BITS College

Undergraduate Program

Course Number : SP 311

Course Title: Business Accounting

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 Chapter Three

Accounting For a
Merchandising Business
2
Accounting For A Merchandising Business

Learning Objectives
3.1 Meaning and Characteristics of merchandising business
3.2 Accounting for purchases of merchandises
3.3 Accounting for sales of merchandises
3.4 Inventory systems: Perpetual and Periodic
3.5 Chart of accounts for a merchandising business
3.6 Financial statements for a merchandising business
3.7 Adjusting and closing entries
Meaning and Characteristics
A merchandising business is a business which is engaged in actively
buying and selling merchandises.
 Merchandises are itemized list of goods which are ready for sale
without requiring further change in structure and/or additional process.

 Features:
 Merchandise inventory is the significant cost of investment
 The main source of revenue is selling of merchandises often called sales
 The cost of merchandise may include: purchase prices, transportation
costs, taxes, customs duties, loading – unloading costs, etc.
Accounting for Purchases and Sales
Accounting for Purchases and sales
 When merchandises are acquired by a firm the following journal entry
will be recorded:
 Purchases ……………….… xxx
 Cash or A/Payable ………………….XXX

 When merchandises are sold by a firm, the following journal entry will be
recorded:
 Cash or A/ Receivable ……………… XXX
 Sales …………………………………………………..XXX

 Example:
 On Feb. 10, 2023, ABC co. acquired merchandises Br. 12,000 for cash
from XYZ Co. Record the journal entry in the books of the buyers and the
seller
Accounting for Purchases and sales
 Solution:
 By the Buyer (ABC Co.)
Date Description P/R Debit Credit
2023
Feb. 10 Purchases 12,000 -
Cash 12,000 -

 By the Seller (XYZ Co.)

Date Description P/R Debit Credit
2023
Feb. 10 Cash 12,000 -
Sales 12,000 -
Discounts and Returns and Allowances
Discounts and Returns and Allowances
 If payments are required immediately upon delivery, the terms are said to be
“cash” or “net cash”.
 Otherwise, the buyer is allowed a certain amount of time, known as the
credit period, in which to pay.
 Credit terms: are arrangements agreed upon by the buyer and the seller as
to when payments for merchandises.
 Discounts are offered to customers to promote prompt payments.
 E.g. 1/10, n/30
 (meaning: 1% of invoice price is given if payment is effected in ten days. Otherwise,
the total invoice price should be settled in 30 days from date of invoice)
 E.g. 2/10, n/eom
 (meaning: 1% of invoice price is given if payment is effected in ten days. Otherwise,
the total invoice price should be settled in 30 days from date of invoice)
 When discounts are given it results reduction in gross purchases and sales
Discounts and Returns and Allowances
 Example:
 On Feb. 12, 2023, ABC Co. purchased merchandises from XYZ Co. Br.
25,000 on accounts terms 2/10, n/30.
 Required:
 Record the journal entry in the books of the buyer and seller:
 On the date of the transaction

 On the date of payment:

 If payment effected within the discount period

 If payment effected outside the discount period

Discounts and Returns and Allowances
 Example:
 Journal entries:
 On the date of the transaction

Date BUYER SELLER

2023
Feb. 12 Purchases 25,000 A/Rec. – ABC Co. 25,000
A/Pay. – XYZ Co. 25,000 Sales 25,000
Discounts and Returns and Allowances
 Example:
 If payment effected within the discount period
Date BUYER SELLER
2023
Feb. 12 A/Pay. – XYZ Co. 25,000 Cash 24,500
Cash 24,500 Sales Discount 500
Purchases Discount 500 A/Rec. – ABC Co. 25,000

