LESSON 1. THE MERCHANDISING purchase returns and allowances.

Cost of
BUSINESS transporting the goods shouldered by the buyer is
recorded as freight-in. Cost of transporting the
goods shouldered by the seller is recorded as
NATURE OF A MERCHANDISING BUSINESS freight-out or delivery expense. Furthermore,
A business engaged in the buying and selling of transactions related to the sale of inventory are
merchandise or good is called TRADING or recorded accordingly as sales, sales discount and
MERCHANDISNG FIRM. While a service type of sales returns and allowances.
business earns income by rendering services to its
clients, a Merchandising type of business THE PERPETUAL SYSTEM
GENERATES INCOME BY BUYING AND For businesses selling high-priced items, the
SELLING GOODS AT A PROFIT. Moreover, a perpetual system is more appropriate system to
merchandising business is also different from a use. Car dealers and expensive watch stores
manufacturing business. A MANUFACTURING approximately make small number of sales daily.
business BUYS RAW MATERIALS AND These sales are few and since the amount per item
PROCESSES THEM TO BECOME FINISHED is material, the cost of each item sold can be
GOODS FOR SALE. On the other hand, a recorded as the cost of good sold per sales
merchandising business only buys and sells transactions. Thus, the running balance of
finished goods. The merchandiser purchases these inventory on hand and the cost of sales are shown
goods directly from the manufacturer or from other continuously. At the end of the accounting period,
mechandisers. the balance of the ending inventory should be the
same with the actual physical count unless there is
TYPES OF MERCHANDISERS theft, obsolescence, or spoilage of goods.
1. Wholesaler – one who buys in bulk or volume
directly from a manufacturer and sells the goods to
a retailer
2. Retailer – one who sells products to end users
LESSON 2. THE PERIODIC SYSTEM
MERCHANDISING OPERATIONS
Two main activities are involved in a merchandising RECORDING TRANSACTIONS UNDER THE
business, namely, BUYING and SELLING. PERIODIC SYSTEM
Therefore, there two points of view considered in  DISCOUNT
recording the business transactions of a  A discount is a reduction from a certain
merchandising business. There are the points of price or amount. There are two kinds of
view of the buyer and the seller. discount in accounting for merchandising
transactions, the TRADE DISCOUNT
INVENTORY SYSTEMS IN A MERCHANDISING and the CASH DISCOUNT.
BUSINESS
Since a merchandising business purchases goods  TRADE DISCOUNT
for sale in the ordinary course of its business o A deduction from the list price or
operations, the goods acquired form part of the catalogue price granted to customers
goods available for sale. Thus, the merchandise to encourage purchase of goods or
inventory is an important factor in the determination merchandise in big quantities or
of these goods as well as the cost of sales. The two volume. This is not recorded or shown
alternative systems which can be used in recording in the buyer’s or seller’s books.
transactions related to a company’s merchandise  CASH DISCOUNT
inventory are the PERIODIC SYSTEM and THE o A deduction from the selling or
PERPETUAL SYSTEM. purchase price granted to customers to
encourage prompt payments of
THE PERIODIC SYSTEM accounts. This is recorded or shown in
For businesses selling goods with different low- the buyer’s and seller’s books. This is
priced items, the periodic system maybe a more recorded as purchase discount in the
appropriate system to use. The sales transactions books of the buyer or sales discount in
resulting from the sale of these low-priced items the books of the seller. This method of
are voluminous. As such, it is not feasible to be recording cash discount in the books of
tracing from the records the cost of each small item the buyer or seller is known as the
every time a sale is consummated. Gross Method.

A supermarket for instance, cannot trace the cost TRADE DISCOUNT

of every bar of soap or bottle of shampoo sold. ILLUSTRATIVE PROBLEM
Businesses selling low-priced items usually a. Spitz Co. bought merchandise for cash with a list
determine the cost of goods sold at the end of the price of P10,000 less 10% trade discount.
accounting period.
LIST PRICE P10,000
Under the periodic system, transactions related to LESS: 10% TRADE DISCOUNT
the acquisition of inventory are recorded (P10,000 X 0.1) 1,000
accordingly as purchases, purchase discounts, and PURCHASE PRICE P 9,000
 NOTE: 1. The 20-10 in the terms represents the
JOURNAL ENTRY ON THE BOOKS OF SPITZ trade discount given to the buyer while the 1/10,
CO. and n/30 are the terms of payment.
Purchases 9,000
Cash 9,000 2. The trade discount was not shown in the books
To record purchased merchandise for cash with and the purchase price recorded on the books is
trade discount P90,000. The list price of P125,00 did not reflect in
the books. Moreover, the “with trade discount” and
NOTE: The trade discount was NOT shown in the the terms must show in To record.
books and the purchase price recorded in the
books is P9,000. The list price of P10,000 did not CASH DISCOUNT
reflect in the books. The “with trade discount” must EXAMPLES OF DIFFERENT CREDIT TERMS:
show in To record.  3/15, 2/20, n/30 – means that a 3% cash
discount is granted to the buyer if account is
b. Terrier Co., sold merchandise to Poodle Co. with paid withing15 days from date of purchase, 2%
a list price of P50,000. Terms: 10%, 10%, 2/10, cash discount is given if account is paid within
n/30. 20 days, purchase price less returns and
allowances if any is payable within 30 days.
NOTE: The 10%, 10% in the terms represent the
trade discount given to the buyer, while the 2/10,  1/10, n/60 – means that a 1% cash discount is
n/30 are the terms of payment. The different term granted to the buyer if account is paid within
of payment will be discussed under cash discount. 10 days from date of purchase, purchase price
less returns and allowances if any, is payable
List Price P50,000 within 60 days.
Less: 10% Trade Discount
(P50,000 x 0.10) 5,000  n/30 – means that no cash discount is
Balance P45,000 available to the buyer. Purchase price less
Less: 10% Trade Discount returns and allowances if any, within 30 days.
(P45,000 X 0.10) 4,500
Sale Price P40,500  2/10 EOM, n/60 – means that a 2% cash
discount is granted to the buyer if paid 10 days
after the End Of the Month (EOM). Purchase
JOURNAL ENTRY N THE BOOKS OF TERRIER price less returns and allowances if any is
CO. payable within 60 days.
Accounts Receivable 40,500
Sales 40,500  1/EOM, n/30 – means that 1% cash discount is
To record sold merchandise on account with given if the buyer pays until the end of the
trade discount; Terms: 10%, 10%, 2/10, n/30 month. Purchase price less returns and
allowances if any, is payable within 30 days.
NOTE: The Trade discount was not shown in the
books and the sales price recorded in the books is  EOM – means that no cash discount is
P40,500. The list price of P50,000 did not reflect in available. Purchase price less returns and
the books. allowances if any is payable at the end of the
month.
c. Dalmatian Co. bought goods from Rotweiller Inc
with list price of P125,000. Terms 20, 10,1/10, n/30. NOTE: EOM can also be written as eom.

COMPUTATION: ILLUSTRATIVE PROBLEM

List Price P125,000 A. On July 1, Kat Merchadising purchased good
Less: 20% Trade Discount from Kit Trading for P70,000. Terms 1/10, n/30.
(P125,000 0.20) 25,000
Balance P100,000 The terms 1/10, n/30 means that a 1%
Less: 10% Trade Discount discount will be given if payment is made within
(100,000 x 0.10) 10,000 10 days from July 1 and no discount will be given
Purchase Price P90,000 if payment is made beyond 10 days. (Purchase
price less returns and allowances if any) is
payable within 30 days.
JOURNAL ENTRY ON THE BOOKS OF
DALMATIAN CO. Purchase Price P70,000
Purchases 90,000 Less: 1% x P70,000 700
Accounts Payable 90,000 Payment within 10 days P69,300
To record purchased merchandise on account
with trade discount; Terms: 20%, 10%, 1/10,
n/30
B. Assuming the terms of Kat Merchandising’s 3. A. Returned defective merchandise bought on
purchase is 3/10, 2/15, n/30 and Kat Merchandising account
paid on July 16. B. Allowances granted by seller for the account
purchases
The terms 3/10, 2/15, n/30 mean that a 3% C. Issued a debit memo to the seller for
discount will be given if payment is made within merchandise returned
10 days from July 1, 2% discount will be given if Accounts Payable xxx
payment is made within 15 days from July 1, and Purchase Returns
no discount will be given if payment is beyond 15 and Allowances xxx
days. (Purchase price less returns and
allowances if any) is payable within 30 days. 4. Received cash refund for returned merchandise
Cash xxx
Purchase Price P70,000 Purchase Returns
Less: 2% x P70,000 1,400 & Allowances xxx
PAYMENT within 15 days P68,600
5. Transportation charges incurred in buying
C. Assuming the terms of Kat Merchandising’s merchandise
purchase is 3/10 EOM, n/60 and Kat Freight-In xxx
Merchandising paid on August 10. Cash or Accounts Payable xxx

The terms 3/10 EOM, n/60 means that a 3% 6. Paid account within the discount period arising
discount will be given if payment is made 10 from the purchase of merchandise.
days after the end of the month and no discount Accounts Payable xxx
will be given if payment is made beyond the Purchase Discount xxx
discount period. (Purchase price less returns and Cash xxx
allowances if any) is payable within 60 days.
7. Paid account after the discount period
Purchase Price P70,000 Accounts Payable xxx
Less: 3% x P70,000 2,100 Cash xxx
Payment within discount period P67,900
ACCOUNT TITLES USED
1. Purchases – the account used to record the
BUYER’S POINT OF VIEW cost of the goods or merchandise bought for
A buyer is the one who purchases goods. purposes of resale.
Merchandise inventory are goods or commodities
purchased by the company for sale normally at a 2. Purchase Returns and Allowances – the
profit. Certain documents are prepared by the account used to record returns acknowledged
buyer to complete a purchase transaction. or allowances granted by the supplier to the
buyer from the purchase of goods.
1. Purchase Order – a document sent by the
buyer to the seller ordering certain goods 3. Purchase Discount – a reduction from the
where the date, quantity, description of goods, purchase price of the merchandise or goods
and the total amount of the order is indicate. bought granted by the supplier to the buyer or
This authorizes the seller to deliver the goods customer for paying within the discount period.
to the buyer under the agreed specifications,
terms and conditions. 4. Freight-in – the cost of transporting the
2. Receiving Report – a form prepared by the merchandise or goods from the seller’s place
buyer’s receiving personnel stating the quantity to the buyer’s place of business. This is also
and condition of the goods delivered by the called Transportation-in.
seller.
3. Debit Memorandum – a written notice from JOURNAL ENTRY
the buyer informing the seller that the buyer NOTE: H’wag niyo kakalimutan na laging mauuna
will debit the account or decrease the amount si Debit(Left side) bago kay Credit(Right Side)
owed to the seller for returned goods or
allowances requested due to defect or wrong
Date Particulars Debit Credit
specifications.
DEBIT – incoming money (nakuha mo)
PRO FORMA JOURNAL ENTRIES: BUYER’S
CREDIT – outgoing money (inilabas mo)
POINT OF VIEW
1. Purchased Merchandise for cash
Purchases xxx ACCOUNT TYPE Increase (+) Decrease (-)
Cash xxx Asset Debit Credit
Liability Credit Debit
2. Purchase merchandise on account Equity Credit Debit
Purchases xxx Income / Revenue Credit Debit
Accounts Payable xxx Expense Debit Credit
 NOTE: Accounts Payable dahil nabawasan ang
ILLUSTRATIVE PROBLEM: BUYER’S POV utang ni buyer kaya ito ay ilalagay sa Dr. at
Purchase Returns & Allowances naman ang
1. On April 5, Cinder Company purchased from gagamitin kung nag returned ng defective
Rella Company merchandise for cash worth merchandise at ito ay ilalagay sa Cr. dahil
P150,000. nabawasan ang Assets ni Buyer.

