Chapter 10

FINANCIAL
ACCOUNTING
FOR
MERCHADISING
ACTIVITIES AND
INCOME
SUMMARY
Financial Accounting 2

1
 OBJECTIVES
• Explain the accounting for merchandising
transactions (buying and selling goods)
according to VAS and IFRS/IAS
• Prepare closing entries for income summary
at the end of period.
• Present financial statements for a
merchandising company.

2
Vietnamese regulation
• Vietnamese Accounting Standard 02: Inventories (VAS 02)
• Vietnamese Accounting Standard 14: Revenues and
Incomes (VAS 14)
• Circular 200 and Circular 133 (for SMEs)
• Circular 200: Article 29. Goods, Article 78. Accounting
principles for revenue (turnover), Article 79. Account 511
– Sales revenue
International Financial Reporting Standard
• IFRS 15 Revenue from Contracts with Customers
Book: Kieso: Chapter 8: 8-7, 8-8, 8-10, 8-11; Chapter 18;
Chapter 3: 3-34
3
 CONTENTS
1 Overview
Accounting for merchandising activities
2 – Vietnamese regulations

10.2.1 Accounting for buying goods

10.2.2 Accounting for selling goods

10.2.3 Income summary

3 Accounting for merchandising activities –

International regulations
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 OVERVIEW
• Goods: Are inventories acquired for selling
in an ordinary course of business.
– Are there a lot of goods in our lives? Are the
goods necessary for our lives? Do you like to have
lots of products in your life? What is one of the
products that you like most and least?

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 OVERVIEW – THE TERMS
Company/
Enterprise/Entity
Goods/
Cash (on Merchandise/
hand/ in bank) Receivables Products ….
Sell goods

Buy/Purchase goods

Payables
Buy/Sell
in cash Buy/Sell on account / on credit
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 Accounting for
purchasing/buying
merchandise

7
 Accounting for buying goods
• When can a buyer/company record inventory
(goods,…) in its accounting books?
…. Check definition and criteria for recognition in
conceptual framework.
 When a buyer controls the goods.
• What does control mean?
…. Check conceptual framework.

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 Goods in Transit
• At year end, goods are not in the warehouse.
The company needs to prepare balance
sheet.
• Are the goods-in-transit inventories/assets in
accounting books of the buyer or the seller?
• Who control the goods?

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 Goods in Transit
F.o.b shipping point vs. F.o.b destination
Who controls the goods? Who bears the risks and benefits relating to the goods?

Buyer controls Goods-in- Seller controls Goods-in-

transit transit
“Shipping point” and “destination” are
FOB: free on board often designated by a particular location
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1/ Buy (HCM) bought products from Sell (HN) f.o.b HN.
At 31/12, Sell shipped the products to a carrier. At 2/1,
the carrier delivered the products at Buy’s warehouse in
HCM. When did Buy recognize the products?

2/ Buy (HCM) bought products from Sell (HN) f.o.b HCM.

At 31/12, Sell shipped the products to a carrier. At 2/1,
the carrier delivered the products at Buy’s warehouse in
HCM. When did Buy recognize the products?

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 Documents
What are the documents as evidence for an
event?

• Purchase
Receive • Memo
Pay
requisition • (Vendor) • Invoice • Payment slips
• Purchase order Invoice • Checks/ Debit
• Contracts • Receiving note
report • Bank
Order Adjust statement

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 Accounts:
Circular 200 – Ministry of Finance
– Perpetual inventory system:
• Account 156 Goods
• Account 1567: Property held for sale (Chapter 14)
• Account 151: Goods on transit
– Periodic inventory system
• Account 611: Purchasing
• Account 151, 156

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 BUYING GOODS
PERPETUAL INVENTORY SYSTEM
111,112,331 156 331,111,112
Cost of inventory Trade discounts, …
settlement discounts,
133
refunds for faulty goods,
Deductible VAT returns

333 Import tax, special

consumption tax

154 Conversion costs

Balance
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 Costs directly related to the
purchasing goods

111,112,331,… 156

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 ILLUSTRATIONS

• At 1/7/20X8, ABC company bought electronic

products from XYZ company. On XYZ’s invoice, VAT
exclusive price was 1,000,000 đ (for 10 units, unit
price of 100,000đ/unit), deductible VAT 100,000
đ, total price was 1,100,000đ. ABC bought on
credit and stocked the products in full.
• Prepare journal entries at ABC.

