MERCHANDISING
OPERATIONS
Measuring net income for a
merchandising company is
conceptually the same for a
service enterprise. That is,
net income (or loss) results
from the matching of
expenses with
revenues. In merchandising
company, the primary source
of revenues is the sale of
merchandise, often referred
to simply as sales revenue or
sales. Unlike expenses for a
service
company, expenses for a
merchandising company are
divided into two categories:
(1) cost of
goods sold and (2) operating
expenses.
The cost of goods sold is the
total cost of merchandise
sold during the period. This
expense is directly related to
the revenue recognized from
the sale of the goods.
Merchandising companies
report gross profit on sales in
MERCHANDISING
OPERATIONS
Measuring net income for a
merchandising company is
conceptually the same for a
service enterprise. That is,
net income (or loss) results
from the matching of
expenses with
revenues. In merchandising
company, the primary source
of revenues is the sale of
merchandise, often referred
to simply as sales revenue or
sales. Unlike expenses for a
service
company, expenses for a
merchandising company are
divided into two categories:
(1) cost of
goods sold and (2) operating
expenses.
The cost of goods sold is the
total cost of merchandise
sold during the period. This
expense is directly related to
the revenue recognized from
the sale of the goods.
Merchandising companies
report gross profit on sales in
PERIODIC INVENTORY" SYSTEM (BUYER'S point of view)
1. Initial investment of merchandise
Debit: Merchandise Inventory 200,000
Credit: Owner's capital 200,000
2. Purchase of merchandise
Debit: Purchases 300,000
Credit: Cash / Accounts Payable 300,000
3. Returns and allowances (defective merchandise)
Debit: Cash / Accounts Payable 10,000
Credit: Purchase returns and allowances 10,000
4. Partial payment
Debit: Accounts payable 100,000
Credit: Cash 100,000
5. Full payment
Debit: Accounts payable 200,000 (190,000)
Credit: Cash 200,000 (190,000)
OR Acc. Pay. 200,000
Cash (No. 3 is not included) 197,000
Purch. Disc. 3,000
Or
Debit: Accounts payable 300,000
Credit: Cash 297,000
Credit: Purchase discount 3,000
6. Additional investment of merchandise
Debit: Purchases/Mdse. Inv.
Credit: Owner's capital
7. Withdrawal of merchandise
Debit: Owner's drawing
Credit: Purchases/MI
*
PERIODIC INVENTORY" SYSTEM (SELLER'S point of view)
1. Sale of merchandise
Debit: Cash / Accounts receivable 300,000
Credit: Sales Revenue 300,000
2. Returns and allowances (defective merchandise)
Debit: Sales returns and allowances 10,000
Credit: Cash / Accounts receivable 10,000
3. Partial collection
Debit: Cash 100,000
Credit: Accounts receivable 100,000
4. Full collection
Debit: Cash 190,000
Credit: Accounts receivable 190,000
Or
Debit: Cash 287,100
Debit: Sales discount 2,900
Credit: Accounts receivable 290,000
~~~~~~~~~~~~~~~~~~~~~~~~~
"PERPETUAL" INVENTORY SYSTEM (BUYER'S point of view)
1. Initial investment of merchandise
Debit: Merchandise inventory
Credit: Owner's capital
2. Purchase of merchandise
Debit: Merchandise inventory
Credit: Cash / Accounts Payable
3. Returns and allowances (defective merchandise)
Debit: Cash / Accounts Payable
Credit: Merchandise inventory
4. Partial payment
Debit: Accounts payable
Credit: Cash
5. Full payment
Debit: Accounts payable
Credit: Cash
Or
Debit: Accounts payable
Credit: Cash
Credit: Merchandise inventory
6. Additional investment of merchandise
Debit: Merchandise inventory
Credit: Owner's capital
7. Withdrawal of merchandise
Debit: Owner's drawing
Credit: Merchandise inventory
*
"PERPETUAL" INVENTORY SYSTEM (SELLER'S point of view)
1. Sale of merchandise
Debit: Cash / Accounts receivable
Credit: Sales Revenues
Debit: Cost of goods sold
Credit: Merchandise inventory
