Accounting Cycle

MERCHANDISING BUSINESS
 Merchandising
• TRADING
• Buy and Sell

 PHYSICAL PRODUCTS ARE SOLD

 Inventory – items intended for
resale
Merchandising Activities
› Selling
› Disposal of goods for profit
› Purchasing
› Buy goods for sale

sold – report as cost of sales

Unsold – merchandise inventory
Merchandising Activities
› Operating
› Management expenses
› General or Administrative
› Other ordinary expenses
 Account titles
purchasing selling
 Purchases  Sales
 Freight In  Freight Out
 Discount  Discount
 Return  Return
 Allowance  Allowance
 Common Business Transactions for a
Merchandising Business
1.Purchasing Inventory
a.Purchase of inventory on cash: - Purchases
Acquiring goods for immediate - Purchase
payment. Discount
- Purchase
b.Purchase of inventory on credit: Returns and
Deferred payment purchases, Allowances
creating accounts payable or notes - Freight-in
- Purchase
payable. Discount
c. Purchase returns and Lost
allowances: Returning goods to - Merchandise
Inventory
suppliers due to defects or other
reasons.
d.Purchase discounts: Cash
discounts taken for credit purchases
 Common Business Transactions for a
Merchandising Business
1.Selling Inventory
a.Cash sales: Immediate sales where
payment is received upfront.
b.Credit sales: Sales on credit, - Sales
leading to accounts receivable or - Sales
notes receivable Discount
- Sales
c. Sales returns and allowances: Returns and
Customer returns or allowances for Allowances
- Sales
damaged or unsatisfactory goods.
Discount
d.Sales discounts: Discounts given Forfeited
to customers for prompt or early - Cost of
payment. Goods Sold
- Freight-out
e.Freight out: Costs incurred to
deliver goods to customers.
Common Business Transactions for a
Merchandising Business

- Merchandise
3.Physical of Ending Inventories Inventory
Establishment of ending - Cost of Goods
Sold
inventories under periodic inventory
system. May also uncover inventory
shortage under perpetual inventory
system.

4. Collection of Receivables
Receipt of cash from accounts
receivable/notes receivable:
Collection of outstanding amounts owed
by customers who bought on credit.
Common Business Transactions for a
Merchandising Business

5. Payment of Payables
a.Payment to suppliers for
inventory: Settling amounts
owed for credit purchases of
inventory.
b.Payment of operating
expenses: Settling recurring
expenses like rent, utilities, and
wages.
 SALES
 Transfer the title of ownership
for a consideration
 Perfected upon delivery of the
thing sold
 Revenue recognized at point of
sale
 Gross profit or mark up to cover
operating cost and residual
amount
 PURCHASES
 Acquisition of Goods for a
consideration
 Perfected upon acceptance of
the thing purchased
 Cost is recognized at point of
purchase
 Incidental cost related to
purchases is part of the cost of
goods sold
 Definitions
 Freight
 – transportation cost in moving
goods
 Return
 – major defect or noncompliance
with desired specification
 Allowance
 – minor defect; no actual return
of goods
 Discount
• Cash discount
• – prompt payment or early
settlement of account
• Trade discount
– quantity discounts (volume
acquisition or bulk buying)
- Never journalized; deducted
from price list to arrive at
invoice price
Terms for Credit Purchases and
Sales
CASH DISCOUNT VS. TRADE
DISCOUNT
 Ways of Recording Cash
Discount
• Gross Method –
• records cash discount only
when actual collection is
made.
• Net Method –
• Assets are recognized net
of discount
 Transportation Cost
Freight On Board, Shipping
Point
Freight On Board, Destination

Freight Prepaid
Freight Collect
 Transportation Terms
FOB, Shipping Point, Freight
Prepaid
FOB, Shipping Point Freight Collect

FOB, Destination, Freight Prepaid

FOB, Destination, Freight Collect
 Inventory System
• Periodic
• - uses purchases for goods
acquired for sale
• - use for specifically
identifiable and relatively
high valued items
• Perpetual
– uses merchandise
inventory
Periodic Inventory System
does not maintain continuous
record of inventory on hand
Uses purchase account for all
inventory acquisition
Inventory end is determined
by actual physical count
 Perpetual Inventory System
maintains continuous record of
physical quantities in its
inventory
Merchandise inventory is used
for all inventory acquisition and
sale.
Stock cards or ledgers are
maintained where quantities and
Both Inventory account
and cost of goods sold
account are maintained
Actual physical count is
still made at year end for
inventory balance
verification.
 Inventory Methods
Specific Identification
First In First Out (FIFO)- both system
Moving average (perpetual)
• Unit price changes every
purchase is made
Weighted Average (periodic)
• Total cost of gas / total # of
goods
 Inventory Valuation
Lower of cost or net realizable value

