ACCOUNTING FOR

MERCHANDISING BUSINESS

Merchandising companies earn income by buying and selling products or merchandise.

Merchandise represents goods or items intended for sale by a merchandiser in the normal
course of business operations. For a grocery store, merchandise includes meats, vegetables,
canned goods and other items for sale. For a gas station, it could be gasoline, oil, and automobile
parts. Merchandising company purchase their merchandise inventories from wholesalers,
manufacturers, and other suppliers.

A merchandising business differs from a service company. Accounting for a

merchandising business is more complex than a service business. For example, the accounting
system for a merchandiser must be designed to record the receipt of goods for resale, keep
tract of the goods available for sale, and record the sale and cost of the merchandise sold.

The revenue activities of a merchandising business involve the buying and selling of
merchandise. A merchandising business must first purchase merchandise for sale. When this
merchandise is sold, the revenue is reported as sales. The amount of Sales consists of the cost of
merchandise plus mark-up. Sales is credited every time a sale is made whether for cash or on
account.

Sales is the principal source of income of a merchandising business. Net Sales is computed
by deducting the contra accounts Sales Returns and Allowances and Sales Discounts from Gross Sales.
Gross sales is the total of cash sales and sales on account.

Examples 1: S Company sold merchandise for cash to B Company worth

P 10,000.

The entry by S Company to record the sale is:

Cash 10,000
Sales 10,000
To record sale of merchandise for cash

Examples 2: On January 5, S Company sold merchandise to B Company, P 15,000 terms 2/10, n/30.

The entry by S Company to record the sale on account is: (It is understood that the sale is on account
because of the credit terms 2/10,n/30

Accounts Receivable – B Company 15,000

Sales 15,000
To record sale of merchandise on account

An invoice is a document prepared by the seller of the merchandise. The seller calls it sales
invoice. A copy is given to the buyer of merchandise and calls it purchase invoice..

Cost of Goods Sold is the cost or purchase price of the goods that was sold. It is computed by adding
the beginning inventory with the net purchases and deducting the ending inventory. Cost of goods sold
represents the largest deduction in a company’s income statement.

Gross Profit is the difference between the net sales and cost of goods sold. The net sales must be large
enough to recover not only the cost of goods sold but also the operating expenses of the business.

Other Income are revenues not related to the sale of merchandise offered for sale by a business.
Examples are interest income that a business earns on its notes receivable, rent income, dividend income,
commission income, gains from disposal of an old equipment.

Operating expenses of a merchandising business are those expenses incurred in the normal
course of business. They are the ordinary and necessary expenses incurred in the day-to-day operations

1
of the business. They are generally classified into three categories: Distribution costs sometimes called
selling expenses, General and Administrative Expenses and Other Operating Expenses.

Distribution Cost or Selling Expenses are expenses directly related to the selling activities of
the business. Examples are sales salaries, salesmen’s commission, delivery expense, advertising, store
supplies expense, depreciation of store equipment and other store property. General and
Administrative Expenses are expenses incurred in the general operations of the business. Examples
are office salaries, office supplies expense, and depreciation of office property and equipment. Some
expenses like rent expense, taxes expense and insurance expense classified as general and administrative,
may sometimes be allocated between selling and administrative categories determined by management.
Bad Debts Expense or Uncollectible Accounts Expense is generally classified as a General and
Administrative expense.

Below is an example of an Income statement of a merchandising business. The data were taken
from the worksheet presented on the next page.

MAHARLIKA TRADING
STATEMENT OF COMPREHENSIVE INCOME
FOR YEAR ENDED DECEMBER 31, 2022

Sales P 457,500
Less: Sales Returns and Allowances P 5,950
Sales Discounts 3,550 9,500
Net Sales P 448,000
Less: Cost of Goods Sold
Merchandise Inventory, January 1 (beginning) P 90,000
Add(Less): Purchases P 270,000
Freight-in 3,100
Purchase Ret. & Allow. (5,050)
Purchase Discounts (2,450)
Net Purchases 265,600

Total Cost of Goods Available for Sale P 355,600

Less: Merchandise Inventory, Dec.31 (ending) 98,000
Cost of Goods Sold 257,600
Gross Profit P 190,400
Add: Other Income – Rent Revenue/Interest income 10,400
Total Revenue P 200,800
Less: Operating Expenses:
Selling Expenses:
Sales Salaries Expense P 37,625
Uncollectible Accounts Expense 5,625
Advertising Expense 12,500
Depreciation expense-Store Equip. 3,750
Store Supplies Expense 1,475
Miscellaneous Selling Expense 800
Total Selling Expenses P 61,775
General and Administrative Expenses:
Office Salaries Expense P 22,575
Rent Expense 13,000
Insurance Expense 2,700
Depreciation Expense-Office Equip. 1,900
Office Supplies Expense 675
Miscellaneous Administrative Exp. 825
Total Administrative Expenses 41,675
Other expense - Interest expense 5,800
Total Expenses (109,250)
Net Income P 91,550

