7216082 Unit I Accounting for Merchandising Business1sd

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Unit IAccounting for Merchandising Business

Overview

Background Merchandising business deals primarily with the buying and selling of finishedgoods. This unit will introduce readers on the different activities done by atrading business. A brief discussion of the perpetual inventory systems is alsoincluded.

Purpose The purpose of Unit I “Accounting for Merchandising Business ” is to

illustrate the various buying and selling activities of a trading business. Thisunit also illustrates the basic entries using perpetual inventory system. A briefdiscussion of business documents are also included to give readers ideas of

what are the basic papers being used that support a merchandising transaction.

In this unit This unit contains the following topics

Topics See Page

Merchandising Business ! of "

Inventory #ystem $ of "

Merchandise Accounts % of "

Business &ocuments ' of "

(roprietor)s Investment and *ithdrawal +, of "(urchase of Merchandise +- of "

(urchase eturns and Allowances +/ of "

&iscounts on (urchases !0 of "

#ales !- of "

#ales eturns and Allowances !% of "

&iscounts on #ales !/ of "

"reight on Merchandise !' of "

Income #tatement $$ of "

eview 1uestions $/ of "

23ercises $' of "

Marivic D. Valenzuela-Manalo (age +of "



Merchandising Business

Overview An organi4ation that is engaged in the buying and selling of goods or

merchandise is a merchandising or trading concern. Merchandise refers togoods purchased for resale in the same form. Unli5e businesses renderingservices for compensation6 a trading concern derives its income through theresale at a profit of the merchandise purchased.

Activities The activities of a merchandising concern that distinguish it from a serviceconcern cover the following

• Purchasing. Information as to the 5ind6 7uality6 7uantity6 and cost of goods bought should be maintained for the use of management. ecords as tosupplies or merchandise bought are also maintained.

• Handling. The costs of transporting and sorting of goods bear an importantrelation to the prices of goods bought. These should be recorded properly.Transportation costs include freight6 e3press6 drayage6 and cartage.

• Returning Of Goods Purchased. #ome of the merchandise received may prove unsatisfactory and must be returned to the vendors6 or if not returned6may be allowed some deductions from the original purchase price.

• Selling. 8oods purchased are sold at prices above the cost in order to provide ade7uate margin of profit. It is therefore imperative that the cost ofgoods bought should be 5nown from the accounting records so thatdesirable selling prices may be set.

• Returning Of Goods Sold. The customers may return some of themerchandise sold. &eductions from the original selling prices must beallowed for sales returns. If the goods delivered are defective and no returnis made6 the customers are granted reduction on the sales price.

• aintaining Ade!uate Stocks On Hand. In order to satisfy orders ofcustomers at all times6 a stoc5 of merchandise must be maintained on hand.This is called Merchandise Inventory or Inventory on 9and

Marivic D. Valenzuela-Manalo (age !of "



Inventory System

Overview A business firm selling a product must use an inventory record system to value

the merchandise on hand at the end of an accounting period. Two differentinventory systems may be used to record trading transactions in the accountingrecords. These systems are the periodic and perpetual inventory system.

Perpetual In a perpetual inventory system a continual6 or perpetual6 record of theinventory activity is maintained. :onse7uently6 any items that are sold orotherwise physically removed from inventory must be removed from theMerchandise Inventory account6 and items that are purchased are added to theMerchandise Inventory account. This may result in significant e3trarecord5eeping as compared to a periodic system. 9owever6 a perpetual

inventory system does have advantages6 and businesses with a relatively lownumber of high;value transactions often find the e3tra effort to be worthwhile.:omputers are also ma5ing it practical for businesses to use perpetual systemsthan would have been not feasible in the past.

Periodic orPh"sical

In the periodic inventory system6 the ending inventory is determined by a physical count of the merchandise on hand at the end of an accounting period.The periodic inventory system receives its name because the balance in theinventory account is 5nown only at the beginning and at the end of theaccounting period. The periodic inventory is the simpler system commonly

used in practice and was the only practical alternative for most businesses withlarge number of transactions before the advent of computers. The periodicinventory system will be used in the illustrations throughout this course unlessotherwise stated.

Continued on next page

Marivic D. Valenzuela-Manalo (age $of "



Continued

Transactions in

PerpetualInventor"S"ste#

As mentioned earlier6 a perpetual inventory system attempts to maintain a

continual record of the inventory on hand. Thus6 if <oseph =abrador purchased merchandise for cash6 (-060006 the entry to record this transactionis

Merchandise Inventory -06000 :ash -06000To record merchandise bought.

>n the other hand6 if <oseph sold (!06000 worth of merchandise for (,060006the entry to record this transaction is

:ash ,06000

#ales ,06000To record merchandise sold.

:ost of 8oods #old !06000 Merchandise Inventory !06000To record the transfer of inventory sold to cost of goods sold account.

Assuming this time6 <oseph =abrador purchased from Mary Tradingmerchandise on account6 (hp +006000. And at the same time6 paid for thefreight on the said purchase6 (hp !6-00. The entries would be

Merchandise Inventory +006000 Accounts (ayable +006000To record merchandise bought.

Merchandise Inventory !6-00 :ash !6-00To record freight paid.


Marivic D. Valenzuela-Manalo (age ,of "



Continued

Transactions inPerpetual

Inventor"S"ste#$ con%t.

=et us say6 after two days6 <oseph returned defective merchandise bought fromMary amounting to (hp -6000. The entry would be

Accounts (ayable ? Mary Trading -6000Merchandise Inventory -6000

To record returned merchandise.

If on the other hand6 <oseph =abrador sold to Michael #upermart merchandiseworth (hp -06000 on account at gross profit of -0 percent. The entries would be

Accounts eceivable -06000#ales -06000

#old merchandise on account.

:ost of 8oods #old !-6000

Merchandise Inventory !-6000To record cost of merchandise sold.

