Merchandising Accounting Cycle

*Comparison of Income Statement

 Service – Revenue-Expenses = Net Income/Loss

 Merchandising – Revenue from Sales – COGS = Gross Profit-Operating Exp = Net Income/Loss

Compute for the sales and net income

Sales ? S – COGS = GP
Cost of Goods Sold 340,000 S = 340,000 + 70,000
Gross Profit 70,000 Sales = 410,000
Operating Expenses 20,000 GP – OE = Net Income
Net Income ? 70,000 – 20,000 = 50,000
 To also get gross profit, Net sales – COGS = GP
 Revenue from sales format
Sales P XX
Less: Sales Returns & Allowances P XX
Sales Discount P XX XX
Net Sales P XX
 Gross sales – consists of total sales for cash and total sales on credit
Sales for Cash + Sales on Credit = Gross Sales
 Source Documents – details of transactions
 Sales Invoice – document prepared by the seller of merchandise
 Trade Discounts – a percentage reduction from published list price; not recorded on book.
Ex: bulk orders, suki of seller
Formula: Trade disc = list price x disc. rate
Ex: 10,000 x 0.01% = 1,000; 10,000 – 1,000 = 9,000

Problem

A wholesaler purchased 100 t-shirts for 150 each. He is given 25% trade discount by the seller. How much is the amount
to be recorded in his books?

100 x 150 = 15,000 x .25% = 3,750 ; 15,000 – 3,750 = 11,250

Or (100 – trade disc rate) x list price = gross invoice price – .(100-25) x 15,000 = 11,250

 Sales Returns & Allowances – contra-revenue account used for describing both sales returns and sales
allowances

Seller:

SRA P XX

Cash P XX

AP P XX

SRA P XX

 Sales Discounts – given if payment are received within a certain number of days from the date of sale

Entry: Cash P XX

Sale Disc P XX
 A/R P XX

Cash Discount Terms

2/10, n/30 2% reduction within 10 days, 30 days to settle the whole payment of the account

(11-30th day no discount)

2/10, 1/15, 2% discount will be given within 10 days, 1% discount within 11-15 th day, 30 days to settle account
n/30
2/EOM, n/60 2% discount during end of month, 60 days to settle accounts
2/10/EOM, 2% will be given if the account is settled 10 days after the ff month (ex. Feb nag order, next month
n/60 March 10 to lay to have discount), 60 days to settle the account

 Cost of Goods Sold

Merchandise Inventory, beg. P XX P XX
Add: Purchases XX
Transportation In XX
Total P XX
Less: Purchase Ret & Allowances P XX
Purchase Discounts XX
Net Purchases XX
Total Cost of Goods Available for Sale P XX
Less: Merchandise Inventory, end XX
Cost of Goods Sold P XX
* to get net purchases
Purchases + Merchandise Inventory, beg – Freight Out

 Purchases – account debited for the cost of goods purchased

Purchase P XX

Cash P XX

Purchase P XX

A/P P XX

 Purchase Invoice – an invoice that is given to the buyer

 Purchase Ret & Allow- a contra account whose normal balance is credit. The purchaser may issue a debit
memorandum to evidence the purchase returns
Pag nabayaran na:
Cash P XX
PRA P XX
Pag di pa nabayaran:
A/P P XX

PRA P XX

 Purchase Discounts – account credited by the buyer when he avails cash discount; contra purchase account
A/P P XX

Cash P XX
 Purchase Disc P XX

 Transportation Costs – buyer & seller must agree on who is responsible for paying any freight costs on
merchandise bought or sold. “FOB” means free on board
A. FOB Shipping Point – the buyer agreed to shoulder all transportation costs, seller free on board
B. FOB Destination – the seller agreed to shoulder all the transportation costs, buyer is free on board
C. Freight Prepaid – seller initially paid the transportation cost at the time of shipment
D. Freight Collect – the buyer paid the transportation upon receipt of the goods at the place of destination
Examples:
A. FOB Shipping Point
Buyer’s Side
Purchases P XX
A/P P XX
Freight In P XX
Cash P XX
A/P P XX
Purchase Disc P XX
Cash P XX

Seller’s Side
A/R P XX
Sales P XX

NO ENTRY

Cash P XX
Sales Disc P XX
A/R P XX

B. FOB Shipping Point, Freight Prepaid

Buyer’s Side
Purchases P XX
A/P P XX
Freight In P XX
Cash P XX
A/P P XX
Purchase Disc P XX
Cash P XX

Seller’s Side
A/R P XX
Sales P XX

A/R P XX
Cash P XX

Cash P XX
Sales Disc P XX
A/R P XX
Problem
On September 10, B Company located in Manila purchased merchandise worth 100,000 from S company in
Bohol. Freight of transportation amounted to 10,000. Terms 2/10, n/30. Give the entries assuming the different
shipping terms discussed.

