ACCOUNTING CYCLE for
MERCHANDISING
BUSINESS
Dr. Josefina R. Torres
MERCHANDISING BUSINESS
• Business organization that is engaged
in buying and selling of merchandise
MERCHANDISE
• Goods or articles acquired by the
business that are intended for sale
• Merchandise inventories Include only
goods that are held for sale in the
normal course of business operations
• Examples: office supplies for sale are
inventories for National Book Store but
“office supplies” for UST
Merchandise Inventory
Merchandise Inventory – Beginning
• Goods available at the start of the
accounting period
Merchandise Inventory - End
• Goods available or remain unsold at the
end of the accounting period
ACCOUNTING FOR
MERCHANDISING BUSINESS
• The accounting cycle for a service
business is also applied to
merchandising business.
• Measuring income for a
merchandising company is the same
as for a service business, however,
their operating cycle differs.
ACCOUNTING FOR
MERCHANDISING BUSINESS
• The operating cycle begins by
purchasing merchandise and ends by
collecting cash from selling the goods.
• The length of the operating cycle
depends on what type of merchandise
the business is into.
ACCOUNTING FOR
MERCHANDISING BUSINESS
• For example, fast food establishments
may have an operating cycle of only a
day but companies selling
merchandise on installment basis may
have operating cycle that can least for
years
ACCOUNTING FOR
MERCHANDISING BUSINESS
• The merchandising business uses
special accounts to record the buying
and selling of merchandise or goods
for sale.
SPECIAL MERCHANDISE ACCOUNTS
SALES
• Income account used to record
sale of merchandise
• Credit to record increase; debit to
record decrease //
SALES RETURN & ALLOWANCES
• Used to record the amount of goods
returned by the buyer
• Reduces the amount of sales
• Debit to record increase; credit to
record decrease
• It is evidenced by the issuance of a
credit memorandum //
CREDIT MEMORANDUM
• Document that informs a customer
that a credit has been made to the
customer’s account receivable arising
from discounts, returns and
allowances//
SALES DISCOUNT
• Discount granted by the seller to
encourage early payment of the
buyers
• Decreases the amount of sales
• Debit to record increase; credit to
record decrease //
FREIGHT OUT
• Freight charges or cost of
delivering the product to the
buyer’s place paid by the seller
• Debit to record increase; credit to
record decrease //
Note:
• These special merchandise accounts
are used to record sale of
merchandise only.
• For sale of non-merchandise items,
the ordinary account titles are used.
TERMS OF SALES
• n/30
– The amount of the invoice is payable
within 30 days from the date of sale.
– One of the most common modes of
purchase
– No discount is given by the seller
TERMS OF SALES
• 2/10, n/30
– A discount of 2% is deducted from the
invoice price if paid within 10 days from
date of sale
– The gross invoice price is to be paid if
payment is made after the discount
period.
– Account should be paid in 30 days from
the date of sale
TERMS OF SALES
• COD
– Cash on Delivery
– The invoice price is to be paid upon delivery of
the product
TERMS OF SALES
• EOM
– End of month
– Account should be paid on or before the
end of the month of sale
TERMS OF SALES
• 2/10, EOM, n/60
– 2% discount is given if the customer
pays by the tenth of the month following
the month of sale
– Beyond this period, the full amount must
be paid within 60 days from the date of
sale
SHIPPING CHARGES ON
MERCHANDISE SOLD OR PURCHASED
• The buyer and the seller must agree
on
– who is responsible for paying any freight
charges, and
– who bears the risk of loss while the
merchandise is on transit
FREIGHT TERMS
• FOB Shipping Point
–
–
–
–
Free on Board at point of origin.
The buyer pays for the freight or transportation
The buyer debits “Freight In” for this.
The buyer assumes the risk of loss while goods
are in transit
FREIGHT TERMS
• FOB Destination
– Free on Board up to destination.
– The seller pays for freight or
transportation
– The seller assumes the risk of loss while
the goods are in transit
– The seller debits “Freight Out” or
“Delivery Expense” account for this
CHART OF ACCOUNTS
• List of account titles used in recording
business transactions.
