Accounting for

merchandising
business
Comparison of income state
ments
Service Income Statement Merchandising Income
Statement
Revenues xx Net Sales xx
Less: Cost of (xx)
Sales
Gross Profit xx
Add: Income xx
Less: (xx) Less: (xx)
Expenses Expenses
Profit xx Profit xx

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Operating cycle of a merch
an dising business

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TERMS OF TRANSACTI
 Credit period
O NS
 when goods are sold on account
 Usually described as the net credit period or net terms.
(e.g. n/30)
Cash Discounts
 are discounts for prompt or immediate payment.
 If a trade discount is also offered, cash discount is computed on the net
amount after the trade discount.
 Cash discount is designated by such notation as “2/10”
Trade Discount
 Encourage the buyers to
purchase products
because of markdowns
 Purchase discount = Buyer’s POV from the list price
 Sales discount = Seller’s POV  May be stated in a series.

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Trade Discounts Illustratio
n:
Pinnacle Technologies Company quoted a list price of P 2,500 for each 64 gigabyte
flash drive, less a trade discount of 20%. If Video Fantastic ordered seven units,
the invoice price would be as follows:

List Price (P 2,500 x 7) P 17,500

Less: 20% Trade Discount 3,500

Invoice Price P 14,000

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Trade Discounts Illustratio
n:
Assume instead that the trade discount given by Pinnacle to Video
Fantastic is 20% and 10%, the invoice price will be:

List Price (P 2,500 x 7) P 17,500

Less: 20% Trade Discount 3,500

Balance 14,000

Less: 10% Trade Discount 1,400

Invoice Price P 12,600

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Cash and Trade Discounts Comprehensive Illustration:

Olive Valenzuela Traders purchased merchandise from San Jose for P 3,600
list price, subject to a trade discount of 25%. The goods were purchased on
terms of 2/10, n/30, FOB Destination. Valenzuela paid P 100
transportation costs. Valenzuela returned P 400 (list price) of the
merchandise to San Jose and later paid the amount due within the
discount period. The amount paid is

a) P 2,254
b) P 2,252
c) P 2,246
d) P 2,352

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List Price P 3,600
Less: Purchase Return (400)
Total 3,200
Less: Trade Discount – 25% (800)
Invoice Price 2,400
Less: Purchase Discount – 2% (48)
Less: Transportation Cost (100)
Amount Paid P 2,252

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 Who shoulder the Who pays the shipper?
Transportation Costs?
FOB DESTINATION, S S
Freight Prepaid
FOB DESTINATION, S B
Freight Collect
FOB Shipping point, B S
Freight Prepaid
FOB Shipping point, B B
Freight Collect

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INVENTORY SYSTEMS
Periodic Inventory System
 Under this system, no detailed record of inventory is being
maintained during the year. An actual physical count of the
goods remaining on hand is required at the end of each period.

Perpetual Inventory System

 is an alternative to the periodic inventory system. This system
involves the maintenance of detailed inventory records in the
accounting system. Continuous record is maintained on a
transaction-by-transaction basis throughout the period.

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INVENTORY SYSTEMS
Assume that the beginning inventory for the year is 250,000. assuming
the transactions (nos. 1 to 7) Where the only transactions for the entire year
the balance in the inventory account at year, end under the periodic inventory
system is 250,000 (beginning inventory). The year end balance in the
inventory account under the perpetual inventory system is 231,860.
Under the perpetual inventory system ,the inventory account is
decreased by purchases, transportation in ,sales returns and is decreased by
the cost of sales, purchase returns and allowances ,and purchases discount.
At year end, the physical inventory is taken, and it revealed that the
actual inventory on hand is 231,500. the year and journal entries are then
made to bring the inventory account balance into agreement with the amount
of the physical inventory. when posted to the general Ledger, both the periodic
and perpetual inventory systems result in the same ending inventory amount
231,500 .

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 Periodic and Perpetual Inve
n tory System
1. Sold merchandise on account costing P 8,000 for P 10,000; terms
were 2/10, n/30.
Accounts 10,000 Accounts Receivable 10,000
Receivable
Sales 10,000 Sales 10,000

Cost of Sales 8,000

Inventory 8,000

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 Periodic and Perpetual Inve
n tory System
2. Customer returned merchandise costing P 400 that had been sold on
account for P 500 (part of P 10,000 sale):

Sales Returns & 500 Sales Returns & 500

Allowances Allowances
Accounts 500 Accounts 500
Receivable Receivable

Inventory 400
Cost of Sales 400

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 Periodic and Perpetual Inve
n tory System
3. Received payment from customer for merchandise sold above (cash
discount taken: ( P 10,000 sale – P 500 return) x 2% discount = P 190):

Cash 9,310 Cash 9,310

Sales Discounts 190 Sales Discounts 190

Accounts 9,500 Accounts 9,500

Receivable Receivable

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 Periodic and Perpetual Inve
n tory System
4. Purchased on account merchandise for resale for P6,000; terms were
2/10, n/30 (purchases recorded at invoice price):

Purchases 6,000 Inventory 6,000

Accounts Payable 6,000 Accounts 6,000

Payable

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 Periodic and Perpetual Inve
n tory System
5. Paid P 200 freight on the P 6,000 purchase; terms were FOB
Shipping point, freight collect:

Transportation In 200 Inventory 200

Cash 200 Cash 200

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 Periodic and Perpetual Inve
n tory System
6. Returned merchandise costing P 300 (part of the P 6,000
purchase):

Accounts Payable 300 Accounts Payable 300

Purchase Ret. & 300 Inventory 300
Allow.

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 Periodic and Perpetual Inve
n tory System
7. Paid for merchandise purchased, refer to no. 4 (cash discount take: (P 6,000
purchase – P300 return) x 2% discount = P 114):

Accounts Payable 5,700 Accounts Payable 5,700

Purchase Discounts 114 Inventory 114
Cash 5,586 Cash 5,586

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 Periodic and Perpetual Inve
n tory System
8. To transfer the beginning inventory balance to the Income Summary
account (part of the closing entries under the periodic inventory system):

Income Summary 250,000 (No entry required)

Inventory 250,000

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 Periodic and Perpetual Inve
n tory System
10. To adjust the ending perpetual inventory balance for the shrinkage
during the year:

Shrinkage already affected Cost of Sales 360

in the no. 9 entry
Inventory 360

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THAN
KS!
Any questions?

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