TYPES OF SPECIAL JOURNALS

1. SALES JOURNAL – records all sales of

merchandise on account.
2. CASH RECEIPTS JOURNAL – records all cash
collections (including cash sales).
3. PURCHASES JOURNAL – records all purchases
of merchandise on account.
4. CASH PAYMENTS JOURNAL – records all cash
payments (including cash purchases).
 MERCHANDISING OPERATIONS
Learning Objectives:
After studying this topic, you should be able
to:
1. Describe merchandising activities and
identify the income components for a
merchandising entity.
2. Distinguish between income statements of
service and merchandising entities.
3. Illustrate operating cycle of a merchandising
entities.
4. Be familiar with the different source
documents being used by merchandising
entities.
5. Compare cash discounts and trade discounts.
6. Summarize the treatment of transportation
costs considering the freight terms FOB
Destination, FOB Shipping Point, Freight
Prepaid and Freight Collect.
7. Explain the inventory systems of merchandising
entity.
8. Analyze and record transactions for
merchandise purchases under a periodic
inventory system.
9. Analyze and record transactions for
merchandise purchases under a periodic
inventory system.
10. Compare and contrast the entries needed
for the periodic and perpetual inventory
system.
COMPARISON OFINCOME STATEMENT
SERVICE MERCHANDISING
Income Statement Income Statement
Revenues from Services Net Sales
minus minus
Expenses Cost of Sales
equals equals
Profit Gross Profit
minus
Expenses
equals
Profit
OPERATING CYCLE OF A MERCHANDISING
BUSINESS
The merchandising entity purchases inventory,
sells the inventory and uses the cash to
purchase more inventory – and the cycle
continues.
 For cash sales, the cycle if from cash to
inventory and back to cash.
 For sales on account, the cycle is from cash to
inventory to accounts receivable and back to
cash.
 Sales on Account Cycle

Cash

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Accounts Sales on account Inventory

Receivable
 Cash Sales Cycle

Cash

Cash Sales
Purchases

Inventory
 SOURCE DOCUMENTS
1. Sales Invoice – is prepared by the seller of
goods and sent to the buyer.
2. Bill of lading – is a document issued by the
carrier – a trucking, shipping or airline – that
specifies contractual conditions and terms of
delivery such as freight terms, time, place and
the person named to received the goods.
3. Statement of Account – is formal notice to the
debtor detailing the accounts already due.
4. Official receipt – evidences the receipt of cash by
the seller or the authorized representative. It notes
the invoices paid and other details of payment.
5. Deposit slips – are printed forms with depositor’s
name, account number and space for details of
the deposit.
6. Check – is a written order to a bank by a
depositor to pay the amount specified in the check
for his checking account to the person named in
the checked.
 Payor – the entity issuing the check.
Payee – receiver of the check.

7. Purchase requisition – is a written

request to the purchaser of an entity
from an employee or user department of
the same entity that goods be purchased.
8. Purchase order – is an authorization made by
the buyer to the seller to deliver the
merchandise as detailed in the form.
9. Receiving report – a document containing
information about goods received from a vendor.
10. Credit memorandum – is a form used by the
seller to notify the buyer that his account is being
decreased due to errors or other factors requiring
adjustments.
 STEPS IN A PURCHASE TRANSACTION
1. When certain items are needed, the user
department fills in a purchase requisition form
and sends it to the Purchasing Department.
2. Purchasing Department prepares a purchase
order after checking with the price lists,
quotations, or catalogs of approved vendors.
3. After receiving the PO, the seller forwards an
invoice to the purchaser upon shipment of the
merchandise. The invoice – called a Sales
Invoice by the seller and Purchase Invoice by
the buyer – defines the terms of the
transactions.
4. Upon receiving the shipment of merchandise,
the purchaser’ receiving department sees to it
that the terms in the PO are complied with and
prepares a receiving report.
5. Before approving the invoice for payment, the
Accounts Payable Department compares copies
of the purchase requisition, purchase order,
receiving report and invoice to ensure that
quantities, descriptions and prices agree.
* All of the above forms – purchase
requisition, PO, invoice and RR/DR – are source
documents.
 TERMS OF TRANSACTIONS
Credit Period – a period of time allowed for
payment of goods sold on account.
- usually described as net credit
period or net terms.
- ex. “n/30” – credit period of 30 days.
“n/10 eom – due 10 days after end of
the month.
Cash Discounts – some businesses give cash
discounts for prompt payment.
- computed on the net amount after the
trade discount.
Discount Period – period covered by the
discount.
- cash discount is designated by notation
“2/10” – which means the buyer may avail 2%
discount if invoice is paid within 10 days from the
invoice date.