2
 MAHARLIKA TRADING
STATEMENT OF COMPREHENSIVE INCOME
FOR YEAR ENDED DECEMBER 31, 2022

Trial Balance Adjustments Income statement Balance Sheet

Account Titles Debit Credit Debit Credit Debit Credit Debit Credit
Cash 39,000 39,000
Accounts Receivable 56,250 56,250
Allowance for bad debts - g) 5,625 5,625
Merchandise inventory 90,000 b)98,000 a) 90,000 98,000
Prepaid Insurance 4,850 c) 2,700 2,150
Store Supplies 2,125 (d) 1,475 650
Office Supplies 1,050 (e) 675 375
Store Equipment 66,000 66,000
Accumulated Depreciation -Store Equip. 20,150 (d) 3,750 23,900
Office Equipment 25,000 25,000
Accumulated Depreciation -Office Equip. 8,600 (g) 1,900 10,500
Accounts Payable 33,350 33,350
Salaries Payable - (h) 2,500 2,500
Unearned Rent 20,600 i)10,400 10,200
Notes Payable(final payment 2014) 52,500 52,500
0. Ramos, Capital 77,300 77,300
0. Ramos, Drawing 20,000 20,000
Income Summary - a)90,000 (b) 98,000 90,000 98,000
Sales 457,500 457,500
Sales Returns and Allowances 5,950 5,950
Sales Discount 3,550 3,550
Purchases 270,000 270,000
Purchase Returns and allowances 5,050 5,050
Purchase Discount 2,450 2,450
Transportation -In 3,100 3,100
Sales Salaries Expense 35,700 h)1,925 37,625
Advertising Expense 12,500 12,500
Depreciation Expense- Store Equip. - f)3,750 3,750
Store Supplies Expense - d)1,475 1,475
Uncollectible Accounts Expense - g)5,625 5,625
Miscellaneous Selling Expense 800 800
Office Salaries Expense 22,000 h) 575 22,575
Rent Expense 13,000 13,000
Insurance Expense - c)2,700 2,700
Depreciation Expense-Office Equip. - g)1,900 1,900
Office Supplies Expense - e) 675 675
Miscellaneous Administrative Expense 825 825
Rent Revenue - i) 10,400 10,400
Interest Expense 5,800 5,800
677,500 677,500 217025 217025 481,850 573,400 307,425 215,875
NET INCOME 91,550 91,550
573,400 573,400 307,425 307,425

The adjustments made on the above worksheet were taken from the following data:

a) Merchandise inventory on December 31 P 98,000

b) Unexpired insurance at the end of the year 2,150
c) Supplies on hand on December 31:
Store Supplies 650
Office Supplies 375
d) Depreciation for the year2022
Store Equipment 3,750
Office Equipment 1,900
e) Salaries Payable on December 31:
Sales Salaries 1,925
Office Salaries 575
f) Rent earned during the period 10,400

g) 10% of the outstanding Accounts receivable is

doubtful of being collected.

3
 MAHARLIKA TRADING
Statement of Owner’s Equity
For the Year Ended December 31, 2022

Capital, January 1, 2011 P 77,300

Add: Net Income for the year 91,550
Total P 168,850
Less: Drawing 20,000
Capital, December 31,2011 P 148,850

MAHARLIKA TRADING
Statement of Financial Position
December 31, 2022

Assets

Current Assets:
Cash P 39,000
Accounts Receivable P 56,250
Less: Allowance for uncollectible accounts 5,625 50,625
Merchandise Inventory 98,000
Prepaid Insurance 2,150
Store Supplies 650
Office Supplies 375
Total Current Assets P 190,800

Non-Current Assets:
Store Equipment P 66,000
Less: Accumulated Depreciation 23,900 P 42,100
Office Equipment P 25,000
Less: Accumulated Depreciation 10,500 14,500
Total Non-Current Assets 56,600
Total Assets P 247,400
Liabilities

Current Liabilities:
Accounts Payable P 33,350
Salaries Payable 2,500
Unearned Rent 10,200

Total Current Liabilities P 46,050

Non-Current Liabilities
Notes Payable (due 2014) 52,500

Total Liabilities P 98,550

Capital

G. Ramos, Capital (December 31, 2022) 148,850

Total Liabilities and Capital P 247,400

4
The adjusting entries for Maharlika Trading are presented as follows

Date Description Debit Credit

2011
Adjusting Entries
Dec. 31 Income Summary 90,000
Merchandise Inventory 90,000
To close the balance of the beginning inventory.

31 Merchandise Inventory 98,000

Income Summary 98,000
To record the balance of ending inventory.

31 Insurance Expense 2,700

Prepaid Insurance 2,700
To take up the expired portion of prepaid insurance

31 Store Supplies Expense 1,475

Store Supplies 1,475
To take up store supplies used.

31 Office supplies Expense 675

Office Supplies 675
To take up office supplies used.

31 Depreciation Expense-Store Equipment 3,750

Accumulated Depreciation-Store Equipment 3,750
To take up depreciation of store equipment.

31 Depreciation Expense-Office Equipment 1,900

Accumulated Depreciation-Office Equipment 1,900
To take up depreciation of office equipment.

31 Office Salaries Expense 575

Salaries Payable 2,500
To take up unpaid salaries at Dec. 31.

31 Unearned Rent 10,400

Rent Revenue 10,400
To take up the earned portion of Unearned rent

31 Uncollectible Accounts Expense 5,625

Allowance for uncollectible accounts 5,625
To take up provision for the estimated
uncollectible accounts.

5
The closing entries for The Green Valley Merchandising are as follows:

P
Closing Entries R DEBIT CREDIT
Dec. 31 Sales 457,500
Purchase Returns and Allowances 5,050
Purchase Discounts 2,450
Rent Revenue 10,400
Income Summary 475,400
To close income and expense accounts
with credit balances.

Dec. 31 Income Summary 391,850

Sales Returns and Allowances 5,950
Sales Discount 3,550
Purchases 270,000
Transportation In 3,100
Sales Salaries Expense 37,625
Advertising Expense 12,500
Uncollectible Accounts Expense 5,625
Depreciation Expense-Store Eqpt. 3,750
Store Supplies Expense 1,475
Miscellaneous Selling Expense 800
Office Salaries Expense 22,575
Rent Expense 13,000
Insurance Expense 2,700
Depreciation Expense-Office Eqpt. 1,900
Office Salaries Expense 675
Miscellaneous Administrative Expense 825
Interest Expense 5,800
To close income and expense accounts
with debit balances.

