Accounting for Merchandising Business PDF

8/14/2019 Accounting for Merchandising Business PDF

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Unit 1Accounting for Merchandising Business

Overview

Background Merchandising business deals primarily with the buying and selling of

finished goods. This unit will introduce readers on the different activities done

by a trading business. A brief discussion of the perpetual inventory systems is

also included.

Purpose The purpose of Unit I Accounting for Merchandising Business is to

illustrate the various buying and selling activities of a trading business. This

unit also illustrates the basic entries using perpetual inventory system. A brief

discussion of business documents are also included to give readers ideas ofwhat are the basic papers being used that support a merchandising transaction.

In this unit This unit contains the following topics:

Topics See Page

Merchandising Business 2 of F

Inventory System 3 of F

Merchandise Accounts 7 of F

Business Documents 9 of FProprietors Investment and Withdrawal 14 of F

Purchase of Merchandise 15 of F

Purchase Returns and Allowances 18 of F

Discounts on Purchases 20 of F

Sales 25 of F

Sales Returns and Allowances 27 of F

Discounts on Sales 28 of F

Freight on Merchandise 29 of F

Income Statement 33 of F


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Merchandising Business

Overview An organization that is engaged in the buying and selling of goods or

merchandise is amerchandising or tradingconcern. Merchandiserefers togoods purchased for resale in the same form. Unlike businesses rendering

services for compensation, a trading concern derives its income through the

resale at a profit of the merchandise purchased.

Activities The activities of a merchandising concern that distinguish it from a service

concern cover the following:

Purchasing. Information as to the kind, quality, quantity, and cost of goods

bought should be maintained for the use of management. Records as to

supplies or merchandise bought are also maintained.

Handling. The costs of transporting and sorting of goods bear an important

relation to the prices of goods bought. These should be recorded properly.

Transportation costs include freight, express, drayage, and cartage.

Returning Of Goods Purchased. Some of the merchandise received may

prove unsatisfactory and must be returned to the vendors, or if not returned,

may be allowed some deductions from the original purchase price.

Selling. Goods purchased are sold at prices above the cost in order to

provide adequate margin of profit. It is therefore imperative that the cost of

goods bought should be known from the accounting records so that

desirable selling prices may be set.

Returning Of Goods Sold. The customers may return some of the

merchandise sold. Deductions from the original selling prices must be

allowed for sales returns. If the goods delivered are defective and no return

is made, the customers are granted reduction on the sales price.

Maintaining Adequate Stocks On Hand. In order to satisfy orders of

customers at all times, a stock of merchandise must be maintained on hand.

This is calledMerchandise Inventoryor Inventory on Hand


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Inventory System

Overview A business firm selling a product must use an inventory record system to

value the merchandise on hand at the end of an accounting period. Twodifferent inventory systems may be used to record trading transactions in the

accounting records. These systems are the periodic and perpetual inventory

system.

Perpetual In aperpetual inventory systema continual, or perpetual, record of the

inventory activity is maintained. Consequently, any items that are sold or

otherwise physically removed from inventory must be removed from the

Merchandise Inventory account, and items that are purchased are added to the

Merchandise Inventory account. This may result in significant extra recordkeeping as compared to a periodic system. However, a perpetual inventory

system does have advantages, and businesses with a relatively low number of

high-value transactions often find the extra effort to be worthwhile.

Computers are also making it practical for businesses to use perpetual systems

than would have been not feasible in the past.

Periodic or

PhysicalIn theperiodic inventory system, the ending inventory is determined by a

physical count of the merchandise on hand at the end of an accounting period.

The periodic inventory system receives its name because the balance in the

inventory account is known only at the beginning and at the end of theaccounting period. The periodic inventory is the simpler system commonly

used in practice and was the only practical alternative for most businesses

with large number of transactions before the advent of computers. The

periodic inventory system will be used in the illustrations throughout this

course unless otherwise stated.

Continued on next page


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Inventory System, Continued

Transactions in

PerpetualInventory

System

As mentioned earlier, a perpetual inventory system attempts to maintain a

continual record of the inventory on hand. Thus, if Joseph Labradorpurchased merchandise for cash, P50,000, the entry to record this transaction

is :

Merchandise Inventory 50,000

Cash 50,000

To record merchandise bought.

On the other hand, if Joseph sold P20,000 worth of merchandise for

P40,000, the entry to record this transaction is:

Cash 40,000Sales 40,000

To record merchandise sold.

Cost of Goods Sold 20,000


To record the transfer of inventory sold

to cost of goods sold account.

Assuming this time, Joseph Labrador purchased from Mary Trading

merchandise on account, Php 100,000. And at the same time, paid for the

freight on the said purchase, Php 2,500. The entries would be:


Accounts Payable 100,000

To record merchandise bought.


Cash 2,500

To record freight paid.



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Transactions in

Perpetual

Inventory

System, cont.

Let us say, after two days, Joseph returned defective merchandise bought from

Mary amounting to Php 5,000. The entry would be:

Accounts Payable Mary Trading 5,000Merchandise Inventory 5,000

To record returned merchandise.

If on the other hand, Joseph Labrador sold to Michael Supermart merchandise

worth Php 50,000 on account at gross profit of 50 percent. The entries would

be:

Accounts Receivable 50,000

Sales 50,000

Sold merchandise on account.