• Arranged in the ALPICE order
Chart of Account of a Merchandising
Business
Examples of Transactions Involving
Sale of Merchandise
The following transactions of Triple J Trading
occurred during the month of January 2009
January
3 - Triple J sold merchandise worth P20,000 to
Mr. Vargas. Terms: COD
3 - Sold merchandise worth P 30,000 to ABC Co.
Terms: P10,000 downpayment, balance: 2/10;
n/30
4 - Mr. Vargas returned defective merchandise
amounting to P300. A cash refund was given
to him.
Jan 5 ABC Co. returned defective
merchandise
amounting to P500.
6 - Sold merchandise to various customers –
P13,000. Paid freight charges amounting to
P400.
12 - Received full payment from ABC Co.
13 - Sold an old office table for P1,000. COD //
ACCOUNTING FOR PURCHASES
• PURCHASES
– Means goods bought for the purpose of
resale without any change in the
physical form
– Debited when goods are acquired on
cash basis or on account //
PURCHASE RETURNS AND
ALLOWANCES
– Used to record the goods returned by
the buyer to the seller
– This usually happens because the goods
are faulty or damaged
– Decreases the cost of goods bought
– Credit for increases, debit for
decreases //
PURCHASE DISCOUNTS
– Used to record the amount of discounts
granted by the seller
– Decreases the cost of goods bought
– Credit for increases, debit for
decreases //
FREIGHT IN
– Account debited by the buyer for the
transportation expense of goods
purchased
– Debit for increases, credit for
decreases //
• Note:
– These special merchandise accounts are
used to record purchase of merchandise
only.
– For purchase of non-merchandise items,
the ordinary account tiles will be used.
Examples of Transactions Involving
Purchase of Merchadise
The following transactions took place during the
month of January 2009:
Jan. 16 - AB Enterprises bought shoes, slippers and
handbags from their Marikina supplier
amounting to P95,000 under the purchase
term of 2/10, n/30. It was agreed
between buyer and supplier that the freight
in or transportation from Marikina to
Makati, amounting to P500, is to be paid by
the buyer, AB Enterprises.
Jan 17 AB Enterprises received deliveries of
handbags
from Celine amounting to
P20,000. Terms: COD
18 -
AB Enterprises ordered and received delivery
from Manel, shoes costing P35,000. Terms:
n/30.
19 -
AB Enterprises paid to the Marikina supplier
the P95,000 less 2% discount. (see Jan. 16)
20 -
The buyer AB Enterprises found some
defective goods and made complaint to
Celine. Supplier Celine agreed to refund
P1,200 and promptly paid this amount to AB
Enterprises.
23 -
29 30 -
AB Enterprises complained to Manel on some
unpolished shoes for which Manel gave
the buyer rebate of P1,000. A credit
memorandum was received from Manels
Purchased supplies for office use, P1,000 on
cash basis.
Purchased goods amounting to P30,000 less
20%
Credit memorandum – a note issued by the seller to
acknowledge the return of merchandise and to
inform the buyer that his account has been
reduced accordingly.
DISCOUNTS
• Reduction in the original price of
goods
• Types of Discounts
a. Cash discount
b. Trade discount
A. CASH DISCOUNT
– Reduction in price to encourage a
customer to pay immediately
– Recorded in the books as
• Sales discount (by seller)
• Purchase discount (by buyer) //
B. TRADE DISCOUNT
– Reductions from the published list price
granted to dealers or wholesalers for
buying large quantities or for regularly
patronizing the business
– Granted to customers who buy items to
resell or who will use the items to
produce other salable goods
– Often listed in catalogs that contain the
list price as well as the amount of trade
discount available.
B. TRADE DISCOUNT (cont’n)
– It has no relationship to whether a
customer is paying a bill early.
– Trade discounts and list price are not
shown in the accounts of either the
buyer or the seller.
– Computed as: List price x rate of
discount //
ACCOUNTING FOR TRADE DISCOUNT
• Trade discounts and list price are not
shown in the accounts of either the buyer
or the seller.
• From the point of view of the buyer, only
the net price paid is recorded in the books
• From the point of view of the seller, the
price received from the buyer is recorded in
the books
Example 1:
Example 2: