STATEMENT OF

COMPREHENSIVE
INCOME FOR A
MERCHANDISING
BUSINESS
OBJECTIVES:
Describe the nature of transactions in a
merchandising business;
Differentiate the two inventory systems;
and
Record transactions of a
merchandising business using periodic
and perpetual inventory system.
TRANSACTIONS IN A MERCHANDISING
BUSINESS:
buying of stocks or items for resale
payment of expenses related to
operations
purchase of equipment
obtaining a loan to finance the business
investment of owners
 NATURE AND EXAMPLES OF
MERCHANDISING COMPANY
A merchandising company is an
enterprise that buys and sells
goods to earn a profit.
Ex. Mercury Drug, KCC, etc.
 NATURE AND EXAMPLES OF
MERCHANDISING COMPANY
Merchandise (or
merchandise inventory) refers
to goods that are held for sale
to customers in the normal
course of business.
 NATURE AND EXAMPLES OF
MERCHANDISING COMPANY
Candies, canned goods, noodles
sold at a grocery stores
Juice, biscuits sold in a grocery
store
Medicines sold in a pharmacy
 IS IT A MERCHANDISE OR NOT?

If a grocery store
decided to sell an old
computer used in the
office.
 IS IT A MERCHANDISE OR NOT?

A computer store who

resells computer units.
 IS IT A MERCHANDISE OR NOT?

a pharmacy decided to
sell a table used in their
display area.
 IS IT A MERCHANDISE OR NOT?

a retail furniture store

sell a table.
 IS IT A MERCHANDISE OR NOT?

furniture stores who

manufacture their own
products being sold.
 NATURE OF MERCHANDISING
COMPANY
A merchandiser’s
primary source of
revenue is sales revenue
or sales.
 EXPENSES FOR A MERCHANDISING
COMPANY
1. Cost of goods sold
(COGS)
2. Operating expenses
(OE)
 1. COST OF GOODS SOLD
(COGS)
❖ the total cost of
merchandise sold
during the period
 2. OPERATING EXPESES
❖ expenses incurred in the
process of earning sales
revenue that are deducted
from gross profit in the
income statement.
Sales - COGS = Gross Profit - Operating Exp. = Net Income (Loss)

❖ Gross profit (GP) is equal to

Sales Revenue less the Cost
of Goods Sold.
THE OPERATING CYCLES FOR A
MERCHANDISER:
1. buy merchandise inventory
2. sell inventory
3. obtain Accounts Receivable
4. receive cash
 COMMONLY USED SPECIAL JOURNALS:
1. Cash Receipts Journal –used to
record all cash that had been
received
2. Cash Disbursements Journal
–used to record all transactions
involving cash payments
 COMMONLY USED SPECIAL JOURNALS:
3. Sales Journal (Sales on Account
Journal) –used to record all sales on
credit (on account)
4. Purchase Journal (Purchase on
Account Journal) –used to record all
purchases of inventory on credit (or
on account)
 INVENTORY SYSTEMS
▶Inventory– is the most
important asset of a
merchandising
business
METHODS OF ACCOUNTING
FOR INVENTORY

