Accounting for
merchandising
business
Service Income Statement
Revenues
Merchandising Income
Statement
xx
Net Sales
Less: Cost of
Sales
Less:
Expenses
Profit
(xx)
xx
xx
(xx)
Gross Profit
xx
Add: Income
xx
Less:
Expenses
Profit
(xx)
xx
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 Credit period
 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”
 Purchase discount = Buyer’s POV
 Sales discount = Seller’s POV
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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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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)
b)
c)
d)
P 2,254
P 2,252
P 2,246
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%
Less: Transportation Cost
Amount Paid
(48)
(100)
P 2,252
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Who shoulder the
Transportation Costs?
Who pays the shipper?
FOB DESTINATION, FP
S
S
FOB DESTINATION, FC
S
B
FOB Shipping point, FP
B
S
FOB Shipping point, FC
B
B
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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-bytransaction basis throughout the period.
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1.
Sold merchandise on account costing P 8,000 for P 10,000; terms were
2/10, n/30.
Accounts
Receivable
Sales
10,000
Accounts Receivable
10,000
10,000
Sales
Cost of Sales
Inventory
10,000
8,000
8,000
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2. Customer returned merchandise costing P 400 that had been sold on
account for P 500 (part of P 10,000 sale):
Sales Returns &
Allowances
Accounts
Receivable
500
Sales Returns &
Allowances
500
500
Accounts
Receivable
Inventory
Cost of Sales
500
400
400
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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
Sales Discounts
Accounts Receivable
9,310
Cash
190
Sales Discounts
9,500
Accounts
Receivable
9,310
190
9,500
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4. Purchased on account merchandise for resale for P6,000; terms were 2/10,
n/30 (purchases recorded at invoice price):
Purchases
Accounts Payable
6,000
Inventory
6,000
Accounts Payable
6,000
6,000
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5. Paid P 200 freight on the P 6,000 purchase; terms were FOB Shipping point,
freight collect:
Transportation In
Cash
200
Inventory
200
Cash
200
200
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6. Returned merchandise costing P 300 (part of the P 6,000 purchase):
Accounts Payable
Purchase Ret. &
300
Accounts Payable
300
Inventory
300
300
Allow.
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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
Purchase
Discounts
Cash
5,700
Accounts Payable
114
5,586
Inventory
Cash
5,700
114
5,586
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8. To transfer the beginning inventory balance to the Income Summary account
(part of the closing entries under the periodic inventory system):
Income Summary
Inventory
250,000
(No entry required)
250,000
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10. To adjust the ending perpetual inventory balance for the shrinkage during the
year:
Shrinkage already affected in
the no. 9 entry
Cost of Sales
Inventory
360
360
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THANKS!
Any questions?
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