Merchandising Business

Transactions of Merchandising Businesses

The focus of this chapter is bookkeeping for the transactions of merchandising
businesses. The business purchases products from its suppliers which it sells to its
customers for a profit. Businesses in this type includes the following:
 Sari-sari stores, groceries and market stalls
 Hardware
 Appliance store
 Gadgets and electronics store
 Fashion and dress shop
 Sports equipment store
 Online product sellers

In contrast to a service business, a merchandising business is more complex due to

the presence of inventory. The inventory items needed to be purchased,
transported, kept and then sold to the customers.
In purchasing merchandise inventory, the company pays for the purchase price of
the goods. There could be an agreement for credit terms between the buyer and
seller. The buyer might be offered discounts within a certain period to encourage
early or prompt payments. This is also true in selling the merchandise inventory.
The company might also offer credit terms and discounts to its customers.
In buying and selling the merchandise inventory, there might be some returns of
goods that needed to be accounted for. Also, in buying and selling, the inventory
items need to be transported and thus, freight costs are incurred. These freights
costs may be charged to the buyer or to the seller depending on their agreement.
Purchasing and keeping merchandise inventory requires some internal control
procedures in order to maintain the right quantity or level of goods on hand. One of
the basic internal control is the recording and monitoring of the cost and quantity of
merchandise inventory. Purchases should be properly recorded on a timely basis in
the books of accounts. Also regular physical counting is done to match the recorded
quantity and amount of inventory with the actual quantity and amount of inventory.
This need for the proper recording and control of the movement of inventory that
two systems of inventory were being commonly used: the periodic inventory system
and the perpetual inventory system. We will study these inventory systems on this
chapter.
The study of this chapter is very important in your professional growth and
development as an accountant. The topic is not complicated nor intricate, but
requires a careful focus and attention so that you can comfortably include this in
your competencies for your exams, in your work, in your public practice or in your
own business.
Items related to Purchases and Sales of Merchandise Inventory:
 Returns and Allowances
 Payment Terms
 Discounts
 Freight or Shipping Costs
 Value-Added Tax
 Inventory System

Payment Terms and Discounts

Payment Terms
Examples of payment terms:
 Cash
 COD
 n/30
 n/EOM
 2/10, n/30
 3/5, 2/10, n/30
 3/EOM, n/45
 4/10 EOM, n/60

Discounts
Types of discounts:
1. Trade Discount – a reduction from the list price or catalog price offered as an
incentive for the customer to buy in larger quantities.

Example:
List Price 100 000 not recorded
TD 10% 10 000 not recorded
Invoice price 90 000 recorded
CD 2% 1800 recorded
Net Payment 88 200 recorded

2. Cash/Payment Discount – a reduction from the invoice price offered as an

incentive for early or timely payment of the buyer.

Accounting Methods for Discounts:

1. Discount Taken Method
2. Discount Not Taken Method
 3. Discount Offered Method

Trade Discount Cash/Payment Discount

Reason Incentive to buy in large Incentives to pay on time
quantities
Allowed Cash or Credit sales Cash Payment Only
Time Allowed Upon purchase Upon Payment Only
Accounting Not Recorded Recorded

Discount Taken/ Gross Method

3/1 Purchased from supplier Z 150 000 merchandise inventory on terms 20, 10,
2/15, 120, n/30.
3/5 Sold to customer A merchandise inventory on account for 70 000 at 1/10,
n/20.

3/7 Collected from customer A

3/8 Sold to customer B merchandise inventory on account for 80 000 at 2/7, 1/10,
n/20

3/19 Collected from customer B.

3/20 Paid Supplier Z.

List Price 150 000

TD: 20% 30 000
120 000
TD 10% 12 000
Invoice Price 108 000
Cash Discount 1080
Net Payment 108 920

3/1 Purchase 108 000

Accounts Payable 108 000

3/5 Accounts Receivable 70 000

Sales 70 000

3/7 Cash 69 300

Sales Discount (70 000 x 1%) 700
Accounts Receivable 70 000

3/8 Accounts Receivable 80 000

 Sales 80 000

3/19 Cash 80 000

Accounts Receivable 80 000

3/20 Accounts Payable 108 000

Purchase (108 000 x 2%) 1080
Cash 106 920

3/25 Accounts Payable 108 000

Cash 108 000

Discount Not Taken/ Net Method

3/1 Purchased from supplier Z 150 000 merchandise inventory on terms 20, 10,
2/15, 120, n/30.

3/5 Sold to customer A merchandise inventory on account for 70 000 at 1/10,

n/20.

3/7 Collected from customer A

3/8 Sold to customer B merchandise inventory on account for 80 000 at 2/7, 1/10,
n/20

3/19 Collected from customer B.

3/20 Paid Supplier Z.

List Price 150 000

TD: 20% 30 000
120 000
TD 10% 12 000
Invoice Price 108 000
Cash Discount 2% 2160
Net Payment 105 840

3/1 Purchase 105 840

Accounts Payable 105 840

3/20 Accounts Payable 105 840

Purchase Discount Lost 1080
 Cash 106 920

3/5 Accounts Receivable 69 300

Sales 69 300

3/7 Cash 69 300

Accounts Receivable 69 300

3/8 Accounts Receivable (80K X 98%) 78 400

Sales 78 400

3/19 Cash 80 000

Sales Discount Forfeited 1 600
Accounts Receivable 78 400

Discount Offered Method

Freight Charges

In purchasing and selling, merchandise inventory needs to be shipped from the

seller to the buyer. The costs of shipping the goods may be charged to the buyer or
the seller depending on their agreement. There are two most common freight
charge agreement:
1. Free on board, Shipping point (FOB-SP), and
2. Free on board, Destination (FOB-D)
To easily understand these terms, just take note that this is the transfer of
ownership to the goods:
 In FOB shipping point, the ownership of the goods is being transferred from
the seller to the buyer from the seller's shipping point. Therefore, the buyer
shoulders the freight charges.
 In FOB destination, the ownership of the goods is being transferred from the
seller to the buyer upon the arrival of the goods to the destination (buyer).
And therefore, the seller shoulders the freight charges.

FOB Shipping Point:

Owner of the merchandise: Buyer
Freight should be paid by: Buyer

FOB Destination:
Owner of the merchandise: Seller
Freight should be paid by: Seller

Account to be used for freight charges:

Buyer: Freight in
Seller: Freight out

Periodic and Perpetual Inventory Methods

There are two methods of accounting for the inventory of merchandising

businesses, namely periodic inventory method and perpetual inventory method.

Periodic Inventory Method

The Periodic Inventory Method is generally used when the individual inventory items
have small peso values.

Under this method, the business maintains temporary accounts like purchases,
purchase returns, and sales returns. At the end of the accounting period, these
temporary accounts are used to determine the amount of inventory available for
sale.

The value of the ending balance of inventory is determining by conducting a

physical count multiplied by the corresponding unit costs. Physical inventory count
at the period end is mandatory under the periodic inventory system. Without such
count, cost of sales (or cost of goods sold) cannot be determined therefore,
businesses have to conduct this activity at least once a year or at every end of an
accounting period.

Perpetual Inventory Method

This inventory method is generally used when the individual inventory items have
relatively large values. This method requires the use and maintenance of stock
cards.
Under this method, the inventory account is continually updated for each inventory
transaction. For every journal entry of sales, a corollary journal entry for the cost of
inventory sold is also recorded. Purchases and returns are recorded in directly in the
Merchandise Inventory account. Physical count of inventory is conducted to confirm
the balances in the stock cards.
 EXERCISE. PERIODIC INVENTORY SYSTEM (SALONGA)

Salonga Marketing is established by Mr. J. Salonga. He opted to use the periodic

inventory system. The business had the following transactions for the month of
February:

JOURNALIZING

3 Cash 80 000
Mr. Salonga, Capital 80 000
To record capital investment

4 Equipment 20 000
Cash 20 000
To record purchase of computer equipment

5 Purchase 30 800
Accounts Payable 30 800
To record purchase of merchandise inventory
6 Supplies 3 000
Cash 3 000
To record purchase of office supplies

7 Accounts Receivable 58 500

Sales 58 500
To record sales on account

10 Accounts Payable 400

Purchase Returns & Allowances 400
To record items returned

11 Accounts Payable 30 400

Purchase Discount 608
Cash 29 792
To record payment of account

12 Cash 57 330

Sales Discount 1170

Accounts Receivable 58 500
To record collection on Feb 7

13 Purchase 38 900
Cash 38 900
To record purchase merchandise

15 Salaries Expense 7 000

Cash 7 000
To record payment of salaries

17 Cash 12 000
Notes Payable 12 000
To record bank borrowing

18 Cash 500
Purchase Return and Allowance 500
To record cash refund from purchase returns

19 Freight In 800
Cash 800
To record freight charge on purchase

20 Cash 51 600
Sales 51 600
To record cash sales
24 Salonga, Drawing 12 000
Cash 12 000
To record capital withdrawal

25 Sales Returns and Allowance 1 500

Cash 1 500
To record refunds

28 Rent Expense 3 000

Salaries Expense 7 000
Utilities Expense 1138
Cash 11 138
To record of expenses

28 No journal Entry
FINANCIAL STATEMENT
SALONGA MARKETING
STATEMENT OF COST OF GOODS SOLD
For the period ended February 28, 2021
Merchandise Inventory, Feb 01 0
Add: Net Purchase
Purchases 69 700
Purchase Returns and Allowance (900)
Purchase Discount (608)
Freight In 800 68 992
Total Goods Available for Sale 68 922
Less: Merchandise Inventory, Feb 28 (17 200)
COST OF GOODS SOLD 51792

SALONGA MARKETING
INCOME STATEMENT
For the period ended February 28, 2021
Sales 110,100
Less: Sales Returns & 1500
Allowance 1107 (2670)
Sales Discount
Net Sales 107430
Less: Cost of Goods Sold (51 792)
Gross Profit 55 638
Less: Operating Expenses
Rent Expense 3000
Salaries Expenses 14 000
Utilities Expenses 1 138 (18 138)
NET PROFIT 37 500

SALONGA MARKETING
STATEMENT OF CHANGES EQUITY
For the period ended February 28, 2021
Salonga, Capital Feb 1 0
Add: Initial Capital 80 000
Investment 37 500 117 500
Net Income
Total 117 500
Less: Capital Withdrawal (12 000)

Salonga, Capital Feb 28 105 500

SALONGA MARKETING
STATEMENT OF FINANCIAL POSITION
 For the period ended February 28, 2021
ASSETS
CURRENT ASSETS
Cash 77 300
Merchandise Inventory 17 200
Supplies 3 000
Total Current assets 97 500

NON-CURRENT ASSETS
Equipment 20 000
TOTAL ASSETS 117 500
LIABILITY AND EQUITY
LIABITITES
Notes Payable 12 000
EQUITY
Salonga, Capital 105 500
TOTAL LIABILITIES AND 117 500
EQUITY

SALONGA MARKETING
STATEMENT OF CASH FLOW
Cash Flow from Operating
Activities
Cash received from:
Collection of accounts 57 330
Refund from suppliers 500
Cash Sales 51 600 109 430
Payment for:
Office supplies (3 000)
Merchandise Inventory (29 792 + 38 900)
Operating Expenses (7 000 + 11 138)
Freight In (800)
Payment to customers (1 500) (92 130)
Tota Cash Flow from operations 17 300

Cash Flow from Investing

Activities
Purchase of equipment (20 000)

Cash from Financing Activities

Capital Investment 80 000
Bank Borrowing 12 000
Capital Withdrawal (12 000) 80 000

NET INCREASE (DECREASE) IN 77 300

CASH
Cash, Feb 1 0
Cash, Feb 28 77 300
 EXERCISE. PERPETUAL INVENTORY SYSTEM (SALONGA)

Salonga Marketing is established by Mr. J. Salonga. He opted to use the perpetual

inventory system. The business had the following transactions for the month of
February:

JOURNALIZING

3 Cash 80,000
Salonga, Capital 80,000

4 Equipment 20,000
Cash 20,000

5 Merchandise Inventory 30,800

Accounts Payable 30,800

6 Supplies 3,000
Cash 3,000

7 Accounts Receivable 58,500

Sales 58,500
 Cost of Goods Sold 27,892
Merchandise Inventory 27,892

10 Accounts Payable 400

Merchandise Inventory 400

11 Accounts Payable 30,400

Merchandise Inventory 608
Cash 29,792

12 Cash 57,330
Sales Discount 1,170
Accounts Receivable 58,500

13 Merchandise Inventory 38,900

Cash 38,900

15 Salaries Expense 7,000

Cash 7,000

17 Cash 12,000
Notes Payable 12,000

18 Cash 500
Merchandise Inventory 500

19 Merchandise Inventory 800

Cash 800

20 Cash 51,600
Sales 51,600

Cost of Goods Sold 24,300

Merchandise Inventory 24,300

24 Drawing 12,000
Cash 12,000

25 Sales Returns 1,500

Cash 1,500

28 Utilities 1,138
Rent 3,000
Salaries Expense 7,000
Cash 11,138
FINANCIAL STATEMENT