Nature of Transactions in Merchandising
Business
Quarter 4,Lesson 3
This chapter is divided into three lessons :
•Lesson 1– Nature of Merchandising Business
•Lesson 2– Nature of Transactions in Merchandising
Business
•Lesson 3– Cash and Trade Discount
Objectives
1. define merchandising business;
2. explain the operating cycle of
merchandising business;
3. explain selling and purchasing
transactions;
4. explain cash and trade discount; and
5. describe the nature of transactions in
merchandising business.
Describe the image
Product A
Product B
Nature of Merchandising Business
The lesson will discuss the nature, transactions involve
and operation cycle of merchandising business.
Understanding of these is the fundamental step to help
you in analyzing the transactions for the preparation of
financial statements of merchandising business. These
will also help you identify the difference between
service business and merchandising business. What do
you think is the difference of service business with
merchandising business?
Complete the picture with the name of sari-sari store and usual
products offered to customers. Imagine that this is your sari-sari you
are planning to establish within your community.
“Sari-sari store” is an example of a merchandising
business. Can you imagine the usual activities occur
during the operation of the business? What do you
think the key to successful merchandising business?
Yes! The key is accounting just like in service business.
To start, you need to know first the nature of
merchandising business.
Nature of Merchandising Business
Merchandising is a business engaged in purchasing or
buying and selling of products. No changes are made to
the products or goods you are going to sell. This is a
business that purchased or buys product and resells
them to consumer.
Inventory or merchandise is the term used to refer the
products the business bought for resell in
merchandising business. They do not make any changes
in the product nor produce their own for sale.
Selling is the primary source of revenue of
merchandising business. The seller will add
a mark-up (tubo) to the cost (puhunan) of
merchandise to earn a profit. The
merchandise can be sold either in
wholesale or retail.
Wholesaling
usually
purchased
merchandise directly from the
manufacturers to sold it at a lower
price. For example, Puregold has its
wholesale section.
Retailing is selling of merchandise
in pieces or small or so called
“tingi-tingi” to the end customer.
For example, sari-sari store near
you.
Merchandising business may sell food
items such as those sold at grocery,
supermarket, and sari-sari store (SM
Supermarket & 7/11), or non-food items
like appliances (Emilio S. Lim Appliances &
Savers) or school supplies (Pandayan &
National Bookstore).
Major activities in Merchandising business
There are two major activities involved in
merchandising business:
• Purchasing is the activity that buys products or goods
intended for sale.
• Selling is the activity that generates revenue within
the operating cycle of the business.
Normal operating cycle of Merchandising business
• The normal operating cycle of merchandising business
revolves around the stages from buying merchandise,
selling it to the customer and using the cash to buy more
merchandise again. Once the merchandise you
purchased have already converted into cash, the cycle
ends, but a new begins.
• In the illustration below, the cycle for cash sales
merchandise can easily be converted into cash. On the
other hand, for merchandise sold on account, the cycle
will only end if the accounts receivables are collected.
Imagine how your sari-sari store will operate.
Let us say, your grandmother gave you a business capital as her
gift. Now, you have already your capital to start your sari-sari
store. You used the available cash to buy your merchandise from
Puregold because you learned that they are giving wholesale
price to retailers like sari-sari-stores. When you got all your
merchandise and displayed, the sari-sari store is ready for the
opening. Your prospective customers are the people within your
barangay. During the operation, some of your customers buy in
cash, others request on credit or “utang muna” promising to pay
on their payday. Then, you will collect it on the day they have
promised. Because you have again the available cash, you will
use it to buy a new set of merchandise.
1. Merchandising business have two major activities namely buying and selling.
2. Selling is the primary source of revenue.
3. Merchandising business do not produce own product to sell.
4. In merchandising business, to earn profit mark-up is added to the cost of the
merchandise.
5. Inventory or merchandise is the term use for the products for sale.
6. Merchandising business can be either wholesaling or retailing or both.
7. The normal operating cycle in merchandising revolve around stages of buying of
merchandise, selling, and using again the cash to buy more merchandise.
8. The main difference of between a merchandising business and a service business is
the nature of product they are selling. Merchandising business is selling physical
products or tangible products while servicing business is selling intangible products
like labor and skills.
TRANSACTION
Let us have the story of Lola Nena’s Sari-Sari Store.
Lola Nena’s Sari-Sari Store started in 2012 which was
owned by Ibyang. She started the business with P5,000
capital. Her merchandise of the store is usually purchase at
Puregold and wholesaler of poultry products and rice at
Balanga Public Market. Her neighbors become of her
“suki” because of her friendly attitude and of course, low
prices. She usually purchased the merchandise every other
day to replenish the sold merchandise.
We do understand that sari-sari store is a
merchandising business. Imagining Lola Nena’s
Sari-Sari Store, it clearly showed that purchasing
and selling are the major transactions involve in
merchandising business. But are there other
transactions
occurred
in
merchandising
business? What is purchasing? What is selling?
Purchase of merchandise
In the previous lesson it is said that purchasing or buying is
the activity that buys goods intended for sale. The
purchases must be merchandise intended for resale.
Purchases of assets other than merchandise like equipment,
machineries or supplies intended for the use in the
operation are not recorded as purchases.
Thus, when Ibyang bought one ream of coupon bond
intended for resale, it is recorded as purchases but if she
bought it to use in price tagging, it should be treated as
purchases.
Purchases is the account title to use in recording
purchasing merchandise intended for sale.
Sales of merchandise
As we have learned, selling of merchandise is the
primary source of revenue in merchandising business.
Only sales of merchandise held for resale are recorded
in the sales account. On the other hand, sale of an
asset other than merchandise like equipment,
machineries, or supplies use in the operation of the
business is not included in sales account.
Let us consider Lola Nena’s Sari-Sari Store, the store is
engaged in selling of food and non-food items like canned
goods, cooking oil, shampoo, etc. Selling of those items are
primary source of their revenue – recorded as sales. But
when Lola Nena sold the refrigerator, it is not included in
the sales account. Because refrigerator is an asset of Lola
Nena’s Sari-sari Store used in the operation of their
business. However, if Emilio S. Appliances sold refrigerators,
it is recorded as sales because the selling of appliances is
the primary merchandise of the entity.
Sales is the account title used in recording for selling of
merchandise.
Terms of payment for purchases and sales
Transactions for purchases and sales can be
done in cash, on account or “utang muna” or
both in cash and on account.
Related transactions to purchases and sales
• Payment of transportation cost or freight
• Merchandise return
• Discounts
Payment of transportation cost
Buyers and Sellers sometimes pay delivery cost in transporting
the merchandise. It is commonly referred to as shipping cost.
They sometimes use freight forwarder via land, sea and air like
LBC, FedEx, and 2Go. Payment of the shipping cost is depending
on the agreement between buyer and seller found in the invoice
indicating the shipment terms.
The shipment term will tell us the following:
a. Who has the obligation to pay the transportation cost or
delivery cost?
b. Who owns the merchandise while in transit?
c. Who is responsible with the merchandise while in transit?
Merchandise Return
A merchandise can be returned to the seller if it is defective or damaged,
incorrect specification in terms of brand name, model type or other details
indicated in buyer’s purchase order.
In the return of merchandise, the buyer may ask for the replacement of
better or correct one. However, if there is no replacement available, the
buyer may request for a refund or reduction in liability.
To acknowledge the return of merchandise the seller will issue a credit
memorandum or credit memo indicating the amount, items, and reason for
returns.
On the other hand, the buyer will issue a debit memorandum or debit memo
informing the seller about the reason, amount, and items of the
merchandise.
For example, Ibyang ordered 50g Corned
Beef but the seller sent 150g Corned Beef.
There is an incorrect delivery which the
buyer has the right to return the
merchandise. In this case, the buyer will
issue a debit memo to inform the seller
about the details if merchandise return.
Purchase return and allowances
is the account title to use in recording the
merchandise return of the buyer.
On the part of the seller, Sales return and
allowances is the account title to use in
recording.
Discounts
Purchase discount
is the account title to use in recording cash
discount availed by the buyer. On the other
hand, Sales Discount is the account title to
use by the seller in recording cash discount
granted to the customers or buyers.
1. There are similar transactions between
service business and merchandising business like
• Purchase of asset like store equipment
• Purchases of supplies like notebook and ballpen to be
use in the operation of the business.
• Incurrence of expenses utilities which include water
and electric bill.
• Owner’s investment and withdrawal
2. Transactions related to acquisition and
disposing of merchandising business are:
• Purchase of merchandise in cash
• Purchase of merchandise on account
• Sale of merchandise in cash
• Sale of merchandise on account
• Payment of transportation cost
• Merchandise returns
• Cash discount
4. Purchases of merchandise is recorded in purchase account if
the merchandise is intended for resale.
5. Sales of merchandise is recorded in sales account if the
merchandise is held for resale.
6. There are two types of shipment terms:
• FOB Destination seller has the obligation to pay the
transportation cost.
• FOB Shipping Point the buyer has the obligation to pay the
transportation cost.
7. Merchandise can be return to the seller if it is defective or
damage, the items delivered is incorrect specification based on
the buyer’s purchase order.
8. The seller will issue credit memo acknowledge the return of
merchandise.
9. The buyer will issue debit memo to inform the seller about the
details of merchandise return.
10. A cash discount is given to buyer who paid their
purchase on account within the specified period or
within the terms of payment.
11. A trade discount is offered to attract the buyers to
buy in volume or bulk.
12. Cash discounts are recorded while trade discounts
are never recorded in the books of buyer and seller.
46-50
Pedro Co. purchased sinovac vaccines
from Chingchong Co. on account.The
vaccines cost 100,000 under the terms
FOB Destination, Freight Collect.The
freight charges amounted to 6,000
Pedro Co. purchased sinovac vaccines
from Chingchong Co. on account.The
vaccines cost 100,000 under the terms
FOB Destination, Freight Prepaid.The
freight charges amounted to 6,000
Pedro Co. purchased sinovac vaccines
from Chingchong Co. on account.The
vaccines cost 100,000 under the
terms FOB Shipping point, Freight
Collect.The freight charges amounted
to 6,000