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Accounting Fundamentals For Merchandising Operations

This document provides an overview of accounting fundamentals for merchandising operations. It discusses the differences between service, merchandising, and manufacturing businesses and their profit calculations. It also describes the operating cycle as the time it takes for cash invested in operations to return as cash. The document outlines key source documents used in merchandising and explains accounting entries for purchases, sales, cost of sales, and operating expenses. It provides examples to illustrate accounting for these typical merchandising transactions.

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Jessa Mae Banse Limosnero
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© © All Rights Reserved
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Download as PPTX, PDF, TXT or read online on Scribd
200 views

Accounting Fundamentals For Merchandising Operations

This document provides an overview of accounting fundamentals for merchandising operations. It discusses the differences between service, merchandising, and manufacturing businesses and their profit calculations. It also describes the operating cycle as the time it takes for cash invested in operations to return as cash. The document outlines key source documents used in merchandising and explains accounting entries for purchases, sales, cost of sales, and operating expenses. It provides examples to illustrate accounting for these typical merchandising transactions.

Uploaded by

Jessa Mae Banse Limosnero
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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ACCOUNTING FUNDAMENTALS

for MERCHANDISING
OPERATIONS
By: Jessa Mae S. Banse

TYPES OF BUSINESS OPERATIONS

SERVICE BUSINESS sells knowledge


or expertise

MERCHANDISING BUSINESS sells a


particular or a group of products

MANUFACTURING BUSINESS
produces the goods that
merchandisers sell

PROFIT of SERVICE vs
MERCHANDISING BUSINESS
SERVICE

MERCHANDISING

Service Revenue

Net Sales

Less: Expenses

Less: Cost of Sales


Equals: Gross Profit

Add: Other Income

Add: Other Income

Equals: Total Income

Equals: Total Income


Less: Operating and Other
expenses
Less: Taxes

Equals: Net Profit

Equals: Net Profit

OPERATING CYCLE

Time it takes for cash invested in the


operations to be reverted back into
cash

Cash

Accounts
Receivabl
e

Inventory

Source Documents

Sales Invoice prepared by the seller; sent to the buyer; contains information about the goods sold

Bill of Lading document issued by a carrier that specifies the conditions and terms of delivery

Statement of Account a formal notice to the debtor detailing the accounts already due

Official Receipt evidences the receipt of cash by the seller

Deposit Slip printed forms that details deposits

Check 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

Purchase requisition written request to the purchaser of an entity from an employee or user
department that goods be purchased

Purchase order an authorization made by the buyer to the seller to deliver the merchandise as
detailed in the form

Receiving Report a document containing information about goods received from a vendor

Credit memorandum form used by the seller to notify the buyer that his account is being
decreased due to errors or other factors requiring adjustments

PURCHASES

Trade Discount encourages the buyers to


purchase; markdown from list prices
NOT RECORDED SINCE INVOICE IS ALREADY REDUCED BY THE AMOUNT OF THE
DISCOUNT

Cash Discounts encourage the buyers on


account to pay before due date
Discount Period period covered by a discount
Credit Period the total duration of the credit

2/10, n/30

Transportation Costs (Transportation In)


FOB Destination/shipping point determines when

ownership is transferred; the owner while on board bears


the liability of the freight
Freight prepaid/collect shows who paid for the freight
cost

Terms of Transaction
SHIPPING (TRANSPORTATION)
COSTS
Owner while
on Fright

Liable for
the Freight

Paid the
Freight

FOB Destination,
Freight Prepaid

Seller

Seller

Seller

FOB Destination,
Freight Collect

Seller

Seller

Buyer

FOB Shipping Point,


Freight Prepaid

Buyer

Buyer

Seller

FOB Shipping Point,


Freight Collect

Buyer

Buyer

Buyer

Freight Term

Accounting for Purchase

Periodic Inventory System


Used when selling small value but of large quantity items
Upon purchase: PURCHASES account is used (debited)
When returned: PURCHASE RETURNS & ALLOWANCES

account is used
When discount is taken: PURCHASE DISCOUNT account is used
Upon sale: No entry is made
At the end of the year, a physical count is undertaken to establish
the ending inventory

Perpetual Inventory System


Used when items are of high value; used when using the

computerized system
MERCHANDISE INVENTORY account is used for all transactions
involving the inventory account, purchases, returns, discount
Upon sale, COST OF SALE is debited with a credit to
MERCHANDISE INVENTORY
At the end of the year, the physical count is compared with the
perpetual records

EXAMPLE

The company purchased P500, 000 worth of merchandise on


account subject to 20% discount with credit terms of 5/10, n/30.
The shipping costs amounted to P5, 000.
TERM

ENTRY

FOB SHIPPING POINT,


FREIGHT COLLECT

Purchases
400, 000
Freight in
5, 000
Accounts Payable
400, 000
Cash
5, 000

FOB SHIPPING POINT,


FREIGHT PREPAID

Purchases
400, 000
Freight in
5, 000
Accounts Payable
405, 000

FOB DESTINATION,
FREIGHT COLLECT

Purchases
400, 000
Accounts Payable
395, 000
Cash
5, 000

FOB DESTINATION,
FREIGHT PREPAID

Purchases
400, 000
Accounts Payable
400, 000

Payment Within Discount


Period

Accounts Payable
400, 000
Cash
Purchase Discount

380, 000
20, 000

Payment beyond Discount


Period

Accounts Payable
Cash

400, 000

400, 000

SALES
Revenue is earned when title of the goods passes (delivery)

NET SALES

Sales Sales Discount Sales


Returns and Allowances
Sales Discount discount given to
customers for paying early
Sales Returns and Allowances
actual returns of sold items that are
unsatisfactory for the customers
Transportation Out

Example

Sold merchandise on account for P250, 000 subject to


2/10, n/30. Cost of the merchandise is P195, 000.
Accounts Receivable 250, 000
Sales 250, 000

Sold merchandise for cash P130, 000, costing P117, 000.


Cash 130, 000
Sales 130, 000

Collected the account sales within the discount period.


Cash 245, 000
Sales Discount
5, 000
Accounts Receivable 250, 000

Assume account sales were collected beyond the discount


period
Cash 250, 000
Accounts Receivable 250, 000

COST OF SALES

Largest single expense


Cost of inventory that the entity has
sold to customers
Beginning Inventory + Net Purchases
+ Transportation In = Goods
Available for Sale Ending Inventory
= Cost of Sales

OPERATING EXPENSES

DISTRIBUTION COSTS directly


related to generate sales

ADMINISTRATIVE COSTS related


to general administration of the
business

OTHER EXPENSES

Example

At the beginning of the year, the company had merchandise inventory of P250, 000.

Sold merchandise on account costing P8, 000 for P10, 000; terms were 2/10, n/30
Accounts Receivable 10, 000
Sales 10, 000

Customer returned merchandise costing P400 that had been previously sold on account for P500.
Sales Returns500
Accounts Receivable 500

Received payment from customer for merchandise sold on account.


Cash 9, 310
Sales Discount
190
Accounts Receivable 9, 500

Purchased on accounts merchandise for resale for P6, 000; terms 2/10, n/30.
Purchases 6, 000
Accounts Payable 6, 000

Paid P200 freight on the above purchase; term FOB Shipping Point, freight collect.
Freight in 200
Cash 200

Returned merchandise costing P300.


Accounts Payable 300
Purchase returns
300

Paid merchandise purchased, within the discount period.


Accounts Payable 5, 700
Cash 5, 586
Purchase Discount
114

At the end of the year the ending inventory per count P231,860.

To establish ending
inventory

Close the beginning inventory to


Income Summary
Income Summary
Inventory

250, 000
250,000

Record the ending inventory


Inventory
231, 860
Income Summary 231, 860

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