Accounting Cycle of a
Merchandising Business
Merchandising Business
• Enterprise that buys and sells good to earn a profit.
Merchandise
• Refers to goods that are held for sale to customers in the
normal course of business.
Example
• If a grocery store decided to sell an old computer used in
the office.
• Pharmacy decided to sell a table used in their display
area.
Comparison of Income Statement
Service Company Merchandising Company
Income Statement Income Statement
Revenue from Services Net Sales
Minus
Cost of Goods Sold
minus Equal
Gross Margin/ Profit
Minus
Expenses Operating Expense
equal Equal
Net Income Net Income
Operating Cycles for a Merchandiser.
Purchases
Cash
Cash Inventory
Accounts
Inventory
Receivable
Sales on
Account
Cash Sales
Source Documents
• Sales Invoice is prepared by the seller of goods and sent
to the buyer,.
• 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 receive the goods.
Source Documents
• Statement of account is a formal notice to the debtor
detailing the accounts already due.
• Deposit slips are printed forms with depositor’s name,
account number and space for details of the deposit.
• Check is a written order to a bank by a depositor to pay
the amount specified in the check from the checking
account to the person named in the check.
Source Documents
• 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.
• Purchase order is an authorization made by the buyer to
the seller to deliver the merchandise as detailed in the
form.
Source Documents
• Receiving report is a document containing information
about goods received from a vendor. It formally records
the quantities and description of the goods delivered.
• Credit memorandum is a form used by the seller to
notify he buyer that his account is being decreased due to
errors or other factors requiring adjustments.
Inventory Systems
• Periodic System
• Perpetual System
Periodic System
No entries are made to the inventory account as the
merchandise is bought and sold. When goods are
purchased, a separate account is used to accumulate
information on the net cost of the purchases. Only at the
end of the period, when inventory is counted, will entries be
made to the inventory account to establish proper balance.
SUPPLIER BUYER
PURCHASES SALES
MERCHANDISER
(YOU)
PURCHASE OF MERCHANDISE
SELLS MERCHANDISE
BUYS MERCHANDISE
MERCHANDISER
SUPPLIER (YOU)
Seller Buyer
Purchases of Merchandise:
Periodic Inventory System
1. When merchandise is purchased for resale to customers,
the account, Purchases, is debited for the cost of goods
purchased.
2. Like sales, purchases may be made for cash or on
account (credit).
3. The purchase is normally recorded by the purchaser
when the goods are received from the seller.
Note that only purchases of merchandise are debited to the ‘Purchase’ account. Acquisition (purchases)
of other assets: supplies, equipment, and similar items are debited to their respective accounts.
Magaling Computer Store started its operations on January
2, 2016. The store is located in Sikat Mall in Bicol. The
owner invested PHP500,000 to start the business. On
January 3, 2016, Magaling purchased 20 units of computers
on account for PHP10,000 each. Upon delivery of the units,
the supplier, Delta, Inc., issued Charge Invoice No. 145 to
Magaling.
Purchase Returns and Allowances
• A purchaser may find the merchandise received to be
unsatisfactory because the goods are:
– damaged or defective
– of inferior quality
– not in accord with the purchaser’s specifications
Purchase Returns
• A return of the merchandise (a deduction from the
purchase price when unsatisfactory goods are kept) is
shown by the entry where Accounts Payable is debited
and Purchase Returns and Allowances is credited to
show that the purchases was reduced with a return or an
allowance.
• The Purchase Returns and Allowances account is a
“contra purchases” account when merchandise is
returned to a supplier.
In such cases, the buyer may return the goods to the seller for credit if the sale was made on account or for
cash refund if the sale was for cash. Allowance/ Deduction from the selling price.
Out of the 20 computer units purchased last January 3,
2016, it was found after inspection on the same day that
one unit was damaged during shipment. Magaling issued a
debit memorandum (DM 01) and informed the supplier that
it will return the one damaged item.
Accounting for Freight Costs/
Transportation Cost
The sales agreement should indicate whether the seller or
the buyer is to pay the cost of transporting the goods to the
buyer’s place of business.
The two most common arrangements for freight costs are:
FOB SHIPPING POINT AND FOB DESTINATION.
FOB Shipping Point:
• The buyer shoulders the shipping cost; ownership over
the goods passes from seller to the buyer when the
inventory leaves the seller’s place of business – the
shipping point.
FOB Shipping Point:
• Buyer pays freight costs.
– Freight-In 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
• Seller pays freight costs.
• “No Entry”
Assume the supplier of Magaling is based in Manila. In
order to bring the 20 computer units to Bicol, it will cost
PHP3,000 to deliver the goods. If the terms is FOB
Shipping Point, the entry to record, assuming Magaling paid
the common carrier in cash on January 4, 2016 is :
Credit Period
Period of time allowed for payment when goods are sold on
account.
If the credit period is 30 day, then payment is expected
within 30 days from the invoice date. “n/30”
“If the credit terms show 2/10, n/30 “
– Net credit period or net terms
– 2% discount within 10days, net 30
Purchase Discounts
Credit terms (specify the amount of cash discount and time
period during which a discount is offered) may permit the
buyer to claim a cash discount for the prompt payment of a
balance due. If the credit terms show 2/10, n/30 means a
2% discount is given if paid within 10 days (called the
discount period); otherwise, the invoice is due in 30 days.
Purchase Discounts
Cash discounts are called purchase discounts from the
buyer’s viewpoint and
Sales discounts from the seller’s point of view
The credit terms for the purchase of 20 computer units (total cost
PHP200,000) is 2/10, n/30. On January 10, 2016, Magaling paid the
account in full with Delta.