=et us assume again that after three days6 Michael issued a debit memorandumamounting to (hp +6/00 for defective goods received from <oseph. The entriesto record the return would be

#ales eturns @ Allowances +6/00Accounts eceivable +6/00

eceived debit memorandum.

Merchandise Inventory '00:ost of 8oods #old '00

To record cost of good returned.

I#portance It is important to note that both periodic and perpetual inventory systems willrecord the sale of merchandise similarly. The only difference is that under the perpetual inventory system6 there is a second entry that is re7uired to berecorded together with the sale to indicate the transfer out of the amount soldfrom the Merchandise Inventory account to the :ost of 8oods #old account.It is possible to combine the two entries into a single compound entry with thesame debits and credits. "or e3ample

:ash ,06000:ost of 8oods #old !06000

#ales ,06000Merchandise Inventory !06000

To record merchandise sold.


Marivic D. Valenzuela-Manalo (age -of "



Continued

Pro&for#a entr" At the end of the year6 no further entries may be re7uired if the balance in the

inventory account e7uals the actual cost of the units on hand. Unfortunately6this seldom happens. &espite the e3tra effort necessary to maintain a perpetual record of the inventory6 the facts often differ from the records.*hen the facts conflict with the records6 the records must be corrected toreflect the facts. Therefore6 an adusting entry is necessary to record anymissing inventory items and reduce the balance in the Inventory account to thecorrect level. The pro;forma entry is

Merchandise Inventory #hort or >ver333Merchandise Inventory 333

To adust Inventory account to actual balance.

erchandiseInventor" Shortor Over

The Merchandise Inventory Short or Over account is an e3pense account thatreflects the cost of missing inventory items. 9owever6 depending on itsmateriality and on normal practice within the industry6 the inventory shrin5ageamount is often combined with cost of goods sold in the financial statements.

'et Inco#e The net income disclosed on the income statements prepared under the two

inventory systems will reflect the same amount. This is also true with theending inventory balance reported in the balance sheet. A business thatcombined its Merchandise Inventory #hrin5age account with its :ost of 8oods#old account would prepare an income statement identical to the one preparedunder the periodic inventory system.

Marivic D. Valenzuela-Manalo (age of "



Merchandise Accounts

Overview The discussion on this topic are the account titles to be used in recording

ac7uisition and sale of merchandise of a trading business using the periodicinventory system.

Sales #ales of merchandise are recorded in this account at selling prices. This is a

temporary or nominal account representing income from selling ofmerchandise. This account has a normal credit balance

Sales Returnsand Allowances

This account is debited for all the merchandise returned by customers. Thedebit entry is at the original selling price of the merchandise. This account is

also being used for all goods delivered to customers but is found to bedefective or not as ordered and still the buyer desiring to retain the goods as is.The customer in this case is normally permitted to deduct a certain amountfrom the selling prices of the goods delivered.

Sales (iscount This account is debited in the boo5 of the seller whenever the buyer avails of

the cash discounts provided by the seller. This is a deduction from salesaccount.

Purchases This is a temporary account to which the cost of goods bought during the

period is debited. This account usually has a debit balance at the end of theaccounting period.

PurchaseReturns andAllowances

8oods bought and returned to supplier6 or goods bought and received asdefective6 or not as ordered6 when not returned to the supplier but issubected to a certain reductions from their ac7uisition prices. Thesedeductions and returns of purchased goods are credited to this account.(urchase returns and allowances account is a deduction from the (urchases

account.


Marivic D. Valenzuela-Manalo (age %of "



Continued

erchandise

Inventor"

At the end of every accounting period6 a physical count of the unsold

merchandise on hand is ta5en. The total amount of these goods on hand isdebited to the Merchandise Inventory account.

Purchase(iscount

This account is credited in the boo5s of the buyer whenever the purchaseravails of the cash discount given by the seller. This is a deduction from Purchases account.

)reight In or

TransportationIn

If the buyer pays the e3penses of transporting the goods from the place of the

seller to his place of business6 such e3penses are debited to the Freight-inaccount.

)reight Out orTransportationOut

If the seller pays the e3penses of transporting the goods from his place to the place of the buyer6 such e3penses are debited to the Freight out account. Thisis reported as part of operating e3penses under the selling e3pensesclassification.

Marivic D. Valenzuela-Manalo (age /of "



Business Documents

Overview All business transactions are evidenced or supported by printed forms or

documents. These business papers or oftentimes;called business documents,furnish the information needed in recording the transactions. *ithout business papers6 it would be very difficult6 if not impossible6 to 5eep accurate records ofthese transactions.

OfficialReceipts

These are issued every time the business receives cash. They show the date onwhich the cash is received6 the party from whom the cash is received6 theamount received6 the particulars of the transaction6 and the signature of theone who received the cash.

The sample given below is an official receipt of M&C ealty issued to Mayon

8rocery. "rom the point of view of M&C ealty6 there was an increase in both the asset cash and the income from rent. >n the other hand6 the assetcash of Mayon 8rocery decreased6 while its rental e3penses increased6 thusdecreasing its proprietorship.

M&C 2A=TD+-0 i4al Avenue

Manila

>""I:IA= 2:2I(T

Eo. FF+!0FFFF &ate FFF<une $06 !0G+FFFFFF

2:2IC2& from FFFFFMayon 8roceryFFFFFFFF the sum of FFFFFTen ThousandFFF pesos H(+06000.00 in payment of FFF<uly rentalFF.

:ashFFFFF(+06000 FFFFFFFFFFFFFFFFFFFFFFFFF :hec5 Eo.F H:ashier


Marivic D. Valenzuela-Manalo (age 'of "



Continued

Sales Invoice

and PurchaseInvoice

After a sale has ta5en place6 the seller fills in the business form called the

invoice. The invoice shows the date of the sale6 name and address of theseller6 name and address of the buyer6 terms of the sale6 list of articles boughtwith the unit price and entire cost of each6 total amount of the invoice6 andmethod of shipment. Invoices are numbered and usually made out in triplicateor 7uadruplicate. The original is given to the buyer. *hen the buyer receivesthe goods6 they are e3amined. Then the invoice is chec5ed to determinewhether there are any discrepancies in 7uantity or price and any errors incalculation. "rom the point of view of the seller6 the invoice is a sales invoiceJfrom that of the buyer6 it is a purchase invoice.