2. Return and allowances (defective merchandise)
RETURNS
1st entry
Debit: Sales returns and allowances
Credit: Cash / Accounts receivable
2nd entry
Debit: Merchandise inventory
Credit: Cost of goods sold
ALLOWANCES
1st entry
Debit: Sales returns and allowances
Credit: Cash / Accounts receivable
No 2nd entry
3. Partial collection
Debit: Cash
Credit: Accounts receivable
4. Full collection
Debit: Cash
Credit: Accounts receivable
Or
Debit: Cash
Debit: Sales discount
Credit: Accounts receivable
"FREIGHT" (Periodic system)
BUYER'S point of view
1. FOB SHIPPING POINT, COLLECT
Debit: Freight in
Credit: Cash
2. FOB DESTINATION, PREPAID
"No entry"
3. FOB SHIPPING POINT, PREPAID
Debit: Freight in
Credit: Accounts payable
4. FOB DESTINATION, COLLECT
Debit: Accounts payable
Credit: Cash
OR
Debit: Accounts Receivable (if purchase is made for CASH)
Credit: Cash
**
SELLER'S point of view
1. FOB SHIPPING POINT, COLLECT
"No entry"
2. FOB DESTINATION, PREPAID
Debit: Freight out
Credit: Cash
3. FOB SHIPPING POINT, PREPAID
Debit: Accounts receivable
Credit: Cash
4. FOB DESTINATION, COLLECT
Debit: Freight out
Credit: Accounts receivable
OR
Debit: Freight out
Credit: Accounts payable (if sale is made for CASH)
"FREIGHT" (Perpetual system)
BUYER'S point of view
1. FOB SHIPPING POINT, COLLECT
Debit: Merchandise inventory
Credit: Cash
2. FOB DESTINATION, PREPAID
"No entry"
3. FOB SHIPPING POINT, PREPAID
Debit: Merchandise inventory
Credit: Accounts payable
4. FOB DESTINATION, COLLECT
Debit: Accounts payable
Credit: Cash
OR
Debit: Accounts receivable (if purchase is made for CASH)
Credit: Cash
*
SELLER'S point of view
1. FOB SHIPPING POINT, COLLECT
"No entry"
2. FOB DESTINATION, PREPAID
Debit: Freight out
Credit: Cash
3. FOB SHIPPING POINT, PREPAID
Debit: Accounts receivable
Credit: Cash
4. FOB DESTINATION, COLLECT
Debit: Freight out
Credit: Accounts receivable
OR
Debit: Freight out
Credit: Accounts payable (if sale is made for CASH)
**
NORMAL BALANCES:
DEBIT:
- Merchandise inventory
- Purchases
- Freight in
- Freight out
(contra accounts)
- Sales returns and allowances
- Sales discount
*
CREDIT:
- Sales Rev.
(contra accounts)
- Purchase returns and allowances
- Purchase discount
Typical Periodic Inventory System Journal Entries
Account Debit Credit
Purchases XXX
Accounts payable XXX
To purchase goods from a supplier using periodic inventory system
journal entries
Account Debit Credit
Accounts payable XXX
Purchase discounts XXX
Cash XXX
To record a supplier a purchase cash settlement discount
Account Debit Credit
Freight-In XXX
Accounts payable XXX
To record freight costs (shipping point)
Account Debit Credit
Accounts payable XXX
Purchase returns and allowances XXX
To record a purchase return to a supplier using periodic inventory
system journal entries
Account Debit Credit
Accounts receivable XXX
Sales Rev. XXX
To record the sale of goods to a customer using periodic inventory
system journal entries
Account Debit Credit
Sales returns XXX
Accounts receivable XXX
To record a sales return from a customer using periodic inventory
system journal entries
Account Debit Credit
Cash XXX
Sales discount XXX
Accounts receivable XXX
To record a customer sales cash settlement discount
Account Debit Credit
Loss on inventory write down XXX
Inventory XXX
To record a physical inventory count shortage
Account Debit Credit
Cost of goods sold XXX
Inventory (Beginning) XXX
Cost of goods sold XXX
Inventory (Ending) XXX
To record end of period journal entries using periodic inventory
system
Periodic vs Perpetual Inventory System Journal Entries
This reference guide is for the periodic inventory system, if the business is using a
perpetual inventory system the journal entries are different and can be seen in
our perpetual inventory system journal entries reference guide.
EXAMPLE:
GROSS SALES
Sale of merchandise for cash:
Sept. 16 Cash 25,000
Sales Revenue 25,000
Sale of mdse. on credit:
Sept. 16 Acc. Rec. 25,000
Sales Rev. 25,000
SALES DISCOUNTS
Assume that Traders sold mdse. on Sept. 20 for P3,000; terms 2/10, n/60. At the time of sale.
Sept. 20 Acc. Rec. 3,000
Sales Rev. 3,000
The client paid on Sept. 30
Sept. 30 Cash 2,940
Sales Discounts 60
Acc. Rec. 3,000
SALES RETURNS and ALLOWANCES
The seller usually issues the customer a credit memorandum
Sept. 17 Sales Returns and Allow. 760
Acc. Rec or Cash 760
TRANSPORTATION OUT – when the freight term is FOB destination, the seller shoulders the
transp. Costs; when the term is FOB Shipping Point, the buyer bears the shipping costs.
Case 1: Assume Traders sold mdse. totaling P17,000 FOB Destination, freight prepaid; terms
2/10, n/30. The transp. Costs amounted to P1,900.
DATE ACCOUNT TITLES DEBIT CREDIT
Nov. 25 Acc. Rec. 17,000
Transp. Out 1,900
Sales Rev. 17,000
Cash 1,900
This invoice is collected on Dec. 5, the sales discount will be P340 (17,000 x 2%)
Dec. 5 Cash 16,660
Sales Discount 340
Acc. Rec. 17,000
Case 2: Assume the same data only the term is FOB shipping point, freight collect.
Nov. 25 Acc. Rec. 17,000
Sales 17,000
Dec. 5 Same entry
Case 3: the term is FOB destination, freight collect
Nov 25 Acc. Rec. 15,100
Transp. Out 1,900
Sales 17,000
Transpo-out 1900
Acc. Rec. 1,900
Acc. Rec. 17,000
Sales Rev. 17,000
Dec. 5 Cash 14,760
Sales Discounts 340
Acc. Rec. 15,100
Case 4: The term is FOB shipping point, freight prepaid
Nov 25 Acc. Rec. 18,900
Sales 17,000
Cash 1,900
AR 17,000
Sales 17,000
AR 1900
Cash 1900
Dec. 5 Cash 18,560
Sales Discounts 340
Acc. Rec. 18,900
PURCHASES: - Periodic
Purchase on account, 2/10, n/30
Nov. 12 Purchases 15,000
Acc. Pay. 15,000
Purchase Returns and Allowances – returned damaged mdse.
Nov. 14 Acc. Pay. 2,000
Purch. Ret. & Allow. 2,000
Purchase Discounts – early payment
Nov. 22 Acc. Pay. 13,000
Purch. Discounts (13,000 x 2%) 260
Cash 12,740
Transportation In:
CASE 1: - Assume that Traders purchase P8,500, FOB Destination, freight prepaid, terms 2/10,
n/30. Transp. Costs amounted to P950. – seller should shoulder the transp. Costs.
Nov. 25 Purchases 8,500
Acc. Pay. 8,500
Paid on Dec. 5, the Purch. Discount will be 8,500 x 2% = P170
Dec. 5 Acc. Pay. 8,500
Purch. Disc. 170
Cash 8,330
CASE 2: - FOB Shipping point, freight collect
Nov. 25 Purchases 8,500
Transp. In 950
Acc. Pay. 8,500
Cash 950
Dec. 5 Acc. Pay. 8,500
Purch. Discounts 170
Cash 8,330
CASE 3: - FOB Destination, freight collect
Nov. 25 Purchases 8,500
Acc. Pay. 7,550
Cash 950
Purchases 8,500
Acc. Pay. 8,500
Acc. Pay. 950
Cash 950
Acc. Pay. Is decreased by the transp. charges paid by the buyer for the benefit of the
seller.
Dec. 5 Acc. Pay. 7,550
Purchase Discount 170
Cash 7,380
CASE 4: - FOB Shipping point, freight prepaid
Nov. 25 Purchases 8,500
Transp. In 950
Acc. Pay. 9,450
Purch. 8,500
Acc. Pay. 8,500
Transpo-in 950
Acc. Pay. 950
# The buyer is not entitled to discounts on the transp. costs, discounts apply only to total net
purchases.