Cost is the purchase price +

freight + costs directly attributable
to acquisition
NRV is the estimated selling price –
estimated cost of completion and
estimated cost necessary to make
the sale
 Journal Entries
Recording
 Non trading activities are
same with servicing
 Trading related activities
depends on the inventory
system used
 Journal Entries
Periodic Perpetual
 Sale of Goods on account
Account receivable Accounts receivable
Sales sales
Cost of Sales
merchandise inventory
 Sales return and Allowances
Sales Return and Allowances Sales Return and Allowances
Accounts Receivable Accounts Receivable
Merchandise Inventory
cash
 Sales Discounts
Cash Cash
Sales Discount Sales Discount
Accounts Receivable Accounts Receivable
 Journal Entries
Periodic Perpetual
 Purchase of Goods on account
Purchase Merchandise Inventory
Accounts Payable Accounts Payable
 Purchase Return and Allowances
Accounts Payable
Accounts Payable
Purchase Return and
Allowances Merchandise Inventory

 Purchase Discounts
Accounts payable Accounts Payable
Purchase Discount merchandise inventory
cash cash
Shipping Cost
Freight in Merchandise Inventory
Cash
cash
Adjusting Entry (periodic only)
Beginning inventory
Cost of goods sold
merchandise inventory,
beg
Ending Inventory
merchandise inventory, end
cost of goods sold
 Journal Entries
Adjusting Entries
 same with servicing

Closing Entries
 same with servicing
Statement 0f Income - Service Company

Income
Revenue 2200
Other Income 1000 3200
Expenses
Cost of Service 500
Operational Costs 400
Marketing Cost 300
Administrative Cost 600
Financing Cost 100
Investment Cost 200
2100
NET INCOME (LOSS)
1100
 Statement of Income – Trading Entity
Sales 5000
Less cost of sales 1200
Net profit from sales 3800
Add other revenues 1000
Gross Income 4800
Less operating expenses 1300
Income from operations 3500
Less administrative expense 500
marketing expenses 400
financing cost 250
investing cost 130 1280
Net income 2220
 Cost of Sale
Beginning Inventory
5000
Add Net Purchase:
Total Purchases 2500
add freight-in 200
less discount 50
returns 30
allowances 20 100
2600
Goods Available for Sale
7600
Less Inventory, end 1200
Cost of Goods Sold 6400
Statement of Changes in Owner’s
Equity

Capital, Beginning of period

4600
Add: Additional Investments
2400
Net Income for the Period
1200
Total Capital
8200
Deduct: Net Loss 500
 Statement of Financial Position
Current Asset Current Liability
Cash Accruals
Deposits
Receivables
Unearned Income
Inventory
Prepayments Long-Term Liabilities
Property, Plant & Equipment Long Term Portion of Notes
Land Payable
Building Mortgage Payable
Furniture and Fixture Bonds Payable
Equipment and Machinery
Motor Vehicle Total Liabilities
Other Asset
Owner’s Equity
Intangibles
Owner’s capital
Long Term Investments
Long Term Deferred Charges
TOTAL ASSETS TOTAL LIABILITES & OWNER’S EQUITY
 Closing Entries
1. Income xx
Expenses
xx
income summary xx

2. income summary xx
owner’s capital xx

3. owner’s capital xx
owner’s withdrawal xx
Sales subject to 12% VAT
How to compute VAT
 Example – VAT exclusive

VAT Cash Sales Invoice #143 was issued for

P5,400 and 12% VAT was added accordingly.
Entry

Cash 6,048
Sales 5,400
Output Tax 648
(5400 x 12%)
 Example – VAT exclusive

The company accepted the return of

defective goods and cash amounting to
P2,800, VAT inclusive, was returned by the
customer.
Sales Returns and
Allowances 2,500
(P2,800/112%)
Output Tax
(P2,500x12%) 300
 Example – VAT inclusive

The company issued VAT charge Sales

Invoice #144 to Gloria Labandera for
P22,000, terms 3/10 n/30.

Accounts Receivable 24,640

Sales
22,000
Output Tax
2,640
(22,000 x 12%)
 Example – VAT inclusive
Gloria Labandera requested for a Sales
Allowance of P672 for a slight defect on the
merchandise given to her. The seller issued
a credit memorandum to acknowledge the
request. The sale was subject to VAT

Sales Return and allowance 600

(P672 / 112%)
Output Tax (P600x12%) 72
Accounts Receivable
672
 Example – VAT inclusive
Gloria Labandera paid her account in
full within the discount period
Computation of Amount Subject to
Sales Discount
Original Amount of Sale 22,000
Less Sales Allowance 600
Basis of 3% Sales 21,400
Discount
23,248.9
Cash 6
Sales Discount(P21,400
x 3%) 642.00
Output Tax (P642 x 12% 77.04
 Purchases subject to
12% VAT
 Purchases subject to the
12% VAT has the same
treatment as Sales with VAT
only that you are recording
from the point of view of the
buyer. The 12% VAT added to
the buyer’s purchases are
recorded as Input tax.
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