Accounting Cycle of a

Merchandising Business
FUNDAMENTALS OF ACCOUNTANCY, BUSINESS AND
MANAGEMENT 1
Merchandising Business – refers to an enterprise that buys and sells
goods to earn a profit.
Buy
Merchandise

Collect Sell
Customer Merchandise
Accounts

Bill
Customers

Merchandising Operating Cycle

MERCHANDISE OR MERCHANDISE INVENTORY -
refers to an item bought by a business for the
purpose of reselling it.

INVENTORY - This is the most important assets of a

merchandising business.
 SALES OR SALES REVENUE – this is the
primary source of revenue in
merchandising business.
Sales Returns and Allowances - a
customer may return merchandise if it
broken or if it is not as ordered.
 Sales Discount – two usual discounts granted to customers
are (1) trade discounts and (2) cash discounts:
Trade Discounts – a percentage reduction from a
published list price may be granted to customers for
patronizing the business. This is immediately deducted
from the list price.
Cash Discounts – when goods are sold on credit,
terms of payment depend on the custom of the industry. Usual
credit terms: n/30 (gross amount is payable within 30 days from
the date sale), or 2/10,n/30 (gross amount is payable within 30
days with 2% discount given if the account is paid within 10
days).
 PURCHASES - represents goods available for sale
by the business for a particular accounting period.
Purchase Returns and Allowances – goods
bought may be returned to the seller for being
defective, spoiled or not as ordered.
Purchase Discount – discount claimed by the
buyer.
 TRANSPORTATION/FREIGHT COSTS – The two
most common arrangements for transportation or
freight costs are FOB Shipping Point and FOB
Destination.
FOB Shipping Point – buyer
should pay for the freight. This is added to Purchases
to get the gross purchases.
FOB Destination – seller is liable for the freight.
Expenses:
Cost of Goods Sold or Cost of Sales – the amount of
merchandise sold by the business for a given period. The
formula to compute for cost of goods sold is:

Merchandise Inventory, beginning

Add: Net Purchases
Cost of Goods Available for Sale
Less:Merchandise Inventory, ending
Cost of Goods Sold
Operating Expenses – refer to
expenses incurred by the business in
their day-to day operations. Examples:
salaries, utilities, rent, supplies,
insurance, transportation,
depreciation, delivery, and advertising.
 Service Business Merchandising
Business

Revenues Net Sales Revenues

Less: Cost of Goods Sold
Gross Profit
Less: Operating Expenses Less: Operating Expenses
Net Income (Loss) Net Income (Loss)
INVENTORY SYSTEMS
Perpetual Inventory System – updating of
inventory is done every time there are
changes in the quantity of the goods. (High
Price – Low Volume)
Periodic Inventory System – updating of
inventory is done periodically which is usually
one or twice a year through physical counting.
(Low price – High Volume)
PURCHASES
Perpetual Periodic
a) Purchase of merchandise on cash basis
Inventory xx Purchases xx
Cash xx Cash xx
a) Purchase of merchandise on account
Inventory xx Purchases xx
Accounts Payable xx Accounts Payable xx
a) Purchase returns and allowances (cash basis)
Cash xx Cash xx
Inventory xx Purchase returns xx
and allowances
a) Purchase returns and allowances (on account)
Accounts Payable xx Accounts Payable xx
Inventory xx Purchase returns xx
and allowances
a) Purchase Discount
Accounts Payable xx Accounts Payable xx
Cash xx Purchase Discount xx
Cash xx
SALES REVENUE
Perpetual Periodic
a) Sale of merchandise on a cash basis
Cash xx Cash xx
Sales xx Sales xx
Cost of Goods Sold xx
Inventory xx
a) Sale of merchandise on account
Accounts Receivable xx Accounts Receivable xx
Sales xx Sales xx
Cost of Goods Sold xx
Inventory xx
a) Sales returns and allowances (cash basis)
Sales xx Sales returns and allowances xx
Cash xx Cash xx
Inventory xx
Cost of Goods Sold xx
a) Sales returns and allowances (on account)
Sales xx Sales returns and allowances xx
Accounts Receivable xx Accounts Receivable xx

Inventory xx
Cost of Goods Sold xx
a) Sales discount
Cash Cash xx

xx Sales Discount xx
Accounts Receivable xx Accounts Receivable xx
 TRANSPORTATION/FREIGHT COSTS

Perpetual Periodic
a)Payment of freight on merchandise purchased (FOB
Shipping Point)

Inventory x Freight-In x
x x
Cash x Cash x
x x
a)Payment of freight on merchandise sold (FOB Destination)
Transportation x Freight-Out x
Expense x x
Cash x Cash x