INTEGRATED ACCOUNTING

LEARNING MODULE ATTACHMENT (DO NOT COPY)

MERCHANDISING OPERATIONS

MERCHANDISE INVENTORY
• A merchandise business is a business that purchases goods and resells them for profit. Examples of merchandise business are
Target, Walmart, Best Buy, etc.
• The goods that merchandise businesses purchase are called merchandise inventory.
• Merchandise Inventory is classified as an asset on the balance sheet,
• All costs incurred to acquire merchandise and get it ready for sale are included in the inventory account.

OPERATING CYCLE FOR A MERCHANDISING BUSINESS

• Process where company spends cash, generates revenues, and receives cash when revenues are generated or later by
collecting accounts receivable
• The operating cycle of merchandising business differs from a service business
• Merchandising business purchases merchandise for sale to customers

CASH SALES SALES ON ACCOUNT

TERMS OF TRANSACTIONS:
Credit Terms:
Generally take the form of 2/10, n/30 where
- 2 is the discount %
- 10 is the discount period in days
- n is the net (total) amount to pay
- 30 is the number of days after the invoice date that the net amount is due

Cash discount are also called purchase discounts from the buyer’s viewpoint and sales discount from the seller’s point of view.

Illustration. Assume that an invoice for P150,000 with terms 2/10 ,n/30/ is to be paid with the discount money borrowed for the
remaining 20 days of the credit period. If an annual interest rate of 18 percent is assumed, the net savings to the buyer is P1,350
which is determined as follows:

Cash discount of 2% on P150,000 Interest for 20 days at P3,000

an annual rate of 18% on the amount due within the discount period;
P147,000* x 18% x 20/360 1,470
Savings effected by borrowing P 1,530
*Amount Due = P150,000 Invoice Price – P3,000 cash discounts

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Trade Discounts
Trade discounts encourage the buyers to purchase products because of markdowns from the list price. Trade discounts should not
be confused with cash discounts. This type of discount enables the suppliers to vary prices periodically without the inconvenience
of revising price lists and catalogs.

Illustration. Pinnacle Technologies quoted a list price of P2,500 for each 5 gigabytes flash drive, less a trade discount of 20%. If
Video Fantastic Company ordered seven units, the invoice price would be as follows:

List Price (2,500 x 7) P 17,500

Less: 20% trade discount 3,500
Invoice Price P 14,000
Trade discounts may be stated in a series. Assume instead that the trade discount given by Pinnacle to Video Fantastic is 20% and
10%, the invoice price will be:

List Price (2,500 x 7) P 17,500

Less: 20% trade discount 3,500
Invoice Price P 14,000
Less: 10% trade discount 1,400
Invoice Price P 12,600

Transportation Costs
Shipping costs borne by the seller are debited to
transportation out account

The shipping costs borne by the buyer using the

periodic inventory system are debited to
transportation in account.

LEARNI NG ACTI VI TY #1

On June 1, 2010, Marites De Chavez Forest Products sold merchandise with a P120,000 list price.

Trade Discount Credit Terms Date Paid

A 30% 2/10, n/30 June 8

B 40% 1/10, n/30 June 15
C - 2/10, n/30 June 11
D 20% 1/15, n/30 June 14

E 40% n/30 June 28

Required:
For each of the sales terms, determine the following:
1. The amount recorded as sale
2. the amount of cash received

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 INTEGRATED ACCOUNTING
LEARNING MODULE ATTACHMENT (DO NOT COPY)

INVENTORY SYSTEMS
Perpetual Inventory System
• the inventory account is continuously updated.
• the inventory account requires that at the time of purchase, merchandise acquisitions be recorded as debits to the inventory
account.
• At the time of sale, the cost of sales is determined and recorded by a debit to a cost of sales account and credit to the
inventory account.
• When a company uses the perpetual inventory system, the ending inventory show reconcile with the actual physical count
at the end of the period assuming that no theft spoilage, or error has occurred.

Periodic Inventory System

The periodic inventory system is primarily used by businesses that sell relatively inexpensive goods and that are not yet using
computerized scanning systems to analyze goods sold.
no entries are made to the inventory account as the merchandise is bought and sold.

NET SALES Net sales is the first part of the merchandising income statement as presented below:

Gross Sales- consist of total sales for cash on credit during an accounting period
As an income account, the sales account is credited whenever sales on account or sales are made. Only sales of merchandise held
for resale are recorded in the account. If a merchandising firm sold one of its delivery trucks, the credit would be made to the
delivery equipment account, not to sales account.

The journal entry to record the sale of merchandise for cash is as follows:

Sales Discounts
Assume that W. Neis Traders sold merchandise on Sept. 20 for P3,000, terms 2/10, n/60. At the time of the sale, the entry is:

At the end of the accounting period, the sales discounts account has accumulated all sales discounts for the period. The account
is considered a contra-income account deducted from gross sales in the income statement

Sales Returns and Allowances

Each return or allowance is recorded as debit to an account called sales returns and allowances. An example of such transaction
follows:

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The seller usually issues the customer a credit memorandum (i.e. Accounts Receivable or Cash is credited), which is a formal
acknowledgement that the seller has reduced the amount owed by the customer. Sales returns and allowances is a contra-income
account and is accordingly deducted from gross sales in the income statement

Transportation Out
When the freight term is FOB destination, the seller shoulders the transportation costs, when the term is FOB shipping point, the
buyer bears the shipping costs

Case No. 1. Assume that W. Neis Traders sold merchandise totaling P17,000 FOB destination, freight prepaid; terms 2/10, n/30.
The transportation costs amounted to P1,900. The entry to record this transaction would be:

If this invoice is collected on Dec. 5, the sales discount will be P340 (17,000 x 2%). Transportation out is an operating expense.

Case No. 2. Assume that W. Neis Traders sold merchandise totaling P17,000, FOB shipping point, freight collect; terms
2/10, n/30. The transportation costs amounted to P1,900. The entry to record this transaction would be:

Nov. 25 Accounts Receivable 17,000

Sales 17,000
Sold merchandise on account; terms 2/10,
n/30; FOB shipping point, freight collect

There is no debit to transportation out account since the shipping terms provided, the buyer should shoulder the transportation
costs. If this invoice costs is collected on Dec. 5, the sales discount will be P340 (17,000 x 2%). The entry would be:
.
Dec. 5 Cash 16,660
Sales Discount 340
Accounts Receivable 17,000

Case No. 3. Now, assume that W. Neis Traders sold merchandise totaling P17,000, FOB destination, freight collect;
terms 2/10, n/30. The transportation costs amounted to P1,900. The entry to record this transaction would be:

Nov. 25 Accounts Receivable 15,100

Transportation Out 1,900
Sales 17,000
Sales on Account; terms 2/10,n/30; FOB
destination, freight collect, P1,900

accounts receivable is decreased by the transportation charges paid by the buyer for the benefit of the seller. If this invoice
is collected on Dec. 5, the sales discounts will be P340 (17,000 x 2%) since the discount applies to total sales
Dec. 5 Cash 14,760
Sales Discount 340
Accounts Receivable 15,100

Case No. 4. Assume further that W. Neis Traders sold merchandise totaling P17,000, FOB shipping point, freight
prepaid; terms 2/10, n/30. The transportation costs amounted to P1,900. The entry to record this transaction would be:

Nov. 25 Accounts Receivable 18,900

Sales 17,000
Cash 1,900
Sales on Account; terms 2/10,n/30; FOB
destination, freight prepaid, P1,900

If this invoice is paid on Dec. 5, the purchases discount will be P340 (17,000 x 2%). The buyer is not entitled to discounts
on the transportation costs. Discounts apply only to total purchases.

THIS FORM IS FOR INSTITUTIONAL PURPOSES ONLY!

 Dec. 5 Cash 18,560
Sales Discount 340
Accounts Receivable 18,900

COST OF SALES
Cost of sales or cost of goods sold is the largest single expense of the merchandising business. It is the cost of inventory that the
entity has sold to customers.
Wilhelmina Neis Traders Partial
Income Statement
For theYear Ended Dec. 31, 2009

Cost of Sales
Merchandise Inventory, 1/1/2009 P 528,000
Purchases P 1,246,000
Less: Purchases Returns and Allowances P 56,400
Purchases Discounts 21,360 77,760
Net Purchases P 1,186,240
Transportation In 82,360
Net Cost of Purchases 1,268,600
Goods Available for Sale P 1,796,600
Less: Merchandise Inventory, 12/31/09 483,000
Cost of Sales P 1,313,600

Merchandise Inventory- The inventory of a merchandising entity consists of goods purchased for resale
Net Cost of Purchases- Under the periodic inventory method, net cost of purchases consists of gross -- minus purchases discount
and purchases returns and allowances equals net -- plus transportation costs.

Purchases- When the periodic inventory method is used. All purchases of merchandise are debited to the purchases account as
shown below:
Nov. 12 Purchases 15,000
Accounts Payable 15,000
To record purchases of merchandise;
terms 2/10,n/30

Purchases Returns and Allowances- Sales returns and allowances in the seller’s books are recorded as purchases returns and
allowances in the books of the buyer. This should be recorded as follows:
Nov. 14 Accounts Payable 2,000
Purchases Returns and Allowances 2,000
Return of damaged merchandise
purchased on Nov. 12
Purchase Discounts-
Merchandise purchases are usually made on credit and commonly involve purchases discounts for early payment. In relation to
the Nov. 12 and 14 transactions, the payment is recorded as follows:
Nov. 14 Accounts Payable 13,000
Purchases Discounts (13,000 x 2%) 260
Cash 12,740

Transportation In

Case No. 1. Assume that W. Neis Traders made purchases totaling P17,000, FOB destination, freight prepaid; terms
2/10, n/30. Transportation costs amounted P1,900. The entry would be:

Nov. 25 Purchases 17,000

Accounts Payable 17,000
Purchased merchandise on account, terms
2/10, n/30; FOB destination, freight prepaid
There is no debit to transportation in account since the shipping term provided that the seller should shoulder the
transportation costs. In addition, the seller prepaid the freight. If this invoice is paid on Dec. 5, the purchases discount will
be P340 (17,000 x 2%). The entry would be:

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 Dec. 5 Accounts Payable 17,000
Purchases Discounts (17,000 x 2%) 340
Cash 16,660
Case No. 2. Assume that W. Neis made purchases totaling P17,000 FOB shipping point, freight collect; terms 2/10, n/30. The
transportation costs amounted to P1,900. The entry to record this transaction would be:
Nov. 25 Purchases 17,000
Transportation In 1,900
Accounts Payable 17,000
Cash 1,900
Purchases on Account; terms 2/10,n/30;
FOB shipping point, freight collect, P1,900

Case No. 3. Now, assume that W. Neis Traders made purchases totaling P17,000 FOB destination, freight collect; terms 2/10,
n/30. The transportation costs amounted to P1,900. The entry to record this transaction would be
Nov. 25 Purchases 17,100
Accounts Payable 15,100
Cash 1,900
Purchases on Account; terms 2/10,n/30;
FOB destination, freight collect, P1,900
Accounts payable is decreased by the transportation charges paid by the buyer for the benefit of the seller. If this invoice is
paid on Dec. 5, the purchases discount will be P340 (17,000 x 2%) because the discount applies to total purchases.

Dec. 5 Accounts Payable 15,100

Purchases Discounts (17,000 x 2%) 340
Cash 14,760

Case No. 4. Assume further that W. Neis Traders made purchases totaling P17,000 FOB shipping point, freight prepaid;
terms 2/10, n/30. The transportation costs amounted to P1,900. The entry to record this transaction would be:

Nov. 25 Purchases 17,000

Transportation In 1,900
Accounts Payable 18,900
Purchases on Account; terms 2/10,n/30;
FOB shipping point, freight prepaid, P1,900

If this invoice is paid on Dec. 5, the purchases discount will be P340 (17,000 x 2%). The buyer is not entitled to discounts
on the transportation costs. Discounts apply only to total purchases.

Dec. 5 Accounts Payable 18,900

Purchases Discounts (17,000 x 2%) 340
Cash 18,560

OPERATING EXPENSES- make up the third major part of the income statement for merchandising entity. These are expenses,
other than the cost of sales, which is incurred to generate profit from the entity’s major line of business – merchandising.

LEARNING ACTIVITY NO. 2

Several purchase transactions of the Yodelito Icaro Company are presented below. The credit terms of the company are 3/10,
n/30.

Oct. 6 Purchased merchandise for cash, P200,000. FOB Shipping point.

12 Purchased merchandise on account P100,000
15 Returned merchandise purchased on account P50,000
17 Paid supplier the amount due
19 Paid freight charges of P7,000 on merchandise acquired last Oct. 6

Required:
Prepare the journal entries. Write your answer in a journal.

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 INTEGRATED ACCOUNTING
LEARNING MODULE ATTACHMENT (DO NOT COPY)

COMPLETING THE ACCOUNTING CYCLE FOR A MERCHANDISING BUSINESS

ACCOUNTING CYCLE -The entire accounting process is considered a cycle. This is simply because the steps or procedures
involved are repeated on a period to period basis

MERCHANDISE INVENTORY AT THE END OF THE PERIOD

The objectives of these entries are as follows:
a. to remove the beginning balance from the merchandise inventory account and to transfer it to income summary;
b. to enter the ending balance in the merchandise inventory account and to establish it in the income summary.

In this example. Merchandise inventory was P528,000 at the beginning of the year and P483,000 at the end of the year. Effect A
removed the P528,000 for the merchandise inventory account and transferred it to income summary. In income summary, the
P528,000 is in effect added to net cost of purchases because, like expenses, the balance of the purchases account is debited to
income summary by closing entry.
Effect B established the ending balance of merchandise inventory of P483,000 and entered it as a credit in the income summary
account. The credit entry in income summary has the effect of deducting the ending inventory from the goods available for sale
because both purchases and beginning inventory are entered on the debit side.
The Adjusting Entry Method Using the adjusting entry method, the two entries indicated by effects A and B which are prepared
at the time the other adjusting entries are made follow:

The Closing Entry Method The closing entry method makes the debit and the credit to merchandise inventory by including them
among the closing entries as follows:

The unadjusted trial balance of the Ween Trading on June 30, 2010 appears below:

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WORKSHEET
A worksheet is a columnar working paper which will show all the accounts together with their adjusted amounts that will appear
in the financial statements. The worksheet will show whether there is a net income or loss.

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FINANCIAL STATEMENTS
These are the accounting reports prepared at the end of the accounting period.
1. INCOME STATEMENT

2. STATEMENT OF CHANGES IN OWNER’S EQUITY

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3. STATEMENT OF FINANCIAL POSITION

ADJUSTING AND CLOSING ENTRIES

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POS T CLOS I NG TRI AL BALANCE

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 LEARNI NG ACTI VI TY # 3

Name: Score:
Program / Course: Class Schedule:
Year & Section: Contact No. / FB Account:
Residential Address:

Type of Activity (check or choose from below)

Concept Notes Laboratory Report Portfolio
Skills: Exercise / Drill Illustration Others:___________________

Activity Title : __________________________________________________________________

Learning Target : ________________________________________________________________
References (Author, Title, and Pages) :_______________________________________________

To test your knowledge of the relationships of these items, insert the missing figures in the following income statement. Note that
gross profit is 40% of net sales and profit is 10% of net sales.

Net Sales
Gross Sales ?
Less: Sales Returns & Allowances P45,000
Sales Discounts 15,000 ?
Net Sales ?
Cost of Goods Sold
Inventory, Jan 1, 2010 P220,000
Purchases P985,000
Less: Purchase Returns & Allowances P31,000
Purchase Discounts 20,000 ?
Net Purchases ?
Transportation In 36,000
Net Cost of Purchases ?
Cost of goods available for sale ?
Less: Inventory Dec.31,2010 260,000
Cost of goods sold ?
Gross margin from Sales P620,000
Operating Expenses ?
Profit ?

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 INTEGRATED ACCOUNTING
LEARNING MODULE ATTACHMENT (DO NOT COPY)

SPECIAL JOURNAL-These are journals of original entry other than the general journal that are designed for recording specific
types of transactions of similar nature. Most entities use the following special journals.

SALES JOURNAL
The information for each sale is obtained from a copy of the related sales invoice, which should be prenumbered for control
purposes. This journal is specifically designed to record sales of merchandise on account. In contrast, cash sales are recorded in
the cash receipts journal.

CAS H RECEI PTS J OURNAL

CASH RECEIPTS JOURNAL
this journal has debit columns for cash and sales discounts; the credit columns for accounts receivable and sales. In addition,
there are columns on the right-hand side of the journal which can be used to record the account titles and credits to other accounts
resulting from cash receipts not related to cash sales and collections on account. Examples of these include investments by the
owner and loan releases.

PURCHASES JOURNAL
Merchandising business frequently purchase merchandise and supplies. Such purchases are usually made on account.
The purchase journal is designed to account or purchases, supplies and other assets on account. In contrast, cash purchases are
recorded in the cash disbursements journal

CASH DISBURSEMENTS JOURNAL

This special journal has columns for the date and the number of checks issued for each cash payment. Also, the other accounts
column is available for recording debits to other accounts.

VOUCHER SYSTEM
checks may be drawn only upon a written authorization in the form of a voucher approved by responsible officials. The system
consists of vouchers, voucher register, unpaid voucher file, check register, and paid voucher file. The voucher
register takes the place of the purchases journal while the check register substitutes the cash disbursements journal

Voucher
The voucher is a serially numbered form that identifies the name and address of the payee, the due date, terms, description
and invoice amount. The form includes a section for designated officers to sign their approval for payment. It also has
spaces for details such as the date of payment, check number and ledger entries

LEARNI NG ACTI VI TY NO. 4

Indicate in which of the five journals each transaction must be recorded. Choose your answer from the choices below
A. SALES
B. CASH RECEIPTS
C. PURCHASES
D. CASH PAYMENTS
E. GENERAL

1. Sale of merchandise for cash

2. Sale of merchandise on account
3. Cash refund to a customer
4. Receipt of cash from a customer
5. Purchase of merchandise for cash
6. Purchase of merchandise on account.
7. Payment of salaries
8. Note payable sent to a creditor in settlement of an account.
9. Payment of interest on a mortgage
10. Receipt of a note in settlement of a customer’s account

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 INTEGRATED ACCOUNTING
LEARNING MODULE ATTACHMENT (DO NOT COPY)
MANUFACTURING OPERATIONS
COMPARING MERCHANDISING AND MANUFACTURING ACTIVITIES
Merchandisers . . .
• Buy finished goods.
• Sell finished goods.
Manufacturers . . .
• Buy raw materials.
• Produce and sell finished goods
ELEMENTS OF MANUFACTURING COSTS
1. Direct Materials- Materials that are clearly and easily identified with a particular product.
Example:
Steel used to manufacture the automobile

2. Direct Labor - Labor costs that are clearly traceable to, or readily identifiable with, the finished product.
Example:
Wages paid to an automobile assembly worker.

3. Manufacturing Overhead- All factory costs except direct material and direct labor. Factory costs that cannot be
traced directly to specific units produced.
Examples:
Indirect labor – maintenance
Indirect material – cleaning supplies
Factory utility costs
Supervisory costs

MANUFACTURING INVENTORY ACCOUNTS

• Finished Goods Inventory- Completed products for sale.
• Work in Process Inventory- Partially complete products, Material to which some labor and/or overhead have been
added.
• Raw Materials Inventory- Materials waiting to be processed.
• Factory Supplies Inventory- cost of unused indirect materials.

STATEMENT OF COST OF GOODS MANUFACTURED

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STATEMENT OF GOODS SOLD

LEARNI NG ACTI VI TY #5

In addition to the year-end statement and financial position and income statement, the management of Esterlina Genera
Company required the controller to prepare the statement of cost of goods manufactured. During 2010, P361,920of raw
materials were purchased. Operating cost data and inventory account balances for 2010 follow:

Required:

1. Compute the cost of direct materials used during the year

2. Compute the total manufacturing costs for the year

3. Compute the costs of goods manufactured during the year.

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