▶Perpetual Inventory System

▶Periodic Inventory System.
 PERPETUAL INVENTORY
SYSTEM
▶ Keep track of all changes in the
inventory account.
▶ Traditionally
used by businesses
selling few expensive goods.
▶ Updatesthe quantity of each item
bought & sold immediately
PERIODIC INV. SYSTEM
▶Providedata on inventory levels
at some points in time.
▶Physical count is made usually
once or twice a year
▶Traditionally
used by business
selling many inexpensive goods
PERIODIC INV. SYSTEM
ASSET
Merchandise Inventory, End
- this refers to unsold merchandise
at the end of the accounting period
- normal balance is a debit being
an asset
PERIODIC INV. SYSTEM
INCOME ACCOUNTS
SALES
- this account is credited
for merchandise that are sold
either in cash or on credit
PERIODIC INV. SYSTEM
INCOME ACCOUNTS
SALES
Debit, Cash/Accounts Receivable xx
Credit, Sales xx
PERIODIC INV. SYSTEM
Transactions:
1. Sale of merchandise on cash
basis
2. Sale of merchandise on account
3. Sale of merchandise with
downpayment
PERIODIC INV. SYSTEM
INCOME ACCOUNTS
SALES DISCOUNTS – contra sales
account
this account is debited for sales
discount given to a customer for early
collection from his/her account.
PERIODIC INV. SYSTEM
INCOME ACCOUNTS
SALES DISCOUNTS
Debit, Cash xx
Debit, Sales Discounts xx
Credit, Accounts Receivable xx
PERIODIC INV. SYSTEM
Transactions
1. Partial collection of customer
account
2. Full collection of account beyond
discount period
3. Full collection of account within a
discount period
ACCOUNTING FOR CREDIT SALES

1. Gross Method

Records accounts receivable

and sales at gross amount of
the invoice
ACCOUNTING FOR CREDIT SALES
1. Merchandise is sold for
P50,000, terms 3/10, n/30
Accounts Receivable 50000
Sales 50000
ACCOUNTING FOR CREDIT SALES
2. Received payment from
customer within the discount
period.
Cash 48,500
Sales Discount 1,500
Accounts Receivable 50,000
ACCOUNTING FOR CREDIT SALES
3. The customer paid beyond
the discount period.

Cash 50,000
Accounts Receivable 50,000
ACCOUNTING FOR CREDIT SALES:NET METHOD

1. Merchandise is sold for

P50,000, terms 3/10, n/30
Accounts Receivable 48500
Sales 48500
NET METHOD
2. Received payment from
customer within the discount
period.
Cash 48,500
Accounts Receivable 48,500
ACCOUNTING FOR CREDIT SALES:NET METHOD

3. The customer paid beyond

the discount period.

Cash 50,000
Accounts Receivable 48,500
Sales Discount forfeited 1,500
PERIODIC INV. SYSTEM
INCOME ACCOUNTS
SALES RETURNS & ALLOWANCES – contra sales
account
this account is debited for merchandise
sold either in cash or on credit but were
returned by the customer for reason such as
but not limited to defects or change of
preference.
PERIODIC INV. SYSTEM
INCOME ACCOUNTS

SALES returns & allow.

Debit, Sales Ret. & Allow. xx
Credit, Cash/Accounts Receivable xx
PERIODIC INV. SYSTEM
Transactions
1. Sales returns and allowances (cash
basis)
2. Sales returns and allowances (on
account)
3. Sales returns and allowances (with
downpayment)
PERIODIC INV. SYSTEM
COST ACCOUNTS

PURCHASES
this account is debited when
merchandise are purchased
either in cash or on credit.
PERIODIC INV. SYSTEM
COST ACCOUNTS

PURCHASES
Debit, Purchases xx
Credit, Cash/AP xx
PERIODIC INV. SYSTEM
Transactions
1. Purchase of merchandise on cash
basis
2. Purchase of merchandise on account
3. Purchase of merchandise with
downpayment
PERIODIC INV. SYSTEM
COST ACCOUNTS
PURCHASES DISCOUNTS-contra purchases
accounts
this account is CREDITED when
there is discount availed from a
supplier for early payment of
merchandise purchased on credit.
PERIODIC INV. SYSTEM
COST ACCOUNTS
PURCHASES DISCOUNTS
Debit, Accounts Payable xx
Credit, Purchase Discounts xx
Credit, Cash xx
PERIODIC INV. SYSTEM
Transactions
1. Partial payment of account with
suppliers.
2. Full payment of account beyond
discount period
3. Full payment of account within
discount period
PERIODIC INV. SYSTEM
TRADE DISCOUNTS
-is a special discount from the list
price offered by a seller to buyers
if the order is in large quantity.
-are NOT RECORDED
PERIODIC INV. SYSTEM
TRADE DISCOUNTS
Assume the catalog price of
merchandise purchased is
P700,000 less 30%, 10%, with credit
terms of 4/10, n/30.
PERIODIC INV. SYSTEM
TRADE DISCOUNTS
PERIODIC INV. SYSTEM
TRADE DISCOUNTS

