the
expenses of transporting the goods from the place of the seller
to his place of business, such expenses are debited to the
Freight-in account.

• Freight Out or Transportation Out. If the seller pays the

expenses of transporting the goods from his place to the place
of the buyer, such expenses are debited to the Freight out
account.
 BUSINESS DOCUMENTS
Official Receipts -These are issued every time the business receives cash. They show the date on which
the cash is received, the party from whom the cash is received, the amount received, the particulars of the
transaction, and the signature of the one who received the cash.
 Sales Invoice and Purchase Invoice - After a sale has taken place, the seller fills in the business
form called the invoice. The invoice shows the date of the sale, name and address of the seller, name
and address of the buyer, terms of the sale, list of articles bought with the unit price and entire cost of
each, total amount of the invoice, and method of shipment.
 Credit Memorandum - If his claim is admitted as valid, the seller sends him a credit
memorandum, which shows the amount by which his account is reduced. Credit memorandum is often
shortened to credit memo.
 Promissory Notes - A promissory note is a written promise signed by one party,
called the maker, to pay a certain specified sum to another, called the payee, at a certain future
time.
Other receipts:

• Bank deposit slips and checks

• Check .
• Cash register slips
• Miscellaneous bills
 Propietor's Investment and Withdrawal
Investment of merchandise
-When merchandise is part of the owner’s initial investment, the said investment must be debited to the
Merchandise Inventory account whether the company is using perpetual or periodic inventory system.
But if the investment of merchandise was made during the normal operation of the business, i.e., as an
additional investment, the said investment must be debited to Merchandise Inventory, if the company is
using perpetual inventory system and Purchases if they are using the periodic inventory system.
Withdrawal of merchandise
- If the company uses the periodic inventory system, withdrawals of the owner in the form of
merchandise for personal use will be credited to the Purchases account at cost. This is done in order to
maintain the original balance of the Merchandise Inventory account, which was computed by means of
actual physical count at the end of the accounting period. On the other hand, the Merchandise Inventory
account is credited if the firm uses the perpetual inventory system
 Purchase of Merchandise
• Purchase Requisition
-This completed form, bearing the signature of some responsible person authorized to approve
such requisitions, is next sent to the purchasing agent or purchasing department of the company.
• Purchase Order
-The purchasing department, after selecting the firm from whom the goods or services are to
be bought, prepares a second business paper called a purchase order.
• Purchase Invoice
-This purchase invoice becomes the basis for recording the purchase in the journal just as it is
in the case of the informal procedure described for small firms.
• Purchases
-The cycle of a merchandising entity begins with cash, which is used to purchase inventory.
Purchases, in the accounting sense, are only those items of merchandise inventory that a firm buys
to resell to customers in the normal course of business.
Below is a sample purchase invoice:
 Purchase Returns and Allowances
Debit Memorandum
- When merchandise bought is returned, or an allowance is requested,
the buyer informs the seller in writing.
 Purchase Returns and Allowances
• Credit Memorandum
-If the return is accepted or the allowance is granted by the seller, the seller usually sends to
the buyer such acceptance or grant in writing through a printed form called credit memorandum.
Assume the following transactions:

Jan. 8, 20X1 - Labrador Store returned P343 worth of merchandise to De Asis Trading. This was
accepted by De Asis Trading (see sample debit memorandum).

Journal entry to record the return:

Jan. 8 Accounts Payable - De Asis Trading 345
Purchase returns and allowances 345
Merchandise returned to De Asis Trading.