Purchases 150,000 ACCOUNT TYPE Increase (+) Decrease (-)

Cash 150,000 Liability Credit Debit
To record purchased merchandise for cash. Asset(Merchandise) Debit Credit

NOTE: Purchases ang ginamit dahil

nagpurchased si Buyer ng merchandise. At 4. Snow Company made a partial payment of
binayaran niya na ito nang Cash (for Cash) kaya P20,000 to White Company.
Cash ang ginamit natin. Nasa Debit Side si Accounts Payable 20,000
Purchases dahil nadagdagan ang assets ni buyer. Cash 20,000
Habang nabawasan naman ang Cash ni buyer To record the partial payment from White Co.
kaya ito ay nasa Credit. Account

ACCOUNT TYPE Increase (+) Decrease (-) NOTE: Nabawasan ang utang(Accounts
Asset(Merchandise) Debit Credit Payable/Liabilities). Nabawasan ang
Asset (CASH) Debit Credit pera(Cash/Assets)

ACCOUNT TYPE Increase (+) Decrease (-)

2. On April 10, Snow Company purchased Liability Credit Debit
merchandise from White Company for P300,000 Asset(Merchandise) Debit Credit
paying P50,000 and the balance on account.
Terms: 2/10, n/30.
5. Cinder Company returned defective
Purchases 300,000 merchandise to Rella Company worth P20,000 and
Accounts Payable 250,000 received a cash refund for the amount.
Cash 50,000 Cash 20,000
To record purchased merchandise on account. Purchase Returns & Allowances 20,000
Terms: 2/10, n/30 To received cash refund for returned defective
merchandise
NOTE: Purchases ang ginamit dahil
nagpurchased si Buyer ng merchandise. Cash NOTE: Nadagdagan ang Cash. Nabawasan ang
dahil nagbayad siya ng 50,000. Accounts Payable assets dahil nireturned and merchandise.
dahil mayroon itong utang o balance on account.
Nasa Dr. ang purchases dahil nadagdagan ang ACCOUNT TYPE Increase (+) Decrease (-)
assets ni buyer. Cr. naman ang Accounts Payable Asset (CASH) Debit Credit
dahil nadagdagan ang utang ni buyer. At Cr. ang Asset(Merchandise) Debit Credit
cash ni buyer dahil nabawasan ang asset nito.
*Ang cash ay isang asset. Habang ang Accounts
payable naman ay Liabilities o utang* 6. Paid P5,000 for transportation charges for
merchandise bought from White Company.
ACCOUNT TYPE Increase (+) Decrease (-) Freight-in 5,000
Asset(Merchandise) Debit Credit Cash 5,000
Liability Credit Debit To record the transportation charges for
Asset (CASH) Debit Credit purchased merchandise or To record freight
charges for merchandise purchased
NOTE 2: Terms: 2/10, n/30
Tatandaan mo rin na kailangan magbayad ni Snow NOTE: Nagbayad ng transportation charges
Company within 10 days para may discount siya na kaya ang gagamitin ay Freight-in. Nadagdagan
2%. Kung hindi naman siya makakabayad within 10 ang expenses(transportation charges).
days ay mayroon pa rin siyang 30 days, simula Nabawasan ang Cash.
nang bumili siya, para makapagbayad.
ACCOUNT TYPE Increase (+) Decrease (-)
Expense Debit Credit
3. Snow Company returned defective merchandise Asset (CASH) Debit Credit
to White Company worth P30,000.

Accounts Payable 30,000

Purchase Returns & Allowances 30,000
To record the returned defective
merchandise on account.
7. Paid account to White Company on April 19 NOTE: Nabawasan ang utang. Nabawasan din
(refer to terms in No. 2) ang cash. Ang Discount ay laging nakaallign kay
Accounts Payable 200,000 Cash, meaning, dapat lagi silang pantay para
Purchase Discount 4,400 maging balance.
Cash 195,600
To record the payment for purchased ACCOUNT TYPE Increase (+) Decrease (-)
merchandise with purchase discount; Terms: Liability Credit Debit
2/10, n/30 or To record account from White Asset (CASH) Debit Credit
Co within the discount period
8. ON April 15, Rumple Company purchased
COMPUTATION: merchandise from Snow Company worth P60,000
Purchases P300,000 on account. Terms: 3/10 EOM, n/60.
Less: Down Payment 50,000 Purchases 60,000
Account Purchases P250,000 Accounts Payable 60,000
Less: Purchase Returns & Allowances 30,000 To record purchased merchandise on
Net Purchase P220,000 account; Terms: 3/10 EOM, n/60
Less: 2% Purchases Discount
(220,000 x 0.02) 4,400 NOTE: Purchases dahil nagpurchased ng
Balance P215,600 merchandise si RC. Accounts Payable dahil ito ay
Less: Partial Payment 20,000 hindi binayaran kundi utang. Nadagdagan ang
Payment w/in discount period P195,600 assets(purchases). Nadagdagan rin ang utang.

NOTE: Kung babalikan ang transaction no. 2, si ACCOUNT TYPE Increase (+) Decrease (-)
Snow Company ay bumili noong April 10 at may Asset(Merchandise) Debit Credit
2% discount siya kung makakabayad siya within Liability Credit Debit
10 days. So meaning, kung makakapagbayad siya
maalin man sa araw ng April 10-19, ay mabibigyan NOTE: Tandaan din na dapat mabayaran within 10
siya ng 2%. Nagbayad siya nang April 19 kaya days after the EOM or End of the Month para
mayroon siyang 2% discount. magkaroon ng 3% discount. Meaning, mayroon
siyang 60 days para bayaran ang kaniyang utang
Need mo munang icompute lahat ng naging (n/60) at kapag nagbayad siya ng May 1-10 ay
transaction ni Snow Company sa merchandise na mayroon siyang 3% discount.(3/10 EOM)
iyon, bago mo masagutan ito sa journal entry.
Meaning ng 3/10 EOM:
Bakit naging 200,000 ang Accounts April 15 – acquisition or araw na nagpurchased
Payable? April 30 – EOM (End of Month)
April 10/Transaction 2- Bumili si SC ng May 1-10 – within 10 days (3/10)
merchandise at nagbayad na kaagad ng May 11-31 – after the discount period
50,000. Kaya 300,000(halaga ng purchased June 1-13 – after the discount period and n/60
merchandise) minus 50,000. Ang natira ay
250,000. 9. On May 18, Rumple Company paid the account
Transaction 3- Nireturned ni SC ang defective to Snow Company.
merchandise na nagkakahalaga ng 30,000. Accounts Payable 60,000
Kaya 250,000 minus 30,000, ang natira ay Cash 60,000
220,000. To record the payment for purchased
Transaction 4- Nagbigay ng partial payment si merchandise on account; Terms: 3/10 EOM, n/60
SC worth 20,000. Kaya 220,000 minus 20,000 or To record paid account with Snow Company
is equal to 200,000. Meaning 200,000 nalang ACCOUNT TYPE Increase (+) Decrease (-)
ang natirang accounts payable ni SC.
Liability Credit Debit
Sa pagbawas naman ng purchase discount
Asset (CASH) Debit Credit
nito, hindi tayo magpapatak ng discount sa
accounts payable kundi sa Net Purchase nito.
NOTE: Si RC ay nagbayad nang May 18 kaya siya
Ang Net Purchase nito ay 220,000,dito na tayo
mismo magbabawas ng discount pagkatapos ay wala ng makukuhang 3% discount dahil lagpas
ay ile-less na natin ang binayad ni SC sa na sa discount period.
transaction 4.
COMPUTATION:
Purchases P300,000
Less: Down Payment 50,000
Account Purchases P250,000
Less: Purchase Returns & Allowances 30,000
Net Purchase P220,000
Less: 2% Purchases Discount
(220,000 x 0.02) 4,400
Balance P215,600
Less: Partial Payment 20,000
Payment w/in discount period P195,600
SELLER’S POINT OF VIEW PRO FORMA JOURNAL ENTRIES: SELLER’S
A SELLER is one who offers his/her merchandise POINT OF VIEW
for sale in exchange for monetary payment. In a 1. Sold Merchandise for Cash
sales transaction, documents are ordinarily issued Cash xxx
by the seller to evidence the sales of goods Sales xxx

1. Sales Invoice - contains the name and 2. Sold Merchandise on Account

address of the buyer, the description of the Accounts Receivables xxx
goods sold, the credit terms, unit price, Sales xxx
quantities, total amount and sate of sale.
This evidences the transfer of ownership of 3. a. Received defective merchandise sold on
the goods from the seller to the buyer. Account
b. Allowances granted to buyer for the accounts
Sales
c. Issued a credit memo to the buyer for
merchandise returned
Sales Returns & Allowances xxx
Accounts Receivable xxx

4. Paid cash refund for returned merchandise

Sales Returns & Allowances xxx
Cash xxx

5. Transportation chargers incurred in SELLING

merchandise
Freight-out or Delivery Expense xxx
Cash or Accounts Payable xxx

2. Official Receipt – A written Note: FREIGHT-OUT is debited if delivery of goods

acknowledgement of money received by the is outside the area of the seller’s place of business.
seller evidencing payment of the buyer for DELIVERY EXPENSE is debited if delivery of
goods purchased and received. goods is within the area of the seller’s place of
business.

6. Collected account within the discount period

arising from the SALE of merchandise.
Cash xxx
Sales Discount xxx
Accounts Receivable xxx

7. Collected account after the discount period.

Cash xxx
Accounts Receivable xxx

ACCOUNTS TITLE USED

3. Credit Memorandum – a written notice form 1. Sales – the proceeds from the sales price of
the seller signifying acknowledgement or goods sold credited to the revenue account in
acceptance of the goods returned by the the accounting period when the sale were
buyer. This notifies the buyer of a made.
corresponding reduction in the amount owed 2. Sales Returns & Allowances – the account
by the buyer because goods returned or used to record returns acknowledged or
allowances granted due to defect or wrong allowances granted by the supplier to the
specification. buyer from the sale of goods.
3. Sales Discount - a reduction from the sales
price of the merchandise or goods granted by
the seller to the buyer or customer for paying
within the discount period.
4. Freight-Out or Delivery Expense – the cost
of transporting the merchandise or goods from
the seller’s place to the buyer’s place of
business.
ILLUSTRATIVE PROBLEM: SELLER’S 3. Persian Ket Trading received defective
BOOKS merchandise worth P10,000 from Porket Company.

Date Particulars Debit Credit Sales Returns & Allowances 10,000

Accounts Receivable - Porket 10,000
To record received returns on merchandise
ACCOUNT TYPE Increase (+) Decrease (-)
sold on account.
Asset Debit Credit
Liability Credit Debit ACCOUNT TYPE Increase (+) Decrease (-)
Equity Credit Debit Asset (Sales Debit Credit
Income / Revenue Credit Debit Returns &
Expense Debit Credit Allowances)
Asset (Accounts Debit Credit
1. On July 10, Siamese Ket Trading sold Receivable)
merchandise worth P100,000 COD to Dee Ket
Company. NOTE: Ibinalik kay PKT ang ibinili sa kaniya ni PC.
Ibig sabihin, nadagdagan ang sales ni seller kaya
Cash 100,000 ito ay nasa debit. Ngunit dahil sa ito ay ibinalik,
Sales 100,000 imbes na SALES ang ilalagay, ito ay magiging
To record sold merchandise for cash. Sales Returns and Allowances. Mababawasan
naman ang dapat matatanggap na pera ni seller
NOTE: COD means Cash on Delivery or Collected dahil sa hindi na babayaran ni buyer ang ibinalik
on Delivery. The buyer will pay the full amount nitong merchandise kay seller. Kaya naman ang
upon delivery of the merchandise. accounts receivable ni Seller ay nasa credit.
ACCOUNT TYPE Increase (+) Decrease (-) 4. Persian Ket Trading received a partial payment
Asset (CASH) Debit Credit of P20,000 from Porket Company.
Asset (Sales) Debit Credit
Cash 20,000
NOTE 2: May bumili sa kaniya on CASH. Ibig Accounts Receivable- Porket 20,000
sabihin nito ay nadagdagan ang Cash ni seller at To record partial payment from Porket
nabawasan naman ang Sales nito (or yung Company
produkto nito).
ACCOUNT TYPE Increase (+) Decrease (-)
NOTE 3: Sales ang ginagamit kapag Seller’s POV Asset (Cash) Debit Credit
at Purchases naman ang ginagamit kapag Asset (Accounts Debit Credit
Buyer’s POV. Receivable)

2. On July 14, Persian Ket Trading sold NOTE: Si seller ay nakatanggap ng partial payment
merchandise to Porket Company for P150,000 galing kay buyer. Kaya ang Cash nito na galing sa
receiving P20,000 down payment and the balance bayad ni buyer ay madadagdagan, kaya ito ay
on account. Terms: 2/10, 1/15, n/60. nasa debit. Ang accounts receivable naman nito ay
mababawasan dahil nareceive na ni seller ang pera
Cash 20,000 galing kay buyer, kaya ito ay nasa credit.
Account Receivable –
Porket 130,000 5. Persian Ket Trading received defective
Sales 150,000 merchandise worth P10,000 from Dee Ket
To record sold merchandise on account. Company and refunded cash for the returns.
Terms: 2/10, 2/15, n/60
Sales Returns & Allowances 10,000
ACCOUNT TYPE Increase (+) Decrease (-) Cash 10,000
Asset (CASH) Debit Credit To record refunded cash for merchandise
Asset (Accounts Debit Credit returned
Receivable)
Asset (Sales) Debit Credit ACCOUNT TYPE Increase (+) Decrease (-)
Asset (Sales Debit Credit
NOTE: Si seller ay nakabenta kay Porket Returns &
Company. Si Porket Company ay nagbayad ng Allowances)
down payment kaya si seller ay makakatanggap ng Asset (Cash) Debit Credit
CASH at ang natirang balance ni buyer ay napunta
sa account kaya naman si seller ay magkaroon ng NOTE: Ibinalik kay seller ang ibiniling merchandise
ACCOUNTS RECEIVABLE. Nadagdagan ang ni buyer kaya naman nadagdagan ang sales ni
Cash at Accounts Receivable ni seller at seller. Ngunit dahil sa ito ay ibinalik, imbes na
nabawasan naman ang Sales ni Seller. SALES ang ilalagay, ito ay magiging Sales Returns
and Allowances. Sabi sa transaction, ang
pinangbayad ni buyer kay seller ay ibinalik on cash
ni seller. Kaya ang cash ni seller ay mababawasan, JOURNAL ENTRY- Quizzes and
kaya ito ay nasa credit. Activity
6. Paid P3,000 transportation charges for
I. PRESENTED ARE TRANSACTIONS OF LEI
merchandise sold to Porket Company.
ELECTRICAL SUPPLIES FOR THE MONTH
OF JUNE 2019. RECORD ALL
Freight-out or Delivery Expense 3,000
TRANSACTIONS USING THE PERIODIC
Cash 3,000
INVENTORY ASSUMING CREDIT TERMS
To record paid transportation charges on
EXTENDED TO CUSTOMERS ARE 25%, 10%,
Merchandise
2/10, n/30. SHOW THE COMPUTATION
AFTER EACH JOURNAL ENTRY.
ACCOUNT TYPE Increase (+) Decrease (-)
Expense (Freight Debit Credit
out or Delivery 4 Cash purchases from Colombia
Expense) Manufacturing, P1,000,000.
Asset (Cash) Debit Credit
8 Cash sales to various customers,
NOTE: Dahil si seller ay nagkaroon ng expense, P125,000.
ang expense niya ay nag-increase(tumaas) kaya
ito ay nasa debit. At dahil binayaran niya ang 9 Refunded P11,000 for merchandise
delivery expense on cash, ang cash niya ay returns.
nagdecrease kaya ito ay nasa credit.
10 sold merchandise to Heir supply,
7. Received payment from Porket Company on July P55,000.
30.
Cash 98,800 11 Granted 10% allowance to Heir Supply
Sales Discount 1,200 due to wrong specifications.
Accounts Receivable- Porket 100,000
To record received payment within the 12 Sold merchandise to Viber Construction,
discount period P300,000.

ACCOUNT TYPE Increase (+) Decrease (-) 15 Cash sales to Architect Kate P220,000.
Asset (Cash) Debit Credit
Asset (Accounts Debit Credit 16 Purchased merchandise from Kenny
Receivable) Logs, P100,000.

NOTE: Nag-increase ang cash ni seller dahil siya 18 Heir Supply settled its account in full.
ay nakatanggap ng payment. Nagdecrease ang
kaniyang accounts receivable dahil may 24 Viber construction settled its account in
nakapagbayad sa kaniya ng utang. Tandaan na full.
ang cash ay laging nakaallign sa sales discount at
purchase discount. 30 Settled account with Kenny Logs in full.

Computation:
Sales ( July 15) P150,000
Less: Down Payment 20,000
Account Sales P130,000
Less: Sales Returns & Allowances 10,000
Net Sales P120,000
Less: Sales Discount
P120,000 x 0.01 1,200
• Balance P118,800
• Less: Partial Payment 20,000
• Payment w/in discount period P98,800
LESSON 3. THE PERPETUAL SYSTEM 4. Paid the account in full within the discount
period.
Accounts Payable 90,000
 Under this method, an acquisition of
Merchandise Inventory 1,800
merchandise is debited to MERCHANDISE
Cash 88,200
INVENTORY. Also, the sale of the
To record payment of account within the
merchandise is recorded as a credit to
discount period
MERCHANDISE INVENTORY with a
corresponding debit to COST OF GOODS
Computation:
SOLD ACCOUNT.
Purchases P100,000
 In other words, any movement in merchandise
Less: Returns 10,000
inventory is directly DEBITED or CREDITED to
Balance P 90,000
this account, thus MAINTAINING a continuous
Less: Purchase Discount
record of the inventory items P90,000 x 0.02 1,800
Amount Paid P88,200
RECORDING TRANSACTIONS UNDER THE
PERPETUAL SYSTEM / PRO FORMA JOURNAL
NOTE: BUYER’S POV
ENTRIES: BUYER’S POINT OF VIEW Periodic
Freight in
1. Purchased merchandise for cash / on account.
Purchases
Merchandise Inventory xxx
Purchases Returns & Allowances
Cash / Accounts Payable xxx Purchase Discount
2. Incurred transportation charges in the purchase Perpetual
of merchandise Merchandise Inventory
Merchandise Inventory xxx
Cash/Accounts Payable xxx PRO FORMA JOURNAL ENTRIES: SELLER’S
POINT OF VIEW
3. a. Returned defective merchandise bought on
1. Sold merchandise for cash / on account.
account. Cash / Accounts Receivable xxx
b. Granted allowances to the buyer for the
Sales xxx
account purchases
c. Issued a debit memo to the seller for
Cost of Sales xxx
merchandise returns Merchandise Inventory xxx
Accounts Payable xxx
Merchandise Inventory xxx Note:
o The amount of CASH/ACCOUNTS
4. Paid account within the discount period arising RECEIVABLE and SALES on the FIRST
from the purchase of merchandise inventory.
ENTRY is the TOTAL SALES PRICE OF
Accounts Payable xxx
THE GOODS SOLD.
Merchandise Inventory xxx
Cash xxx
o The amount of COST OF SALES and
MERCHANDISE INVENTORY on the
5. Paid account after the discount period arising
SECOND ENTRY is the COST OF
from the purchase of merchandise.
MERCHANDISE SOLD.
Accounts Payable xxx
Cash xxx ** The SECOND ENTRY removes the sold
goods from the merchandise inventory account and
ILLUSTRATIVE PROBLEM
transfers it to the cost of goods sold.
1. Gisell Company purchased P100,000
merchandise from Emil Trading on account. Terms: 2. a. Received defective merchandise sold on
2/10, n/30
account.
Merchandise Inventory 100,000
b. Granted allowances to the buyer for the
Accounts Payable 100,000
account sales
To record purchased merchandise c. Issued a credit memo to the buyer for
on account; Terms: 2/10, n/30
merchandise returns.
Sales Returns & Allowances xxx
2. Gisell Co. paid P5,000 freight charges on the
Cash/ Accounts Receivable xxx
purchase of merchandise from Emil Trading.
Merchandise Inventory 5,000
Merchandise Inventory xxx
Cash 5,000
Cost of Sales xxx
To record freight charges
Note: No. 2
3. Returned defective merchandise, P10,000
o The amount of sales returns and allowances
Accounts Payable 10,000
and accounts receivable on the first entry is
Merchandise Inventory 10,000
the total sales price of the goods returned.
To record returned defective merchandise
 o The amount of merchandise inventory and POINTS TO REMEMBER
cost of sales on the second entry is the cost [Link] or Trading – a business
of merchandise returned. engaged in the buying and selling of merchandise
o The second entry TRANSFERS BACK to the or goods.
merchandise inventory account the cost of
returned goods while removing it from the INVENTORY SYSTEMS IN A MERCHANDISING
cost of goods sold. BUSINESS
1. Periodic System – transactions related to the
acquisition of inventory are recorded accordingly as
3. Collected account within the discount period. purchases, purchase discounts and purchase
Cash xxx returns and allowances.
Sales Discount xxx
Accounts Receivable xxx Cost of transporting the goods shouldered
by the buyer is recorded as freight-in. Furthermore,
4. Collected account after the discount period. transactions related to the sale of inventory are
Cash xxx recorded accordingly as sales, sales discount and
Accounts Receivable xxx sales returns and allowances. Cost of transporting
the goods shouldered by the seller is called freight-
ILLUSTRATIVE PROBLEM out or delivery expense.
1. Owly Trading sold P50,000 merchandise to
Duckling Enterprises. Terms: 2/10, n/30. (cost of 2. PERPETUAL SYSTEM – under this method, an
sales P35,000) acquisition of merchandise is debited to
Accounts Receivable 50,000 merchandise inventory. Also, the sale of the
Sales 50,000 merchandise is recorded as a credit to
To record sold merchandise on account, merchandise inventory with a corresponding debit
Terms : 2/10, n/30 to cost of sales or cost of goods sold account. In
other words, any movement in merchandise
Cost of Sales 35,000 inventory is directly debited or credited to this
Merchandise Inventory 35,000 account, thus maintaining a continuous record of
To record cost of merchandise sold. the inventory items.

2. Received merchandise returns, P8,000. (Cost of 3. Discount – a reduction in a certain price of

Returns, P5,600) amount.
Sales Returns & Allowances 8,000
Accounts Receivable 8,000 TWO KINDS OF DISCOUNT IN ACCOUNTING
To record received merchandise returns FOR MERCHANDISING TRANSACTIONS.

Merchandise Inventory 5,600 1. TRADE DISCOUNT – a deduction from the list

Cost of Sales 5,600 price or catalogue price granted to customers to
To record cost of returns encourage purchase of goods or merchandise in
big quantities or volume. This is not recorded or
3. Owly Trading paid P2,000 freight charges for shown in the buyer’s or seller’s books.
sales made to Duckling Enterprises.
Freight-out or Delivery Expense 2,000 2. CASH DISCOUNT – a deduction from the selling
Cash 2,000 or purchase price granted to customers to
To record payment for freight charges encourage prompt payments of accounts. This is
recorded or shown in the buyer’s and seller’s
4. Received full settlement of account from books. This is recorded as purchase discount in the
Duckling Enterprise. book of the buyer or sales discount in the books of
Cash 41,160 the seller. This method of recording cash discount
Sales Discount 840 in the books of the buyer or seller is known as the
Accounts Receivable 42,000 Gross Method.
To record payment within discount period

Computation: Exercises: Write on the blank the letter that

Sales P50,000 represents the correct answer.
Less: Returns 8,000 _____1. The form issued by a purchaser to inform
Balance P42,000 a creditor that a debit has been made to accounts
Less: Sales Discount 840 payable.
P42,000 x 0.02 _____2. The discount taken by the buyer for early
Amount Received P41,160 payment of an invoice.
_____3. The discount given to customers to
encourage them to buy in big quantity or volume.
_____4. A revenue account credited with the sales
price of goods sold during the accounting period.
_____5. The form issued by a seller to inform a THE ANNUAL REPORT
buyer that a credit has been made to accounts  Balance sheet – provides a snapshot of a
receivable. firm’s financial position at one point in time.
_____6. Under the periodic system, it is the  Income statement – summarizes a firm’s
account credited when the proprietor withdraws revenues and expenses over a given period
merchandise for personal use. of time
_____7. It is the amount of reduction allowable  Statement of retained earning – shows how
from the list price of goods offered for sale. much of the firm’s earning were retained,
_____8. This is computed by deducting returns and rather than paid out as dividends.
allowances and partial payments from the invoice  Statement of cash flows – reports the
cost. impact of a firm’s activities on cash flows over
a given period of time.

Write the accounting term that best suits each

statements.
___________ 1. A deduction form the list price
granted to buyers to encourage them to purchase
in volume. This is not recorded or shown in the
buyer’s or seller’s books.
____________2. A method of inventory where
movement of merchandise inventory is directly
debited or credited to this account, thus maintaining
a continuous record of the inventory items.
____________3. A deduction form the selling price
given to customers to encourage prompt payment
of accounts.
____________4. A method of inventory which
uses the account titles purchases, purchase returns
and allowances, purchase discount and freight in
 ASSETS are economic resources that are
NOTE: owned by the business and are expected to
Buyer’s POV – different treatment kay Periodic provide positive future cash flows.
and Perpetual System  LIABILITIES are debts that represent
Seller’s POV – same treatment negative future cash flows for the
enterprise.
Cost of sales – Puhunan  OWNER’S EQUITY represents the owner’s
Hindi na kailangan pa maglagay ng terms sa to claim to the assets of the business.
record ng cost of sales.
3 classifications of the Statement of Cash
Flows
LESSON 4. INTRODUCTION OF 1. Operating Activities – include the money
FINANCIAL STATEMENTS received from customers and the cash paid
for expenses
Companies prepare interim financial statements 2. Investing Activities – includes the use of cash
and annual financial statements. in purchasing PPEs; payment of PPEs on
account
Three Primary Financial Statements 3. Financing Activities –include cash contribution
[Link] Sheet – Describes where the enterprise of owners; loan extended by banks and
stands at a specific date. lending institutions, and cash withdrawal of
2. Income Statement – Depicts the revenue and owner.
expenses for a designated period of time.
LESSON 5. THE STATEMENT OF
FINANCIAL POSITION
A. The Accounting Equation
Assets = Liabilities + Equity
B. Assets
C. Liabilities
D. Equity
E. Single/Sole Proprietorship Business

 Net income (or net loss) is simply the ASSET- everything that you OWN
difference between revenues and expenses LIABILITIES- the amount that you OWE from your
3. Statement of Cash Flows – Depicts the ways friends, family members, parents.
cash has changed during designated period of EQUITY- Deduct the amount you owe from the
time. amount you own.
ASSET characteristic of conservatism wherein no
 The statement of financial position or profits would be anticipated but all probable
balance sheet shows the financial condition or estimable losses should be provided.
of a company as of a given time. It is a clear Accumulated Depreciation – represents the
representation of the accounting equation expired cost of property, plant, and
Assets = Liabilities + Owner’s Equity. The equipment as a result of usage passage of
first element of the statement of financial time. This is deducted from the cost of the
position is the ASSET related asset account to get carrying value
or book valued of the asset.
REVIEW OF CLASSIFICATION OF ASSETS
A. CURRENT ASSETS B. NON-CURRENT ASSETS
-easy to get/ can convert into cash for 12 months
Current Assets are classified and CLASSIFICATION OF NON-CURRENT ASSETS
presented according to liquidity with the most liquid ❑Long-Term Investments – are assets held by
followed by those with lesser liquidity. Since cash is an enterprise for the accretion of wealth through
the most liquid, it is always listed first followed by capital distribution such as interest, royalties,
other current assets according to their proximity to dividends and rentals, for capital appreciation or for
cash. other benefits to the investing enterprise such as
It is expected to be realized in, or is those obtained through trading relationships.
intended for sale or consumption in, the entity’s
normal operating cycle. It is expected to be realized ❑Investments are classified as long-term when
within twelve months of the balance sheet date they are intended to be held an extended period of
time.
CLASSIFICATION OF CURRENT ASSETS
❑Cash – includes coins, currencies, checks, bank ❑Property, Plant, and Equipment – are tangible
deposits/cash in bank, and other cash items readily assets that are held by an enterprise for use in the
available for use in the operations of the business. production or supply of goods or services, or for
 Cash on hand administrative purposes and which are expected to
 Cash in bank be used for more than one period.
 Land – is a piece of lot or real estate owned by
❑Trade and Other Receivables – include the the enterprise on which a building can be
amounts collectible from any of the following constructed for business purposes.
accounts:  Building – is an edifice or structure used to
 Accounts Receivable – is the amount accommodate the office, store, or factory of a
collectible from the customer to whom sales business enterprise in the conduct of its
have been made or services have been operations.
rendered on account or credit.  Equipment – includes typewriter, air-
 Notes Receivable – is a promissory note conditioner, calculator, filing cabinet, computer,
issued by the client or the customer in electric fan, trucks, and cars used by the
exchange for services or goods received as business in its office, store or factory.
evidence of his/her obligation to pay.  Specific account titles may be used such as
 Interest Receivable – amount of interest Office Equipment, Store Equipment, Delivery
collectible on promissory notes received from Equipment, Transportation Equipment,
customers and clients, Machinery and Equipment.
 Advances to Employees – certain amount of  Furniture and Fixtures include tables, chairs,
money loaned to employees payable in cash carpets, curtains, lamp and lighting fixtures,
or through salary deductions. and wall decors. Specific account titles maybe
 Accrued Income – income already earned but used such as Office Furniture and Fixtures and
not yet received. Store Furniture and Fixtures.

❑Inventories – represent the unsold goods at the ❑Intangible Assets – are identifiable,
end of the accounting period. This is applicable nonmonetary assets without physical substance
only to a merchandising business. held for use in the production or supply of goods or
services, for rental to others, or for administrative
❑Prepaid Expenses – include supplies bought for purposes. These include goodwill, patents,
use in the business or services and benefits to be copyrights, licenses, franchises, trademarks, brand
received by the business in the future in advance. names, secret processes, subscription lists and
noncompetition agreements
Contra-Asset Accounts – are accounts deducted
from the related asset accounts. The following
are the contra-asset accounts.
Allowance for Bad Debts – are losses due to
uncollectible accounts. This is deducted
from the accounts receivable account to get
the net realizable value. This is in line with
the financial statement’s qualitative