31 Income Summary 91,550

G. Ramos, Capital 91,550
To close the net income to capital.

31 G. Ramos, Capital 20,000

G. Ramos, Drawing 20,000
To close the owner’s drawing account to capital.

Trade Discounts

Merchandisers offer their goods to customers using a catalog where the goods are listed
with their prices. The prices are called catalog or list prices. A trade discount, which is a percentage
reduction from a published list price, may be granted to certain customers such as dealers or
wholesalers for buying frequently and in large quantities. Since a trade discount is granted at the point of
sale, this is immediately deducted from the list price and the difference which is called the invoice
price will be the basis for invoicing and recording.

Both the buyer and seller do not record the list prices and the trade discounts in their books of
accounts. The buyer records purchases and the seller records sales at invoice price.

Illustration: Assume that S Company sold merchandise with a list price of P100,000 subject to a trade
discount of 15% and 10%. The computation of invoice price is as follows:

List price P 100,000

Multiply by complements of trade discounts 85% x 90%
Invoice Price P 76,500

6
The complement 85%is (100%-15%), and the complement 90%is (100%-10%).

The entries of both the seller and the buyer are as follows:

SCompany (Seller) B Company (Buyer)

Accounts Receivable (B Co.) – 76,500 Purchases - 76,500
Sales 76,500 Accounts Payable (S Co.) - 76,500
To record sales on account To record purchases on account

Sales Returns and Allowances

A customer may return merchandise if it is defective, of poor quality, or erroneous

merchandise had been delivered. This is known as sales return. The customer may also be willing to
accept the goods despite of some defects provided a reduction in the invoice price will be granted to
the customer. This is known as sales allowance. Whether the transaction is a sales return or a sales
allowance, the title used to describe both situations is the account Sales Returns and Allowances, a
contra revenue account. The seller issues a document, credit memorandum to evidence sales return.
Credit memo informs the customer that a credit has been made to his/her account for a sales return
or allowance granted.

Example 1: On January 7, S Company issued a credit memorandum to B Company for defective

merchandise returned previously sold on January 5. The merchandise returned is worth P 2,000.
Entry by S Company

Sales Returns and Allowances 2,000

Accounts Receivable- B. Company 2,000
To record merchandise returned by B. Co.

Sales Discount

When goods are sold on credit, both parties should have an understanding as to the amount, mode
and date of payment. These terms are usually printed on the sales invoice and constitute part of the sales
agreement.

To encourage customers to pay their accounts promptly, sellers offer a cash discount. This
discount, is usually given if payments are received within a certain number of days from the date of
sale. From the seller’s viewpoint, cash discount is called Sales Discount.

Some common examples of cash discount terms are:

2/10, n/30 - This means that the buyer may deduct 2% from the amount
due if he pays in full within 10 days from the date of the sales
invoice. If the buyer does not pay within 10 days, then the full
amount must be paid within 30 days from the date of the sales
invoice.

2/10, 1/15, n/30 - This means that the buyer may deduct 2% from the amount
due if full payment is made within 10 days from the date of the
sales invoice, 1 % if full payment is made within 11 to 15 days
from the date of the sales invoice, or the full amount will be
due if payment is made within 16 to 30 days from the date of
the sales invoice.

2/EOM, n/60 - This means that the buyer may deduct 2% from the amount
due if full payment is made by the end of the month.
Otherwise, full payment is due 60 days from the date of the
invoice.

The Sales Discount account is debited by the seller when a customer avails of the cash discount.
Sales Discount is a contra account. Sales Discount and Sales Returns and Allowances account are both
deducted from Sales to arrive at Net Sales in the Income Statement.

7
 Illustration:On January 15, S Company received full payment from B Company.

Entry by S Company

Cash 12, 740

Sales Discount 260
Accounts Receivable-B Company 13,000
Collection within the discount period

Computation:
Accounts Receivable, January 2, sales P 15,000
Less: Returns on January 7 2,000
Balance P 13,000
Less: 2% cash discount(P13,000 x 2%) 260
Amount due from B Company P 12,740

Purchases and Related Accounts

Purchases

Under the periodic inventory system, when a merchandising or trading business buys
merchandise for sale, the Purchases account is debited for the cost of the goods purchased. The
Purchases account is used only for merchandise purchased for sale.

Other assets bought which will be used for operations of the business should be recorded in the
appropriate asset account. For example, when an office equipment is bought, the account Office
Equipment is debited.

Examples 1:On Jan. 2, B Company bought for cash merchandise worth P 8,000

Entry by B Company

Purchases 10,000
Cash 10,000
Purchased merchandise for cash

2: On January 5, B Company bought merchandise from S Company,

P 15,000 terms 2/10, n/30.

Entry by B Company

Purchases 15,000
Accounts payable – S Company 15,000
Purchased merchandise on account

Purchase Returns and Allowances

From the buyer’s viewpoint, the returns and allowances on goods purchased is called Purchase
Returns and Allowances. This is a contra account whose normal balance is credit. The purchaser
may issue a document called debit memorandum to evidence the purchase returns. This will inform
the seller that a debit has been made to the purchaser’s accounts payable for a purchase return or
allowance.

Example 3:On January 7, B Company issued a debit memorandum to S Company for defective
merchandise returned previously purchased on January 5. The merchandise returned is worth P 2,000.

Entry by B Company

Accounts Payable – S Co. 2,000

Purchase Returns and Allowances 2,000
Defective merchandise returned to supplier.

4: On January 8, B Company received a cash refund from S Company for defective

merchandise returned previously purchased on Jan. 1, worth P 1,000.

8
 Entry by B Company

Cash 1,000
Purchase Returns and Allowances 1,000
To record purchase return receiving a
refund.

Purchase Discount

The Purchase Discount account is credited by the buyer when he avails of a cash discount.
Purchase Discount is a contra account similar to Purchase Returns and Allowances. Both have a
normal credit balance and are both deducted from the account Purchases in the income statement.

Example 5: On January 15, B Company paid in full its account to S Company.

Entry (B Company)

Accounts Payable – S Company 13,000

Cash 12,740
Purchase Discount 260
To record payment within the discount period

Computation:

Accounts Payable, January 5 purchases P15,000

Less: Returns on January 7 2,000
Balance P 13,000
Less: 2% cash discount (P13,000 x 2%) 260
Net amount due to S Company P 12,740

Transportation Costs on Merchandise Purchased or Sold

The buyer and the seller must agree on who is responsible for paying any freight costs on
merchandise bought or sold. In computing cost of goods sold, transportation costs play a very important
part. Failure to include transportation costs will affect the cost of goods sold and ultimately affect the net
income. The following terms are important in understanding transportation costs on merchandise:

1. FOB shipping - the term means free on board at shipping point. The
point purchaser or buyer agreed to shoulder all the
transportation costs from the point of shipment up to
the point of destination. The buyer receives title to the
goods at shipping point.

2. FOB Destination - the term means free on board at destination. The seller
agreed to shoulder all the transportation costs from
the point of shipment up to the point of destination.
The buyer receives title to the goods at point of
destination.

3. Freight prepaid - when the seller pays the transportation costs at the
time of shipment.

4. Freight collect - when the buyer pays the transportation costs upon
receipt of the goods at the place of destination.

Assume the following examples:

On January 10, B Company located in Cebu purchased merchandise worth P 100,000 from S
Company located in Manila. Freight costs amounted to P 10,000. Terms: 2/10, n/30. Assume the
following shipping terms:

a) FOB shipping point, freight collect

b) FOB shipping point, freight prepaid
c) FOB destination, freight prepaid

9
 d) FOB destination, freight collect

The following are the entries on both the books of B Company and S Company. Assume in all
cases, B Company paid in full on January 20.

a) Terms of shipment: FOB shipping point, freight collect.

ENTRIES:B CompanyS Company

Jan 10 Purchases 100,000 Accounts Receivable 100,000

Accounts Payable 100,000 Sales 100,000

14 Freight In 10,000 No entry

Cash 10,000

20 Accounts Payable 100,000 Cash 98,000

Purchase Discount 2,000 Sales Discount 2,000
Cash 98,000 Accounts Receivable 100,000

Computation: Computation:
Accounts Payable – S Co. P 100,000 Accounts Receivable – B Co. P 100,000
Less: Cash discount Less: Cash discount
(2% x 100,000) 2,000 (2% x 100,000) 2,000
Net amount due to S Co. P 98,000 Net amount due from B Co. P 98,000

b) Terms of shipment: FOB shipping point, freight prepaid

ENTRIES: B Company S Company

Jan 10 Purchases 100,000 Accounts Receivable 100,000

Accounts Payable 100,000 Sales 100,000

14 Freight In 10,000 Accounts Receivable 10,000

Accounts Payable 10,000 Cash 10,000
To record freight prepaid by the seller. To record freight prepaid.

20 Accounts Payable 110,000 Cash 108,000

Purchase Discount 2,000 Sales Discount 2,000
Cash 108,000 Accounts Receivable 110,000

Note: The shipping term is FOB shipping point, so transportation cost is to be shouldered by the buyer. The seller
prepaid the freight but it is charged to the buyer.

Computation:

Accounts Payable (for mdse. purchased) P 100,000

Accounts Payable (for freight cost of mdse.) 10,000
Total P 110,000
Less: Cash discount
(2% x 100,000) 2,000
Cash to be paid to S Company P 108,000

The 2% cash discount is based on the invoice price of P 100,000.

c) Terms of shipment: FOB destination, freight prepaid

ENTRIES: B CompanyS Company

Jan 10 Purchases 100,000 Accounts Receivable 100,000

Accounts Payable 100,000 Sales 100,000

14 No entry Freight Out 10,000

Cash 10,000

20 Accounts Payable 100,000 Cash 98,000

Purchase Discount 2,000 Sales Discount 2,000
Cash 98,000 Accounts Receivable 100,000

10
 Computation:

Accounts Payable P 100,000

Less: Cash discount
(2% x 100,000) 2,000
Amount to be paid to S Co. P 98,000

d) Terms of shipment: FOB destination, freight collect

B CompanyS Company

Jan 10 Purchases 100,000 Accounts Receivable 100,000

Accounts Payable 100,000 Sales 100,000

14 Accounts Payable 10,000 Freight Out 10,000

Cash 10,000 Accounts Receivable 10,000
Freight paid charge to
the seller.

20 Accounts Payable 90,000 Cash 88,000

Purchase Discount 2,000 Sales Discount 2,000
Cash 88,000 Accounts Receivable 90,000

Computation:

Accounts Payable ( cost of mdse.) P 100,000

Less: Amount paid for freight P 10,000
Cash discount (2% x P100,000) 2,000
Total amount to be deducted 12,000
Net amount due to S Company P 88,000

The Freight In account is used to record freight costs incurred by the buyer in acquiring the
merchandise. Another name for Freight-In is Transportation-In which has a normal debit balance.
Freight In is shown in the Cost of Goods Sold section of the Income Statement. It is added to Purchases
to arrive at the total cost of goods purchased. It is an adjunct account.

The Freight Out account is used to record shipping costs shouldered by the seller for sales of
merchandise to customers. Another term is Delivery Expense which is shown in the Selling Expense
section of the Income Statement.

Accounting for Inventories

The cost of inventory is a significant item in many businesses’ financial statements.

