CHAPTER 7

MERCHANDISING OPERATIONS

 Nature of a Merchandising Business

 Operating Cycle of a Merchandising Business

The faster the sale of

inventory and the
collection of cash, the
higher the profits

Cash Sales
The cycle is from cash to Sales on
inventory and back to cash The cycle is from cashAccount
to
inventory to accounts
receivable and back to cash

 Types of Merchandisers
 Wholesalers – one who buys in bulk or volume directly from a manufacturer and
sells goods to a retailer
 Retailer – one who sells products to end users

 Inventory Systems in a Merchandising Business

 The Periodic System: Under this system, For business selling goods with
transactions related to the acquisition of different low-priced items, the
inventory are recorded accordingly as periodic system maybe a more
purchases, purchase discounts, and purchase appropriate system to use
returns and allowances.
 The Perpetual System: Under this
system, running balance of inventory on For business selling high-priced
hand and the cost of sales are shown items, the perpetual system is a
continuously more appropriate system to use
 Recording Transactions Under the Periodic System
Discount – a reduction from a certain price or amount

 Two kinds:
 Trade Discount – a deduction from the list
Trade discount is not recorded or
price or catalogue price granted to customers
shown in the buyer’s or seller’s books
to encourage purchase of goods or
as it directly deducts the list price
merchandise in big quantities or volume.

Illustrative Problem
a. Spitz Co. bought merchandise for cash with a list price of P10,000 less 10% trade
discount

Journal Entry on the books of Spitz Co. Computation:

Dr. Cr. List Price P10,000
Purchases 9,000 10% Trade Discount
Cash 9,000 P10,000 x 10% (1,000)
Purchased merchandise for cash Purchase Price P 9,000

b. Terrier Co. sold merchandise to Poodle Co. with a list price of P50,000.
Terms: 10%, 10%, 2/10, n/30

Journal Entry on the books of Terrier Co.

Dr. Cr. Computation:
Accounts Receivable 40,500 List Price P50,000
Sales 40,500 10% Trade Discount
Sold merchandise on account; P50,000 x 10% (5,000)
Terms: 2/10, n/30 Balance 45,000
10% Trade Discount
Note: The 10%, 10% in the terms represent the P45,000 x 10% (4,500)
trade discount given to the buyer while the 2/10,
Sale Price P 40,500
n/30 are the terms of the payment (see cash
discount)

 Cash Discount – a deduction from the selling or purchase price granted to customers to
encourage prompt payments of accounts

 Examples of different credit terms:

o 3/15, 2/20, n/30 – means that 3% cash discount is granted to the buyer if account is
paid within 15 days from date of purchase, 2% cash discount is given if account is paid
within 20 days, purchase price less returns and allowance if any is payable within 30
days
o 1/10, n/60 – means that a 1% cash discount is granted to the buyer if account is paid
within 10 days from date of purchase, purchase price less returns and allowances if
any, is payable within 60 days
 o n/30 or EOM1 – means that no cash discount is available to the buyer. Purchase price
less returns and allowances if any, is payable within 30 days.
o 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. Purchase price less returns and allowances if any, is
payable within 60 days
o 1/EOM, n/30 – means that a 1% cash discount is given if the buyer pays until the end
of the month. Purchase price less returns and allowances if any, is payable within 30
days

Illustrative Problem
a. On July 1, Siamese Kat Merchandising purchased goods from Persian Kat Trading for
P70,000. Terms 1/10, n/30.
Siamese Kat Merchandising settled its account on July 11.