The sample given below shows that from the standpoint of the seller6 &iamond8rocery6 the invoice price of (+6%-0 is the gross income from sales6 which

covers the cost of the uice sold and the gross profit. There was an increase inassets in the form of an amount receivable from Mayon 8rocery6 there was anincrease in cost of merchandise available for sale and an increase in liabilitiesHthe amount of (+6%-0 is payable within $0 days.

&IAM>E& 8>:2D'$0 &el Monte Avenue

1ue4on :ity

I E C > I : 2 Eo. FFF-$!FFF

#old to FFFFFFMayon 8roceryFFFF &ate FFFFFF<une +06!0G+FFFFF Address FF',- Mayon #t.6 1.:.FFFF Term FFFEet $0 days FFFFFFF

*uantit" ( + S , R I P T I O ' -nit Price A#ount

-0 bo3es "unchum >range <uice &rin5 ( $-.00 ( +6%-0.00


Marivic D. Valenzuela-Manalo (age +0of "



Continued

,redit

e#orandu#

*henever the buyer finds an error in an invoice6 or when merchandise is

damaged6 he should notify the seller at once. If his claim is admitted as valid6the seller sends him a credit memorandum, which shows the amount by whichhis account is reduced. :redit memorandum is often shortened to creditmemo.

The credit memo illustrated below shows that because of the return of two bo3es of "unchum uice drin56 the gross income from sales of &iamond8rocery decreased6 and the amount receivable from Mayon 8rocery Hassetdecreased. "rom the point of view of Mayon 8rocery6 the merchandiseavailable for sale and also the debt to &iamond 8rocery decreased.

&IAM>E& 8>:2D'$0 &el Monte Avenue

1ue4on :ity

: 2 & I T M 2 M > Eo. FFF+!+FFF

To FFFFFFMayon 8roceryFFFF &ate FFFFFF<une +-6 !0G+FFFFF FF',- Mayon #t.6 1.:.FFFF

*e have credited your accounts as follows

Inv. 'o. +planation -nit Price A#ount

-$! eturn of two bo3es of slightlydefective "unchum orange uicedrin5.

( $-.00 ( %0.00


Marivic D. Valenzuela-Manalo (age ++of "



Continued

Pro#issor"

'otes

A promissory note is a written promise signed by one party6 called the maker 6

to pay a certain specified sum to another6 called the payee6 at a certain futuretime. The amount to be paid on maturity date may or may not include interest.The amount due6 not including interest6 is called the ace o the note.(romissory notes may be received by the business from its debtors6 or the business may give it to its creditors. The following is a sample of a promissorynote.

Php 10,000 Quezon City,May 1, 20X1

!hirty days ater date, I promise to pay to the order o "oseph #abrador, !enthousand Pesos, payable at COCO$%&', (ito Cru) $ranch or valuereceived with interest at *+.

-Signed Mariade "esus

Bank depositslips and checks

"or control and safe5eeping of cash most businesses maintain chec5ing orcurrent accounts with the ban5s. They deposit their money in ban5s and

payments from the deposit are then made by means of chec5s.

The ban5 deposit slip is filled in every time the business deposits money in the ban5. It shows the date when the deposit is made6 for whose account thedeposit is made6 the amount of the deposit classified into currency and chec5sreceived from others6 and the signature of the depositor.


Marivic D. Valenzuela-Manalo (age +!of "



Continued

,heck An order to the ban5 signed by the person issuing it6 to pay to bearer or order

a certain sum of money. After the ban5 has paid the payee6 the amount isdeducted from the deposit account of the one who issued the chec5.

,ash registerslips

#ome cash registers are operated in such a way that a strip or slip of papercomes out as evidence that money was received. The slip shows the date andthe amount of cash received.

iscellaneous

/ills

#ome businesses6 li5e the Meralco6 (hilippine =ong &istance Telephone :o.6

M*##6 etc.6 send bills to their customers to notify them of the amounts theyhave to pay. Thus6 there are advertising bills6 light bills6 water bills6 telephone bills6 and others.

Marivic D. Valenzuela-Manalo (age +$of "



Proprietor’s Investment and Withdrawa

Overview >wners of merchandising firms may want to invest merchandise into its

business operations. The following are the entries that would be recorded

under the periodic inventory system if the proprietor invests or withdrawsmerchandise.

Invest#ent of#erchandise

ecording of the investment of the owner in the business will be treated in thesame way the recording is done in a service business. The only differencewould be if the owner invested an asset into the business in the form ofmerchandise. *hen merchandise is part of the owner)s initial investment 6 thesaid investment must be debited to the Merchandise Inventory accountwhether the company is using perpetual or periodic inventory system. But ifthe investment of merchandise was made during the normal operation of the business6 i.e.6 as an additional investment 6 the said investment must be debitedto Merchandise Inventory6 if the company is using perpetual inventory systemand Purchases if they are using the periodic inventory system.

(ro;forma entry Initial investment&ate Merchandise Inventory 333

>wner6 :apital 333Investment made in the form of merchandise.

(ro;forma entry Additional investment&ate Merchandise Inventory 333 (urchases 333

>wner6 :apital 333 >wner6 :apital 333 Investment made in the form of merchandise.

Marivic D. Valenzuela-Manalo (age +,of "



0ithdrawal of#erchandise

Any subse7uent withdrawal made by the owner of any assetKs in the businessHe.g.6 cash6 supplies6 etc. in anticipation of future profits of the company Hi.e.6temporary withdrawal will be debited to the drawing account. *ithdrawalsthat are permanent in nature Hi.e.6 the owner has no intention of returning thesaid amount into the business will be debited directly to the capital account.If the company uses the periodic inventory system6 withdrawals of the ownerin the form of merchandise for personal use will be credited to the Purchasesaccount at cost. This is done in order to maintain the original balance of theMerchandise Inventory account6 which was computed by means of actual physical count at the end of the accounting period. >n the other hand6 the Merchandise Inventory account is credited if the firm uses the perpetualinventory system.