 If payment effected outside the discount period

Date BUYER SELLER
2023
Feb. 12 A/Pay. – XYZ Co. 25,000 Cash 24,500
Cash 25,000 A/Rec. – ABC Co. 25,000
Returns and Allowances
 Merchandises sold may be returned by the buyer (sales return) or,
because of defects or for other reasons, the buyer may be allowed a
reduction from the original price at which the goods were sold (sales
allowances)
 This will be recorded as a credit to purchase returns and allowances for
the buyer and a debit to sales returns and allowances for the seller.
 Example 1:
 On Feb. 15, 2023 ABC co. purchased merchandises from XYZ Co. Br. 30,000
cash in 1/10, n/30 credit terms
 On Feb. 18, 2023 ABC co. returned Br. 5000 worth merchandises which are part
of the Feb. 15, 2023 purchases to XYZ co.
 On Feb. 20, 2023 XYZ co. received cash from ABC co. for the merchandises
sold on Feb. 15, 2023.
 Record the journal entries in the books of the buyer and the seller
Returns and Allowances
 Example 2:
 On Feb. 17, 2023 ABC co. purchased merchandises from XYZ Co. Br. 40,000
cash in 2/15, n/60 credit terms
 On Feb. 28, 2023 ABC co. paid the amount for the Feb. 17, 2023 purchases
 On Mar. 03, 2023 XYZ Co. received Br. 10,000 worth of merchandise as returns
which were part of the Feb. 17, 2023 sales made to ABC Co.
 Record the journal entries in the books of the buyer and the seller
Transportation Costs
Transportation Costs
 The terms of agreement between buyer and seller include provisions
concerning:
 When the ownership (title) of the merchandise passes to the buyer and
 Which party is to bear the cost of delivering the merchandise to the buyer
 There are two transportation terms: FOB shipping point and FOB destination
 Under FOB shipping point, the seller places the merchandise “free on
board” at the shipping point and the buyer is responsible for the
transportation costs beyond that point.
 In such a case, the transportation cost will be debited to either
“transportation-in” account or “freight-in” account.
 Under FOB Destination, the seller places the merchandise “free on board” to
its destination by paying the delivery costs
 In such a case, the seller will debit “transportation-out” account or “freight-
out” account.
Transportation Costs
 Example 1:
 Assume that on February 20, 2023 ABC co purchased merchandises from
XYZ co. on account Br. 9000 terms FOB shipping point, 2/10, n/30, with
prepaid transportation costs of Br. 500 added to the invoice.

 On Mar. 01, 2023, ABC co settled the amount

 Required: record the journal entries in the books of the buyer and the seller
 As of Feb. 20, 2023
 As of Mar. 01, 2023
Transportation Costs
 Solution:
 journal entries in the books of the buyer and the seller
 As of Feb. 20, 2023
Date Buyer (ABC Co) Seller (XYZ Co.)
2023
Feb. 20 Purchases 9000 A/Rec. 9500
Transportation-In 500 Sales 9500
A/Payable 9500

 As of Mar. 01, 2023

Date Buyer (ABC Co) Seller (XYZ Co.)

2023
Mar. 01 A/Payable 9500 Cash 9320
Purchased Discount 180 Sales Discount 180
Cash 9320 A/Rec. 9500
Transportation Costs
 Example 2:
 Merchandise is sold on account to a customer Br. 1000, terms FOB
destination, 1/10, n/30. If the seller pays Br. 50 in transportation costs
and the customer returns Br. 100 of the merchandise prior to payment,
what is the amount of the discount for early payment?
 A. Br. 9.50.00
 B. Br. 9.00
 C. Br. 10.00
 D. Br. 10.50
Transportation Costs
 Exercise 1:
 Oct. 02. Sold merchandises to a customer for Br. 10,000, terms FOB
shipping point, 1/10, n/30.
 Oct. 02. Paid the transportation charges of Br. 1950, debiting the amount
to Accounts Receivable
 Oct. 06. Issued a credit memorandum for Br. 1000 to the customer for
merchandises returned
 Oct. 12. received a check for the mount due from the sale

 Required: record the journal entries

Transportation Costs
 Exercise 2:
 Nov. 01. Sold merchandises to a customer for Br. 15,000, terms FOB
destination point, 2/10, n/45.
 Nov. 02. Paid the transportation charges of Br. 1500 to express transport plc
 Nov. 08. Issued a credit memorandum for Br. 1200 to the customer for
merchandises returned
 Nov. 11. received a check for the mount due from the sale

 Required: record the journal entries

Taxes
Sales Taxes
 Governments levied taxes on consumers at the time when goods and
services are sold.
 Sellers often serve as agents of governments and collect taxes from
their customers.
 Then periodically, sellers should remit amounts they collect to a
government organ.
 In doing so, sellers should record:
 sales tax payable as a credit at they time when they collect taxes from
customers and
 make a debit entry to sales taxes payable and credit to cash at the time
when they do remit the amount to a government organ.
Sales Taxes
 Example 1:
 A sale of Br. 1200 on account to a customer is subject to 3% tax. Record the
journal entry.