Note: As a result of the returns, the debt to De Asis Trading was diminished, thus, the seller’s
account was debited.
• Jan. 8 Cash 345
Purchase returns and allowances 345
Cash refund for the return of goods

However, if the return on Jan. 8 was not refunded in cash, then the
journal entry should have been:

Jan. 8 Accounts Receivable - De Asis Trading 345

Purchase returns and allowances 345
To charge De Asis Trading for goods returned.
 Discounts on Purchases
• Cash Discounts -Special deductions from the prices of goods bought granted by the seller to
the buyer to induce the latter to pay within a specified period.
Example:
Jan. 5, 20X1 Labrador Store bought merchandise from De Asis Trading
P8,750. Terms: 2/10, n/30
The terms of the above transaction mean that if the invoice is paid within 10 days after the date
of the invoice (Jan. 6 to 15), Labrador Store may pay the invoice amount less a discount of 2%.
This is computed as follows:

Amount of invoice P8,750

Less: 2% thereof 175
Amount to be paid P8,575
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Other examples of terms attached to a credit invoice are:

• 5/10, n/30 - There is a 5% discount if paid 10 days after invoice date, net amount if paid
beyond the 10 days but within 30 days.

• 2/10, 1/15, n/30 - There is a 2% discount if paid 10 days after invoice date, 1% discount if
paid within fifteen days, net amount if paid beyond 15 days but within 30 days.

• 2/5EOM, n/45 - There is a 2% discount if paid 5 days after end of the month, net amount if
paid beyond 5 days after end of month but within 45 days from the invoice date.

• 2/10, n/EOM - There is a 2% discount if paid 10 days after invoice date, net amount if paid
beyond the 10 days but up to end of the month only.

• n/60 - No cash discount is offered. The full amount must be paid within 60 days from invoice
date.
 Recording of Cash Discounts
• Below are sample transactions involving the recording of cash discounts:

Transactions 20X1

Jan. 4 - Mary Store purchased merchandise from Uniwide Trading,P10,000 .Terms 2/10, n/30
7 - Mary Store made a partial payment of P5,000 to Uniwide Trading
14 - Mary Store paid in full its account to Uniwide Trading
18 - Mary Store purchased merchandise from SM Superstore worth P25,000. Terms:
P10,000 down payment, balance 2/10, 1/15, n/30.
21 - Mary Store returned to SM Superstore P500 cost of merchandise acquired on Jan. 18.
SM Superstore in return issued a credit memo with the same amount-signifying acceptance of the
return made by Mary.
31 - Mary Store settled in full its account with SM.
 • Trade Discounts - Deductions from the list prices of merchandise offered by
the seller to the buyer to encourage the latter to buy in bulk or large volume/quantity.
 Sales
• Cash Sales -Retailers like drug stores, sari-sari stores, department stores and
restaurants will at times sell their merchandise on cash basis.

• Sales on Account - Most business establishments are now extending credit to

their customers to become competitive. In the advent of what we call “plastic
money”, i.e., credit cards, selling on account has been the current trend whether
you are a manufacturing business, wholesaler or retailer.
 Sales returns and allowances
• Entries - The effect of a sales return or allowance is to reduce the amount of sales and the amount
of receivable from the customer. If Sales account is debited for the return or allowance, then, the
said account will show only net sales.

the entry to record sales returns or allowances is:

Discounts on Sales
 Freight on Merchandise
• Freight-in- is the title used in recording the freight or transportation charges on
merchandise bought, and Freight-out, for the freight on merchandise sold.

• F.O.B shipping point - means that the goods are free on board up to the shipping point.

• F.O.B destination - means that the goods are free on board up to the point of destination.

• Freight prepaid - means that the seller has paid the shipping company the transportation
expenses up to the point of destination.

• Freight collect - means that the buyer should pay the shipping company upon the
delivery of the goods at the point of destination.
 Income Statement
Below are the terms used in the income statement:

• Revenue from Sales. The total amount charged to customers for merchandise sold, for cash and on
account, is reported in this section.

• Cost of Goods (Merchandise) Sold. The cost of merchandise sold during the period may also be
called Cost of Goods Sold or the Cost of Sales. It is computed by adding to the beginning inventory the
net cost of purchases to yield Total Goods Available for Sale.

• Gross Profit. The excess of net sales over the cost of goods sold is called gross profit. It is sometimes
called gross profit on sales or gross margin.
• Operating Expenses. Most merchandising businesses classify operating expenses as either distribution
expenses, administrative expenses or other operating expenses.