Upon purchase:
Purchases 441,000
Accounts Payable 441,000
PERIODIC INV. SYSTEM
TRADE DISCOUNTS
Payment of purchase on account:
Accounts Payable 441,000
Cash 423,360
Purchase discount 17,640
ACCOUNTING FOR CREDIT PURCHASES
Gross Method
a. Goods are purchased on account,
P300,000, with terms 3/10, n/30.
Purchases 300,000
Accounts Payable 300,000
ACCOUNTING FOR CREDIT PURCHASES
Gross Method
b. Assume supplier is paid within the
discount period.
Accounts payable 300,000
Cash 291,000
Purchase Discount 9,000
ACCOUNTING FOR CREDIT PURCHASES
Gross Method
c. Assume supplier is paid beyond the
discount period.
Accounts payable 300,000
Cash 300,000
ACCOUNTING FOR CREDIT PURCHASES
Net Method
a. Goods are purchased on account,
P300,000, with terms 3/10, n/30.
Purchases 291,000
Accounts Payable 291,000
ACCOUNTING FOR CREDIT PURCHASES
Net Method
b. Assume supplier is paid within the
discount period.
Accounts payable 291,000
Cash 291,000
ACCOUNTING FOR CREDIT PURCHASES
Net Method
c. Assume supplier is paid beyond the
discount period.
Accounts payable 291,000
Purchase discount lost 9,000
Cash 300,000
PERIODIC INV. SYSTEM
COST ACCOUNTS
PURCHASES RETURNS & ALLOW.-contra
purchases accounts
this account is CREDITED for
merchandise purchased either in
cash or on credit that were returned
by the company to their suppliers.
PERIODIC INV. SYSTEM
COST ACCOUNTS

PURCHASES RETURNS & ALLOW.

Debit, Cash xx
Credit, Purchase Ret. & Allow. xx
PERIODIC INV. SYSTEM
Transactions

1. Purchase returns & allow (cash basis)

2. Purchase returns & allow (on account)
3. Purchase returns & allow (with
downpayment)
PERIODIC INV. SYSTEM
COST ACCOUNTS
FREIGHT-IN (FOB Shipping Point)
this account is DEBITED for the
freight and handling charges of
merchandise purchased by the
buyer or customer.
PERIODIC INV. SYSTEM
COST ACCOUNTS

FREIGHT-IN
Debit, Freight-In xx
Credit, Cash/AP xx
PERIODIC INV. SYSTEM
Transactions

1. Payment of freight on merchandise

purchased
PERIODIC INV. SYSTEM
EXPENSE ACCOUNTS

FREIGHT-OUT (FOB Destination)

this account is DEBITED for the
freight and handling charges of
merchandise sold to customers.
PERIODIC INV. SYSTEM
EXPENSE ACCOUNTS

FREIGHT-OUT (FOB Destination)