Thus, good internal control over inventory must be maintained. The primary objectives of
internal control over inventory are safeguarding the inventory and properly reporting it in
the financial statements. At the end of a period, some of the merchandise will be in inventory
and some will have been sold. But which costs relate to the sold merchandise and which costs
relate to the merchandise in inventory? An accurate merchandise inventory figure is needed to
determine the cost of merchandise in the inventory and the cost of merchandise sold.
The two accounting systems used for inventories are:
1. Perpetual Inventory System
2. Periodic Inventory System

PERPETUAL INVENTORY SYSTEM

The perpetual inventory system provides detailed records of the quantity and cost of
each item of inventory and continuously shows the cost of goods on hand. This inventory
system has traditionally been used by companies that sell high-unit value items such as
automobiles, computers, stereo, television sets, furniture and other large home appliances since
this system also provides an effective means of control over inventory.

11
 Under the perpetual inventory method, the cost of goods purchased is debited to the
account Merchandise Inventory.

PERIODIC INVENTORY SYSTEM

Under the periodic inventory system, the cost of goods purchased is debited to the
account Purchases. The periodic inventory system is used by merchandising companies with
low value items of inventory. This is used for its simplicity, but it provides little control over
inventory. Any items not included in the physical count of inventory at the end of the period are
assumed to have been sold. Thus, even if items have been stolen, they are assumed to have been
sold and their costs are included in the cost of goods sold.

Comparison of entries prepared under the Periodic Inventory System and Perpetual
Inventory System is presented below:

Transactions Periodic System Perpetual System

a. Purchased merchandise on account, Purchases 50,000 Merchandise Inventory 50,000

P50,000. Terms 2/10,n/30 Accounts Payable 50,000 Accounts Payable 50,000
To record cost of merchandise
purchased on account.

b. Paid transportation cost of merchandise Freight-In 2,000 Merchandise Inventory 2,000

purchased, P 2,000 Cash 2,000 Cash 2,000
Freight cost of goods purchased.

c. Returned P 3,000 worth of goods Accounts Payable 3,000 Accounts Payable 3,000
purchased in (a). Purchase returns and Merchandise Inventory 3,000
Allowances 3,000
Returned goods purchased on account.

d. Paid within the discount period the Accounts Payable 47,000 Accounts Payable 47,000
purchases made in (a). Purchase discount 940 Merchandise Inventory 940
Cash 46,060 Cash 46,060
Payment within the discount period.

e. Merchandise costing P 10,000 were sold on Accounts Receivable 20,000 Accounts Receivable 20,000
account for P 20,000. Terms 2/10, n/30 Sales 20,000 Sales 20,000
Sold merchandise on account.
Cost of goods sold 10,000
Merchandise Inventory 10,000
To record cost of goods sold.

f. Merchandise costing P 2,000 were returned Sales Ret. and Allow. 4,000 Sales Ret. and Allow. 4,000
From transaction (e). The goods were sold for Accounts Receivable 4,000 Accounts Receivable 4,000
P 4,000. Merchandise returned by customer.

Merchandise Inventory 2,000

Cost of goods sold 2,000
Merchandise returned by customer.

g. Collected within the discount period the Cash 15,680 Cash 15,680
sales made in (e), less the return made in (f). Sales Discount 320 Sales Discount 320
Accounts Receivable 16,000 Accounts Receivable 16,000
Received payment from customer
within the discount period.

12
Summary of journal entries prepared for merchandising transactions:
I. Pro-forma entries for transactions relating to purchases of merchandise (under the
Periodic Inventory System)
a. To record purchase of merchandise for cash.
Purchases xx
Cash xx

b. To record merchandise purchased on account.

Purchases xx
Accounts Payable xx

c. To record transportation costs paid on merchandise purchased.

Freight-In or Transportation-In xx
Cash xx

d. Merchandise returned that was purchased for cash receiving a refund.

Cash xx
Purchase returns and allowances xx

e. Merchandise returned that was purchased on account.

(the account has not been paid yet).
Accounts Payable xx
Purchase returns and allowances xx

f. Payment within the discount period.

Accounts Payable xx
Purchase discount xx
Cash xx

g. Payment of an account after the discount period.

Accounts Payable xx
Cash xx

II. For transactions relating to sales

a. Sales for cash
Cash xx
Sales xx

b. Sales on account
Accounts Receivable xx
Sales xx

c. Return by customer of merchandise that was sold for cash paying a

refund.
Sales returns and allowances xx
Cash xx

d. Issuance of credit memo to a customer for merchandise returned

previously sold on account.
Sales returns and allowances xx
Accounts Receivable xx

13
 e. Receipt of payment from customer within the discount period.
Cash xx
Sales Discount xx
Accounts Receivable xx

f. Receipt of payment from customer after the discount period.

Cash xx
Accounts Receivable xx

g.Transportation costs of merchandise sold.

Freight-out or delivery expense xx
Cash xx

Please answer the following: ASSESSMENT ACTIVITIES

IDENTIFICATION

1. It is a business activity of buying and selling products. TRADING

2. A document prepared by the seller of merchandise and sent to the buyer that contain the details of
the sale, such as the number of units, amount due and the credit terms. INVOICE
3. It is a deduction from the gross invoice price that the buyer can take only if the invoice is paid within
a specified period of time. CASH DISCOUNT
4. The term of shipment wherein the seller ships the goods to their destination without charge to the
buyer. FREE ON BOARD AT DESTINATION
5. It is an account whose normal balance is opposite the balance of the account it reduces. CONTRA
ACCOUNT
6. Freight terms where in the seller pays the freight at the time of shipment. FREIGHT PREPAID
7. It is the cost to the seller of the goods sold to customer. COST OF GOODS SOLD
8. It is the quantity of goods on hand and are available for sale. MERCHANDISE INVENTORY
9. When the buyer pays the freight bill upon the arrival of the goods. FREIGHT COLLECTED
10. The account debited under perpetual inventory system to record the cost of goods purchased.
MERCHANDISE INVENTORY
11. The account used to record freight costs incurred in the acquisition of goods. FREIGHT IN
12. The inventory system that uses the account Purchases to record the cost of merchandise
purchased. PERIODIC INVENTORY SYSTEM
13. The inventory system that requires the maintenance of stock card. PERPETUAL INVENTORY
SYSTEM
14. The inventory system that is suitable for companies selling high-price commodities. PERPETUAL
INVENTORY SYSTEM
15. A note issued by the seller to the buyer indicating the amount and the reason for which the
customer’s account is to be credited. CREDIT MEMORANDUM
16. Discounts from the list prices in published catalogs or special discounts offered to certain classes of
buyers. TRADE DISCOUNTS
17. From the buyer’s perspective, returned merchandise or an adjustment for defective merchandise.
PURCHASE RETURN AND ALLOWANCES
18. An account that is added to the balance of a related account. ADJUNCT ACCOUNT
19. The inventory system which provides a continuous record of inventory inflows and outflows.
PERPETUAL INVENTORY SYSTEM
20. Discount taken by the buyer for early payment of account. PURCHASE DISCOUNT