Merchandise Inventory 25,000To record cost of merchandise sold.

Let us assume again that after three days, Michael issued a debit

memorandum amounting to Php 1,800 for defective goods received from

Joseph. The entries to record the return would be:

Sales Returns & Allowances 1,800

Accounts Receivable 1,800

Received debit memorandum.

Merchandise Inventory 900

Cost of Goods Sold 900

To record cost of good returned.

Importance It is important to note that both periodic and perpetual inventory systems will

record the sale of merchandise similarly. The only difference is that under the

perpetual inventory system, there is a second entry that is required to be

recorded together with the sale to indicate the transfer out of the amount sold

from the Merchandise Inventory account to the Cost of Goods Sold account.

It is possible to combine the two entries into a single compound entry with the

same debits and credits. For example:

Cash 40,000


Sales 40,000


To record merchandise sold.



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Pro-forma

entry

At the end of the year, no further entries may be required if the balance in the

inventory account equals the actual cost of the units on hand. Unfortunately,this seldom happens. Despite the extra effort necessary to maintain a

perpetual record of the inventory, the facts often differ from the records.

When the facts conflict with the records, the records must be corrected to

reflect the facts. Therefore, an adjusting entry is necessary to record any

missing inventory items and reduce the balance in the Inventory account to

the correct level. The pro-forma entry is:

Merchandise Inventory Short or Over xxx

Merchandise Inventory xxx

To adjust inventory account to actual balance.

Merchandise

Inventory

Short or Over

TheMerchandiseInventory Short or Over account is an expense account that

reflects the cost of missing inventory items. However, depending on its

materiality and on normal practice within the industry, the inventory

shrinkage amount is often combined with cost of goods sold in the financial

statements.

Net Income The net income disclosed on the income statements prepared under the two

inventory systems will reflect the same amount. This is also true with the

ending inventory balance reported in the balance sheet. A business thatcombined its Merchandise Inventory Shrinkage account with its Cost of

Goods Sold account would prepare an income statement identical to the one

prepared under the periodic inventory system.


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Merchandise Accounts

Overview The discussions on this topic are the account titles to be used in recording

acquisition and sale of merchandise of a trading business using the periodicinventory system.

Sales Sales of merchandise are recorded in this account at selling prices. This is a

temporary or nominal account representing income from selling of

merchandise. This account has a normal credit balance

Sales Returns

and Allowances

This account is debited for all the merchandise returned by customers. The

debit entry is at the original selling price of the merchandise. This account isalso being used for all goods delivered to customers but is found to be

defective or not as ordered and still the buyer desiring to retain the goods as

is. The customer in this case is normally permitted to deduct a certain amount

from the selling prices of the goods delivered.

Sales Discount This account is debited in the book of the seller whenever the buyer avails of

the cash discounts provided by the seller. This is a deduction from sales

account.

Purchases This is a temporary account to which the cost of goods bought during the

period is debited. This account usually has a debit balanceat the end of the

accounting period.

Purchase

Returns and

Allowances

Goods bought and returned to supplier, or goods bought and received as

defective, or not as ordered, when not returned to the supplier but is

subjected to a certain reductions from their acquisition prices. These

deductions and returns of purchased goods are credited to this account.

Purchase returns and allowances account is a deduction from the Purchases

account.



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Merchandise Accounts, Continued

Merchandise

Inventory

At the end of every accounting period, a physical count of the unsold

merchandise on hand is taken. The total amount of these goods on hand isdebited to theMerchandise Inventoryaccount.

Purchase

DiscountThis account is credited in the books of the buyer whenever the purchaser

avails of the cash discount given by the seller. This is a deduction from

Purchases account.

Freight In or

TransportationIn

If the buyer pays the expenses of transporting the goods from the place of the

seller to his place of business, such expenses aredebitedto theFreight-inaccount.

Freight Out or

Transportation

Out

If the seller pays the expenses of transporting the goods from his place to the

place of the buyer, such expenses are debited to theFreight out account. This

is reported as part of operating expenses under the selling expenses

classification.


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Business Documents

Overview All business transactions are evidenced or supported by printed forms or

documents. Thesebusiness papersor oftentimes-calledbusiness documents,furnish the information needed in recording the transactions. Without

business papers, it would be very difficult, if not impossible, to keep accurate

records of these transactions.

Official

ReceiptsThese are issued every time the business receives cash. They show the date

on which the cash is received, the party from whom the cash is received, the

amount received, the particulars of the transaction, and the signature of the

one who received the cash.

The sample given below is an official receipt of MDV Realty issued to MayonGrocery. From the point of view of MDV Realty, there was an increase in

both the asset cash and the income from rent. On the other hand, the asset

cash of Mayon Grocery decreased, while its rental expenses increased, thus

decreasing its proprietorship.

MDV REALTY

150 Rizal Avenue

Manila

OFFICIAL RECEIPT

No. __120____

Date ___June 30, 20X1______

RECEIVED from _____Mayon Grocery________ the sum of

_____Ten Thousand___ pesos (P10,000.00) in payment of ___July rental__.

Cash_____P10,000 _________________________

Check No._ (Cashier)



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Business Documents, Continued

Sales Invoice

and PurchaseInvoice

After a sale has taken place, the seller fills in the business form called the

invoice. The invoice shows the date of the sale, name and address of theseller, name and address of the buyer, terms of the sale, list of articles bought

with the unit price and entire cost of each, total amount of the invoice, and

method of shipment. Invoices are numbered and usually made out in triplicate

or quadruplicate. The original is given to the buyer. When the buyer receives

the goods, they are examined. Then the invoice is checked to determine

whether there are any discrepancies in quantity or price and any errors in

calculation. From the point of view of the seller, the invoice is a sales

invoice; from that of the buyer, it is apurchase invoice.

The sample given below shows that from the standpoint of the seller,

Diamond Grocery, the invoice price of P1,750 is the gross income from sales,which covers the cost of the juice sold and the gross profit. There was an

increase in assets in the form of an amount receivable from Mayon Grocery,

there was an increase in cost of merchandise available for sale and an increase

in liabilities (the amount of P1,750 is payable within 30 days).


DIAMOND GROCERY

930 Del Monte Avenue

Quezon City

I N V O I C E

No. ___532___

Sold to: ______Mayon Grocery____ Date ______June 10, 20X1_____

Address __945 Mayon St., Q.C.____ Term: ___Net 30 days _______

Quantity D E S C R I P T I O N Unit Price Amount

50 boxes Happy Orange Juice Drink P 60.00 P 3,000.00


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Credit

Memorandum

Whenever the buyer finds an error in an invoice, or when merchandise is

damaged, he should notify the seller at once. If his claim is admitted as valid,the seller sends him a credit memorandum, whichshows the amount by which

his account is reduced. Credit memorandum is often shortened to credit

memo.

The credit memo illustrated below shows that because of the return of two

boxes of Funchum juice drink, the gross income from sales of Diamond

Grocery decreased, and the amount receivable from Mayon Grocery (asset)

decreased. From the point of view of Mayon Grocery, the merchandise

available for sale and also the debt to Diamond Grocery decreased.

DIAMOND GROCERY

930 Del Monte Avenue

Quezon City

C R E D I T M E M O

No. ___121___

To: ______Mayon Grocery____ Date ______June 15, 20X1_____

__945 Mayon St., Q.C.____

We have credited your accounts as follows:

Inv. No. Explanation Unit Price Amount

532 Return of two boxes of slightly

defective Happy orange juice

drink.

P 35.00 P 70.00



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Promissory

Notes

A promissory note is a written promise signed by one party, called the maker,

to pay a certain specified sum to another, called thepayee, at a certain futuretime. The amount to be paid on maturity date may or may not include

interest. The amount due, not including interest, is called theface of the note.

Promissory notes may be received by the business from its debtors, or the

business may give it to its creditors. The following is a sample of a

promissory note.

Php 10,000 Quezon City,May 1, 20X1

Thirty days after date, I promise to pay to the order of Joseph Labrador, Tenthousand Pesos, payable at COCOBANK, Vito Cruz Branch for value received with

interest at 12%.

(Signed) Maria de Jesus

Bank deposit

slips and checksFor control and safekeeping of cash most businesses maintain checking or

current accounts with the banks. They deposit their money in banks and

payments from the deposit are then made by means of checks.

The bank deposit slip is filled in every time the business deposits money in

the bank. It shows the date when the deposit is made, for whose account the

deposit is made, the amount of the deposit classified into currency and checks

received from others, and the signature of the depositor.



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Check An order to the bank signed by the person issuing it, to pay to bearer or order

a certain sum of money. After the bank has paid the payee, the amount isdeducted from the deposit account of the one who issued the check.

Cash register

slipsSome cash registers are operated in such a way that a strip or slip of paper

comes out as evidence that money was received. The slip shows the date and

the amount of cash received.

Miscellaneous

bills

Some businesses, like the Meralco, Philippine Long Distance Telephone Co.,

MWSS, etc., send bills to their customers to notify them of the amounts theyhave to pay. Thus, there are advertising bills, light bills, water bills, telephone

bills, and others.


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Proprietors Investment and Withdrawal

Overview Owners of merchandising firms may want to invest merchandise into its

business operations. The following are the entries that would be recorded

under the periodic inventory system if the proprietor invests or withdrawsmerchandise.

Investment of

merchandiseRecording of the investment of the owner in the business will be treated in the

same way the recording is done in a service business. The only difference

would be if the owner invested an asset into the business in the form of

merchandise. When merchandise is part of the owners initial investment, the

said investment must be debited to theMerchandise Inventoryaccount

whether the company is using perpetual or periodic inventory system. But if

the investment of merchandise was made during the normal operation of the

business, i.e., as an additional investment, the said investment must be debited

toMerchandise Inventory, if the company is using perpetual inventory system

and Purchasesif they are using the periodic inventory system.

Pro-forma entry: Initial investment under both methods:

Date Merchandise Inventory xxx

Owner, Capital xxx

Investment made in the form of merchandise.

Pro-forma entry: Additional investment

Perpetual Method Periodic Method

Date Merchandise Inventory xxx Purchases xxx

Owner, Capital xxx Owner, Capital xxxInvestment made in the form of merchandise.


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Withdrawal of

merchandiseAny subsequent withdrawal made by the owner of any asset/s in the business

(e.g., cash, supplies, etc.) in anticipation of future profits of the company (i.e.,

temporary withdrawal) will be debited to thedrawingaccount. Withdrawals

that are permanent in nature (i.e., the owner has no intention of returning the

said amount into the business) will be debited directly to the capitalaccount.

If the company uses the periodic inventory system, withdrawals of the ownerin the form of merchandise for personal use will be credited to thePurchases

account at cost. This is done in order to maintain the original balance of the

Merchandise Inventory account, which was computed by means of actual

physical count at the end of the accounting period. On the other hand, the

Merchandise Inventory account is credited if the firm uses the perpetual

inventory system.

Pro-forma entry: Periodic inventory system/Temporary withdrawal

Date Owner, Drawing xxx

Cash xxx

Purchases xxx

Owner withdrew cash and merchandise for

personal use.

Pro-forma entry: Perpetual inventory system/Temporary withdrawal

Date Owner, Drawing xxx

Cash xxx

Merchandise Inventory xxx

Owner withdrew cash and merchandise for

personal use.

Pro-forma entry: Permanent withdrawalDate Owner, Capital xxx

Cash xxx

Owner permanently withdrew an amount in the

business for personal use.


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Purchase of Merchandise

Overview When a firm sells goods or services, it gives a sales slip or sales invoice to its

customers. This sales invoice becomes a purchase invoice as far as thepurchasing business is concerned. The purchase invoice provides the

objective information used to record purchasing transactions. In small

business firms, the only written document received or handled in purchases of

goods or services is this invoice. For such businesses, authorization for

purchases is given informally by telephone or by having an employee

personally purchases goods or services. In this part, we would be dealing with

transactions affecting the firms acquisition of the merchandise for sale. As

we have mentioned earlier, all our business transactions must be properly

supported by business documents.

Purchase

RequisitionLarge companies rely on a more careful procedure. As a first step they may

insist that the person or department needing the goods or services to be

purchased fill out a form called apurchase requisition. This completed form,

bearing the signature of some responsible person authorized to approve such

requisitions, is next sent to the purchasing agent or purchasing department of

the company.

Purchase

Order

The purchasing department, after selecting the firm from whom the goods or

services are to be bought, prepares a second business paper called apurchaseorder. The original copy of this document is sent to the company from which

the purchase is to be made. This copy gives the selling business authority to

send the purchaser the goods or services ordered.

Purchase

InvoiceAbout the same time that shipment of the goods is made or services are

supplied to the purchaser, the purchaser is sent an invoice that is the third

business paper. Thispurchase invoicebecomes the basis for recording the

purchase in the journal just as it is in the case of the informal procedure

described for small firms.



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Purchase of Merchandise, Continued

Purchases The cycle of a merchandising entity begins with cash, which is used to

purchase inventory. Purchases, in the accounting sense, are only those itemsof merchandise inventory that a firm buys to resell to customers in the normal

course of business. For example, a bookstore records in the purchases

account the price it pays for books, school and office supplies, and other items

of inventory acquired for resale. A grocery store debits purchases when it

buys canned goods, meat, frozen food and other inventory.

Below is a sample purchase invoice:

DE ASIS TRADING

2401 Taft Avenue

Manila

Sold to : Labrador Store Invoice No. 143

Address : Blk 28, Lot 24 St. Charbels, Cavite Date : Jan. 7, 20X1

How shipped : FOB Destination, prepaid Terms 2/10, n/30

Quantity Description Unit Price Amount

10 dozen Ladys Sando 25 P 3,000.00

10 dozen Mens Undershirt 40 4,800.00

10 pcs. Girls Dress 95 950.00

P 8,750.00

=========

Prepared by : Checked by : Approved by:

---------------- ---------------- -----------------



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Purchase of Merchandise, Continued

Journal Entries The purchase made on credit by Labrador Store is recorded in the general

journal as follows:

Jan. 5 Purchases 8,750

Accounts Payable - De Asis Trading 8,750

Purchased under wears and childrens dresses. Terms: 2/10,n/30.

If the above purchase was made on cash basis instead of on credit, then the

journal entry of Labrador Store will be:


Cash 8,750

Cash purchases from De Asis Trading.

If the above purchase was made with down payment of P4,000 and the

balance on account, then the journal entry of Labrador Store will be:


Cash 4,000

Accounts Payable 4,750

Various purchases. Terms: 4,000 down, balance, 2/10, n/30.

Merchandise purchased with value added tax (VAT)is recorded using the

following pro-forma journal entry:

Purchases xxxxInput Tax xx

Accounts Payable xxxx

Purchased merchandise on account.


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Purchase Returns and Allowances

Overview Merchandise purchased for resale would not always be as what the buyer

expects. In this regard, buyers can return goods purchased due to a lot ofreasons, for example, due to defects, wrong specifications, poor quality, etc.

Debit

MemorandumWhen merchandise bought is returned, or an allowance is requested, the buyer

informs the seller in writing. The communication is done usually through the

buyers printed business form calleddebit memorandum. An illustration of

such a form is shown below:

Labrador StoreBlk 28, Lot 24 St. Charbels

Dasmarinas, Cavite

No. 8

DEBIT MEMORAMDUM

Date : Jan. 8, 20X1

To : De Asis Trading

2401 Taft Ave., Manila

We DEBIT your account for the following:

2 pcs. Ladys Sando P25 P 50

5 pcs. Mens Undershirt 40 200

1 pc. Girls dress 95 95

--------

P 345

=====

Remarks: The above goods were received in damaged-condition as per your

invoice No 143 dated Jan. 5, 2001.



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Purchase Returns and Allowances, Continued

Credit

Memorandum

If the return is accepted or the allowance is granted by the seller, the seller

usually sends to the buyer such acceptance or grant in writing through aprinted form calledcredit memorandum. A credit memorandum may in

similar form as the debit memorandum above except for the change of the

word debit to credit. Upon receipt of this communication, the buyer makes an

entry for the returns or allowances

Illustration Assume the following transactions:

Jan. 8, 20X1 - Labrador Store returned P343 worth of merchandise to De Asis

Trading. This was accepted by De Asis Trading (see sample

debit memorandum).

Journal entry to record the return:

Jan. 8 Accounts Payable - De Asis Trading 345

Purchase returns and allowances 345

Merchandise returned to De Asis Trading.

Note: As a result of the returns, the debt to De Asis Trading was diminished,

thus, the sellers account was debited.

The return was credited to purchase returns and allowances account instead of

directly against purchases in order to have the books show total purchases

and total returns and allowances.

If the purchase of January 5 was in cash, the return of goods worth P343 on

Jan. 8 may result in a refund of cashfrom De Asis Trading. If no cash refund

is made, then Labrador Store will have a receivablefrom the De Asis Trading

which may be collected or applied to purchases in the future.

Jan. 8 Cash 345


Cash refund for the return of goods

However, if the return on Jan. 8 was not refunded in cash, then the journal

entry should have been:

Jan. 8 Accounts Receivable - De Asis Trading 345


To charge De Asis Trading for goods returned.


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Discounts on Purchases

Overview Buyers of merchandise can avail of two types of discounts, namely, the cash

discount and trade discount. This part will provide readers on how to record

discounts on merchandise purchased.

Cash Discounts Special deductions from the prices of goods bought granted by the seller to the buyer

to induce the latter to pay within a specified period.

Example:

Jan. 5, 20X1 Labrador Store bought merchandise from De Asis Trading

P8,750. Terms: 2/10, n/30

The terms of the above transaction mean that if the invoice is paid within 10 days

after the date of the invoice (Jan. 6 to 15), Labrador Store may pay the invoice

amount less a discount of 2%. This is computed as follows:

Amount of invoice P8,750

Less: 2% thereof 175

Amount to be paid P8,575

======

If payment is not made within 10 days, then Labrador Store should pay the full

amount of the invoice, P8,750, within 30 days from the date of the invoice.

If the invoice remains unpaid after 30 days, it is said to bepast dueand, usually, the

amount begins to earn interest from the 31st day.

Other examples of terms attached to a credit invoice are:

5/10, n/30 - There is a 5% discount if paid 10 days after invoice date, net

amount if paid beyond the 10 days but within 30 days.

2/10, 1/15, n/30 - There is a 2% discount if paid 10 days after invoice date, 1%

discount if paid within fifteen days, net amount if paid beyond

15 days but within 30 days.

2/5EOM, n/45 - There is a 2% discount if paid 5 days after end of the month, net

amount if paid beyond 5 days after end of month but within 45

days from the invoice date.

2/10, n/EOM - There is a 2% discount if paid 10 days after invoice date, net

amount if paid beyond the 10 days but up to end of the month

only.

n/60 - No cash discount is offered. The full amount must be paid within

60 days from invoice date.

Cash discounts are computed on the amount of the bill less returns and allowance, if

any. The base amount should be that which pertains only to merchandise.

Discounts are ordinarily not allowed on incidental expenses such as freight,

insurance while in transit, taxes, duties, and other charges.



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Discounts on Purchases, Continued

Recording of

Cash Discounts

Below are sample transactions involving the recording of cash discounts:

Transactions

20X1

Jan. 4 - Mary Store purchased merchandise from Uniwide Trading,

P10,000. Terms: 2/10, n/30

7 - Mary Store made a partial payment of P5,000 to Uniwide

Trading

14 - Mary Store paid in full its account to Uniwide Trading

18 - Mary Store purchased merchandise from SM Superstore

worth P25,000. Terms: P10,000 down payment, balance

2/10, 1/15, n/30.

21 - Mary Store returned to SM Superstore P500 cost of

merchandise acquired on Jan. 18. SM Superstore in return

issued a credit memo with the same amount-signifying

acceptance of the return made by Mary.

31 - Mary Store settled in full its account with SM.



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Recording

cont

Continuation of the recording of discounts:

Journal Entries:

20X1


Accounts Payable - Uniwide 10,000

Merchandise purchased. Terms:

2/10,n/30.

7 Accounts Payable - Uniwide 5,000

Cash 5,000

Partial Payment.

14 Accounts Payable - Uniwide 5,000

Cash 4,800

Purchase Discounts 200

Full payment.

18 Purchases 25,000

Cash 10,000

Accounts Payable-SM 15,000

Bought merchandise. Terms:

2/10,1/15/n/30.

21 Accounts Payable - SM 500

Purchase Returns and Allowances 500

Received CM for merchandise

returned.

31 Accounts Payable - SM 14,500

Purchase Discounts 145

Cash 14,355

Settled account in full.NOTE: The cash discount in the last entry was computed on the net amount

after deducting the returns.



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Trade

Discounts

Deductions from the list prices of merchandise offered by the seller to the

buyer to encourage the latter to buy in bulk or large volume/quantity. This isa strategy being adopted by the seller to promote the sale of the merchandise.

A list price may be subjected to one or more trade discounts

Illustration Trade Discounts and Cash Discount Illustrated:

a. Assume a credit invoice of P3,000 less 10. Terms: 2/10,n/30.

List price P3,000

Less: trade discounts(3,000x10%) 300Net invoice price P2,700

Less: Cash discounts(2,700x2%) 54

Amount due if payment is made with in 10 days P2,646

=====

b. Assume a credit invoice of P5,000 less 10-5. Terms: 2/10,n/30.

List price P5,000.00

Less: First trade discounts(5,000x10%) 500.00

P4,500.00

Less: Second trade discounts(4,500x5%) 225.00Net Invoice price P4,275.00

Less: Cash discounts(4,275x2%) 85.50

Amount due if payment is made w/in 10 days P4,189.50

========



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Journal Entries The journal entries on buyers book for (b):

At the time of purchase

Purchases 4,275.50

Accounts Payable 4,275.50


Payment within 10 days


Purchase discounts 85.50

Cash 4,189.50

Settled accounts in full with in discountperiod

Payment beyond 10 days


Cash 4,275.50

Paid account in full.

Summary The purchase invoice is the business document generated by a purchase

transaction. Most merchandising entities offer discounts (i.e. cash and trade

discounts) to their customers. Trade discountsare not recorded in the booksof both buyer and seller. While cash discountsare recorded in the buyers

book under the account title Purchase Discount. The Purchase Discount

account, which has a credit balance, is a contra account to Purchases.

Most businesses allow their customers to returnmerchandise that is

defective, damaged in shipment, or otherwise unsuitable. Or if buyer chooses

to keep damaged goods, the seller may deduct an allowance from the amount

the buyer owes. Similar to purchase discount,Purchase Returns and

Allowances, the account title used to record returns and allowance granted, is

also a contra purchases account.


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Sales

Overview The sale of merchandise may be for cash or on account. An invoice supports

every sale. The sellerssales invoiceis the buyerspurchase invoice. Whena sale is for cash, the seller receives money in return for his merchandise.

When the sale is made on credit, the seller acquires a receivable or right to

collect from the buyer.

The preceding discussion on methods of recording merchandise inventory

transactions stated that under the periodic inventory method, purchases

represent the cost of merchandise bought. Sales, on the other hand, represent

the selling price of merchandise previously bought and then sold. In the

income statement (See sample on page 36 of F), Sales is shown as an income

item from which the cost of goods sold (consisting of merchandise inventory

beginning and end and net cost of purchases), was deducted, the differencebeing the gross profit. Therefore, sales represents income, which covers both

the cost of merchandise, sold and gross profit (or gross loss). In the following

discussions, it was assumed that merchandise is sold normally at a profit, i.e.,

the selling price of the merchandise sold is greater than its cost.

It is very important to note that a purchase and sales transaction involve two

parties; namely, the buyer and the seller. Furthermore, a business acts

sometimes as a buyer and sometimes a seller.

The analysis of a purchase and sale transaction would depend on whether the

business for which the accounting work is being done, is playing the role of a

buyer or that of a seller. The treatment therefore, for cash discount andreturns and allowances on this part will also be similar to that discussed under

purchases, only this time the account titles to be used would be Sales discount

and Sales returns and allowances.



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Sales, Continued

Cash Sales Retailers like drug stores, sari-sari stores, department stores and restaurants

will at times sell their merchandise on cash basis. Assuming Mary Store soldP5,000 worth of merchandise for cash, this cash sale is recorded as follows:

Jan. 10 Cash 5,000

Sales 5,000

Cash Sales.

Sales on

AccountMost business establishments are now extending credit to their customers to

become competitive. In the advent of what we call plastic money,i.e.,

credit cards, selling on account has been the current trend whether you are a

manufacturing business, wholesaler or retailer. Assuming Mary Store soldmerchandise worth P7,000 on account. The transaction is recorded as

follows:

Jan. 13 Account receivable 7,000

Sales 7,000


The related cash receipt on account is recorded as follows:

Jan. 20 Cash 7,000

Accounts receivable 7,000

Collected account in full.

Merchandise sold with value added tax (VAT) will be recorded using thefollowing pro-forma journal entry:

Accounts Receivable xxxx

Sales xxxx

Output Tax xx



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Sales Returns and Allowances

Overview When the customer returns goods to the seller or requests for a deduction

from the price of the goods delivered to him, the seller accepts the return orgrants the request through a credit memorandum.

Entries The effect of a sales return or allowance is to reduce the amount of sales and

the amount of receivable from the customer. If Sales account is debited for

the return or allowance, then, the said account will show only net sales. To

preserve the gross amount of sales and to maintain a separate record for the

returns and allowances, the entry to record sales returns or allowances is:

Sales Returns and AllowancesAccounts Receivable

Return of goods.

xxxxxx

If a cash sale is made and a return of a part thereof by the customer is

accepted, the seller may refund cash to the customer for which the

entry is:


Cash

Cash refund for good returned.

xxx

xxx

However, if cash is not refunded, then the entry will be


Accounts Payable

Customer credited for goods returned.

xxx

xxx


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Discounts on Sales

Overview Credit terms encountered in sales are similar to those discussed in accounting

for purchases. The following are illustrations on how to record salestransactions with cash discount.

20X1

Jan. 4 Sold to Francis Asis merchandise worth P12,000 less 5.

Terms: 2/10, n/30

7 Francis Asis issued a debit memo worth P500 for defective

items received from Joseph

10 Made partial payment amounting to P5,000

14 Francis Asis settled account with Joseph in full

Journal Entries The following are the journal entries:

20X1

Jan. 4 Accounts receivable - Asis

Sales

Sold merchandise. Terms: 2/10,

n/30

11,400

11,400

7 Sales returns and allowancesAccounts receivable - Asis

Asis was credited for allowance

granted

500500

10 Cash

Accounts receivable - Asis

Received partial payment

5,000

5,000

10 Cash

Sales discountAccounts receivable - Asis

Asis settled account in full

5,682

2185,900


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Freight on Merchandise

Overview Transportation or freight on merchandise purchased or sold is recorded as an

expense in the books of the party who, as per contract, should shoulder theexpense.

Shipping

TermsFreight-inis the title used in recording the freight or transportation charges

on merchandise bought, andFreight-out, for the freight on merchandise sold.

The term of shipment that is contained in the bill of ladingindicates whether

or not the buyer or the seller should assume the burden of the freight expense

(Punzalan, J., Santos, L., 1963). Merchandise may be shipped under the

following terms:

F.O.B shipping pointmeans that the goods are free on board up to theshipping point. Therefore, if the seller is in Davao and the buyer is in

Manila, the seller absorbs all transportation expenses up to the port of

Davao only. This also signifies that title to the goods already passes to the

buyer upon the loading of the goods onto the carrier at Davao.

F.O.B destinationmeans that the goods are free on board up to the point of

destination. If the seller is in Davao and the buyer is in Manila, the seller

absorbs all transportation expenses of the goods up to Manila. The title of

the goods passes to the buyer only upon the unloading of the goods from the

carrier in Manila.

Freight prepaidmeans that the seller has paid the shipping company thetransportation expenses up to the point of destination.

Freight collectmeans that the buyer should pay the shipping company upon

the delivery of the goods at the point of destination.



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Freight on Merchandise, Continued

Illustration

No. 1

Assume Mr. Vic Cruz of Davao sold to Joseph Labrador of Manila on

account. The invoice showed the following:

Price of merchandise P 14,000

Freight (to Manila) 1,000

Total P 15,000

======

1. If the purchase is F.O.B shipping point, prepaid, the journal entry ofJoseph is:

Purchases P 14,000

Freight-in 1,000

Accounts Payable-Cruz 15,000Purchased merchandise on account. FOB SP, prepaid.

Analysis: The transportation expense to Manila is the expense of Labrador.

In as much as Vic Cruz has advanced the amount of freight, then, the amount

payable to him should include the said amount of freight.

2. If the purchase is F.O.B shipping point, collect, the journal entriesof Labrador are:

Purchases

Account payable-Cruz

Purchased merchandise on account

14,000

14,000

Freight-in

Cash

Paid freight F.O.B. SP, collect

1,000

1,000

3. If the purchase is F.O.B. destination, prepaid, the journal entry ofLabrador is:

Purchases

Accounts payable-Cruz


14,000

14,000

Note: The freight is not reflected in the books of Labrador

because said expense is for the account of Cruz.



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Illustration

No. 1, cont.

4. If the purchase is F.O.B. destination, collect, the journal entries of

Labrador are:

Purchases

Accounts Payable-Cruz


14,000

14,000

Accounts Payable-Cruz

Cash

Paid freight F.O.B. destination, collect.

1,000

1,000

Note: Labrador is liable to pay Cruz only P13,000 (14,000-1,000).

In the foregoing transactions, the entries presented are all in thebooks of the buyer. Now, using the same transactions, the

following are the entries in the books of the seller.

Illustration

No. 21. If the sale is F.O.B. shipping point, prepaid, the journal entries of Cruz are:

Account Receivable- Labrador

Sales


14,000

14,000

Accounts Receivable- Labrador

Cash

Paid freight F.O.B. SP, prepaid

1,000

1,000

Note: Cruz advanced the amount of freight, which is supposed to

be paid by Labrador. Therefore, the amount receivable from Joseph

should include the amount of freight.



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Illustration

No. 2, cont.

2. If the sale is F.O.B shipping point, collect, the journal entry of Cruz is:


Sales


14,000

14,000

Note: The freight is not reflected in the books of Cruz because the

said expense is for the account of Labrador.

3. If the sale is F.O.B destination, prepaid, the journal entries of Cruz

are:


SalesSold merchandise on account

14,000

14,000

Freight-out

Cash

Paid freight F.O.B. Destination,

Prepaid

1,000

1,000

4. If the sale is F.O.B. Destination, collect the journal entries of Cruz

are:

Accounts receivable- LabradorSales

Sold merchandise on account

14,000 14,000

Freight-out

Accounts receivable- Labrador

F.O.B. Destination, collect.