A. FOB Shipping Point, Freight collect

Buyer’s Side
Purchases P 100,000
A/P P 100,000
Freight In P 10,000
Cash P 10,000
A/P P 100,000
Purchase Disc P 2,000
Cash P 98,000

Seller’s Side
A/R P 100,000
Sales P 100,000

NO ENTRY

Cash P 98,000
Sales Disc P 2,000
A/R P 100,000

B. FOB Shipping Point, Freight Prepaid

Buyer’s Side
Purchases P 100,000
A/P P 100,000
Freight In P 10,000
Cash P 10,000
A/P P 110,000
Purchase Disc P 2,000
Cash P 108,000

Seller’s Side
A/R P 100,000
Sales P 100,000

A/R P 10,000
Cash P 10,000

Cash P 108,000
Sales Disc P 2,000
A/R P 110,000
 C. FOB Destination, Freight Prepaid
Buyer’s Side
Purchases P 100,000
A/P P 100,000

NO ENTRY

A/P P 100,000
Purchase Disc P 2,000
Cash P 98,000

Seller’s Side
A/R P 100,000
Sales P 100,000

Freight Out P 10,000

Cash P 10,000

Cash P 98,000
Sales Disc P 2,000
A/R P 100,000

D. FOB Destination, Freight Collect

Buyer’s Side
Purchases P 100,000
A/P P 100,000
A/P P 10,000
Cash P 10,000
A/P P 90,000
Purchase Disc P 2,000
Cash P 98,000

Seller’s Side
A/R P 100,000
Sales P 100,000

Freight Out P 10,000

Cash P 10,000

Cash P 88,000
Sales Disc P 2,000
A/R P 90,000

*Accounting Inventories

 Periodic Inventory System

- No details of physical inventory on hand are maintained
- Low value items of inventory
- Purchases account is debited upon purchase
  Perpetual Inventory System
- Continuously shows the cost of goods sold on hand
- High unit value items
- Merchandise inventory account is debited upon purchase
o Purchase of merchandise in account
Periodic Perpetual
Purchase PXX Merchandise Inventory PXX
A/P PXX A/P PXX
o Payment of transportation cost for merchandise purchase
Periodic Perpetual
Freight In PXX Merchandise Inventory PXX
Cash PXX Cash PXX

o Returns of goods purchased

Periodic Perpetual
A/P PXX A/P PXX
PRA PXX Merchandise Inventory PXX
o Purchase discount within the discount period
Periodic Perpetual
A/P PXX A/P PXX
Purchase disc PXX Merchandise Inventory PXX
Cash PXX Cash PXX
o Sale of merchandise on account
Periodic Perpetual
A/R PXX A/R PXX
Sales PXX Sales PXX
Cost of Goods Sold PXX
Merchandise Inventory PXX
o Return of merchandise sold on account
Periodic Perpetual
SRA PXX SRA PXX
A/R PXX A/R PXX
Merchandise Inventory PXX
Cost of Goods Sold PXX
o Collection of payment within discount period
Periodic Perpetual
Cash PXX Cash PXX
Sales Discount PXX Sales Discount PXX
A/R PXX A/R PXX

*Accounting for VAT – buyer & seller must agree on who is responsible for paying any freight costs

 Value Added Tax Payable – is a current liability of the enterprise until the same is remitted on the BIR.
 VAT payable = Output Tax – Input Tax ; 12% VAT based on Revenue Regulation no. 9
 Output Tax – (nagbenta) normal balance credit, added on sale amount
 Input Tax – (bumili) purchase transaction, normal balance debit
 Inclusive VAT – with VAT na yung amount na given, to get the VAT, amount divide to 112%
o Sales of merchandise on a cash basis
Seller’s book Buyer’s book
 Cash PXX Purchases PXX
Sales PXX Input Tax PXX
Output Tax PXX Cash PXX
o Issued a credit memo
Seller’s book Buyer’s book
SRA PXX A/P PXX
Output Tax PXX PRA PXX
A/R PXX Input Tax PXX
o Paid in full
Seller’s book Buyer’s book
Cash PXX A/P PXX
Sales Discount PXX Purchase Discount PXX
Output Tax PXX Input Tax PXX
A/R PXX Cash PXX