* Cash discounts are called PURCHASE DISCOUNT

from the buyer’s viewpoint and
SALES DISCOUNTS from the seller’s viewpoint.
TRADE DISCOUNTS
- encourage the buyers to purchase
products because of markdowns from
the list price.
- trade discounts should not be confused
with cash discounts. This type of
discount enables the suppliers to vary
prices periodically without the
inconvenience of revising price lists and
catalogs.
Example: G12 Technologies quoted a list price of
P2,000 for each 120 gigabyte flash drive, less a
trade discount of 20%. If Taramedativo Video
Shop ordered seven units, the invoice price
would be as follows:
List Price (P2,000 x 7) P14,000
Less: 20% Trade Discount 2,800
Invoice Price P11,200
Trade discounts may be stated in a series.
Assume instead that the trade discount given
by G12 Technologies to Taramedativo Video
Shop is 20% and 10%, the invoice price will
be:
List Price (P2,000 x 7) P14,000
Less: 20% Trade Discount 2,800
Balance P11,200
Less: 10% Trade Discount 1,120
Invoice Price P10,080
 TRANSPORTATION COSTS
Who SHOULDERS
Freight Terms the Transportation Who PAYS the
Costs? Shipper?

FOB Destination,
Freight Prepaid Seller Seller

FOB Destination,
Freight Collect Seller Buyer

FOB Shipping Point,

Freight Prepaid Buyer Seller

FOB Shipping Point,

Freight Collect Buyer Buyer
Transportation in / Freight in
- shipping cost borne by the buyer under periodic
inventory system.
- in accounting, the cost of an asset – the
merchandise inventory – includes all costs (e.g.
shipping costs) incurred to bring the assets to its
intended use.
Transportation out / Freight Out
- shipping cost borne by the seller. This account
which is also called delivery expense, is an
operating expense in the income statement.
 INVENTORY SYSTEMS
PERIODIC INVENTORY PERPETUAL INVENTORY
SYSTEM SYSTEM
Primarily used by businesses that More advisable for firms that sell
sell relatively inexpensive goods low-volume, high-priced goods
and not yet using computerized such as motor vehicles, jewelry and
scanning systems to analyze goods furniture.
sold.

No entries are made to the

inventory account as the Inventory account is continuously
merchandise is bought and sold. updated.
When goods are purchased, a separate set Updating the inventory
of accounts – PURCHASES, PURCHASES
DISCOUNTS, PURCHASES RETURNS AND account at the time of
ALLOWANCES AND TRANSPORTATION IN purchase and at the time of
is used to accumulate info. on net cost of sale.
purchases.
GROSS SALES
- Consist of total sales for cash and on credit during
an accounting period.

Journal entry to record sale of merchandise for cash

Sept. 16 Cash 25,000

Sales 25,000

To record sale
of merchandise for
cash
Journal entry to record sale of merchandise on
credit or on account
Sept. 16 Accounts Receivable 25,000
Sales 25,000
To record sale of
merchandise on credit

Sales Discounts
Assume that T. Calaguas Traders sold merchandise
on Sept. 21 for P3,000; terms 2/10, n/60.
Sept. 21 Accounts Receivable 3,000
Sales 3,000
To record sale on
credit; terms 2/10,n/60
The customer may take advantage on the discount
anytime on or before Sept. 30, which is 10 days
from the invoice date/date of transaction. If the
client paid on Sept. 30, the entry is:
Sept. 30 Cash 2,940
Sales Discounts 60
Accounts Receivable 3,000
To record collection on
the Sept. 20 sale, discounts
taken.

At the end of the accounting period, the sales

discounts for the period is considered a contra-
income account deducted from Gross Sales.
Sales Returns and Allowances
- buyers may be dissatisfied with merchandise
received either because the goods are damaged or
defective, of inferior quality or not in accordance
with their specifications.
- in such cases, the buyer may return the goods to
the seller for credit if the sale was made on credit
or for cash refund if the sale was for cash.
- alternatively, the seller may just grant an
allowance or deduction from the selling price.
- a high sales returns and allowance is not
commendable because it may signal poor quality
of goods.
Each return and allowance is recorded as a debit to
an account called sales returns and allowances.
Sept. 17 Sales Returns & Allowances 760
Accounts Receivable
760
(or Cash)
To record return or
allowance on unsatisfactory
merchandise

* The seller issues the customer a credit

memorandum. (i.e. Accounts Receivable or Cash
is credited, which is a formal acknowledgement
that the seller has reduced the amount owed by
the customer. SR&A is a contra-income account.
Transportation Out
- when the freight term is FOB destination,
the seller shoulders the transportation
costs;
- when the term is FOB shipping point, the
buyer bears the shipping costs.
Case No. 1. Assume that T. Calaguas Traders sold
merchandise totaling P17,000 FOB destination,
freight prepaid; terms 2/10, n/30. The
transportation costs amounted to P1,900.
Nov. 25 Accounts Receivable 17,000

Transportation out 1,900

Sales 17,000

Cash 1,900

Sales on account; terms

2/10,n/30
If the above invoice is collected on Dec. 4, the sales
discount will be P340 (17,000 x 2%).
Transportation out is an operating expense.

Dec. 4 Cash 16,660

Sales Discount 340

Accounts Receivable 17,000

Collection of AR,
discount taken.
 Case No. 2. Assume that T. Calaguas Traders sold
merchandise totaling P17,000 FOB Shipping
point, freight collect; terms 2/10, n/30. The
transportation costs amounted to P1,900.
Nov. 25 Account Receivable 17,000
Sales 17,000
Sold merchandise on
account terms 2/10, n/30
* There is no debit to transportation cost account
since the shipping term provided that the buyer
should shoulder the transportation cost
If the above invoice is collected on Dec. 4, the
sales discount will be P340 (P17,000 x 2%).
Dec. 4 Cash 16,660

Sales Discounts 340

Accounts Receivable 17,000

Collection on
account discount taken
Case No. 3 Now, assume that T. Calaguas Traders sold
merchandise totaling P17,000 FOB Destination, freight
collect; terms 2/10, n/30. The transportation cost
amounted to P1,900. The entry to record this transaction
would be:
Nov.25 Accounts Receivable 15,100
Transportation out 1,900
Sales 17,000
Sales on account; terms 2/10,
n/30, FOB Dest, F. collect P1,900

* Accounts receivable is decreased by the transportation

charges paid by the buyer for the benefit of the seller. If
this invoice is collected on Dec. 4, the sales discount will
be P340 (P17,000x2%) since discount applies to total
Dec. 4 Cash 14,760
Sales Discounts 340
Accounts Receivable 15,100
Collection of accounts
Case No. 4 Assume fruther that T. Calaguas Traders sold
merchandise totaling P17,000 FOB Shipping point,
freight prepaid; terms 2/10, n/30. The transportation
cost amounted to P1,900. The entry to record this
transaction would be:
Nov.25 Accounts Receivable 18,900
Sales 17,000
Cash 1,900
Sales on account; terms 2/10,
n/30, FOB Shpt pt., F. prepd. P1,900

*If this invoice is collected on Dec. 4, the sales discount

will be P340 (P17,000x2%). The discount only applies to
total sales.
Dec. 5 Cash 18,560
Sales Discounts 340
Accounts Receivable 18,900

Collection on account, discount

was taken
COST OF SALES
Cost of sales or cost of goods sold is the largest
single expense of the merchandising business. It
is the cost of the inventory that the entity sold to
customers.
 G12 TRADERS
Statement of Cost of Goods Sold
For the Year Ended Dec. 31, 2018

Merch. Inv, Beg P528,000

Purchases P1,264,000

Less: Purch. ret & allow. P56,400

Purch. disct. 21,360 77,760
Net Purchases P1,186,240
Transportation In 82,360
Net Cost of Purchases 1,268,600
Goods Avail. for Sale P1,796,600
Less: Merch. Inv. – End 483,000
Cost of Sales
The following information pertains to the G12 Traders:

Transportation in P172,000
Merch. Inv, 1/1/2018 1,200,000
Merch. Inv, 12/31/2018 1,900,000
Purchases 4,300,000
PRA 5% of Purchases ?______
PD 3% of Purchases ?______

Required: Prepare statement of Cost of Goods Sold

for the year ended Dec. 31, 2018, in good form.
Determining Ending Merchandise Inventory
On February 18, 2018, a fire destroyed merchandise inventory of
G12 Taramedativo Shirts. The following information was available
from the entity’s accounting office:
Cost of Goods sold P1,260,000
Merch. Inv, 1/1/2018 300,000
Transportation in 39,600
Purchases 1,320,000
Purchase Returns and Allowances 46,200
Purchase Discounts 26,400

Required: Determine the ending inventory at December 31, 2018.

Merchandise Inventory
The inventory of a merchandising entity consists
of goods purchased for resale.
 For grocery store, inventory would be made up
of meats, vegetables, canned goods and other
items.
For a lumber and hardware, it would be plywood,
nails, paints, iron sheets, cement, tools, and
other items.
Merchandising entities purchase their
inventories from manufacturers,
wholesaler/supliers.
The merchandise inventory at the beginning of
the period is called beginning inventory.
Merchandise inventory at the end of accounting
period is called ending inventory.
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 costs.
Purchases
When periodic inventory method is used, all purchases of
merchandise are debited to the purchases account as
shown below.
Journal entry:
Nov. 12 Purchases 15,000
Accounts Payable 15,000
To record purchases of merchandise
terms 2/10, n/30.
* The purchase account, a temporary account, is used
only for merchandised purchased for resale. Purchases
of other assets such as equipment, should be recorded
in the appropriate asset account.
Purchases Returns and Allowances
Sales ret. & allow. in the seller’s book are recorded as
purchases ret. & allow. in the books of the buyer.
Journal entry:
Nov. 14 Accounts Payable 2,000
Purch. ret. & allow. 2,000
Return of damaged merchandise
purchased on Nov. 12
* Purchase ret & allow is a contra account and is
accordingly deducted from purchases.
Purchases Discounts
Merchandise purchase are usually on credit and
commonly involve purchases discounts for early
payment. In relation to the Nov. 12 & Nov. 14
transactions, the payment is recorded as follows:
Journal entry:
Nov. 14 Accounts Payable 13,000
Purch. Discts. 260
Cash 12,740
* Purchase disct. is a contra account that is deducted
from purchases.
Transportation in
Case 1. Assume that T. Calaguas Traders made purchases
totaling P17,000 FOB Destination, freight prepaid;
terms 2/10n n/30. Transportation costs amounted
P1,900.
Journal entry:
Nov. 25 Purchases 17,000
Accounts Payable 17,000
Purchased merch. on account; terms
2/10,n/30; FOB Destination, freight prepaid.
* There is no debit to trans. in since the shipping terms
provided that the seller should shoulder the
transportation cost plus the seller prepaid the freight
If the above invoice is paid on Dec. 4, the purchases discount will be
(P17,000 x 2%). The entry would be:

Journal entry:
Dec. 4 Accounts Payable 17,000
Purchase disct. 340
Cash 16,660
Case 2. Assume that T. Calaguas made purchases
totaling P17,000 FOB Shipping point, freight collect;
terms 2/10, n/30. The transportation cost
amounted to P1,900. The entry is;
Journal Entry:
Nov. 25Purchases 17,000
Transportation in 1,900
Accounts Payable 17,000
Cash 1,900
Purchases on account; terms
2/10,n/30; FOB Shipping pt., freight
collect, P1,900.
If the above invoice is paid on Dec. 4, the purchases discount will be P340
(P17,000 x 2%). Transportation in will form part of the net cost of
purchases.
Journal entry:
Dec. 4 Accounts Payable 17,000
Purchase disct. 340
Cash 16,660
Case 3. Now assume that T. Calaguas made purchases
totaling P17,000 FOB Destination, freight collect;
terms 2/10, n/30. The transportation cost
amounted to P1,900. The entry would be;
Journal Entry:
Nov. 25Purchases 17,000
Accounts Payable 15,100
Cash 1,900
Purchases on account; terms
2/10,n/30; FOB Destination., freight
collect, P1,900.
Accounts payable is decreased by the transportation
charges paid by the buyer for the benefit of the seller. If
this invoice is paid on Dec. 4, the purchases discount
will be P340 (P17,000 x 2%) because the discount
applies to total purchases.

Journal entry:
Dec. 4 Accounts Payable 15,100
Purchase disct. 340
Cash 14,760
Case 4. Assume furhter that T. Calaguas made
purchases totaling P17,000 FOB Shipping pt., freight
prepaid; terms 2/10, n/30. The transportation cost
amounted to P1,900. The entry would be;
Journal Entry:
Nov. 25Purchases 17,000
Transportation in 1,900
Accounts Payable 18,900
Purchases on account; terms
2/10,n/30; FOB Shipping pt., freight
prepaid, P1,900.
If the above invoice is paid on Dec. 5, the purchases discount will
be P340 (P17,000 x 2%). The buyer is not entitled to discounts on
the transportation costs. Discounts apply only to total purchases.

Journal entry:
Dec. 5 Accounts Payable 18,900
Purchase disct. 340
Cash 18,560
OPERATING EXPENSES
Operating expenses make up the third major part
of the income statement for merchandising
entity.
These are expenses, other than the cost of sales,
which are incurred to generate profit from the
entity (merchandising)
“CATEGORIES OF OPERATING EXPENSES”
1. Selling Expenses or Distribution costs
2. Administrative Expenses
3. Other Operating Expenses
 Selling expenses or distribution costs – are expenses
related directly to the entity’s efforts to generate sales.
Examples: Sales salaries and commissions and the
related employer payroll expenses, advertising
and store displays; traveling expenses; store supplies
used; depreciation of store property and equipment;
and transportation out.
 Administrative expenses - expenses related to the
general and administration of the business.
Examples: Officers and office salaries, related
employer payroll expenses; office supplies used;
depreciation of office prop & eqpt., business taxes,
professional services; uncollectible accounts expense
and other general office expenses .
Other operating expenses – expenses that are
not related to the central operations of the
business.
Examples: Expenses and losses from peripheral
or incidental transactions of the enterprise;
example, loss on sale of investments or loss on
sale of property and equipment.
 F.O.B. Shipping Point F.O.B. Destination
OWNERSHIP over the
goods passes from the
seller to the buyer when TITLE passes only when
the inventory leaves the the goods are received
seller’s place of by the buyer at the
business-the shipping point of destination.
point.

BUYER already owns the while in transit, SELLER

goods while still in still the owner of the
transit and therefore goods so the seller
shoulder the shoulders the
transportation cost. transportation cost.
 PERIODIC and PERPETUAL INVENTORY SYSTEMS
COMPARED
TRANSACTIONS PERIODIC PERPETUAL
1. Sold
merchandise on Accounts Receivable 10K
account costing Sales 10K
P8,000 for Accounts Receivable 10K
P10,000; terms Sales 10K Cost of Sales 8K
2/10, n/30: Inventory 8K

2. Customer
returned
merchandise Sales Returns and
costing P400 that Sales Returns and Allowances 500
had been sold on Allowances 500 Accounts Receivable 500
account for P500 Accounts Receivable 500 Inventory
(part of the 400
P10,000 sale): Cost of sales 400
TRANSACTIONS PERIODIC PERPETUAL
3. Received
payment from
customer for
merchandise sold
above (cash Cash 9,310 Cash 9,310
discount taken: Sales Discount 190 Sales Discount 190
(P10,000 sale – Accounts Receivable 9,500 Accounts Receivable 9,500
P500 return) x 2%
discount = P190

4. Purchased on
account
merchandise for
resale for P6,000;
terms were 2/10, Purchases 6,000 Inventory 6,000
n/30 (purchase Accounts Payable 6,000 Accounts Payable 6,000
recorded at
invoice price
TRANSACTIONS PERIODIC PERPETUAL
5. Paid P200
freight on the
P6,000 purchase;
terms were FOB Transportation in 200 Inventory 200
shipping point, Cash 200 Cash 200
freight collect:

6. Returned
merchandise
costing P300 (part Accounts Payable 300 Accounts Payable 300
of the P6,000 Purchase returns Inventory 300
purchase): and allowances 300

7. Paid for
merchandise
purchased, refer
to no. 4 (cash Accounts Payable 5,700 Accounts Payable 5,700
discount taken: Purchase Discounts 114 Inventory 114
(P6,000 – 300 x Cash 5,586 Cash 5,586
2% disct. = P114)
TRANSACTIONS PERIODIC PERPETUAL
8. To transfer the
beginning
inventory balance
to the Income
Summary account
(part of the Income Summary 250,000
closing entries (No entry required)
Inventory 250,000
under the periodic
inventory system)

9. To record the
ending inventory
balance (part of
the closing entries Inventory 231,500
under the periodic (No entry required)
Income Summary 231,500
inventory system):