1,000

1,000

Note: The total receivable of Cruz from Labrador will be 13,000

only (14,000-1,000), since the payment of freight was advanced by

Labrador.

Reminder It should be noted that bothfreight-inandfreight-outrepresent expense.

However,freight-in is shown as an addition to net purchasesbecause it is a

direct cost of procuring the merchandise bought. On the other hand,freight-

out is listed among the selling expenses


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Income Statement

Overview A merchandising business prepares its income statement using the functional.

The functional income statement contains several sections, subsections and

subtotals. The amount of the details presented in this section, e.g., the sellingexpenses, general and administrative expenses, etc., varies from company to

company

Income

Statement

Terminologies

Below are the terms used in the income statement:

Revenue from Sales. The total amount charged to customers for

merchandise sold, for cash and on account, is reported in this section. Sales

returns and allowances and Sales discounts are deducted from this to yield

Net Sales.

Cost of Goods (Merchandise) Sold. The cost of merchandise sold during

the period may also be called Cost of Goods Soldor the Cost of Sales. It is

computed by adding to the beginning inventory the net cost of purchases to

yield Total Goods Available for Sale. The ending inventoryis deducted

from the Total Goods Available for Sales to yield the Cost of Goods

(Merchandise) Sold.

The net purchases amount is computed by deducting purchase discount and

purchase returns and allowances from purchases. Net cost of purchases is

computed by adding freight-in to the net purchases amount.

Gross Profit. The excess of net sales over the cost of goods sold is calledgross profit. It is sometimes called gross profit on sales or gross margin.

.



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Income Statement, Continued

Income

StatementTerms, cont

Cont

Operating Expenses. Most merchandising businesses classify operating

expenses as eitherdistribution expenses, administrative expenses or other

operating expenses. However, depending on the decision-making needs of

managers and other users of the financial statements, other classifications

could be used.

Expenses that are incurred directly in the selling of merchandise are

distribution expenses. They include such expenses as salespersons

salaries, store supplies used, depreciation of store equipment, and

advertising.

Expenses incurred in the administration or general operations of the

business areadministrative expenses. Examples of these expenses are

office salaries, depreciation of office equipment, and office supplies used.

Expenses that are related to both administrative and selling functions may

be divided into the two classifications. In small businesses, however, such

expenses as rent, insurance, and taxes are commonly reported as

administrative expenses. Transactions for small, infrequent expenses are

often reported asMiscellaneous Selling Expense or Miscellaneous

Administrative Expense.

Expenses that cannot be traced directly as selling or administrative expenses

are identified as other expenses. Examples of these are the losses incurred

in the disposal of plant and other assetsandDiscount loston the purchase

of plant assets.

Interest expense that results from financing activities is included in the

operating expenses after the other expenses asfinance costs.



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Income

StatementTerms, cont

Cont

Other Income. Revenues from sources other than the primary operating

activity of a business are classified as other income or non-operating

income. In a merchandising business, these items include income from

interest, rent, and gains resulting from the sale of plant and other assets.

Net Income. The final figure on the income statement is called the net

income (or net loss). It is the net increase (or net decrease) in the owners

equity as a result of the periods profit-making activities.



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Illustration Below is an illustration of a functional form income statement:

NoteNet sales revenue 1 P 200,000Cost of sales 2 (145,000)

Gross profit P 55,000Other income 3 3,000

Total income P 58,000

Operating expenses:Distribution expenses 4 P 14,000Administrative expenses 5 24,000Other expenses 6 800Finance Cost 7 1,200 (40,000)

Net income P 18,000

Notes to the

Functional

Form

The following are the notes to the functional form income statement:

Note 1 - Net sales revenue

Gross sales P 207,000

Less: Sales Returns & Allowances P 5,000

Sales Discount 2,000 7,000

Net sales revenue P 200,000



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Notes to the Functional Form (continued)

Note 2 - Cost of salesMerchandise Inventory, Jan. 1 P 5,000

Add: Net cost of purchasesPurchases P 175,000

Less: Purchase Returns & Allowances P 3,000Purchase Discounts 2,000 5,000

Net purchase P 170,000

Add: Freight-in 1,000 171,000

Cost of goods available for sale P 176,000Less: Merchandise Inventory, Dec. 31 31,000

Cost of sales P 145,000

Note 3 - Other incomeRent Income P 1,500

Dividend Income 800Interest Income 500Gain on Sale of Furniture & Fixtures 200

Total other income P 3,000

Note 4 - Distribution expensesSalesmen's Salaries and Commissions P 9,000Representation and Entertainment 1,200Depreciation - Store Equipment 1,000

SSS & Philhealth Premiums - distribution 900Freight-out 800Miscellaneous Distribution Expense 1,100

Total distribution expenses P 14,000

Note 5 - Administrative expensesSalaries Expense P 15,000Light, Water and Telephone 3,500Uncollectible Accounts Expense 2,000Depreciation Expense 1,500SSS & Philhealth Premiums - Administrative 1,300Miscellaneous Administrative Expense 700

Total administrative expenses P 24,000

Note 6 - Other expenses

Loss on Sale of Equipment P 800==========

Note 7 Finance Cost

Interest Expense P 1,000Discount Lost 200

Total finance cost P 1,200