Matching Type
List of Possible Answers

a. Merchandise Inventory l. Operating expenses

b. Sales m. Non-operating expenses
c. Cost of goods sold n. Administrative expenses

14
 d. Gross Profit o. Selling expenses
e. Net Income p. Freight-out
f. Net Loss q. Freight-In
g. Direct write-off method r. Bad debts expense
h. Allowance method s. Income summary
i. Trade discount t. Other income
j. Cash discount u. Multiple-step income statement
k. Credit memo v. Debit memo

C 1. The major expense of a merchandising business.

D 2. Sales minus the cost of goods sold.
A 3. Merchandise on hand at the end of an accounting period.
U 4. A form of income statement that contains several sections, subsections, and subtotals.
O 5. Expenses that are incurred directly in the selling of merchandise.
N 6. Expenses incurred in the administration or general operations of the business.
E 7. The excess of gross profit over total operating expenses.
T 8. Revenue from sources other than the primary operating activity of a business.
M 9. Expenses that cannot be traced directly to operations.
V 10. A note issued by the buyer who is returning the merchandise to the seller indicating the amount debited
to the seller’s account.
Q 11. An adjunct account used to record transportation costs of merchandise purchased.
J 12. A discount to encourage early payment of an account.
S 13. A temporary account used to close the balance of the beginning inventory.
R 14. A loss incurred for failure to collect a receivable.
H 15. The method of accounting for uncollectible accounts that prepares adjusting entry to take up provision
for bad debts.

Fill in the blank

1. Gross sales – Sales discounts and Sales returns and allowances = Net Sales

2. Cost of goods sold = Beginning inventory + net cost of purchases – Ending inventory

3. Gross margin = Net sales - Cost of goods sold.

4. Beginning inventory + Purchases = Net Purchase

5. Net income from operations = Gross profit - Operating expenses.

6. Cost of goods available for sale – Ending inventory = Cost of Goods Sold

7. The cost of goods sold is P 73,500. Beginning and ending inventory is P 19,000 and P 25,000
respectively. If freight-in is P 3,000 and purchase discount is P 5,000, what is the amountof purchases?
P 81,500

8. The cost of goods available for sale is P 232,000. The gross profit is P 67,500. If net sales amounts to
P 227,000 and net purchases is P 197,000, what is the amount of ending inventory? P 72,500

Number 9 and 10 are based from the following information taken from the books of Smart Trading
Company.

Purchases P125,700; Sales, P 423,500; Purchase discount, P 3,785; Sales discount, P 5,765;
Merchandise Inventory (beginning),P29,000; Merchandise inventory (ending), P 17,400; Selling
expenses, P 78,575; Administrative expenses, P 68,475.

9. How much is the gross profit of Smart? P 255,220

10. How much is the net income of Smart? P 108,170

15
MULTIPLE CHOICE.Encircle the letter of your answer
1. Under the periodic inventory system, the account debited to record the cost of merchandise
purchased is
a. Merchandise Inventory c. Purchase returns and allowances
b. Purchases d. Purchase Discount

2. The inventory system that requires the maintenance of stock card is

a. Perpetual system c. FOB destination
b. Periodic system d. FOB shipping point

3. The seller bears the transportation cost of merchandise sold if the terms of
shipment is
a. FOB shipping point c. Freight prepaid
b. FOB destination d. Freight collect

4. The terms of shipment wherein title or ownership to goods is transferred from the seller to
the buyer only upon the buyer’s receipt of merchandise.
a. FOB shipping point c. Freight prepaid
b. FOB destination d. Freight collect

5. The following are contra accounts except

a. Sales discount c. Purchase returns and allowances
b. Allowance for bad debts d. Sales

6. An account that is deducted from its related account

a. Adjunct account c. Transportation-In
b. Contra account d. Purchases

7. Which is classified as adjunct account

a. Sales returns and allowances c. Merchandise Inventory
b. Purchase discount d. Freight-In

8. Which is not reflected in the accounting books.

a. Trade discount c. Sales discount
b. Sales return d. Purchase discount

9. An account that is added to its related account

a. Sales discount c. Purchase discount
b. Adjunct account d. Contra account

10. A discount offered to encourage the early payment of account.

a. Trade discount c. Cash discount
b. Sales discount d. Purchase discount

11. The major expense of a merchandising business is

a. Rent Expense c. Depreciation Expense
b. Cost of goods sold d. Uncollectible accounts expense

12. A purchase discount results from

a. Returning goods to the seller
b. Buying large quantity of merchandise
c. Receiving a purchase allowance
d. Paying within a discount period

13. Noy Company purchased merchandise, the invoice for P 84,500 includes

16
 P 4,500 for freight and terms 3/15,n/30. Merchandise in the amount of
P 12,000 was returned, and the balance of the invoice was paid within the
discount period. How much cash was disbursed by Noy in full settlement of
the account?
a. P 84,500 c. P 72,500
b. P 70,460 d. P 7,000
Answer: 70,325
14. If merchandise purchased on account is returned, the buyer may inform the seller of the
details by issuing:
a. a debit memorandum c. an invoice
b. a credit memorandum d. a bill