 Example 2:
 Present entries to record the following related transactions of CD Co.
 A. purchased merchandises on account, Br. 150,000, terms 2/10, n/30
 B. Sold Br. 30,000 of merchandises on account, subject to 15% VAT
 C. paid the amount owed in (a) within the discount period
 D. Paid the tax authority for the taxes collected on the sales made (b)
above
Inventory Systems
Inventory Systems
 There are two main systems for accounting for merchandise held for sale:
 Periodic inventory system
 Perpetual inventory system

 Periodic inventory system:

 Often used by small firms
 Under this system:
 When merchandises acquired:
 Purchases …………………… xxx
 Cash or A/Payable ……………………. xxx
 Revenue from sales are recorded when sales are made but no attempt is made on
the date of sale to record the cost of merchandise sold
 Cash or A/Receivable ………………xxx
 Sales ……………………………………………..xxx
 Taking a physical or inventory count is a must to determine:
 the cost of merchandise sold [Expense]
 The cost of merchandise on hand [Asset]
Inventory Systems
 Perpetual inventory system:
 Often used by big firms that do have varieties of merchandises
 Under this system:
 When merchandise acquired:
 Merchandise Inventory …………………. XXX
 Cash or A/Payable …………………………………… XXX

 When merchandises sold: Both the revenue from sale of merchandises and the cost
of merchandises sold are recorded on the date of sale
 To record the revenue:
 Cash or A/Receivable ………………xxx
 Sales ……………………………………………..xxx
 To Record the cost of merchandise sold
 Cost
of merchandise (goods) sold …………… xxx
 Merchandise Inventory ………………………………. xxx
 Taking a physical or inventory count is not a must but recommended to reconcile
the book records with the physical count.
Cost of Merchandise Sold Schedule
Cost of Merchandise Sold Schedule: Periodic

 Purchases………………………………….………………….. XXX
 Less: Purchases Ret. and Allow. ……. xxx
 Purchases Discounts …………… xxx XXX
 Net Purchases ……………………………………………………….... XXX
 Add: Transportation- In (freight- in) ……………………………….. XXX
 Cost of Merchandise purchased ………….………………………………XXX
 Less: Merchandise inventory, Ending Balance ………………………… XXX
 Cost of Merchandise Sold ………………………………………………….. XXX
Cost of Merchandise Sold Schedule: Perpetual
 Merchandise Inventory, Beginning Balance ……………………………..XXX
 Purchases………………………………….………………….. XXX
 Less: Purchases Ret. and Allow. ……. xxx
 Purchases Discounts …………… xxx xxx
 Net Purchases ……………………………………………….. XXX
 Add: Transportation- In (freight- in) ……………………... XXX
 Cost of Merchandise purchased ………….………………………………XXX
 Cost of Merchandise available for sale ………………………………… XXX
 Less: Merchandise inventory, Ending Balance ………………………… XXX
 Cost of Merchandise Sold ………………………………………………….. XXX
Exercise
 Based on the following data, prepare the cost of goods (merchandise)
sold section for the fiscal year ended 2021:
 Merchandise inventory, ending of 2020…………….. Br. 25,000
 Purchases ………………………………………………… 60, 000
 Purchases returns and allowances ……………… 2% of purchases
 Purchases Discount ………………………………… 3.5% of purchases
 Merchandise inventory, ending of 2021 ………… 85% of beginning inventory
Adjustments
Adjustments
 The adjustment process for a merchandising enterprise is similar with a
service entity except that for a merchandising firm that follows periodic
inventory system there is a need to make adjustment for merchandise
inventory.
 Two journal entries are required:
 To remove the beginning inventory balance by:
 IncomeSummary ………………. XXX
 Merchandise Inventory ……………..XXX

 To record the ending inventory balance by:

 MerchandiseInventory ………… XXX
 Income Summary ……………………..XXX
End of Chapter Three