Freight-out xx
Cash/A/P xx
PERIODIC INV. SYSTEM
Transactions

1. Payment of freight on merchandise

sold.
PERPETUAL INV. SYSTEM
-characterized by the
use of Merchandise
Inventory as an Asset
PERPETUAL INV. SYSTEM
Debit Credit
1. To record purchases 1. To record purchases
returns & allowances
2. To record freight-in 2. To record purchase
discounts
3. Excess of actual 3. To record actual cost of
inventory against stock goods sold
card
4. Excess of stock card
against actual inventory
PERPETUAL INV. SYSTEM
1. Purchase of merchandise
Debit, Inventory xx
Credit, Cash/AP xx
PERPETUAL INV. SYSTEM
Debit Credit
1. To record purchases 1. To record purchases
returns & allowances
2. To record freight-in 2. To record purchase
discounts
3. Excess of actual 3. To record actual cost of
inventory against stock goods sold
card
4. Excess of stock card
against actual inventory
PERPETUAL INV. SYSTEM
1. Purchase Returns & Allow.
Debit, Cash/AP xx
Credit, Inventory xx
PERPETUAL INV. SYSTEM
Terms of Sale-Transfer of
Ownership
1. Freight on Board (FOB) Shipping
Point
2. Freight on Board (FOB) Destination
PERPETUAL INV. SYSTEM
Freight on Board (FOB) Shipping
Point
Buyer pays freight costs.
Ownership over the goods is
transferred to the buyer once it is out
of the premises of the seller.
PERPETUAL INV. SYSTEM
Debit Credit
1. To record purchases 1. To record purchases
returns & allowances
2. To record freight-in 2. To record purchase
discounts
3. Excess of actual 3. To record actual cost of
inventory against stock goods sold
card
4. Excess of stock card
against actual inventory
PERPETUAL INV. SYSTEM
1. Paid
freight on the purchased
goods
Debit, Merchandise Inv. xx
Credit, Cash/AP xx
PERPETUAL INV. SYSTEM
FREIGHT TERMS: FOB SHIPPING
POINT
Assuming the supplier of Covidio is
based in Luzon and in order to bring
the 20 computer units to Koronadal it
will cost PHP3,000 to deliver the
goods.
PERPETUAL INV. SYSTEM
1. Paid
freight on the purchased
goods
Debit, Merchandise Inv. 3,000
Credit, Cash/AP 3,000
PERPETUAL INV. SYSTEM
Freight on Board (FOB)
Destination
Seller pays freight costs.
Ownership over the goods is
transferred to the buyer once the
goods are delivered and received
by the buyer.
PERPETUAL INV. SYSTEM
1. Delivery
Expense is debited if
seller pays freight on outgoing
merchandise to a buyer which is
an operating expense to the
seller.
PERPETUAL INV. SYSTEM
FREIGHT TERMS: FOB DESTINATION
— SELLER PAYS FREIGHT
Delivery expense xx
Cash xx
PERPETUAL INV. SYSTEM
FREIGHT TERMS: FOB DESTINATION
— SELLER PAYS FREIGHT
Assuming the supplier of Covidio is
based in Luzon and in order to bring
the 20 computer units to Koronadal it
will cost PHP3,000 to deliver the
goods.
PERPETUAL INV. SYSTEM
FREIGHT TERMS: FOB DESTINATION
— SELLER PAYS FREIGHT
NO ENTRY IS RECORDED IN THE BOOKS
OF COVIDIO
PERPETUAL INV. SYSTEM
1. Purchase Discounts
Debit, Accounts Payable xx
Credit, Inventory xx
Credit, Cash xx
PERPETUAL INV. SYSTEM
Debit Credit
1. To record purchases 1. To record purchases
returns & allowances
2. To record freight-in 2. To record purchase
discounts
3. Excess of actual 3. To record actual cost of
inventory against stock goods sold
card
4. Excess of stock card
against actual inventory
PERPETUAL INV. SYSTEM
SALES TRANSACTIONS: Two entries
are made with each sale:
Cash/AR xx
Sales xx
Cost of Goods Sold xx
Inventory xx
PERPETUAL INV. SYSTEM
SALES RETURNS AND ALLOWANCES:
Sales Returns & Allow. xx
AR xx
Inventory xx
COGS xx
PERPETUAL INV. SYSTEM
SALES DISCOUNTS
An example of a discount term is commonly
expressed as: 2/10, n/30, which means that
the customer is given 2% discount if payment
is made within 10 days. After 10 days there is
no discount, and the balance is due in 30
days.
PERPETUAL INV. SYSTEM
SALES DISCOUNTS
2/EOM, n/30 – 2% discount of the gross
invoice price is allowed if payment is made
up to the end of the month and the gross
price is due 60 days from the invoice date.
PERPETUAL INV. SYSTEM
SALES DISCOUNTS

Debit, Cash xx
Debit, Sales Discounts xx
Credit, Accounts Receivable xx