15. If merchandise is sold on account to a customer for P 10,000, terms FOB shipping point,
1/10, n/30, and the seller prepays the transportation costs of P 500, the amount of the
discount for early payment would be:
a. P 0 c. P 100
b. P 50 d. P 105

EXERCISES

1-In the table below, indicate in column 1, the classification of each account. In column 2, its
normal balance. And in Column 3, in what financial statement (Balance Sheet or Income
Statement) the account is to be reported.
Normal Reported in which
Title of account Classification Balance financial Statement
Example – Cash asset debit Balance Sheet

1. Merchandise Inventory asset debit Balance Sheet

2. Purchases expense debit Income Statement
3. Freight-In adjunct debit Income Statement
4. Purchase Returns &Allowances contra expense credit Income Statement
5. Purchase Discount contra expense credit Income Statement
6. Sales revenue credit Income Statement
7. Sales Returns &Allowances contra revenue debit Income Statement
8. Sales Discount contra revenue debit Income Statement

2- On October 5, of the current year, Masagana Trading Company purchased merchandise

with a list price of P 85,000. The merchandise is subject to a trade discount of 15%,
10%, 5%, with credit terms of 2/10, n/30

Required: Answer the following questions based from the above data.
1. How much is the invoice price? P 61,744
2. At what amount should Masagana debit Purchases? P 61,744
3. How much is the trade discount? P 23,226
4. How much is the cash discount? P 1,235
5. Up to what date is the discount period? October 15
6. If Masagana make payment on October 15, how much should it
pay in full settlement of its account? P 60,538
7. If payment is made on October 20, how much should Masagana
pay infull settlement of its October 5, account? P 61,744

3- Compute the peso amount of each item indicated by letters below:

17
 Net
Beginning Net Ending Cost of Gross Operating Income
Sales Inventory Purchases Inventory Goods Sold Profit Expenses (Net Loss)
1. P 175,000 a. 60,000 P 85,000 P 60,000 b. 85,000 P 90,000 c. 28,000 P 62,000

2.d. 268,000 P 62,000 e. 164,000 68,000 P 158,000 110,000 40,000 70,000

3. 280,000 72,000 217,000 f. 109,000 g. 180,000 100,000 h. 151,000 (51,000)

4. 440,000 90,000 i 200,00 110,000 j. 180,000 k. 260,000 170,000 90,000

4- The following data for adjustments for merchandise inventory appeared below:

Merchandise Inventory, January 1, 2022 P 435,000

Merchandise Inventory, December 31, 2022 590,000

Required: Using the periodic inventory system, journalize the two

adjusting entries for merchandise inventory.

01-Jan-
22 Income Summary 435,000
Merchandise Inventory 435,000

31-Dec-
22 Merchandise Inventory 155,000
Income Summary 155,000

5-Accounts Receivable of Harrison Company shows a debit balance of P 52,000 at the end of the year. An
aging of the individual accounts indicates estimated uncollectible accounts to be P 5,350. Prepare the
adjusting entry to record the estimated uncollectible accounts under each of the following independent
assumptions: Show supporting computations for the amount of adjustment.

a. The Allowance for Uncollectible Accounts has a credit balance of P 1,400 before
adjustment.

Estimated Uncollectible
Accounts 5,350
Less: Uncollectible
Accounts 1,400
Uncollectible Accounts 3,950

Uncollectible Accounts Expense 3,950

Allowance for Uncollectible Account 3,950

b. The Allowance for Uncollectible Accounts has a debit balance of P 1,400 before
adjustment.

Estimated Uncollectible
Accounts 5,350
Add: Uncollectible
Accounts 1,400
Uncollectible Accounts 6,750

Allowance for Uncollectible Account 6,750

Uncollectible Account Expense 6,750

18
PROBLEM- The following trial balance was taken from the ledger of Goodwill Company. The
balances are as of December 31, 2023

Goodwill Company
Trial Balance
December 31, 2023

Debit Credit
Cash 237,525
Accounts Receivable 178,780
Merchandise Inventory 70,950
Store Supplies 23,411
Prepaid Insurance 13,100
Store Equipment 98,700
Accumulated Depreciation-Store Equipment 17,100
Accounts Payable 45,800
A. Fajardo, Capital 394,644
A. Fajardo, Drawing 13,500
Sales 578,750
Sales Returns and Allowances 2,487
Sales Discount 3,500
Purchases 163,200
Purchases Returns and Allowances 11,655
Purchase Discount 2,856
Freight In 8,761
Sales Salaries Expense 112,500
Other Selling Expenses 34,114
Utilities Expense 32,000
Rent Expense 55,100
Miscellaneous General Expenses 3,177
Total 1,050,805 1,050,805
Required:

1. Prepare an eight-column worksheet.

Use the following data for adjustments:
a) Merchandise inventory at Dec. 31, 2023, P 34,727.
b) Unused store supplies at Dec. 31, 2023, P 2,804.
c) Expired insurance for the year 2023, P 10,700.
d) Estimated depreciation on store equipment, P 5,800.
e) Unpaid sales salaries at Dec. 31,2023, P 11,580
f) 5% of outstanding accounts receivable is doubtful of collection.

2. Prepare the following financial statements:

a) Income Statement (multiple-step)
b) Statement of Capital
c) Balance Sheet

3. Journalize the adjusting entries.

4. Journalize the closing entries.

1. Prepare an eight-colum worksheet

Use the following data for adjustments:
a. Merchandise inventory at Dec. 31, 2023, P 34,727.
b. Unused store supplies at Dec. 31, 2023, P 2,804.
c. Expired insurance for the year 2023, P 10,700.