Assuming that instead of paying on January 10, 2016,
Magaling paid on February 4, 2016, thus forfeiting the 2%
discount, the entry to record
Trade Discounts
It encourage the buyers to purchase products because of
markdowns from the list price. This type of discount enables
the suppliers to vary prices periodically without the
inconvenience of revising price lists and catalogs.
Recording of Sales and Transaction
under the Periodic Inventory System
SALE OF MERCHANDISE
SELLS MERCHANDISE
BUYS MERCHANDISE
CUSTOMER
MERCHANDISER BUYER
(YOU)
Seller
Sales Recording:Periodic Inventory System
• Revenues are reported when earned in accordance with
the revenue recognition principle, and in a merchandising
company, revenues are earned when the goods are
transferred from seller to buyer.
• All sales should be supported by a document such as a
cash register tape (to provide evidence of cash sales) or
cash receipt, or office receipt for cash sales, and charge
invoice for credit sales, or sales on account.
Sales Recording:
Periodic Inventory System
• One entry is made with each sale:
– Debit — Accounts Receivable (if a credit sale) or Cash (if a
cash sale) which increases assets for the sales amount
– Credit — Sales which increases revenues
• The sales account is credited only for sales of goods held
for resale. Sales of assets not held for resale (such as
equipment, buildings, land, etc.) are credited directly to
the asset account.
1/10/2016 Official Receipt (OR) No. 001 Sold two units for
cash to Marie Cruz for PHP36,000 (PHP18,000 per unit),
FOB Destination.
1/15/2016 Charge Invoice (ChI) No. 001 Sold five units on
account to Rafael Reyes for PHP97,500 (PHP19,500 per
unit) with terms 3/10, n/30, FOB Shipping Point.
FREIGHT TERMS: FOB DESTINATION —
SELLER PAYS FREIGHT
• An entry is made when seller pays the freight to deliver
goods to a customer or buyer. If the buyer will pay for the
freight, no entry is made.
• Debit — Delivery Expense and credit — Cash or
Accounts Payable
FREIGHT TERMS: FOB SHIPPING POINT
— BUYER PAYS FREIGHT
• No Entry
On January 10, 2016 Magaling paid MM Express, PHP500
FOB Destination, to deliver the two units to Marie Cruz.
Sales Returns and Allowances
• Sales Returns. Result when customers are dissatisfied
with merchandise and are allowed to return the goods to
the sellers for credit or refund.
Sales Returns and Allowances
• Sales Allowances. Result when customers are
dissatisfied, and the seller allows a deduction from the
selling price.
• To grant the return or allowance, the seller prepares a
credit memorandum to inform the customer that a credit
has been made to the customer’s accounts receivable.
• Sales Returns and Allowances is a contra revenue
account to the Sales account. A contra account is a
reduction to a particular account.
• A contra account is used, instead of debiting sales, to
disclose in the accounts the amount of sales returns and
allowances.
• The normal balance of Sales Returns and Allowances is a
debit.
Two entries are made with
each sale return and allowance:
• The first entry records the sales return or allowance:
– Debit —Sales Return and Allowances which decreases
revenues for the amount of the sale
– Credit — Accounts Receivable (if a credit sale) or Cash (if a
cash sale) which decreases assets
On January 16, 2016, Rafael Reyes returned one unit of the
computers purchased last January 15, 2016 under Charge
Invoice 001. The unit returned was in good condition.
However, Rafael Reyes returned the unit because it is one
unit more than what they need. The return was approved
and accepted by Magaling. The price will be deducted from
the account of Rafael Reyes.
Sales Discounts
• A sales discount is the offer of a cash discount to a
customer to encourage them to pay the balance at an
earlier date.
• An example of a discount term is commonly expressed
as: 2/10, n/30, which means that the customer is given
2% discount if payment is made within 10 days. After 10
days there is no discount, and the balance is due in 30
days.
• Sales Discounts is a contra revenue account with a
normal debit balance.
Assume that Magaling purchased on cash, five units of
computers at PHP10,000 per unit from a supplier on
January 17, 2016. These units were subsequently sold to
Jun Cruz on January 18, 2016 under Charge Invoice (ChI)
No. 002 amounting to PHP90,000 (PHP18,000 per unit)
with terms 2/10, n/30, FOB Shipping Point. On January 23,
2016, Cruz paid the said account in full.
What If Jun Cruz paid the account on January 30, 2016
instead of January 23, 2016?
Cost of Goods Sold
The largest single expense of the merchandising business.
It is the cost of inventory that the entity has sold to
customer.
Sales
• Merchandiser’s primary source of revenue.
Expenses for a Merchandising Company
• Cost of Goods Sold (COGS)- the total cost of
merchandise sold during the period.
• Operating Expense (OP)- Expenses incurred in the
process of earning sales revenue that are deducted from
gross profit in the income statement.
Cost of Goods Sold:
Merchandise Inventory, Beginning
Purchases
Less: Purchase Returns and Allowances
Purchase Discounts
Net Purchases
Add: Freight In
Cost of goods purchased
Cost of goods available for sale
Merchandise Inventory, Ending
Cost of Goods Sold
Net Sales:
Gross Sales
Less: Sales Returns and Allowances
Sales Discounts
Net Sales
Perpetual System
Detailed records of the cost of each item are maintained,
and the cost of each item sold is determined from records
when the sale occurs. Both the inventory and cost of goods
sold accounts receive entries throughout the accounting
period.