Dec. 5 Acc. Pay. 9,450
Purch. Discounts 170
Cash 9,280
EVALUATION:
1. Jomar Trading Company engaged in the ffg. Transactions in Oct.:
Oct. 7 Sold mdse. on credit to Lacson Co., Terms n/30, FOB Shipping Point, P30,000.
PERIODIC PERPETUAL
Acc. Rec. 30,000 same
Sales Rev. 30,000
8 Purchased mdse. on credit from Orcajada Co., terms n/30, FOB Shipping point, P60,000.
Purchases 60,000 MI 60,000
Acc. Pay. 60,000 Acc. Pay 60,000
9 Paid Orcajada Co. for shipping charges on mdse. purchased on Oct. 8, P254.
Freight-in 254 MI 254
Cash 254 Cash 254
10 Purchased merchandise on credit from Ortiz Co., terms n/30 FOB Shipping point,
P90,000. Freight prepaid, by Ortiz, P600.
Purchases 90,000 MI
Acc. Pay 90,000 A/P
Freight-in 600 MI
Acc. Pay 600 A/P
13 Purchased off. Supp. On credit from Dedumo Co., terms n/10, P24,000.
Off. Supp. 24,000 same entry
Acc. Pay 24,000
14 Sold mdse. on credit to Tagum Co., terms n/30, FOB shipping, P24,000.
Acc. Rec. 24,000 Same entry
Sales Rev. 24,000
14 Returned damaged mdse. received from Orcajada Co. on Oct. 8 for credit, P6,000.
Acc. Pay. 6,000 Acc. Pay. 6,000
Purch. Ret. & Allow. 6,000 MI 6,000
17 Received check payment from Lacson Co. for his purchase on Oct. 7.
Cash 30,000 same
Acc. Rec. 30,000
18 Returned a portion of the office supplies received on Oct. 13 for credit, P4,000.
Acc. Pay. 4,000 same
Off. Supp. 4,000
19 Sold mdse. for cash, P18,000.
Cash 18,000 same
Sales. Rev. 18,000
20 Paid Ortiz Co. for purchase of Oct. 10.
Acc. Pay. 90,600 same
Cash 90,600
21 Paid Orcajada Co. the balance from the transaction on Oct. 8 and 14.
Acc. Pay 54,000 same
Cash 54,000
24 Accepted from Tagum Co. a return of mdse., P2,000.
Sales Ret. & Allow. 2,000 same MI
Acc. Rec. 2,000 CGS
Required: Prepare the journal entries.
2. Prepare the cost of goods sold section of the income statement of Gian Company for the year
Ended June 30, 2020.
Mdse. Inv., 6/30/2020 P 310,000
Mdse. Inv., 7/1/2019 260,000
Purchases 830,000
Purchase Returns and Allowances 8,300
Purchase Discounts 16,600
Transp. In 12,450
MI, beg. 260,000
Purchases 830,000
Less: Purch. R/A 8,300
Purch. Disc 16,600 (24,900)
Net Purchases 805,100
Add: Transp.-in 12,450
Net Cost of Purchases 817,550
TGAS 1,077,550
Less: MI, End (310,000)
CGS P767,550
3. During the month of April 2010, the Mary Paz Abad Company and the Nelson Palete Supply
Company entered into the ffg. Transactions:
Apr. 5 Abad purchased mdse. on account from Palete, P243,000. Terms: FOB Shipping point;
3/10, n/30. Paid freight charges amounting to P4,000.
ABAD – Buyer PALETE – Seller
Purch. 243,000 AR 243,000
AP 243,000 Sales Rev. 243,000
Freight-in 4,000
Cash 4,000
7 Abad purchased mdse. on account from Palete, P470,000. Terms: FOB Destination;
3/10, n/30. Freight charges amounted to P7,000.
Purch. 470,000 AR 470,000
AP 470,000 Sales R. 470,000
8 Abad returned P18,000 of mdse. to Palete from the Apr. 5 purchase.
AP 18,000 Sales Ret & All. 18,000
Purch. Ret. & Allow. 18,000 AR 18,000
10 Abad paid Palete the amount due on the April 5 transaction less returns and discounts.
ABAD – Buyer PALETE - Seller
AP 225,000 Cash 218,250
Purch. Disc 6,750 Sales Disc 6,750
Cash 218,250 AR 225,000
11 Palete paid the transp. charges on the Apr. 7 shipment.
No entry Freight – out 7,000
Cash 7,000
14 Abad paid Palete the amount due from the April 7 transaction.
AP 470,000 Cash 455,900
Purc. Disc. 14,100 Sales Disc. 14,100
Cash 455,900 AR 470,000
21 Abad purchased mdse. from Palete on account, P270,000. Terms: 20% trade discount;
FOB shipping point; 3/10, n/30.
Purch. 216,000 AR 216,000
AP 216,000 Sales Rev. 216,000
25 Freight charges on the Apr. 21 transaction amounted to P3,000 and were paid by Abad.
Freight-in 3,000 No entry
Cash 3,000
26 Abad paid Palete the amount due on the Apr. 21 transaction.
AP 216,000 Cash 209,520
Purch. Disc. 6,480 Sales Disc. 6,480
Cash 209,520 AR 216,000
Required: 1. Prepare the journal entries for Mary Paz Abad Co.
2. Prepare the journal entries for Nelson Palete Co.
4. Compute the mdse. inventory as at Jan. 1, 2019.
Cost of Goods Sold P836,000
Transp. In 20,000
Mdse. Inv., 1/31/2019 180,000
Purchase Discounts 18,000
Purchase Ret. And Allow. 9,000
Purchases 900,000
MI, beg 123,000
Add: NP
Purchases 900,000
Less: P. Disc ( 18,000)
P. Ret & All. ( 9,000)
Add: Transp- in 20,000
Net Cost of Purch. ? 893,000
TGAS ? 1,016,000
Less: MI, end ( 180,000)
CGS 836,000
5. Determine the missing elements of the Income Statement of five different companies.
1 2 3 4 5
Net Sales a.120k d.180k 250,000 290,000 400,000
Mdse. Inv., Beg.+ b.30k 50,000 70,000 j.40k 120,000
Net Purchases 80,000 e.110k g.190k 160,000 390,000
TGAS = 110,000 160,000 h.260,000 k.200k m.510k
Mdse. Inv., End - 40,000 f.20k 30,000 70,000 n.130k
-Cost of Goods Sold = c.70k 140,000 230,000 l.130k 380,000
=Gross Profit 50,000 40,000 i.20k 160,000 o.20k
b. 30,000 d. 180,000 i. 20,000 l. 130,000 o. 20,000
c. 70,000 e. 110,000 h. 260,000 k. 200,000 m. 510,000
a. 120,000 f. 20,000 g. 190,000 j. 40,000 n. 130,000
a. P120,000
b. P30,000
Sales
Less: CGS
Gross Profit
SELLER BUYER
Cash / Acc. Rec. 50,000 Purch.
Sales Rev. 50,000 Cash / Acc. Pay 50,000
Cash Acc. Pay.
Acc. Rec. Cash
Cash s Acc. Pay.
Sales Disc 45,000 x 10% 4500 Cash
Acc. Rec Purch. Disc.
Sales Ret & Allow. 5000 Acc. Pay 5,000
Cash / Acc. Rec. 5000 Purch Ret. /Allow 5,000
Cash 40,500 Acc. Pay. 45,000
Sales Disc 45,000 x 10% 4500 Cash 40,500
Acc. Rec 45,000 Purch Disc 4,500
Freight- Out Freight-in
Cash/Acc. Pay Cash / Acc. Pay.
Periodic Perpetual
Purchases MI
Cash or Acc Pay A/P or Cash
Acc. Pay A/P
Cash Cash
Purch Disc. MI
Acc. Pay./Cash A/P
Purc. Returns MI
Freight-in MI
Cash or AP Cash or AP
Cash or Acc. Rec. Cash or Acc Rec
Sales Rev. Sales Rev
COGS
MI
Cash
Sales Disc. same
Acc. Rec.
Freight-out
Cash or Acc. Pay same
Sales Rec and Allow
Acc. Rec/Cash same