Journal Entry on July 1 Computation:

Dr. Cr. Purchase Price P70,000
Purchases 70,000 1% Cash Discount
Accounts Payable 70,000 P70,000 x 1% (700)
Purchased merchandise on account Cash Payment P 69,300
Terms: 1/10,n /30

Journal Entry on July 11

Accounts Payable 70,000
Cash 69,300
Purchase Discount 700
Paid account with Persian Kat Trading

b. Assuming the terms of Siamese Kat Merchandising’s purchase is 3/10 EOM, n/60 and
Siamese Kat Merchandising paid on August 10

Journal Entry on August 10 Computation:

Dr. Cr. Purchase Price P70,000
Accounts Payable 70,000 3% Cash Discount
Cash 67,900 P70,000 x 3% (2,100)
Purchase Discount 2,100 Cash Payment P 67,900
Paid account with Persian Kat Trading

 Source Documents
Two main activities are
1
“EOM” or end of the month, can also be written as “eom” involved in a
merchandising business,
namely, buying and selling.
Therefore there are two
points of view considered
in recording the business
 o Buyer:
 Purchase Requisition – is a written request to the purchaser of an entity from an employee
or user department of the same entity that goods be purchased
 Purchase Order – is an authorization made by the buyer to the seller to deliver the
merchandise as detailed in the form
 Receiving Report – is a document containing information about goods received from a
vendor. It formally records the quantities and description of the goods delivered.
 Debit memorandum – a written notice from the buyer informing the seller that the buyer
will debit the account or decrease the amount owed
to the seller for returned goods or allowances
requested due to defect or wrong Steps in a Purchase Transaction
specifications 1. When certain items are needed, the
user department fills in a purchase
o Seller: requisition form and sends it to the
purchasing department.
 Sales Invoice – contains the name and address
2. The purchasing department then
of the buyer, the description of the goods prepares a purchase order after
sold, the credit terms, unit price, quantities, checking with the price lists, quotations,
total amount, and date of sale. This evidences or catalogs of approved vendors. The
the transfer of ownership of the goods from purchase order, addressed to the
the seller to the buyer selected vendor, indicates the quantity,
 Statement of Account – is a formal notice to description, and price of the
the debtor detailing the accounts already due merchandise ordered. It also indicates
 Official Receipt – a written acknowledgement expected payment terms and
transportation arrangements.
of money received by the seller evidencing
3. After receiving the purchase order, the
payment of the buyer for goods purchased seller forwards an invoice (sales invoice
and received on the seller; purchase invoice on the
 Credit Memorandum – is a form used by the buyer) to the purchaser upon shipment
seller to notify the buyer that his account is of the merchandise. It defines the terms
being decreased due to errors or other factors of the transaction.
requiring adjustments 4. Upon receiving the shipment of
merchandise, the purchaser’s receiving
o Other Source Documents: department sees to it that the terms in
the purchase order are complied with,
 Bill of Lading – is a document issued by the
and prepares a receiving report.
carrier – a trucking, shipping or airline – that’s 5. Before approving the invoice for
specifies contractual conditions and terms of payment, the accounts payable
delivery such as freight terms, time, place, and department compares copies of the
the person named to receive goods purchase requisition, purchase order,
 Deposit slips – are printed forms with receiving report and invoice to ensure
depositor’s name, account number and space that quantities, descriptions, and prices
for details of the deposit agree.
 Check – is a written order to a bank by a
depositor to pay the amount specified in the check
from his checking account to the person named in the check. The entity issuing the check is
the payor while the receiver is the payee
 Comparison of Buyer’s Books and Seller’s Books (Periodic System)

Buyer’s Books Seller’s Books

Purchased merchandise for cash Sold merchandise for cash

Dr. Cr. Dr. Cr.
Purchases xxx Cash xxx
  The Perpetual System
 Under this method, an acquisition of merchandise is debited to merchandise inventory.
See Chapter 7.1 (review papers) for illustrative problems
  Sale of the merchandise is recorded as a credit to merchandise inventory with a
corresponding debit to cost of goods sold account.
 In other words, any movement in merchandise inventory is directly debited or credited
to this account, thus maintaining a continuous record of the inventory items

 Comparison of Buyer’s Books and Seller’s Books (Perpetual System)

