ACCOUNTING FOR MERCHANDISING BUSINESS

Service Merchandising
Primary Activity Rendering services to Buying and selling of
customers goods
Revenues earned from Revenues earned from
rendering services less goods sold must exceed
Measuring Profitability expenses incurred for the cost of goods sold
services rendered along with operating
expenses

Merchandising Operations
Wholesaler Retailer Consumer
*** The operating cycle of merchandising business is longer than the operating
cycle of service business
Income Measurement Process in Merchandising Business
Sales Revenue -- Less --> Cost of Sales -- Equals --> Gross Profit -- Less -->
Operating Expense -- Equals --> Profit (Loss)

BUSINESS DOCUMENTS
1. Purchase Order
- a document used to request to purchase goods, supplies and property
assets
2. Invoice
- a document gives evidence to a transaction involving sales of goods or
merchandise
- gives information as to the name and address of the customers, a
description of the merchandise sold and terms of payment.
- Point of View of the seller Sales Invoice
Point of View of the buyer Purchase Invoice
3. Official Receipt
- a document gives evidence to a transaction involving the receipt of cash
- gives information as to the amount of cash received, person from whom the
cash received, date of receipt and nature of the transaction involved.
4. Debit Memorandum
- a document sent by the buyer to the seller to inform the latter of the
formers claim for goods to be returned or allowances to be granted.
5. Credit Memorandum
- a document sent by the seller to the buyers claim regarding defective
goods purchased.
 6. Promissory Note
-a written promise made by the maker promising to pay the payee a certain
amount in the future
7. Check
- a document which gives evidence to withdrawal of cash in a checking
account
8. Voucher
- a document which gives evidence to a transaction involving approval of
payment of cash. It gives information as to the name and address of the
payee, the amount of payment, the date of payment, an explanation for such
payment and the journal entry to record the payment.
9. Delivery Receipt
- a document which gives evidence to the delivery of supplies or property
assets. It gives information as to the quantity and description of the items
delivered, the total amount of delivery, the person who received the items,
the date of the delivery, the person who received the items, the date of the
delivery and the name of the supplier.
10. Statement of Account
-A document requesting payment of a account for services rendered or for
goods sold.

MAJOR ACTIVITIES OF MERCHANDISING FIRM

1. Purchasing Activities
- refers to buying, acquisition or procurement of finished products intended for
sale.
- also includes handling, transportation and referring of some defective goods
purchased
2. Selling Activities
- pertains to the act of transferring the title of the ownership over the
merchandise from the seller to the buyer

MERCHANDISE INVENTORY
goods purchased by the entity which are available for sale on the ordinary course
of business
a current asset of a merchandising firm
there is a need to maintain adequate stocks on hand
INVENTORY SYSTEM
1. Perpetual Inventory System
- maintains detailed records of cost of each inventory purchase of sale
 - made easier with use of bar codes and optical scanners
- common to a firm with high value, low quantity items
- cost of sales is determined each time a sale occurs
- physical count is made at the end of the accounting period to verify
inventory records

2. Periodic Inventory System

- detailed inventory record of goods on hand not kept throughout the period
- common to a firm with low value, high quantity items
- cost of sales is determined only at the end of accounting period
- physical count of inventory at the end of the period to determine inventory
on hand

ACCOUNT TITLES IN A MERCHANDISING BUSINESS

PURCHASING ACTIVITIES
Periodic Inventory System
1. Purchases
- a temporary account which is being debited for the cost of goods
purchased during a specific period
- has a normal debit balance
2. Purchase Returns and Allowances
- a temporary account which used t record goods returned to a supplier
- it has a normal credit balance
- a deduction from the purchases account (contra-asset account)
3. Purchase Discount
- a temporary account which is used to record discounts taken by the entity
for goods that is purchased
- it has a normal credit balance
- a deduction from the purchases account ( contra-asset account)
4. Freight-In
- used to record costs of transporting goods from the seller to buyer if buyer
pays for it
- treated as an inventoriable cost
- it has a normal credit balance

Perpetual Inventory System

1. Merchandise Inventory
- an asset representing the total amount of goods on hand at the end of one
accounting period
- it has a normal debit balance
- used to record acquisition and return of defective goods, purchase discounts
granted, as well as costs of transporting goods
- credited each time there is a sale of goods under perpetual inventory
system
RECORDING PURCHASING ACTIVITIES: DISCOUNTS
Accounting for Discounts
1. Trade Discounts
- also known as Quantity or Volume Discount
- discounts given to customers to encourage bulk purchase of merchandise
- usually applied to the list price or the catalogue price
- never recorded to accounting books
2. Cash Discounts
- discount given to customers who purchase on account to induce or
encourage prompt payment of the account
- a customer is given a period (discount period) during which payment is to
be made to avail of discount
- always recorded when availed
**Purchase Discount Terms
2/10, n/30 2% discount if paid within 10 days
1/10 EOM 1% discount if paid within first 10 days at next month
N/30 or n/10 EOM net amount due in 30 days or within the first 10 days of
the next month
**Computing for Purchase Discount
Invoice Price (exclude any trade P
discount) XXXX
Downpayment
(XXXX)
Returns and Allowances
(XXXX)
Basis for Purchase Discount P
XXXX
Multiply with the percentage *X
%
Purchase Discount P
XXXXX

** In computing the cash discount, the starting point is always the Invoice
amount/price
**Whenever there are downpayment or returns and allowances made or granted,
deduct them from the invoice price to arrive at cost at the basis for cash discount
**Whenever there are partial payments made, ignore them in computing the cash
discount

ACCOUNT TITLES IN A MERCHANDISING BUSINESS

SELLING ACTIVITIES
1. Sales
- a temporary account used to record revenue arising from the sales of
merchandise based on their selling prices
- it has a normal credit balance
- sales are always recorded on selling price
2. Sales Returns and Allowances
-a temporary account debited for all merchandise returned by customers due
to defects or errors in specification
- goods returned are usually recorded at their selling price
- it has a normal debit balance
- a contra-revenue account
3. Sales Discount
- accounts debited by the seller whenever the buyer avails of a cash discount
from the entity
- it has a normal debit balance
- cash discount from the point of view of the seller
- a contra-revenue account
4. Freight-Out
- accounts used to record costs of transporting goods from the seller to buyer
if the seller pays for such cost
- represents an operating cost on the part of the seller
- it has a normal debit balance
5. Cost of Sales
- accounts used to record cost of good sold each time a sale occur
- only used under a perpetual inventory system
- it has a normal debit balance

SUMMARY
Account Titles Used in Recording PURCHASING Activities

Activity Periodic Inventory System Perpetual Inventory

System
Debited to Merchandise
Purchase of Merchandise Debited to Purchases
Inventory
Freight Costs related to Debited to Freight-In or Debited to Merchandise
Merchandise Transportation-In Inventory
Return of Defective Credited to Purchase Credited to Merchandise
Merchandise Returns and Allowances Inventory
Purchased Discount Credited to Purchase Credited to Merchandise
Received Discount Inventory

Account Titles Used in Recording SELLING Activities

Activity Periodic Inventory System Perpetual Inventory

 System
Credited to Sales
*Cost of Goods sold is
Sale of Merchandise Credited to Sales debited for each sale
along with a credit to
Merchandise Inventory
Freight Costs related to sale Debited to Freight-Out or Debited to Freight-Out
of Merchandise Transportation-Out or Transportation-Out
Debited to Sales Returns
and Allowances *Cost of
Return of Defective Debited to Sales Returns Goods sold is credited
Merchandise by Customer and Allowances for each return along
with a debit to
Merchandise Inventory
Debited to Sales
Sales Discount granted Debited to Sales Discount
Discount

Pro-Forma Entries
Activity Periodic Inventory Perpetual Inventory
System System
Purchases Merchandise Inventory
Purchase of
XXX XXX
Merchandise on
Accounts Payable Accounts Payable
account
XXX XXX
Freight In Merchandise Inventory
Freight Costs paid by XXX XXX
the buyer Cash Cash
XXX XXX
Accounts Payable
Accounts Payable
Defective XXX
XXX
Merchandise Purchase Returns
Merchandise Inventory
returned and Allowances
XXX
XXX
Accounts Payable Accounts Payable
XXX XXX
Payment within the Purchase Discount Merchandise Inventory
discount period XXX XXX
Cash Cash
XXX XXX

Activity Periodic Inventory Perpetual Inventory

System System
Sale of Goods on Accounts Receivable Accounts Receivable XXX
Account XXX Sales
 XXX
Cost of Sales
Sales
XXX
XXX
Merchandise Inventory
XXX
Freight Out
Freight Out XXX
Freight Costs paid by XXX
Cash
the seller Cash
XXX
XXX
Sales Returns and
Allowances
Sales Returns and
XXX
Allowances
Goods returned by Accounts Receivable
XXX
customer XXX
Accounts Receivable
Merchandise Inventory XXX
XXX
Cost of Sales
XXX
Cash
XXX Cash XXX
Collection within Sales Discount Sales Discount XXX
discount period XXX Accounts Receivable
Accounts Receivable XXX
XXX

Merchandising Periodic Inventory Perpetual Inventory

Activity System System
Initial Investment Merchandise Inventory Merchandise Inventory
Additional
Purchases Merchandise Inventory
Investment