INFORMATION SHEET 7
Merchandising Operation
Learning Outcomes:
1.
2.
3.
4.
5.
6.
7.
Define merchandising.
Know the difference between supplies and inventory.
Learn accounting for merchandising concern.
Compare cash discounts and trade discounts.
Understand the treatment of transportation costs considering the freight terms.
Explain the inventory systems of merchandising entities.
Analyze and record transactions for merchandise sales under periodic inventory
system.
8. Analyze and record transactions for merchandise sales under perpetual inventory
system.
Merchandising – is a type of business that buys finished goods and generally sell them
at a higher price than they were originally purchase.
Supplies vs. Inventory
Supplies – are assets that are purchase for use in business. Ex.
Office supplies, cleaning materials, etc.
Inventory – are asset held for sale in the ordinary course of business.
Ex. Finished goods
Accounting for Merchandising Concern.
The steps in the accounting cycle for merchandising concern are the same as those for a
service business. However, additional accounts and entries and the manner of their
presentation in the financial statements are needed for merchandising transaction such
as sale of merchandise and cost of goods sold.
Flow of Costs The flow of costs for a merchandising company is as follows. Beginning
inventory plus the cost of goods purchased is the cost of goods available for sale. As goods
are sold, they are assigned to cost of goods sold. Those goods that are not sold by the
end of the accounting period represent ending inventory. Illustration below describes these
relationships. Companies use one of two systems to account for inventory: a perpetual
inventory system or a periodic inventory system
1
Additional Accounts and Entries
I.
Sales and related accounts
1. Sales – used to record the sales of merchandise. It could be on cash or on
account. However, sales should be recognized when merchandise is sold,
whether payment has been received or not, following accrual basis of
accounting.
2. Sales returns and allowances – a customer may physically return
merchandise received due to excess delivery, damages or inferior quality.
This is known as sales return. Sometimes, a customer may be willing to
keep the merchandise even if there are minor defects or damages as long
as he is granted a price reduction. This is called sales allowance. Although
there is a difference between sales return and allowances, they are often
combined under one account called Sales Return and Allowances. This
is a contra revenue account and evidence by a credit memorandum issued
by the seller.
3. Sales discount – when goods are sold on credit, both parties should have
an understanding as to the amount and time of payment. To encourage
customers to pay their accounts promptly, a cash discounts is usually given
if payment are received within a number of days from the date of sale. From
the seller’s point of view, cash discount is called sales discount.
II.
Purchase and related accounts
1. Purchases - under periodic inventory system, when a merchandising
business buys goods for resale, the purchase account is debited for the cost
of goods purchase.
2. Purchase return and allowances – the buyer may return merchandising
due to excess delivery, damages or inferior quality. This is known as
purchase return. Or the buyer may be willing to accept the goods despite
certain defects but a reduction in price will be granted. This is known as
purchase allowances. Purchase return and allowances reduces
purchases account and evidenced by a debit memorandum issued by the
buyer.
3. Purchase discount – to encourage the buyers to pay their accounts
promptly, a cash discount is usually given if payments are made within a
2
certain number of days from the date of sale. From the buyer’s point of view,
cash discount is called Purchase Discount.
2 TYPES OF DISCOUNTS
Credit terms specify the amount of the cash discount and time period in which it is
offered. They also indicate the time period in which the purchaser is expected to pay
the full invoice price. Credit terms are 2/10, n/30, which is read “two-ten, net thirty.”
This means that the buyer may take a 2% cash discount on the invoice price, less
(“net of”) any returns or allowances, if payment is made within 10 days of the invoice
date (the discount period). Otherwise, the invoice price, less any returns or
allowances, is due 30 days from the invoice date.
Alternatively, the discount period may extend to a specified number of days following
the month in which the sale occurs. For example, 1/10 EOM (end of month) means
that a 1% discount is available if the invoice is paid within the first 10 days of the next
month.
III.
Shipping charges on Merchandise sold.
1. FOB Shipping point – FOB means free on board. The purchases agreed
to shoulder all the transportation costs from the point of shipment up to point
of destination. The buyer receives title to the goods at shipping point.
2. FOB destination – the seller agreed to shoulder all the transportation costs
from the point of shipment up to the point of destination. The buyer receives
the title to the goods at the point of destination.
Who paid the shipping point?
•
•
If the seller paid the freight cost at the shipping point, this refer to “Freight
Prepaid”.
If the buyer paid the freight cost at the destination point, this refer to Freight
Collect.
3
Example:
June 10, Lady Company buys merchandise from Lord Company on account., P1,000,
terms FOB Shipping point and pays the transportation cost P150.
What if the terms: FOB Shipping Point, Freight Prepaid
June 15, Feb Company sells merchandise to Mary Joy Company on account.
P1,100, terms FOB Destination. The cost of merchandise sold is P800. Feb pays the
transportation cost P200.
4
What if terms is: FOB Destination, Freight Collect
Inventory systems
There are two methods of accounting for cost of goods sold and merchandise inventory
namely:
1. Perpetual Inventory Systems
Under this method, the cost of item acquired is debited to the Merchandising Inventory
account. As the items are sold, the merchandise inventory account is credited and the
cost of goods sold is debited for the cost of items sold. Hence, under this method, the
amount of merchandise inventory and cost of goods sold are always updated in the
accounting records. This system of accounting is applicable for merchandising firms
that sell high-unit value and in small quantities such as automobiles and industrial
machineries. For example, a Ford dealership has separate inventory records for each
automobile, truck, and van on its lot and showroom floor. Similarly, a Kroger grocery
store uses bar codes and optical scanners to keep a daily running record of every box
of cereal and every jar of jelly that it buys and sells. Under a perpetual inventory
system, a company determines the cost of goods sold each time a sale occurs.
5
Helpful Hint: For control purposes, companies take a physical inventory count under
the perpetual system, even though it is not needed to determine cost of goods sold.
2. Periodic Inventory Systems
Under this method, the count of physical inventory takes place periodically, usually at
the end of the accounting period and no detailed records of the physical inventory on
hand are maintained during the period. The Purchase account is used to record the
cost of merchandise bought by the business. When merchandise is sold, revenue
account (sales) is recorded but not the cost of merchandise sold. When the financial
statements are prepared, the company takes a physical count of the ending
merchandising which is then used in computing the cost of goods sold. This system
of accounting is applicable for merchandising firm with low value and large quantities.
To determine the cost of goods sold under a periodic inventory system, the following
steps are necessary:
1. Determine the cost of goods on hand at the beginning of the accounting period.
2. Add to it the cost of goods purchased.
3. Subtract the cost of goods on hand at the end of the accounting period.
RECORDING OF TRANSACTIONS
Book of the buyer:
Date
Transaction
May-04 Purchase of
merchandise on credit
6 Freight costs on
purchases.
8 Purchase returns and
allowances.
14 Payment on account
with a discount
Perpetual Inventory System
Merchandise Inventory
3,800
Purchases
Accounts Payable
Merchandise Inventory
Cash
Accounts Payable
Merchandise Inventory
Accounts Payable
Cash
Merchandise Inventory
Periodic Inventory System
3,800
3,800
Accounts Payable
150
150
300
300
3, 500
3,430
70
Freight-In
Cash
Accounts Payable
Purchase Returns
and Allowances
Accounts Payable
Cash
Purchase Discounts
3,800
150
150
300
300
3, 500
3,430
70
6
Book of the seller:
CLOSING ENTRIES
PERPETUAL
PERIODIC
Sales
xxx
Sales
xxx
Sales Return and Allowances
xxx
Sales Return and Allowances
xxx
Sales Discount
xxx
Sales Discount
xxx
Income Summary
xxx
Income Summary
xxx
To close sales and its related accounts
To close sales and its related accounts
Income Summary
xxx
Cost of Goods Sold
xxx
Operating expenses
xxx
To close cost of goods sold and other
expenses
Merchandise Inventory, end
xxx
Purchase Discount
xxx
Purchase Return
xxx
Income Summary
xxx
Merchandise Inventory, beg.
Purchases
Income Summary
xxx
Freight-in
Adrianne, Capital
xxxx
To close the related accounts
To close the income summary account
in cost of goods sold
Adrianne, Capital
xxx
Adrianne, Drawing
To close the drawing account
xxx
Income Summary
xxx
Operating Expense
To close all operating expenses
xxx
xxx
xxx
xxx
Income Summary
xxx
Adrianne, Capital
xxxx
To close the income summary account
Adrianne, Capital
xxx
Adrianne, Drawing
To close the drawing account
xxx
7
Sample of Statement of Cost of Goods Sold
PW AUDIO SUPPLY, INC.
STATEMENT OF COST OF GOODS SOLD
FOR THE YEAR ENDED DEC. 31, 1998
Beginning Inventory
Purchases
Less: Purchase Returns and Allowances
P 40,000.00
Purchase Discount
60,000.00
Net puchases
Total
Freight In
Total Goods Available for Sale
Less: Ending Inventory
Cost of Goods Sold
P
P
250,000.00
250,000.00
100,000.00
P
P
P
150,000.00
400,000.00
50,000.00
450,000.00
134,000.00
316,000.00
Sample of Income Statement
8
Required: Record the transactions
What do you think are the missing controls?
9
References
Ballada, Win, “Basic Accounting Made Easy.”
Lopez, Rafael M., “Fundamentals of Accounting.”
Valix, Condrado T., “Theory of Accounts.”
https://legacy.senate.gov.ph/publications/AG%202012-03%20-%20MSME.pd
Weygandt, J. et.al 2015. “Accounting Principles”, Illinois, Courier Kendallville
“If you are not willing to learn, no one can help you. If you are determined to learn, no
one can stop you”
By: Zig Ziglar
10