19
 d. Estimated depreciation on store equipment, P 5,800.
e. Unpaid sales salaries at Dec. 31,2023, P 11,580
f. 5% of outstanding accounts receivable is doubtful of collection.

Trial Balance Adjustments Income Statement Balance Sheet

Account Titles
Debit Credit Debit Credit Debit Credit Debit Credit
Cash 237,525 237,525
Accounts Receivable 178,780 178,780
Merchandise Inventory 70,950 36,223 34,727
Store Supplies 23,411 20,607 2,804
Prepaid Insurance 13,100 2,400 10,700
Store Equipment 98,700 98,700
Accumulated Dep. - Store Equipment 17,100 5,800 22,900
Accounts Payable 45,800 45,800
A. Fajardo, Capital 394,644 394,644
A. Fajardo, Drawing 13,500 13,500
Sales 578,750 578,750
Sales Returns and Allowances 2,487 2,487
Sales Discount 3,500 3,500
Purchases 163,200 163,200
Purchases Returns and Allowances 11,655 11,655
Purchase Discount 2,856 2,856
Freight In 8,761 8,761
Sales Salaries Expense 112,500 11,580 124,080
Other Selling Expenses 34,114 34,114
Utilities Expense 32,000 32,000
Rent Expense 55,100 55,100
Miscellaneous General Expenses 3,177 3,177
Total

Income Summary 36,223 36,223

Store Supplies Expense 20,607 20,607
Insurance Expense 2,400 2,400
Depreciation Expense - Store Equipment 5,800 5,800
Uncollectible Accounts Expense 8,939 8,939
Sales Salaries Payable 11,580 11,580
Allowance for Uncollectible Accounts 8,939 8,939
Total 1,050,805 1,050,805 85,549 85,549 500,388 593,261 576,736 483,863
Net Income 92,873 92,873
Grand Total 593,261 593,261 576,736 576,736

2. Prepare the following financial statements:

a. Income Statement (Multi-step)
b. Statement of Capital
c. Balance Sheet

20
 Goodwill Company
Statement of Comprehensive Income
For the Year Ended December 31, 2023

Sales 578,750
Less: Sales Return and Allowances 2,487
Sales Discount 3,500 5,987
Net Sales 572,763
Less: Cost of Goods Sold
Merchandise Inventory (January 1) 70,950
Add/Less: Purchases 163,200
Freight In 8,761
Purchase Returns and Allowances 11,655
Purchase Discount 2,856
Net Purchases 157,450
Total Goods Available for Sale 228,400
Less: Merchandise Inventory (Dec. 31) -34,727
Cost of Goods Sold 193,673
Gross Profit 379,090
Less: Operating Expenses:
Utilities Expense 32,000
Total Operating Expenses 32,000
Selling Expenses:
Sales Salaries Expense 124,080
Other Selling Expenses 34,114
Store Supplies Expense 20,607
Dep. Expense - Store Equipment 5,800
Uncollectible Accounts Expense 8,939
Total Selling Expenses 193,540
General and Administrative
Expenses:
Rent Expense 55,100
Miscellaneous General Expenses 3,177
Insurance Expense 2,400
Total General and Administrative
Expenses 60,677

Total Expenses 286,217

Net Income 92,873

Goodwill Company
Statement of Owner's Equity
For the Year Ended December 31, 2023

A. Fajardo, Beginning Capital 394,644

Add: Net Income for the year 92,873
Total 487,517
Less: Drawings -13,500
A. Fajardo, Ending Capital 474,017

21
 Goodwill Company
Statement of Financial Position
as of December 31, 2023

Current Assets
Cash 237,525
Accounts Receivable 178,780
Less:
Allowance for Uncollectible Accounts -8,939
Merchandise Inventory 34,727
Store Supplies 2,804
Prepaid Insurance 10,700
Total Current Assets 455,597

Non-Current Assets
Store Equipment 98,700
Less:
Accumulated Dep. - Store Equipment -22,900
Total Non-Current Assets 75,800

Total Assets 531,397

Current Liabilities
Accounts Payable 45,800
Sales Salaries Payable 11,580
Total Current Liabilities 57,380

Owner's Equity
A. Fajardo, Capital 394,644
A. Fajardo, Drawing -13,500
Net Income 92,873
Total Owner's Equity 474,017

Total Liabilities and

Owner's Equity 531,397

3. Journalize the adjusting entries

a. Income Summary 36,223

Merchandise Inventory 36,223

b. Store Supplies Expense 20,607

Store Supplies 20,607

c. Insurance Expense 2,400

Prepaid Insurance 2,400

Depreciation Expense -
d. Store Equipment 5,800
Accumulated Dep. - Store 5,800

22
 Equipment

e. Sales Salaries Expense 11,580

Sales Salaries Payable 11,580

Uncollectible Accounts
f. Expense 8,939
Allowance for
Uncollectible Accounts 8,939

4. Journalize the closing entries.

Closing Entries
Date Principal Debit Credit
31-
Dec Sales 578,750
Purchases Returns and
Allowances 11,655
Purchase Discount 2,856
Income Summary 593,261
To close all income and expenses with credit balances

31-
Dec Income Summary 464,165
Sales Return and Allowances 2,487
Sales Discount 3,500
Purchases 163,200
Freight In 8,761
Utilities Expense 32,000
Sales Salaries Expense 124,080
Other Selling Expenses 34,114
Store Supplies Expense 20,607
Dep. Expense - Store Equipment 5,800
Uncollectible Accounts Expense 8,939
Rent Expense 55,100
Miscellaneous General Expenses 3,177
Insurance Expense 2,400
To close all income and expenses with debit balances

31-
Dec Income Summary 92,873
A. Fajardo, Capital 92,873
To close net income to capital

31-
Dec A. Fajardo, Capital 13,500
A. Fajardo, Drawings 13,500
To close drawings to capital

23