(ro;forma entry (eriodic inventory systemKTemporary withdrawal

&ate >wner6 &rawing 333 :ash 333 (urchases 333

>wner withdrew cash and merchandise for personal use.

(ro;forma entry (erpetual inventory systemKTemporary withdrawal

&ate >wner6 &rawing 333 :ash 333 Merchandise Inventory 333

>wner withdrew cash and merchandise for personal use.

(ro;forma entry (ermanent withdrawal

&ate >wner6 :apital 333 :ash 333

>wner permanently withdrew an amount in the business for personal use.

Marivic D. Valenzuela-Manalo (age +-of "



Purchase of Merchandise

Overview *hen a firm sells goods or services6 it gives a sales slip or sales invoice to its

customers. This sales invoice becomes a purchase invoice as far as the purchasing business is concerned. The purchase invoice provides the obectiveinformation used to record purchasing transactions. In small business firms6the only written document received or handled in purchases of goods orservices is this invoice. "or such businesses6 authori4ation for purchases isgiven informally by telephone or by having an employee personally purchasegoods or services. In this part6 we would be dealing with transactions affectingthe firm)s ac7uisition of the merchandise for sale. As we have mentionedearlier6 all our business transactions must be properly supported by businessdocuments.

PurchaseRe!uisition

=arge companies rely on a more careful procedure. As a first step they mayinsist that the person or department needing the goods or services to be purchased fill out a form called a purchase requisition. This completed form6 bearing the signature of some responsible person authori4ed to approve suchre7uisitions6 is ne3t sent to the purchasing agent or purchasing department ofthe company.

Purchase Order The purchasing department6 after selecting the firm from whom the goods or

services are to be bought6 prepares a second business paper called a purchase

order . The original copy of this document is sent to the company from whichthe purchase is to be made. This copy gives the selling business authority tosend the purchaser the goods or services ordered.

PurchaseInvoice

About the same time that shipment of the goods is made or services aresupplied to the purchaser6 the purchaser is sent an invoice that is the third business paper. This purchase invoice becomes the basis for recording the purchase in the ournal ust as it is in the case of the informal proceduredescribed for small firms.


Marivic D. Valenzuela-Manalo (age +of "



Continued

Purchases The cycle of a merchandising entity begins with cash6 which is used to

purchase inventory. Purchases6 in the accounting sense6 are only those itemsof merchandise inventory that a firm buys to resell to customers in the normalcourse of business. "or e3ample6 a boo5store records in the purchasesaccount the price it pays for boo5s6 school and office supplies6 and other itemsof inventory ac7uired for resale. A grocery store debits purchases when it buys canned goods6 meat6 fro4en food and other inventory.

Below is a sample purchase invoice

&2 A#I# TA&IE8!,0+ Taft Avenue

Manila

#old to =abrador #tore Invoice Eo. +,$Address Bl5 !/6 =ot !, #t. :harbels6 :avite &ate <an. %6 !0G+9ow shipped ">B &estination6 prepaid Terms !K+06 nK$0

1uantity &escription Unit (rice Amount

+0 do4en =ady)s #ando !- ( $6000.00+0 do4en Men)s Undershirt ,0 ,6/00.00+0 pcs. 8irl)s &ress '- '-0.00

( /6%-0.00LLLLLLLLL

(repared by :hec5ed by Approved by;;;;;;;;;;;;;;;; ;;;;;;;;;;;;;;;; ;;;;;;;;;;;;;;;;;


Marivic D. Valenzuela-Manalo (age +%of "



Continued

1ournal +ntries The purchase made on credit by =abrador #tore is recorded in the general

ournal as follows

<an. - (urchases /6%-0 Accounts (ayable ; &e Asis Trading /6%-0 (urchased under wears and children)s dresses. Terms !K+06nK$0.

If the above purchase was made on cash basis instead of on credit6 then the ournal entry of =abrador #tore will be

<an. - (urchases /6%-0 :ash /6%-0 :ash purchases from &e Asis Trading.

If the above purchase was made with down payment of (,6000 and the balanceon account6 then the ournal entry of =abrador #tore will be

<an. - (urchases /6%-0 :ash ,6000 Accounts (ayable ,6%-0 Carious purchases. Terms ,6000 down6 balance6 !K+06 nK$0.

Merchandise purchased with value added tax (V!" is recorded using thefollowing pro;forma ournal entry

(urchases 3333

Input Ta3 33Accounts (ayable 3333

(urchased merchandise on account.

Marivic D. Valenzuela-Manalo (age +/of "



Purchase !eturns and Aowances

Overview Merchandise purchased for resale would not always be as what the buyer

e3pects. In this regard6 buyers can return goods purchased due to a lot ofreasons6 for e3ample6 due to defects6 wrong specifications6 poor 7uality6 etc.

(e/ite#orandu#

*hen merchandise bought is returned6 or an allowance is re7uested6 the buyerinforms the seller in writing. The communication is done usually through the buyer)s printed business form called debit memorandum. An illustration ofsuch a form is shown below

=abrador #toreBl5 !/6 =ot !, #t. :harbel)s

&asmarinas6 :avite Eo. /

&2BIT M2M>AM&UM &ate <an. /6 !0G+To &e Asis Trading !,0+ Taft Ave.6 Manila

*e &2BIT your account for the following

! pcs. =ady)s #ando (!- ( -0

- pcs. Men)s Undershirt ,0 !00 + pc. 8irl)s dress '- '- ;;;;;;;; ( $,- LLLLL

emar5s The above goods were received in damaged;condition as per your invoice Eo +,$ dated <an. -6 !00+.


Marivic D. Valenzuela-Manalo (age +'of "



Continued

,redit

e#orandu#

If the return is accepted or the allowance is granted by the seller6 the seller

usually sends to the buyer such acceptance or grant in writing through a printed form called credit memorandum. A credit memorandum may insimilar form as the debit memorandum above e3cept for the change of theword debit to credit. Upon receipt of this communication6 the buyer ma5es anentry for the returns or allowances

Illustration Assume the following transactions

<an. /6 !0G+ ; =abrador #tore returned ($,$ worth of merchandise to &e AsisTrading. This was accepted by &e Asis Trading Hsee sample

debit memorandum.<ournal entry to record the return

<an. / Accounts (ayable ; &e Asis Trading $,- (urchase returns and allowances $,-Merchandise returned to &e Asis Trading.

Eote As a result of the returns6 the debt to &e Asis Trading was diminished6thus6 the seller)s account was debited.

The return was credited to purchase returns and allowances account instead ofdirectly against purchases in order to have the boo5s show total purchases

and total returns and allowances.If the purchase of <anuary - was in cash6 the return of goods worth ($,$ on<an. / may result in a reund o cash from &e Asis Trading. If no cash refundis made6 then =abrador #tore will have a receivable from the &e Asis Tradingwhich may be collected or applied to purchases in the future.

<an. / :ash $,- (urchase returns and allowances $,-:ash refund for the return of goods

9owever6 if the return on <an. / was not refunded in cash6 then the ournalentry should have been

<an. / Accounts eceivable ; &e Asis Trading $,- (urchase returns and allowances $,-To charge &e Asis Trading for goods returned.

Marivic D. Valenzuela-Manalo (age !0of "



Discounts on Purchases

Overview Buyers of merchandise can avail of two types of discounts6 namely6 the cash discount

and trade discount. This part will provide readers on how to record discounts onmerchandise purchased.

,ash (iscounts #pecial deductions from the prices of goods bought granted by the seller to the buyer

to induce the latter to pay within a specified period.

23ample

<an. -6 !0G+ =abrador #tore bought merchandise from &e Asis Trading(/6%-0. Terms !K+06 nK$0

The terms of the above transaction mean that if the invoice is paid within +0 daysafter the date of the invoice H<an. to +-6 =abrador #tore may pay the invoiceamount less a discount of !. This is computed as follows

Amount of invoice (/6%-0

=ess ! thereof +%-Amount to be paid (/6-%-LLLLLL

If payment is not made within +0 days6 then =abrador #tore should pay the fullamount of the invoice6 (/6%-06 within $0 days from the date of the invoice.

If the invoice remains unpaid after $0 days6 it is said to be past due and6 usually6 theamount begins to earn interest from the $+st day.

>ther e3amples of terms attached to a credit invoice are

-K+06 nK$0 ; There is a - discount if paid +0 days after invoice date6 netamount if paid beyond the +0 days but within $0 days.

!K+06 +K+-6 nK$0 ; There is a ! discount if paid +0 days after invoice date6 +

discount if paid within fifteen days6 net amount if paid beyond +-days but within $0 days.

!K-2>M6 nK,- ; There is a ! discount if paid - days after end of the month6 netamount if paid beyond - days after end of month but within ,-days from the invoice date.

!K+06 nK2>M ; There is a ! discount if paid +0 days after invoice date6 netamount if paid beyond the +0 days but up to end of the monthonly.

nK0 ; Eo cash discount is offered. The full amount must be paid within0 days from invoice date.

:ash discounts are computed on the amount of the bill less returns and allowance6 ifany. The base amount should be that which pertains only to merchandise. &iscountsare ordinarily not allowed on incidental e3penses such as freight6 insurance while intransit6 ta3es6 duties6 and other charges.


Marivic D. Valenzuela-Manalo (age !+of "



Continued

Recording of

,ash (iscounts

Below are sample transactions involving the recording of cash discounts

!ransactions!0G+

<an. , ; Mary #tore purchased merchandise from Uniwide Trading6(+06000. Terms !K+06 nK$0

% ; Mary #tore made a partial payment of (-6000 to UniwideTrading

+, ; Mary #tore paid in full its account to Uniwide Trading

+/ ; Mary #tore purchased merchandise from #M #uperstoreworth (!-6000. Terms (+06000 down payment6 balance!K+06 +K+-6 nK$0.

!+ ; Mary #tore returned to #M #uperstore (-00 cost ofmerchandise ac7uired on <an. +/. #M #uperstore in returnissued a credit memo with the same amount;signifyingacceptance of the return made by Mary.

$+ ; Mary #tore settled in full its account with #M.


Marivic D. Valenzuela-Manalo (age !!of "



Continued

Recording

con%t

:ontinuation of the recording of discounts

#ournal $ntries%!0G+

<an. , (urchases +06000 Accounts (ayable ; Uniwide +06000Merchandise purchased. Terms!K+06nK$0.

% Accounts (ayable ; Uniwide -6000 :ash -6000(artial (ayment.

+, Accounts (ayable ; Uniwide -6000 :ash ,6/00 (urchase &iscounts !00"ull payment.

+/ (urchases !-6000 :ash +06000 Accounts (ayable;#M +-6000Bought merchandise. Terms!K+06+K+-KnK$0.

!+ Accounts (ayable ; #M -00 (urchase eturns and Allowances -00eceived :M for merchandisereturned.

$+ Accounts (ayable ; #M +,6-00 (urchase &iscounts +,- :ash +,6$--#ettled account in full.

&O!/0 !he cash discount in the last entry was computed on the net amountater deducting the returns.


Marivic D. Valenzuela-Manalo (age !$of "



Continued

Trade (iscounts &eductions from the list prices of merchandise offered by the seller to the

buyer to encourage the latter to buy in bul5 or large volumeK7uantity. This is astrategy being adopted by the seller to promote the sale of the merchandise. Alist price may be subected to one or more trade discounts

Illustration Trade (iscounts and ,ash (iscount Illustrated2

a. Assume a credit invoice of ($6000 less +0. Terms !K+06nK$0.