Buyer’s Books Seller’s Books

Purchased merchandise for cash/on account Sold merchandise for cash/ on account
Dr. Cr. Dr. Cr.
Merchandise Inventory xxx Cash/ Accounts Receivable xxx
Cash/Accounts Payable xxx Sales xxx

Returned defective merchandise bought on Cost of Sales xxx

account Merchandise Inventory xxx
Accounts Payable xxx
Merchandise Inventory xxx Received defective merchandise sold on account
Sales Returns and Allowances xxx
Payment of Accounts Payable within the discount Accounts Receivable xxx
period arising from the purchase of
merchandise Merchandise Inventory xxx
Accounts Payable xxx Cost of Sales xxx
Merchandise Inventory xxx
Cash xxx Collection within the discount period arising from
the sale of merchandise
Payment after discount period Cash xxx
Accounts Payable xxx Sales Discount xxx
Cash xxx Accounts Receivable xxx

Collection after discount period

See Chapter 7.1 (review papers) for illustrative problems Cash xxx
Accounts Receivable xxx

Sold merchandise for cash/ on account

Note: 1. The amount of cash/accounts receivable and sales on the first entry is the total sales price of the goods sold.
2. The amount of cost of sales and merchandise inventory on the second entry is the cost of merchandise sold.
*the second entry removes the sold goods from the merchandise inventory account and transfers it to the cost
of goods sold

Received defective merchandise sold on account

Note: 1. The amount of sales returns and allowances and accounts receivable on the first entry is the total sales price of
the goods
 returned.
Comparison Between the Periodic System and perpetual System in Recording Transactions
2. The amount of merchandise inventory and cost of sales on the second entry is the cost of merchandise returned
* the second entry transfers back to the merchandise inventory account the cost of returned goods while
removing it from the cost of goods sold
 Transactions Periodic Perpetual
1. Purchase of Purchases xxx Merchandise Inventory xxx
merchandise Accounts Payable xxx Accounts Payable xxx
2.Returned defective Accounts Payable xxx Accounts Payable xxx
merchandise on Purchase Returns and xxx Merchandise Inventory xxx
account Allowances
3.Payment of account Accounts Payable xxx Accounts Payable xxx
within discount Purchase Discount xxx Merchandise Inventory xxx
period Cash xxx Cash xxx
4.Sale of merchandise Accounts Receivable xxx Accounts Receivable xxx
on account Sales xxx Sales xxx

Cost of Sales xxx

Merchandise Inventory xxx
5.Received defective Sales Returns and Allow. xxx Sales Returns and Allowances xxx
merchandise bought Accounts Receivable xxx Accounts Receivable xxx
on account
Merchandise Inventory xxx
Cost of Sales xxx
6.Collection of account Cash xxx Cash xxx
within discount Sales Discount xxx Sales Discount xxx
period Accounts Receivable xxx Accounts Receivable xxx

 Difference in Recording Owner’s Investment and Withdrawal of Merchandise Under the Periodic
and Perpetual Systems of Inventory

Transactions Periodic Perpetual

1. Initial Investment Merchandise Inventory xxx Merchandise Inventory xxx
Owner, Capital xxx Owner, Capital xxx
2. Additional Investment Purchases xxx Merchandise Inventory xxx
Owner Capital xxx Owner Capital xxx
3. Temporary Withdrawal Owner, Drawing xxx Owner, Drawing xxx
(Owner is anticipating profit Purchases xxx Merchandise Inventory xxx
in the business and has the
intention of returning the
amount withdrawn)
4. Permanent Withdrawal Owner, Drawing xxx Owner, Drawing xxx
(Owner has no intention of Purchases xxx Merchandise Inventory xxx
returning the amount
withdrawn)

Note: under the periodic system, the Purchases account is credited for owner’s withdrawal of merchandise
for personal use in order to keep the balance of the Merchandise Inventory account to its original amount