Problem
S Company sold merchandise to B company on a cash basis. Invoice price P50,000, exclusive of VAT. Give entries for the
sale or purchase of merchandise of both companies.
50,000 x .12 = 6,000 Output Tax
50,000 sales

o Jan 2
Seller’s book Buyer’s book
A/R P56,000 Purchases P50,000
Output Tax P6,000 Input Tax P6,000
Sales P50,000 A/P P56,000
o Jan 4
Seller’s book Buyer’s book
SRA P5,000 A/P P5,600
Output Tax P600 PRA P5,000
A/R P5,600 Input Tax P600
(divide A/R amount to 1.12 to get SRA)
o Jan 12
Seller’s book Buyer’s book
Cash P49,392 A/P P50,400
Sales Discount P900 Purchase Discount P900
Output Tax P108 Input Tax P108
A/R P50,400 Cash P49,392
*to get cash, 50,400 x .02 = 1,008 ; 50,400 – 1008 = 49,392
*to get sales disc. P1,008 (w/VAT inclusive) /1.12 = 900
* Output Tax = 1008 – 900 =108

 Accounting is a service activity. The function of accounting is to provide quantitative info primarily financial
in nature, about economic entities that is intended to be useful in making economic decisions and in making
reasoned choices among alternative courses of action.

 What are special journals?

- These are journals where similar transactions that frequently occur are recorded. The advantages of using
these are:
 It saves time in journalizing, posting
  Promotes division of labor
 Aids in management analysis
- Sales journal – to record sales of merchandise on account
- Purchase journal – to record purchases of merchandise and other assets on account
- Cash receipts journal – to record inflow of cash from any sources; basta may tinanggap na cash
- Cash disbursement / payment journal – to record outflow of cash from the company; basta may lalabas na
cash
- General journal – used when the transaction does not fit in any of then special journals
ex: return of merch (on account)
Adjusting entries
closing entries
other entries like reversing entries
Sundry column – kapag wala sa specific columns

Partnership Formation and Operation

 What is a partnership?
- Art 1767 of the Civil code
“a contract whereby two or more persons bind themselves to contribute money, property or industry into a
common fund with the intention of dividing profits among themselves.”
- Magbibigay pera, property sa iisang fund tas balak na paghati-hatiin yung profit
- A partnership has a juridical personality separate and distinct from that of each partner (Art. 1768)
 Characteristics of a Partnership
- Mutual Agency – any partner may act as an agent of the partnership in conducting affairs, unless they
elected someone
- Limited life – a partnership may be dissolved anytime by action of the partners or by operation of law
- Division f profits and losses - a partner has the right to share in partnership profits and losses
- Unlimited liability – personal assets of any partner may be used to satisfy the partnership creditors’ claims
upon liquidation if partnership assets are not enough to settle the liabilities to outsiders. Unless the partner
is a limited partner.
- Co-ownership of contributed assets – property contributed to the partnership are owned by the partnership
by virtue of its separate legal personality.
- Legal entity - has legal personality separate and distinct from that of each partner
- Income Tax – all partnerships, except general professional partnerships are subjected to 30% income tax

 Partnership Formation
Partners’ Capital Account

Permanent withdrawals Original investment

Debit balance of drawing acct. Additional investment
Share in partnership loss Share in partnership profit
(Decreases capital) (Increases capital)

Partners’ Drawing Account

Permanent withdrawals Share in partnership profit

Share in partnership loss
 Valuation of Contributions
- Cash – face value
- Property or noncash asset – agreed value or fair market value
- Liabilities – agreed value or fair market value (if assumed)
- Services – memorandum entry
 Types
- All first timers – record
- Sole proprietor and first timer(s) – adjust books and close, then make partnership book
- Sole proprietors - – adjust books and close, then make partnership book

Example 1: all first timers

Cash 500,000
Equipment 600,000
Mortgage payable 100,000
Eren, Capital 200,000
Mikasa, Capital 800,000
Armin is admitted into the partnership as an industrial partner to share 1/3 in the partnership profit.

Example 2: Sole proprietor and first timer(s)

Books of Wel (adjusting)

Wel, Capital 22,000
AFDA 22,000
Inventories 30,000
Wel, Capital 30,000
Prepaid Expense 12,000
Accrued Expense 5,000
Wel, Capital 7,000

Closing of Wel’s Book

A/P 90,000
AFDA 22,000
Acc. Expenses 5,000
Wel, Capital 915,000
Cash 300,000
A/R 450,000
Inventories 270,000
Prepaid Expenses 12,000

Partnership Book

Cash 1,215,000
A/R 450,000
Inventories 270,000
Prepaid Expenses 12,000
A/P 90,000
AFDA 22,000
Acc. Expenses 5,000
 Wel, Capital 915,000
Haloja, Capital 915,000

Example 3: