MERCHANDISING BUSINESS

NATURE & ACCOUNTING FOR

MERCHANDISING BUSINESS
• The revenue generating activities of a merchandising
business involve the buying & selling of merchandise
(items bought for resale in its original form such as
goods, groceries, books, appliances, clothing, etc.)
• When the merchandise is sold, the revenue is
reported as Sales & its cost is recognized as expense
called Cost of Goods Sold, which is subtracted from
sales to arrive at the Gross Profit.
 • Other expenses are then deducted to arrive at the
Net Profit.
• Unsold merchandise at the end of a given period is
called Merchandise Inventory.

Sales - Cost of Goods Sold = Gross Profit - Operating Expenses = Net Profit
ACCOUNTING FOR PURCHASES OF MERCHANDISE

Two Methods of Accounting or

Recording for Merchandise Purchases:
1. Periodic Inventory Method
2. Perpetual Inventory Method
1. Periodic Inventory Method

• Under this method, every time a purchase of

merchandise is made, it is charged or recorded
(debited) to an account called PURCHASES.
• When a sale is made, revenue account called SALES
is recorded (Credited).
1. Periodic Inventory Method

• At the end of a given period, an inventory (physical

count of the goods unsold – called MERCHANDISE
INVENTORY-END) is made to determine the Cost of
Goods Sold.
• This ending inventory will then be carried forward to
the next period and will become the MERCHANDISE
INVENTORY-BEGINNING.
2. Perpetual Inventory Method

• Under this method, an account called MERCHANDISE

INVENTORY (instead of Purchases) is used to record
the acquisition of merchandise.
• When a sale is made, two entries will be made; first is
to record the revenue account called SALES & the
second is to record the cost by charging or debiting to
an account called COST OF GOODS SOLD.
2. Perpetual Inventory Method

• In this manner the merchandise inventory account

will have a running balance & there is no need to
make a physical count.
• If ever a physical count or an inventory will be made,
it is only for the purpose of checking the accuracy of
recording but not for the purpose of determining the
ending balance of the merchandise inventory.
 TERMS OF
PURCHASES
Cash or COD (Cash on Delivery)

•Payment is required at the time

the merchandise is delivered.
Credit Term
•The term when payment for the
merchandise is to be made as
agreed upon by the seller and the
buyer.
Credit Period
•The time in which the buyer is
allowed to pay.
2/10, n/30
• A 2% discount of the gross invoice price
is allowed if payment is made within 10
days after the invoice date, and the
gross price is due 30 days from the
invoice date.
2/EOM, n/60
•A 2% discount of the gross invoice
price is allowed if payment is made
up to the end of the month and the
gross price is due 60 days from the
invoice date.
2/10/EOM, n/60
•A 2% discount of the gross invoice
price is allowed if payment is made
by the 10 of the following month,
th

and the gross price is due 60 days

from the invoice date.
SOURCE DOCUMENTS

• Contain vital information about the nature

& amount of transactions.
1. Sales Invoice

• Prepared by the seller of goods & sent to the

buyer
• Contains the name & address of the buyer, the
date of the sale * information – quantity,
description & price –about the goods sold.
• Also specifies the amount of sales, & the
transportation & payment terms.
2. Bill of Lading

• A document issued by the carrier –

trucking, shipping or airline – that
specifies contractual conditions & terms
of delivery such as freight terms, time,
place, and the person named to receive
the goods.
3. Statement of Account

•A 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.
•Notes the invoices paid & other
details of payment.
5. Deposit slips

• Are printed forms with depositor’s name, account

number & space for details of the deposit.
• A validated deposit slip indicates that cash &
checks with the supplied details were actually
deposited or credited to the account holder.
6. Check

• A written order to a bank by a depositor to

pay the amount specified in the check from
his checking account to the person named in
the check.
• Payor – the entity issuing the check
• Payee – the receiver
7. Purchase Requisition

• 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
•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.
• Formally records the quantities &
description of the goods delivered.
10. Credit Memorandum
•A form used by the seller to notify
the buyer that his account is being
decreased due to errors or other
factors requiring adjustments.
GROSS SALES

•Consist of total sales for cash & on

credit during an accounting period.
Sales
•Revenue account which represents
the merchandise sold to
customers valued at selling price
whether for cash or on credit
•Only sales held for resale are
recorded
Sales Returns & Allowances
• the merchandise returned by customers or
the price adjustments allowed for
damaged merchandise valued at selling
price.
• A contra-income account
• Deducted from gross sales in the income
statement
Sales Discount
• Cash discounts granted by the seller to
the customers for early payments of
their accounts.
• A contra-income account
• Deducted from gross sales in the
income statement
Purchases
• A temporary account used only for merchandise
purchased for resale.
• Its sole purpose is to accumulate the total cost
of merchandise purchased during an accounting
period.
• Recording merchandise purchases at invoice
price is known as the gross price method of
recording purchases.
Transportation In/ Freight-In

• The cost of transporting the

merchandise purchased up to the
buyer’s place.
• Part of the cost of the merchandise
purchased by the buyer.
• CASE #1: Assume that W. Neis Traders made purchases
totaling ₱17,000 FOB destination, freight prepaid; terms
2/10, n/30. Transportation costs amounted to ₱1,900.
The entry would be:
• If that invoice is paid on Dec. 5, the entry
would be:
• CASE #2: Assume that W. Neis made purchases totaling
₱17,000 FOB shipping point, freight collect; terms 2/10,
n/30. The transportation costs amounted to ₱1,900.
• The entry would be:
• If the invoice is paid on Dec. 5, the purchases discount
will be ₱340 (₱17,000 x 2%). Transportation In will form
part of the net cost of purchases.
• CASE #3: Assume that W. Neis made purchases totaling
₱17,000 FOB destination, freight collect; terms 2/10,
n/30. The transportation costs amounted to ₱1,900.
• The entry would be:
• If the invoice is paid on Dec. 5, the purchases
discount will be ₱340 (₱17,000 x 2%) because the
discount applies to total purchases.
• CASE #4: Assume further that W. Neis made purchases
totaling ₱17,000 FOB shipping point, freight prepaid;
terms 2/10, n/30. The transportation costs amounted to
₱1,900.
• The entry would be:
• If the invoice is paid on Dec. 5, the purchases
discount will be ₱340 (₱17,000 x 2%). The buyer
is not entitled to discounts on the transportation
costs. Discounts apply only to total purchases.
Freight Out
•The cost of transporting the
merchandise sold to the buyer’s
place
FOB Shipping Point
• Goods placed free on board (FOB) the carrier by seller.
• Buyer pays freight costs.
• Merchandise Inventory is debited if buyer pays freight.
• Cash is credited if the goods come on cash on delivery
(COD), for example, and was paid immediately.
Accounts Payable would be credited if on account.
• Ownership over the goods is transferred to the buyer
once it is out of the premises of the seller.
FOB Destination
• Goods placed free on board (FOB) at buyer’s business.
• Seller pays freight costs.
• Delivery Expense is debited if seller pays freight on
outgoing merchandise to a buyer which is an operating
expense to the seller.
• Ownership over the goods is transferred to the buyer
once the goods are delivered and received by the buyer.
Purchase Returns & Allowances

•The merchandise returned to

vendors or suppliers or price
adjustments for damaged
merchandise valued at purchase
cost.
Purchase Discounts
•Cash discounts granted by the
suppliers to the buyers for early
payments of their accounts.
Merchandise Inventory
•Represents the unsold
merchandise valued at cost as
of a given date.
VAT Output Tax
• The value added tax (VAT) that you
calculate & charge on your own sales of
goods & services if you are registered for
VAT.
• This must be charged on sales both to other
businesses and to ordinary consumers.
VAT Input Tax
•The value added tax (VAT) added
to the price you pay for eligible
goods or services.
Chart of Accounts (Merchandising)

• draft_FS.xlsx
First in, First Out (FIFO)
• As the name implies, FIFO involves the
assumption that goods sold are the first
units that were purchased - that means
the oldest goods on hand.
• Thus, the remaining inventory is
comprised of the most recent purchases.