=ist price ($6000=ess trade discountsH$60003+0 $00

Eet invoice price (!6%00=ess :ash discountsH!6%003! -,Amount due if payment is made with in +0 days (!6,

LLLLL

b. Assume a credit invoice of (-6000 less +0;-. Terms !K+06nK$0.

=ist price (-6000.00=ess "irst trade discountsH-60003+0 -00.00

(,6-00.00=ess #econd trade discountsH,6-003- !!-.00

Eet Invoice price (,6!%-.00=ess :ash discountsH,6!%-3! /-.-0Amount due if payment is made wKin +0 days (,6+/'.-0

LLLLLLLL


Marivic D. Valenzuela-Manalo (age !,of "



Continued

1ournal +ntries The ournal entries on buyer)s boo5 for Hb

At the time of purchase (urchases ,6!%-.-0 Accounts (ayable ,6!%-.-0 (urchased merchandise on account.

(ayment within +0 days Accounts (ayable ,6!%-.-0 (urchase discounts /-.-0 :ash ,6+/'.-0 #ettled accounts in full with in discount

period

(ayment beyond +0 days Accounts (ayable ,6!%-.-0 :ash ,6!%-.-0 (aid account in full.

Su##ar" The purchase invoice is the business document generated by a purchase

transaction. Most merchandising entities offer discounts Hi.e. cash and tradediscounts to their customers. !rade discounts are not recorded in the boo5s

of both buyer and seller. *hile cash discounts are recorded in the buyer)s boo5 under the account title Purchase 1iscount. The (urchase &iscountaccount6 which has a credit balance6 is a contra account to (urchases.

Most businesses allow their customers to 2return3 merchandise that isdefective6 damaged in shipment6 or otherwise unsuitable. >r if buyer choosesto 5eep damaged goods6 the seller may deduct an allowance from the amountthe buyer owes. #imilar to purchase discount6 Purchase &eturns and llowances6 the account title used to record returns and allowance granted6 isalso a contra purchases account.

Marivic D. Valenzuela-Manalo (age !-of "



Saes

Overview The sale of merchandise may be for cash or on account. An invoice supports

every sale. The seller)s sales invoice is the buyer)s purchase invoice. *hen asale is for cash6 the seller receives money in return for his merchandise. *henthe sale is made on credit6 the seller ac7uires a receivable or right to collectfrom the buyer.

The preceding discussion on methods of recording merchandise inventorytransactions stated that under the periodic inventory method6 purchasesrepresent the cost of merchandise bought. 'ales6 on the other hand6 representthe selling price of merchandise previously bought and then sold. In theincome statement H#ee sample on page $ of "6 #ales is shown as an incomeitem from which the cost of goods sold Hconsisting of merchandise inventory beginning and end and net cost of purchases6 was deducted6 the difference

being the gross profit. Therefore6 sales represents income6 which covers boththe cost of merchandise6 sold and gross profit Hor gross loss. In the followingdiscussions6 it was assumed that merchandise is sold normally at a profit6 i.e.6the selling price of the merchandise sold is greater than its cost.

It is very important to note that a purchase and sales transaction involve two partiesJ namely6 the buyer and the seller. "urthermore6 a business actssometimes as a buyer and sometimes a seller.

The analysis of a purchase and sale transaction would depend on whether the business for which the accounting wor5 is being done6 is playing the role of a buyer or that of a seller. The treatment therefore6 for cash discount andreturns and allowances on this part will also be similar to that discussed under purchases6 only this time the account titles to be used would be 'ales discountand 'ales returns and allowances.


Marivic D. Valenzuela-Manalo (age !of "



Continued

,ash Sales etailers li5e drug stores6 sari;sari stores6 department stores and restaurants

will at times sell their merchandise on cash basis. Assuming Mary #tore sold(-6000 worth of merchandise for cash6 this cash sale is recorded as follows

<an. +0 :ash -6000 #ales -6000:ash #ales.

Sales onAccount

Most business establishments are now e3tending credit to their customers to become competitive. In the advent of what we call 2plastic money3, i.e.6credit cards6 selling on account has been the current trend whether you are a

manufacturing business6 wholesaler or retailer. Assuming Mary #tore soldmerchandise worth (%6000 on account. The transaction is recorded asfollows

<an. +$ Account receivable %6000 #ales %6000#old merchandise on account.

The related cash receipt on account is recorded as follows

<an. !0 :ash %6000 Accounts receivable %6000:ollected account in full.

Merchandise sold with value added ta3 HCAT will be recorded using the

following pro;forma ournal entry

Accounts eceivable 3333#ales 3333>utput Ta3 33

#old merchandise on account.

Marivic D. Valenzuela-Manalo (age !%of "



Saes !eturns and Aowances

Overview *hen the customer returns goods to the seller or re7uests for a deduction

from the price of the goods delivered to him6 the seller accepts the return orgrants the re7uest through a credit memorandum.

+ntries The effect of a sales return or allowance is to reduce the amount of sales and

the amount of receivable from the customer. If #ales account is debited for thereturn or allowance6 then6 the said account will show only net sales. To preserve the gross amount of sales and to maintain a separate record for thereturns and allowances6 the entry to record sales returns or allowances is

#ales eturns and Allowances

Accounts eceivableeturn of goods.

333

333

If a cash sale is made and a return of a part thereof by the customer isaccepted6 the seller may refund cash to the customer for which theentry is

#ales eturns and Allowances :ash:ash refund for good returned.

333 333

9owever6 if cash is not refunded6 then the entry will be

#ales eturns and Allowances Accounts (ayable:ustomer credited for goods returned.

333 333

Marivic D. Valenzuela-Manalo (age !/of "



Discounts on Saes

Overview :redit terms encountered in sales are similar to those discussed in accounting

for purchases. The following are illustrations on how to record salestransactions with cash discount.

!0G+<an. , #old to "rancis Asis merchandise worth (+!6000 less -.

Terms !K+06 nK$0 % "rancis Asis issued a debit memo worth (-00 for defective

items received from <oseph+0 Made partial payment amounting to (-6000

+, "rancis Asis settled account with <oseph in full

1ournal +ntries The following are the ournal entries

!0G+<an. , Accounts receivable ; Asis

#ales#old merchandise. Terms !K+06nK$0

++6,00 ++6,00

% #ales returns and allowances

Accounts receivable ; AsisAsis was credited for allowancegranted

-00

-00

+0 :ash

Accounts receivable ; Asis

eceived partial payment

-6000

-6000

+0 :ash

#ales discount

Accounts receivable ; AsisAsis settled account in full

-6/!

!+/

-6'00

Marivic D. Valenzuela-Manalo (age !'of "



"reight on Merchandise

Overview Transportation or freight on merchandise purchased or sold is recorded as an

e3pense in the boo5s of the party who6 as per contract6 should shoulder thee3pense.

Shipping Ter#s Freight-in is the title used in recording the freight or transportation charges

on merchandise bought6 and Freight-out 6 for the freight on merchandise sold.The term of shipment that is contained in the bill o lading indicates whetheror not the buyer or the seller should assume the burden of the freight e3penseH(un4alan6 <.6 #antos6 =.6 +'$. Merchandise may be shipped under thefollowing terms

• F)* shipping point means that the goods are free on board up to the

shipping point. Therefore6 if the seller is in &avao and the buyer is inManila6 the seller absorbs all transportation e3penses up to the port of&avao only. This also signifies that title to the goods already passes to the buyer upon the loading of the goods onto the carrier at &avao.

• F)* destination means that the goods are free on board up to the point ofdestination. If the seller is in &avao and the buyer is in Manila6 the sellerabsorbs all transportation e3penses of the goods up to Manila. The title ofthe goods passes to the buyer only upon the unloading of the goods from thecarrier in Manila.

• Freight prepaid means that the seller has paid the shipping company the

transportation e3penses up to the point of destination.• Freight collect means that the buyer should pay the shipping company upon

the delivery of the goods at the point of destination.


Marivic D. Valenzuela-Manalo (age $0of "



Continued

Illustration

'o. 3

Assume Mr. Cic :ru4 of &avao sold to <oseph =abrador of Manila on

account. The invoice showed the following

(rice of merchandise ( +,6000"reight Hto Manila +6000Total ( +-6000

LLLLLL

+. If the purchase is ".>.B shipping point6 prepaid6 the ournal entry of <osephis

(urchases ( +,6000"reight;in +6000

Accounts (ayable;:ru4 +-6000(urchased merchandise on account. ">B #(6 prepaid.

Anal"sis2 The transportation e3pense to Manila is the e3pense of =abrador.In as much as Cic :ru4 has advanced the amount of freight6 then6 the amount payable to him should include the said amount of freight.

!. If the purchase is ".>.B shipping point6 collect6 the ournal entriesof =abrador are

(urchases Account payable;:ru4(urchased merchandise on account

+,6000 +,6000

"reight;in :ash(aid freight ".>.B. #(6 collect

+6000 +6000

$. If the purchase is ".>.B. destination6 prepaid6 the ournal entry of=abrador is

(urchases Accounts payable;:ru4(urchased merchandise on account.

+,6000 +,6000

Eote The freight is not reflected in the boo5s of =abrador because said e3pense is for the account of :ru4.


Marivic D. Valenzuela-Manalo (age $+of "



Continued

Illustration

'o. 3$ con%t.

,. If the purchase is ".>.B. destination6 collect6 the ournal entries of

=abrador are

(urchases Accounts (ayable;:ru4(urchased merchandise on account.

+,6000 +,6000

Accounts (ayable;:ru4 :ash(aid freight ".>.B. destination6 collect.

+6000 +6000

Eote =abrador is liable to pay :ru4 only (+$6000 H+,6000;+6000.

In the foregoing transactions6 the entries presented are all in the boo5s of the buyer. Eow6 using the same transactions6 the followingare the entries in the boo5s of the seller.

Illustration'o. 4

+. If the sale is ".>.B. shipping point6 prepaid6 the ournal entries of :ru4are

Account eceivable; =abrador #ales#old merchandise on account.

+,6000 +,6000

Accounts eceivable; =abrador:ash

(aid freight ".>.B. #(6 prepaid

+6000 +6000

Eote :ru4 advanced the amount of freight6 which is supposed to be paid by =abrador. Therefore6 the amount receivable from <osephshould include the amount of freight.


Marivic D. Valenzuela-Manalo (age $!of "



Continued

Illustration

'o. 4$ con%t.

!. If the sale is ".>.B shipping point6 collect6 the ournal entry of :ru4 is

Accounts eceivable; =abrador #ales#old merchandise on account.

+,6000 +,6000

Eote The freight is not reflected in the boo5s of :ru4 because thesaid e3pense is for the account of =abrador.

$. If the sale is ".>.B destination6 prepaid6 the ournal entries of :ru4are

Accounts eceivable; =abrador

#ales#old merchandise on account

+,6000

+,6000

"reight;out

:ash

(aid freight ".>.B. &estination6(repaid

+6000

+6000

,. If the sale is ".>.B. &estination6 collect the ournal entries of :ru4are

Accounts receivable; =abrador

#ales#old merchandise on account

+,6000

+,6000

"reight;out Accounts receivable; =abrador ".>.B. &estination6 collect.

+6000 +6000

Eote The total receivable of :ru4 from =abrador will be +$6000 onlyH+,6000;+60006 since the payment of freight was advanced by=abrador.

Re#inder It should be noted that both

+reight-in and

+reight-out represent

expense.

9owever6 reight4in is shown as an addition to net purchases because it is adirect cost of procuring the merchandise bought. >n the other hand6 reight4out is listed among the selling expenses

Marivic D. Valenzuela-Manalo (age $$of "



Income Statement

Overview A merchandising business prepares its income statement using the functional.

The functional income statement contains several sections6 subsections and

subtotals. The amount of the details presented in this section6 e.g.6 the sellinge3penses6 general and administrative e3penses6 etc.6 varies from company tocompany

Inco#eState#entTer#inologies

Below are the terms used in the income statement

• Revenue fro# Sales. The total amount charged to customers formerchandise sold6 for cash and on account6 is reported in this section. #alesreturns and allowances and #ales discounts are deducted from this to yield Eet #ales.

• ,ost of Goods 5erchandise6 Sold. The cost of merchandise sold duringthe period may also be called Cost o 5oods Sold or the Cost o Sales. It iscomputed by adding to the beginning inventory the net cost of purchases toyield !otal 5oods %vailable or Sale. The ending inventory is deductedfrom the Total 8oods Available for #ales to yield the Cost o 5oods-Merchandise Sold.

The net purchases amount is computed by deducting purchase discountand purchase returns and allowances from purchases. Eet cost of purchases is computed by adding freight;in to the net purchases amount.

• Gross Profit. The e3cess of net sales over the cost of goods sold is calledgross profit. It is sometimes called gross profit on sales or gross margin.

.


Marivic D. Valenzuela-Manalo (age $,of "



Continued

Inco#e

State#entTer#s$ con%t

:on)t

• Operating +penses. Most merchandising businesses classify operatinge3penses as either selling expenses or administrative expenses. 9owever6depending on the decision;ma5ing needs of managers and other users of thefinancial statements6 other classifications could be used.

23penses that are incurred directly in the selling of merchandise are sellingexpenses. They include such e3penses as salespersons) salaries6 storesupplies used6 depreciation of store e7uipment6 and advertising.

23penses incurred in the administration or general operations of the business are general and administrative expenses. 23amples of thesee3penses are office salaries6 depreciation of office e7uipment6 and office

supplies used.

23penses that are related to both administrative and selling functions may be divided into the two classifications. In small businesses6 however6 suche3penses as rent6 insurance6 and ta3es are commonly reported asadministrative e3penses. Transactions for small6 infre7uent e3penses areoften reported as Miscellaneous Selling /xpense or Miscellaneous %dministrative /xpense

• Inco#e fro# Operations. The e3cess of gross profit over the operatinge3penses is called income rom operations or operating income. Therelationships of income from operations to total assets and to net sales are

important factors in udging the efficiency and profitability of operations. Ifoperating e3penses are greater than the gross profit6 the e3cess is called aloss rom operations.


Marivic D. Valenzuela-Manalo (age $-of "



Continued

Inco#e

State#entTer#s$ con%t

:on)t

• Other Inco#e and Other +pense. evenues from sources other than the primary operating activity of a business are classified as other income ornon;operating income. In a merchandising business6 these items includeincome from interest6 rent6 and gains resulting from the sale of plant andother assets.

23penses that cannot be traced directly to operations are identified as othere3penses or non;operating e3pense. Interest e3pense that results fromfinancing activities and losses incurred in the disposal of plant and otherassets are e3amples of these items.

>ther income and other e3penses could be offset against each other on the

income statement. If the total of the other income e3ceeds the total othere3pense6 the difference is added to income from operations. If the reverseis true6 the difference is subtracted from income from operations.

• 'et Inco#e. The final figure on the income statement is called the netincome -or net loss. It is the net increase Hor net decrease in the owner)se7uity as a result of the period)s profit;ma5ing activities.


Marivic D. Valenzuela-Manalo (age $of "



Continued

Illustration Below is an illustration of a functional form income statement

Joseph Labrador ConsultancyIncome Statement

For the year ended December 31, 20X1

Note

Net sales revenue 1 P 193,000

Cost of sales 2 (14,000!

"ross profit P 4#,000$ther operatin% in&o'e 3 3,000

"ross profit an other operatin%in&o'e P 1,000

$peratin% e)penses*

+ellin% e)penses 4 P 14,000

'inistrative e)penses 24,000

$ther operatin% e)penses - 1,000

.nterest /)pense 1,000 (40,000!

Net in&o'e P 11,000

'otes to the

)unctional)or#

The following are the notes to the functional form income statement

#ote $ % #et saes revenue

&ross saes P '(()(((

*ess+ Saes !eturns , Aowances P -)(((

Saes Discount ')((( .)(((

#et saes revenue P $/0)(((


Marivic D. Valenzuela-Manalo (age $%of "



Continued

'otes to the )unctional )or# Hcontinued

#ote ' % 1ost of saes Merchandise Inventory) 2an3 $ P -)((( Add+ #et cost of purchases Purchases P $.-)((( *ess+ Purchase !eturns , Aowances P 0)((( Purchase Discounts ')((( -)(((

#et purchase P $.()(((

Add+ "reight%in $)((( $.$)((( 1ost of goods avaia4e for sae P $.5)((( *ess+ Merchandise Inventory) Dec3 0$ 0$)(((

1ost of saes P $6-)(((

#ote 0 % Other operating income !ent Income P $)-((

Dividend Income 7((Interest Income -((&ain on Sae of "urniture , "i8tures '((9ota other income P 0)(((

#ote 6 % Seing e8penses Saesmen:s Saaries and 1ommissions P /)((( !epresentation and ;ntertainment $)'(( Depreciation % Store ;<uipment $)(((

SSS , Phiheath Premiums /(( "reight%out 7(( Misceaneous Seing ;8pense $)$((

9ota seing e8penses P $6)(((

#ote - % Administrative e8penses

Saaries ;8pense P $-)((( *ight) Water and 9eephone 0)-(( Uncoecti4e Accounts ')((( Depreciation ;8pense $)-(( SSS , Phiheath Premiums $)0(( Misceaneous &enera ;8pense .(( 9ota administrative e8penses P '6)(((

#ote 5 % Other operating e8penses *oss on Sae of ;<uipment P 7(( Discount *ost '((

9ota other operating e8penses P $)(((