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 Practices
• On 1/1, Buy bought on credit 1,000 units from Sell.
Before-VAT listed prices is 1,0000đ/unit. Sell provided a
discount of 10đ/unit for any buyer buying 500 units or
above. VAT 10%. Transportation cost of 2,000 đ paid by
Buy in cash. Buy received and stocked the products in
full.
• On 5/1, Buy found that the products were faulty and
recommended a discount of 10% including VAT. Sell
accepted.
• On 10/1, Buy transferred via bank accounts for Sell and
received 2% discount for the early payment
• Determine relevant documents and prepare double
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Costs of Goods/Products/Inventory
What are included in cost of product?
…Check the accounting standard on Inventory
(VAS 02 / IAS 02)

 Purchase price
 Import duties
 …..

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 What are excluded from cost of product?
 …Check the accounting standard on Inventory (VAS
02 / IAS 02)

 selling expenses
 general and administrative expenses
 …

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 Discounts

What are discounts?

How to account for discounts?
Do the cost of product include discounts?

• Purchase discount
• Cash discount/settlement discount

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 ILLUSTRATIONS
• At 1/1, Buy bought on credit 1,000 units from Sell. Net of
VAT listed prices is 1,0000đ/unit. Sell provided a
discount of 10đ/unit for any buyer buying 500 units or
above. VAT is 10%. Transportation cost of 2,000 đ paid
by Buy in cash. Buy received the products in full.
• At 5/1, Buy found that the products were faulty and
recommended a discount of 10% including VAT. Sell
accepted.
• At 10/1, Buy transferred via bank accounts to pay for
Sell and received 2% discount for the early payment
• Calculated the cost of the inventory.

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LOSS/SHORTAGE DURING PURCHASING AND STOCKING

• Can the company totally avoid the loss of

inventory?
• Is there an accepted level of loss?

• Accounting for losses/shortage: Circular

200

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LOSS/SHORTAGE DURING PURCHASING AND STOCKING
• DURING PURCHASING
Shortages within limit: included in product costs of
inventory
Dr 156: Shortage within limit
Dr 133
Cr 331, 111, 112
Shortages beyond limit:
If the shortages awaiting resolution :
Dr 1381: Asset in shortage awaiting resolution
Cr 331, 111, 112
Determining how to solve the losses
Dr 1388, 632…
Cr 1381 23
LOSS/SHORTAGE DURING PURCHASING AND STOCKING

DURING STOCKING
The shortages and losses during stocking are often
identified when stock-taking
• When stock-taking, identifying shortages/losses
within acceptable/registered limit
Dr 632
Cr 156
• When stock-taking, identifying shortages/losses
beyond limit
Dr 1381, 1388…
Cr 156 24
 Illustrations
• ABC company bought on account 1,000 kg
of argicultural products from a cooperative,
unit price 200,000. Losses within limit is
1%. ABC identified a loss of 15 kg when
receiving the products for stocking. The
losses beyond the limit would be
compensated by shipping staff.
• What are the double entries?
• Determine the product costs and unit
product cost.
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Accounting for sales
of merchandise

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 Accounting for selling goods
• When can a seller/company record a sale in its
accounting books?
…. Check criteria in the accounting standard on
revenue (VAS 14 / IFRS 15).
VAS 14:
 When the seller does not control.
 When the seller have received economic benefits from
the transaction.
…
…
 ….
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 Who controls the goods? Who bears the risks and benefits relating to the goods?

