CHAPTER 7
MERCHANDISING OPERATIONS
 Nature of a Merchandising Business
 Operating Cycle of a Merchandising Business
Cash
Cash
The faster the sale of
inventory and the
collection of cash, the
higher the profits
Inventory
Accounts
Receivable
Inventory
Cash Sales
The cycle is from cash to
inventory and back to cash
Sales on Account
The cycle is from cash to
inventory to accounts
receivable and back to cash
 Types of Merchandisers
 Wholesalers – one who buys in bulk or volume directly from a manufacturer and
sells goods to a retailer
 Retailer – one who sells products to end users
 Inventory Systems in a Merchandising Business
 The Periodic System: Under this system,
For business selling goods with
transactions related to the acquisition of
different low-priced items, the
inventory are recorded accordingly as
periodic system maybe a more
purchases, purchase discounts, and purchase
appropriate system to use
returns and allowances.
 The Perpetual System: Under this
For business selling high-priced
system, running balance of inventory on
items,
the perpetual system is a
hand and the cost of sales are shown
more
appropriate
system to use
continuously
 Recording Transactions Under the Periodic System
Discount – a reduction from a certain price or amount
 Two kinds:
 Trade Discount – a deduction from the list
price or catalogue price granted to customers
to encourage purchase of goods or
merchandise in big quantities or volume.
Trade discount is not recorded or
shown in the buyer’s or seller’s books
as it directly deducts the list price
Illustrative Problem
a. Spitz Co. bought merchandise for cash with a list price of P10,000 less 10% trade
discount
Computation:
Journal Entry on the books of Spitz Co.
Dr.
9,000
Cr.
Purchases
Cash
9,000
Purchased merchandise for cash
List Price
10% Trade Discount
P10,000 x 10%
Purchase Price
P10,000
(1,000)
P 9,000
b. Terrier Co. sold merchandise to Poodle Co. with a list price of P50,000.
Terms: 10%, 10%, 2/10, n/30
Journal Entry on the books of Terrier Co.
Dr.
40,500
Accounts Receivable
Sales
Sold merchandise on account;
Terms: 2/10, n/30
Cr.
40,500
Note: The 10%, 10% in the terms represent the
trade discount given to the buyer while the 2/10,
n/30 are the terms of the payment (see cash
discount)

Computation:
List Price
10% Trade Discount
P50,000 x 10%
Balance
10% Trade Discount
P45,000 x 10%
Sale Price
P50,000
(5,000)
45,000
(4,500)
P 40,500
Cash Discount – a deduction from the selling or purchase price granted to customers to
encourage prompt payments of accounts
 Examples of different credit terms:
o 3/15, 2/20, n/30 – means that 3% cash discount is granted to the buyer if account is
paid within 15 days from date of purchase, 2% cash discount is given if account is paid
within 20 days, purchase price less returns and allowance if any is payable within 30
days
o 1/10, n/60 – means that a 1% cash discount is granted to the buyer if account is paid
within 10 days from date of purchase, purchase price less returns and allowances if
any, is payable within 60 days
o n/30 or EOM1 – means that no cash discount is available to the buyer. Purchase price
less returns and allowances if any, is payable within 30 days.
o 2/10 EOM, n/60 – means that a 2% cash discount is granted to the buyer if paid 10
days after the end of the month. Purchase price less returns and allowances if any, is
payable within 60 days
o 1/EOM, n/30 – means that a 1% cash discount is given if the buyer pays until the end
of the month. Purchase price less returns and allowances if any, is payable within 30
days
Illustrative Problem
a. On July 1, Siamese Kat Merchandising purchased goods from Persian Kat Trading for
P70,000. Terms 1/10, n/30.
Siamese Kat Merchandising settled its account on July 11.
Journal Entry on July 1
Computation:
Dr.
Cr.
Purchases
70,000
Accounts Payable
70,000
Purchased merchandise on account
Terms: 1/10,n /30
Purchase Price
1% Cash Discount
P70,000 x 1%
Cash Payment
P70,000
(700)
P 69,300
Journal Entry on July 11
Accounts Payable
70,000
Cash
69,300
Purchase Discount
700
Paid account with Persian Kat Trading
b. Assuming the terms of Siamese Kat Merchandising’s purchase is 3/10 EOM, n/60 and
Siamese Kat Merchandising paid on August 10
Journal Entry on August 10
Computation:
Dr.
70,000
Cr.
Accounts Payable
Cash
67,900
Purchase Discount
2,100
Paid account with Persian Kat Trading
1
“EOM” or end of the month, can also be written as “eom”
Purchase Price
3% Cash Discount
P70,000 x 3%
Cash Payment
P70,000
(2,100)
P 67,900
 Source Documents
Two main activities are
o Buyer:
involved in a
 Purchase Requisition – is a written request to the purchaser
merchandising business,
of an entity from an employee or user department of the
namely, buying and selling.
same entity that goods be purchased
Therefore there are two
 Purchase Order – is an authorization made by the buyer to
points of view considered
the seller to deliver the merchandise as detailed in the form
in recording the business
 Receiving Report – is a document containing information
transactions of a
about goods received from a vendor. It formally records the
merchandising business –
quantities and description of the goods delivered.
buyer and seller
 Debit memorandum – a written notice from the buyer
informing the seller that the buyer will debit the
account or decrease the amount owed to the
seller for returned goods or allowances
Steps in a Purchase Transaction
1. When certain items are needed, the
requested due to defect or wrong
user department fills in a purchase
specifications







o Seller:
Sales Invoice – contains the name and address
of the buyer, the description of the goods
sold, the credit terms, unit price, quantities,
total amount, and date of sale. This evidences
the transfer of ownership of the goods from
the seller to the buyer
Statement of Account – is a formal notice to
the debtor detailing the accounts already due
Official Receipt – a written acknowledgement
of money received by the seller evidencing
payment of the buyer for goods purchased
and received
Credit Memorandum – is a form used by the
seller to notify the buyer that his account is
being decreased due to errors or other factors
requiring adjustments
2.
3.
4.
requisition form and sends it to the
purchasing department.
The purchasing department then
prepares a purchase order after
checking with the price lists, quotations,
or catalogs of approved vendors. The
purchase order, addressed to the
selected vendor, indicates the quantity,
description, and price of the
merchandise ordered. It also indicates
expected payment terms and
transportation arrangements.
After receiving the purchase order, the
seller forwards an invoice (sales invoice
on the seller; purchase invoice on the
buyer) to the purchaser upon shipment
of the merchandise. It defines the
terms of the transaction.
Upon receiving the shipment of
merchandise, the purchaser’s receiving
department sees to it that the terms in
the purchase order are complied with,
and prepares a receiving report.
Before approving the invoice for
payment, the accounts payable
department compares copies of the
purchase requisition, purchase order,
receiving report and invoice to ensure
that quantities, descriptions, and prices
agree.
o Other Source Documents:
Bill of Lading – is a document issued by the
5.
carrier – a trucking, shipping or airline – that’s
specifies contractual conditions and terms of
delivery such as freight terms, time, place, and
the person named to receive goods
Deposit slips – are printed forms with
depositor’s name, account number and space
for details of the deposit
Check – is a written order to a bank by a depositor
to pay the amount specified in the check from his checking account to the person named in
the check. The entity issuing the check is the payor while the receiver is the payee
 Comparison of Buyer’s Books and Seller’s Books (Periodic System)
Buyer’s Books
Seller’s Books
Purchased merchandise for cash
Dr.
Purchases
xxx
Cash
Sold merchandise for cash
Cr.
Purchased merchandise on account
Purchases
xxx
Accounts Payable
xxx
Cash
Sales
xxx
Sold merchandise on account
Accounts Receivable
xxx
Sales
Returned defective merchandise bought on
account
Accounts Payable
xxx
Purchase Returns and Allowances xxx
Received cash refund for returned merchandise
Cash
xxx
Purchase Returns and Allowances xxx
Payment of Accounts Payable within the discount
period arising from the purchase of
merchandise
Accounts Payable
xxx
Purchase Discount
xxx
Cash
xxx
Payment after discount period
Accounts Payable
xxx
Cash
Dr.
xxx
xxx
xxx
xxx
Received defective merchandise sold on account
Sales Returns and Allowances xxx
Accounts Receivable
xxx
Paid cash refund for returned merchandise
Sales returns and Allowances xxx
Cash
xxx
Collection within the discount period arising from
the sale of merchandise
Cash
xxx
Sales Discount
xxx
Accounts Receivable
xxx
Collection after discount period
Cash
xxx
Accounts Receivable
xxx
Normal Balances of Accounts
Normal Balances of Accounts
Sales
Debit
Purchases
Debit
Purchase price of
merchandise bought
Cr.
Credit
Purchase Returns and Allowances
Debit
Credit
Purchase price of
goods returned to
seller and allowances
granted
See Chapter 7.1 (review papers) for illustrative problems
Credit
Sale price of
merchandise sold
Sales Returns and Allowances
Debit
Credit
Sale price of goods
returned by buyer and
allowances granted
 The Perpetual System
 Under this method, an acquisition of merchandise is debited to merchandise inventory.
 Sale of the merchandise is recorded as a credit to merchandise inventory with a
corresponding debit to cost of goods sold account.
 In other words, any movement in merchandise inventory is directly debited or credited
to this account, thus maintaining a continuous record of the inventory items
 Comparison of Buyer’s Books and Seller’s Books (Perpetual System)
Buyer’s Books
Seller’s Books
Purchased merchandise for cash/on account
Dr.
Cr.
Merchandise Inventory
xxx
Cash/Accounts Payable
xxx
Sold merchandise for cash/ on account
Dr.
Cash/ Accounts Receivable
xxx
Sales
xxx
Returned defective merchandise bought on
account
Accounts Payable
xxx
Merchandise Inventory
xxx
Cost of Sales
Merchandise Inventory
xxx
Payment of Accounts Payable within the discount
period arising from the purchase of
merchandise
Accounts Payable
xxx
Merchandise Inventory
xxx
Cash
xxx
Payment after discount period
Accounts Payable
xxx
Cash
xxx
See Chapter 7.1 (review papers) for illustrative problems
Cr.
xxx
Received defective merchandise sold on account
Sales Returns and Allowances xxx
Accounts Receivable
xxx
Merchandise Inventory
Cost of Sales
xxx
xxx
Collection within the discount period arising from
the sale of merchandise
Cash
xxx
Sales Discount
xxx
Accounts Receivable
xxx
Collection after discount period
Cash
xxx
Accounts Receivable
xxx
Sold merchandise for cash/ on account
Note: 1. The amount of cash/accounts receivable and sales on the first entry is the total sales price of the goods sold.
2. The amount of cost of sales and merchandise inventory on the second entry is the cost of merchandise sold.
*the second entry removes the sold goods from the merchandise inventory account and transfers it to the cost
of goods sold
Received defective merchandise sold on account
Note: 1. The amount of sales returns and allowances and accounts receivable on the first entry is the total sales price of
the goods returned.
2. The amount of merchandise inventory and cost of sales on the second entry is the cost of merchandise returned
* the second entry transfers back to the merchandise inventory account the cost of returned goods while
removing it from the cost of goods sold
 Comparison Between the Periodic System and perpetual System in Recording Transactions
Transactions
1. Purchase of
merchandise
2.Returned defective
merchandise on
account
Periodic
Purchases
Accounts Payable
Accounts Payable
Purchase Returns and
Allowances
3.Payment of account
within discount
period
4.Sale of merchandise
on account
Accounts Payable
Purchase Discount
Cash
Accounts Receivable
Sales
5.Received defective
merchandise bought
on account
6.Collection of account
within discount
period
Sales Returns and Allow.
Accounts Receivable
Cash
Sales Discount
Accounts Receivable
xxx
xxx
xxx
xxx
xxx
Perpetual
Merchandise Inventory
Accounts Payable
Accounts Payable
Merchandise Inventory
xxx
xxx
xxx
xxx
xxx
xxx
Accounts Payable
Merchandise Inventory
Cash
Accounts Receivable
Sales
xxx
xxx
Cost of Sales
Merchandise Inventory
Sales Returns and Allowances
Accounts Receivable
xxx
xxx
Merchandise Inventory
Cost of Sales
Cash
Sales Discount
Accounts Receivable
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
 Difference in Recording Owner’s Investment and Withdrawal of Merchandise Under the
Periodic and Perpetual Systems of Inventory
Transactions
1. Initial Investment
2. Additional Investment
3. Temporary Withdrawal
(Owner is anticipating profit
in the business and has the
intention of returning the
amount withdrawn)
4. Permanent Withdrawal
(Owner has no intention of
returning the amount
withdrawn)
Periodic
Merchandise Inventory
Owner, Capital
Purchases
Owner Capital
xxx
Perpetual
Merchandise Inventory
Owner, Capital
Merchandise Inventory
Owner Capital
xxx
xxx
Owner, Drawing
Merchandise Inventory
xxx
xxx
Owner, Drawing
Merchandise Inventory
xxx
xxx
xxx
Owner, Drawing
Purchases
xxx
Owner, Drawing
Purchases
xxx
xxx
xxx
xxx
xxx
xxx
Note: under the periodic system, the Purchases account is credited for owner’s withdrawal of merchandise
for personal use in order to keep the balance of the Merchandise Inventory account to its original amount
xxx