Buyer controls Goods-in- Seller controls Goods-in-

transit transit
“Shipping point” and “destination” are
FOB: free on board often designated by a particular location
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Determine the time of recognition and Time of Amounts
recognitio
the sale amounts n
The seller uses VAT credit method, and has the
accounting period from 1/1 to 31/12
1/ On 25/12/20X8, the seller delivered the
products to the buyer and issued the invoice
of 100 mil, plus VAT 10%. The buyer bought
on credit, received the products and accepted
the payable amount.
On 4/1/20X9, the buyer paid money.
2/On 25/12/20X8, the seller received money
from the buyer for the products not yet
delivered, before-VAT price 100 million VND,
VAT 10%. The seller issued the invoice but did
not yet deliver the products. On 4/1/20X9, the
products were delivered to the buyer and the
buyer accepted the products.
 Cases Time of Amounts
recognitio
n
3/On 25/12/20X8, the seller delivered products
to a shipping company, before-VAT price is
100 mil, VAT 10%. According to the contract,
the buyer is responsible for the expenses and
risks during transits.
On 4/1/20X9, the seller received and accepted
the products. One day later, the buyer paid
the money.
4/On 25/12/20X8, the seller delivered products
to a shipping company, before-VAT price is
100 mil, VAT 10%. According to the contract,
the buyer is responsible for the expenses and
risks during transits.
On 4/1/20X9, the buyer received the products
but accepted half of the products. One day
later, the buyer paid for the accepted
products. 30
 Cases Time for Amounts
revenue
recognitio
n
5/ On 25/12/20X8, a seller delivered products to
a selling agent with the before-VAT price of
100 mil, VAT 10%. According to the contract,
the agent would earn a commission on sold
products and could return the unsold items.
On 31/12/20X8, the agent confirmed the sold
products of 50% of the total and was eligible
for a commission of 1 mil.
On 31/1/20X9, the agent confirmed the
remaining products sold and was eligible for a
commission of 1 mil.
On 2/2/20X9, the agent transferred the money
to the seller after keeping the earned
commission of 2 mil.

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 DOCUMENTS
• The company needs documents as evidence
of transactions and for controlling purposes.
• Memo Biên
bản
Delivery • Invoice
• Receiving Cash
•
report receipts
Customer’ • Invoice • Credit memo
s purchase • Outgoing slip • Cash
order Phiếu xuất kho Reduction receipts
• Sales • Shipping notice adjustments • Cheque/
order Chứng từ Credit
Sales chuyển hàng note
approval • Bank
statement

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 ACCOUNTS
Product cost /COGS Revenues

Account 156- Goods:

Account 511:
Revenue
Account 157: Goods in
transit

Account 632-COGS
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 Cost of goods sold Revenues/Sales
COGS (product cost) (Selling price)

155,156 632 511 11*,131

COGS Net of
VAT Total
price
price
33311
VAT

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 REVENUE

3332,3333,.. 511 111,112

Indirect taxes excluded Revenues collected in
from revenues cash
113
521 Revenues collected in
cheque
Ending entries for trade
discounts, returns and 131
allowances Revenues of sale on
911 credit
341
Ending entries for net
revenues Selling goods to pay a debt

641,642
Commissions, bank fees
deducted from sales
35
 COGS
331,111,…Buy and sell 632 911
products Ending entries for
immediately COGS
157
Buy and
send for Sold

156 sale
Send
for sale
Sold from
warehouse/shops

Returned goods
36
 Illustrations
• The seller delivered 100 units of A to
customers at the seller’s warehouse to sell
on credit, selling price 200.000đ/unit,
product cost: 150.000đ/unit, VAT 10%.
• Determine documents and prepare journal
entries.

37
On 1/1: X sold to customer Y 100 units of
product A f.o.b destination. Net of VAT
selling price: 200.000đ/unit, VAT 10%,
product cost 150.000đ/unit.
On 3/1: Y received the products. Y accepted
90 units but did not accept faulty 10 units. Y
kept the faulty products for X but did not
buy them.
Determine documents and entries at the seller
X.
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 Illustration (self-study)
• Company T bought 300 units from company A to
send directly to C f.o.b C’s destination. Net of VAT
purchase price from A: 90,000 d/unit, VAT 10%, T
must pay A after 10 days. Net of VAT selling price
to C: 100,000 d/unit, VAT 10%.
• 2 days later, C received the products and paid via
bank accounts.
• Determine entries at T.
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 Solutions (self-study)
T bought from A and sent to C
Dr TK 157: 27.000.000
Dr TK 133: 2.700.000
Cr TK 331 A: 29.700.000
When C received the goods
+Dr 632/Cr 157: 27.000.000
+Dr TK 131 C: 33.000.000
Cr TK 511: 30.000.000
Cr TK 33311: 3.000.000
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 Consignment
What are ways to increase sales?
What is a consignment?
Why do a company engage in a consignment
arrangement?

What are consigned goods?

Who own/control the consigned goods?
What are the responsibilities and benefits of
consignors and consignees?
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 Consignment
• Manufacturers (or wholesalers) deliver goods but retain
legal title to the goods until they are sold.
• Consignor (manufacturer or wholesaler) ships
merchandise to the consignee (dealer), who is to act as an
agent for the consignor in selling the merchandise.
• Consignor makes a profit on the sale. Consignor c arries
merchandise as inventory.
• Consignee makes a commission on the sale.

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 ILLUSTRATION 18.23

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 Illustrations (self-study)
Company ABC is the consignee for company
XYZ (consignor). ABC sold 2 electronic
devices, net of VAT price is 100 mil, VAT 10%.
ABC gets a 5% commission on net of VAT
price, VAT of the commission is 10%.
ABC paid the money due XYZ via bank account
after retaining the commission.
Prepare the journal entries at ABC

48
 Installment sales
What is installment sale?
Why does a seller engage in installment sales?

49
 Installment sales

• Installment sale: an arrangement where

someone sells something and receives part of the cost
immediately and then regular payments until the money
is completely paid.
• (https://dictionary.cambridge.org/dictionary/english/
instalment-sale)

50
 Installment sales – Extended payment terms
• In essence, the company provides financing to
customers (lending money to customers).
The seller needs to separate:
1. Revenue from providing goods/products: fair value
of the goods/products
2. Revenue from providing financing: interests.

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 Installment Sales
COGS Revenues

156 632 511 131

(1) (2) Fair value
Product 3331
cost VAT

3387
515(3) Amortised Total
earned interests interests 52
 Illustrations
• Company H sells motorbikes. Selling price for
paying immediately (cash price) is 14,000,000 đ.
Total price for 12 monthly installment is
15,200,000 đ. VAT 10% on the cash price. COGS
10,000,000.
• The customer paid immediately 3,000,000. The
remaining amount was to be paid evenly every
month in 12 months from the following month.
• Interests (or credit charges) are amortized over 12
months in straight line methods.
• Prepare entries at the point of sale and in the
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 Time Value of Money
Extended Payment Terms (Self-study)

ILLUSTRATION 18.7 (self-study)

According to IFRS, the company does not record receivable and
liability for unearned interests at the time of sale. Interests earned is
calculated according to time value of money.

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 Time Value of Money
Transaction Price—Extended Payment Terms

ILLUSTRATION 18.7

IFRS: the company

does not record
receivable and
liability for
unearned interests
at the time of sale.

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 SALE RETURNS AND ALLOWANCES

1. Sale returns
2. Sale allowances
3. Trade discounts

56
 Documents and Accounts

Accounts
Documents
• Memo - Account 521: Revenue
• Invoice reductions
Sub-accounts:
- Account 5211 – Trade
discount
- Account 5212 – Returns
- Account 5213 –Allowances
57
 Diagram

521 511
11*, 131
Sale returns, discounts Closing entry at the end
and allowances of period

33311

58
 Illustrations
1. Sell sold in cash to Buy 100 units with the
before-VAT unit price 100,000 d, VAT 10%,
COGS 80,000 d/unit.
2. Due to faulty products, Sell received 20
returned units. Sell refunded to Buy for
cash.
• Prepare the entries.

59
 Illustrations
1. Sell sold in cash to Buy 100 units with the before-VAT unit
price 100,000 d, VAT 10%, COGS 80,000 d/unit.
2. Due to faulty products, Sell received 20 returned units.
Sell refunded to Buy for cash.
• Prepare the entries.

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CUSTOMER LOYALTY PROGRAM (SELF-
STUDY)
• Customer loyalty program grants customers some loyalty
points when purchasing goods or services. When customers
accumulate adequate points, customers can receive goods or
services for free or at a discounted price.
• At the point of sale, the seller determines/estimates the fair
value of the goods or services to be delivered in the future for
free or at a discount. This is recognized as an obligation in
account Unearned Revenue (Account 3387-Liability)

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 CUSTOMER LOYALTY PROGRAM

• At the end of the program, if customers do

not accumulate adequate points for
redemption and cannot receive the free or
discounted products, Unearned Revenue is
recognised as Revenue from selling goods
and providing sevices.

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 CUSTOMER LOYALTY PROGRAM
At the time of sale:
+ Dr Account 112, 131: Total selling price
Cr 511: Total selling price after excluding fair value
of the products to be delivered in the future for free or at
a discount
Cr 3387: Fair value of the products to be delivered
in the future for free or at a discount
Cr 333: VAT payable to the State
+Dr 632/Cr 156: COGS

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 CUSTOMER LOYALTY PROGRAM

• Ending the program:

– Customers receive free or discounted products:
+Dr 632/Cr 156, 331, 111…
+Dr 3387: fair value of the products
Cr 511
– Customers are not eligible for the free or
discounted products:
+Dr 3387: fair value of the products
Cr 511

64
 Example
• Company A operates a customer loyalty program for company
B. If B’s purchases in the year 2022 worth 5000 million dong
or above (VAT exclusive price), B receives free goods worth
25 million VAT exclusive price.
• On 1/2: A sold goods worth 200 million dong to B (VAT
exclusive price, VAT 20 million
• On 1/7: A sold goods worth 300 million dong to B (VAT
exclusive price, VAT 30 million
• 31/12: A granted B free goods worth 25 million dong and cost
of 20 million.

65
 CLOSING ENTRIES: INCOME SUMMARY
-
Net sales COGS
+ Finance - Oper =
= Gross profit revenue ating Income from
costs operations
Sales/Revenues from selling
goods as an ordinary activities +

- Other
Other Gains expense = Other Income

From sales of property, plant, equipment, …

= Net income

66
 Diagram – Closing entries
632 911 Income Summary 511

641,642 521
Closing administration
and selling expenses
635 515

811 711

821 Closing income tax 821

expenses
421 421
Closing net Closing
income net loss 67
 Illustrations
• Company ABC has revenues for the period
of 200 mil. Total sale discounts were 1 mil,
sale allowances 4 mil, and sale returns 5 mil.
Net COGS of the period 150 mil (after
excluding COGS of returned products).
Selling expenses 20 mil, administration
expense 15trđ.
• Prepare closing entries for income
summary.

68
 PRESENTATION ON FINANCIAL
STATEMENTS (self-study)
Statement of financial position
Inventory
Income statement
Statement of Cash flow
Cash flow from operating activities and
other information relating to revenues
and expenses.

69
 PRESENTATION ON FINANCIAL
STATEMENTS (self-study)
 The Notes
 The accounting policies adopted in measuring
inventories, including the cost formula used (FIFO,
weighted-average)
 The total carrying amount of inventories and the
carrying amount in classification (merchandise, raw
materials, production supplies, work-in-process,and
finished goods)
 The amount of inventories recognized as an expense
during the period (COGS)
 The amount of any write-down of inventories
recognized as an expense in the period and the amount
of any reversal of write-downs.
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 The circumstance or events that led to the reversal of a
write-down of inventories
 The carrying amount of inventories pledged as
securities for liabilities.
 The accounting policies for recognizing revenues and
other incomes.
 The accounting policies for sale returns and allowances.

71
 Accounting for merchandising
activities – IFRS (self-study)
• IAS 02 Inventory
• IFRS 15 Contracts with customers

72
 Accounting for merchandising
activities – IFRS (self-study)
A difference between VAS 02 and IAS 02
• IAS 02: cash or settlement discounts are
treated similarly to purchase discounts.
They are excluded from cost of products.
• This is different from VAS. Cost of products
include cash discounts (if any).

73
 Accounting for merchandising
activities – IFRS (self-study)
• IFRS 15.
• Kieso Chapter 18.

74
 SUMMARY
• Accounting for buying goods: VAS 02 and
Circular 200/2014.
• Accounting for selling goods: VAS 14, Circular
200/2014.

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