ACCOUNTING ABM

FOR
MERCHANDISING
ACTIVITIES
LICEO DE CAGAYAN UNIVERSITY-RNP CAMPUS
 OBJECTIVES

01 02 03
CYCLE TRADING INVENTORY
Explain the operating cycle of Describe the major activities Understand the basic concepts
a merchandising company of a merchandising or of inventory accounting
and its major activities trading company

04 05 06
APPROACHES FINANCE ACTIVITIES
Describe the 2 approaches Prepare the financial Apply the accounting
in accounting for statements of a trading processing cycle to a
merchandising transactions concern merchandising firm
 NATURE OF MERCHANDISING BUSINESS

- Generates revenue from selling of merchandise or goods that it

purchases from other companies.
- Major activities: buying and selling of merchandise
- The revenue of a merchandising company is termed as SALES.
- The goods that are acquired for sale by an entity are reported as
Merchandise Inventory(current asset)
- Upon sale of the merchandise, their cost is transferred to an expense
account Cost of Goods Sold.
 NATURE OF MERCHANDISING BUSINESS

- Merchandising company is different from a manufacturing company.

- Merchandising companies include both retailers and wholesalers.
- Retailer is a business that sells merchandise directly to the consumers or
public.
- Wholesaler buy large quantities of merchandise from several different
manufacturers and then resell them to many different retailers.
- The procedures in accounting for merchandising concerns are the same
as those applied to service and manufacturing concern.
OPERATING CYCLE OF A MERCHANDISING OR TRADING
BUSINESS

OPERATING CYCLE- series of transactions through which a business generates its

revenue and its cash receipts from customers.

Operating Cycle of a Merchandising company consist of the ff transactions:

1. Purchases of merchandise either on cash or on credit basis
2. Payment of account to suppliers
3. Sales of merchandise, also either on cash or on account basis.
4. Collection of accounts receivable from customers.

As the word cycle implies, the sequence of transactions is repeated continuously.

OPERATING CYCLE OF A MERCHANDISING OR TRADING
BUSINESS

CASH

4. Collections of 1. Purchase of
the receivables merchandise

ACCOUNTS
INVENTORY
RECEIVABLE
3. Sale of
merchandise to
customer
2. Payment of debt
to suppliers.
 BASIC CONCEPT OF INVENTORY ACCOUNTING IN A
MERCHANDISING BUSINESS

Inventories are asset items that a company holds for sale in the ordinary course of business, or goods
that will use or consume in the production of goods to be sold.

Cost of Goods Purchased

Beginning Inventory

Cost of Goods Available for Sale

Cost of Goods Sold Ending Inventory

 TYPES OF INVENTORY SYSTEM
Continuously tracks changes in the
inventory account. A company records all
PERPETUAL purchases and sales (issues) of goods
directly in the inventory account as they
occur.

a company physically counts inventory at the

end of each period to determine what's on hand
and the cost of goods sold. Many companies PERIODIC
choose monthly, quarterly, or annual periods
depending on their product and accounting
needs.
 02
Accounting for Merchandising
Transactions using the Perpetual
Inventory System
 KEY TAKEAWAYS

- Purchases of merchandise for resale or raw materials for production are

debited to inventory rather than to purchases.
- Freight-in is debited to inventory, not purchases. Purchase returns and
allowances and purchase discounts are credited to inventory rather than
to separate accounts.
- Cost of goods sold is recorded at the time of each sale by debiting cost of
goods sold and crediting inventory.
- A subsidiary ledger of individual inventory records is maintained as a
control measure..
Accounting for Purchases of
Merchandise

Inventory xxxx

Accounts Payable/Cash xxxx

Accounting for Transportation Costs

Transportation Costs Incurred by Buyer (FOB Shipping Point)

Inventory xxxx
Cash xxxx

Transportation Costs Incurred by Seller (FOB Destination)

Freight-out expense xxxx

Cash xxxx
 Accounting for Purchase Returns
and Allowances
Purchase return - the purchaser ships
the unsatisfactory merchandise back
A purchaser is dissatisfied
to the seller and receives a credit
with some or all of the
merchandise purchased
against the amount due equal to the
because of the ff reasons: invoice price of the returned
- Manufactured poorly merchandise.
- Wrong merchandise was
shipped
- Merchandise was
Cash/Accounts Payable xxxx
damaged during
shipping Inventory xxxx
 Accounting for Purchase Returns
and Allowances
Purchase allowance, the purchaser
retains the merchandise, and the
A purchaser is dissatisfied
seller reduces the amount that the
with some or all of the
merchandise purchased
purchaser owes the seller for the
because of the ff reasons: shipment, in effect reducing the sales
- Manufactured poorly price.
- Wrong merchandise was
shipped
- Merchandise was
Cash/Accounts Payable xxxx
damaged during
shipping Inventory xxxx
Accounting for Purchase Discounts

- When a merchandise is sold on credit, the CREDIT PERIOD is the maximum amount
of time, often stated in days, that the purchaser can take to pay a seller for the
purchased items.
- A typical credit period for a wholesale distributor is 30 days.
- The credit period is frequently described as the NET CREDIT PERIOD, or net terms.
- Merchandise use the notation “n/” followed by the number of days in the credit period
to designate the time period that a customer can take before paying cash for
purchased goods.
- Examples:
n/30 credit period of 30 days
n/45 credit period of 45 days
- To encourage the early payment of unpaid bills, many firms offer their customers a
cash discount or sales discount.
Accounting for Purchase Discounts

- A CASH DISCOUNT or SALES DISCOUNT, is the amount that the seller deducts
from the invoice price if payment is made within the allowed discount period.
- The DISCOUNT PERIOD is the maximum amount of time, stated in days, that a
purchaser has to pay the seller if the purchaser wants to claim the cash discount.
- The discount period is always shorter than the credit period.
- Most merchandisers use the format “cash discount percent/discount period”.
- Example: 1/10 indicates a cash discount of one percent of the invoice price and a
discount period of ten days following the invoice date.
- Example: 1/10, n/30 represents a cash discount of one percent if paid within ten days
of the sale with a total credit period of 30 days following the date of the sale.
Accounting for Purchase Discounts

Pay Within Discount Period

Accounts payable xxxx

Inventory xxxx
Cash xxxx

Payment Made After Discount Period

Accounts payable xxxx

Cash xxxx
Accounting for Sales of Merchandise

- Manufacturing firms and merchandising firms credit SALES REVENUE when they
sell products, regardless of whether the sales transaction is on credit or for cash.
- The sales revenue account has a normal credit balance.

To record sale at a sales price:

Accounts receivable xxxx

Sales revenue xxxx

To record sale at a unit cost:

Cost of goods sold xxxx

Inventory xxxx
 Accounting for Sales Returns and
Allowances
- When buyers have returns and allowances, there are sellers that must record those same
returns and allowances.
- With a SALES RETURN, the customer ships the merchandise back to the seller and the
customer receives a reduction in the amount due to the seller.
- With SALES ALLOWANCES, the customer retains the merchandise, and the seller reduces
the amount the customer owes, in effect reducing the sales price.
- Accounting for sales returns requires two journal entries:
1. Offsets the sales revenue generated from the transaction and reduces the amount
owed by the customer.
Sales returns and allowances xxxx
Accounts receivable xxxx
2. Transfers the cost of merchandise from cost of goods sold back to the Inventory
account.
Inventory xxxx
Cost of goods sold xxxx
 Accounting for Sales Discount
- When making a cash payment for purchased goods, a customer is entitled to take a
cash discount only if the payment is made during the allowed discount period. If a
cash discount is taken, the seller records it in a separate account called Sales
Discounts.
- SALES DISCOUNTS is a contra-revenue account like sales return and allowances.
Both accounts are contra to, or subtracted from, gross sales revenue on the income
statement.

Payment Received Within the Discount Period Payment Received After the Discount Period

Cash xxxx Cash xxxx

Sales discounts xxxx Account receivable xxxx
Account receivable xxxx
 NET SALES

Net sales - is the gross sales revenue generated through merchandise sales less any sales
returns and allowances and any sales(cash) discounts.

A company calculates its net sales for the period by subtracting the balances of the sales
returns and allowances account (normal debit balances) and the sales discounts accounts
(normal debit balances) from the balance of the Sales Revenue account(normal credit
balance)

Gross sales revenue

Less: Sales returns and allowances
Sales discounts
=Net sales
 A. RECORDING OF PURCHASES AND RELATED TRANSACTIONS

Transactions Perpetual Inventory System

Purchase of merchandise for cash Merchandise Inventory xxxx

Cash xxxx

Purchase of merchandise on Merchandise Inventory xxxx

account, the freight charges to be Accounts Payable xxxx
shouldered by the buyer

Return of merchandise to seller Cash xxxx

due to defect or damage Merchandise Inventory xxxx

Return of merchandise purchased Accounts Payable xxxx

on account to seller due to defect Merchandise Inventory xxxx
or damage
 A. RECORDING OF PURCHASES AND RELATED TRANSACTIONS

Transactions Perpetual Inventory System

Granting of allowance by seller on Cash xxxx

defective merchandise Merchandise Inventory xxxx

Accounts Payable xxxx

Merchandise Inventory xxxx

Payment of account less cash Accounts Payable xxxx

discount Merchandise Inventory xxxx
Cash xxxx

Payment of account, no cash Accounts Payable xxxx

discount taken Cash xxxx
 B. RECORDING OF SALES AND RELATED TRANSACTIONS

Transactions Perpetual Inventory System

Sale of merchandise for cash Cash xxxx

Sales xxxx

Recording of cost of merchandise Cost of Goods Sold xxxx

sold Merchandise Inventory xxxx

Sale of merchandise for cash Accounts Receivable xxxx

Sales xxxx

Recording of cost of merchandise Cost of Goods Sold xxxx

sold Merchandise Inventory xxxx
 B. RECORDING OF SALES AND RELATED TRANSACTIONS

Transactions Perpetual Inventory System

Payment of freight charges on the

goods:
a. Freight charges to be Freight-out or Delivery expense xxxx
absorbed by the seller Cash xxxx

b. Freight charges to be Accounts Receivable xxxx

absorbed by the buyer Cash xxxx

Return of defective or damaged Sales Returns and Allowances xxxx

merchandise by buyer Cash xxxx

Sales Return and Allowances xxxx

Accounts Receivable xxxx
 B. RECORDING OF SALES AND RELATED TRANSACTIONS

Transactions Perpetual Inventory System

Recording the cost of returned Merchandise Inventory xxxx

merchandise Cost of Goods Sold xxxx

Granting of allowance for defective Sales Returns and Allowances xxxx

or damaged merchandise Cash xxxx

Sales Return and Allowances xxxx

Accounts Receivable xxxx

Collection from customer, less Cash xxxx

discount Sales Discount xxxx
Accounts Receivable xxxx

Collection from customer beyond Cash xxxx

the discount period. Accounts Receivable xxxx
 TAKING A PHYSICAL INVENTORY
- When a physical inventory is taken, management uses the inventory ledger to
determine on a product-by-product basis whether inventory on hand corresponds to
the amount indicated in the inventory subsidiary ledger.
- Over time normal inventory shrinkage may cause some discrepancies between the
quantities of merchandise shown in the inventory records and the quantities actually on
hand.
- INVENTORY SHRINKAGE OR SHORTAGE refers to unrecorded decreases in inventory
resulting from such factors as breakage, spoilage, employee theft, and shoplifting.
- If there are any discrepancy between the amount of merchandise counted and the
inventory controlling account balance. The pro-forma adjustment is:

Cost of Goods Sold xxxx

Merchandise Inventory xxxx
 03
Accounting for Merchandising
Transactions using the Periodic
Inventory System
 KEY TAKEAWAYS

- When merchandise is purchased, its cost is debited to an account entitled PURCHASES.

- When merchandise is sold, an entry is made to recognize the sales revenue, but NO
ENTRY is made to record the cost of goods sold.
- As the inventory records are not updated as transactions occur, there is no inventory
subsidiary ledger.
- At year end, a complete physical count of the merchandise on hand is conducted.
- The cost of goods sold for the entire year is then determined by a short computation as
follows:
Inventory, beginning of the year xxx
Add: Purchases xxx
Cost of goods available for sale xxx
Less: Inventory, end of the year xxx
Cost of goods sold xxx
Accounting for Purchases of
Merchandise

Purchases xxxx

Accounts Payable/Cash xxxx

Accounting for Transportation Costs

Transportation Costs Incurred by Seller , the purchaser

records the transportation cost in the Freight In account,
rather than in the Inventory account.

Freight-in xxxx
Cash xxxx
 Accounting for Purchase Returns
and Allowances

- If a purchaser is dissatisfied Purchase Returns and Allowances is a

with merchandise that was contra-purchases account with a
purchased and a purchase normal credit balance.
return or allowance is
granted, the purchaser
records the purchase return
or allowance using the
Purchase Returns and
Allowances account, rather
Cash/Accounts Payable xxxx
than the inventory account. Purchase returns and allowances
xxxx
 Accounting for Purchase Discounts

- If a purchaser makes a cash payment to the seller before the end of the allowed
discount period, the purchaser deducts a cash discount. Otherwise, the purchaser pays
the full invoice price.

- When the purchaser takes a cash discount, the purchaser will record:
Accounts Payable xxx
Purchase discounts xxx
Cash xxx

- Purchase discounts is a contra-purchases account with a normal credit balance.

- If the purchaser pays beyond the discount period, the purchaser will record:
Accounts Payable xxx
Cash xxx
Accounting for Sales of Merchandise

- Under the periodic inventory system, a seller makes only one journal entry to record
a sale of merchandise.

To record sale at a sales price:

Accounts receivable/Cash xxxx

Sales revenue xxxx
 Accounting for Sales Returns and
Allowances

- Under the periodic inventory system, only one journal entry is used to record a sales return
or allowance.

- Accounting for sales returns requires one journal entry:

1. Offsets the sales revenue generated from the transaction and reduces the amount
owed by the customer.
Sales returns and allowances xxxx
Accounts receivable/Cash xxxx
 Accounting for Sales Discount
- When making a cash payment for purchased goods, a customer is entitled to take a
cash discount only if the payment is made during the allowed discount period. If a
cash discount is taken, the seller records it in a separate account called Sales
Discounts.
- SALES DISCOUNTS is a contra-revenue account like sales return and allowances.
Both accounts are contra to, or subtracted from, gross sales revenue on the income
statement.

Payment Received Within the Discount Period Payment Received After the Discount Period

Cash xxxx Cash xxxx

Sales discounts xxxx Account receivable xxxx
Account receivable xxxx
 A. RECORDING OF PURCHASES AND RELATED TRANSACTIONS

Transactions Periodic Inventory System

Purchase of merchandise for cash Purchases xxxx

Cash xxxx

Purchase of merchandise on Purchases xxxx

account, the freight charges to be Freight In xxxx
shouldered by the buyer Accounts Payable xxxx

Return of merchandise to seller due Cash/Accounts Payable xxxx

to defect or damage (Cash or On Purchases Returns and xxxx
account) Allowances
 A. RECORDING OF PURCHASES AND RELATED TRANSACTIONS

Transactions Periodic Inventory System

Granting of allowance by seller on Cash/Accounts Payable xxxx

defective merchandise Purchases Returns and xxxx
Allowances

Payment of account less cash Accounts Payable xxxx

discount Purchase Discount xxxx
Cash xxxx

Payment of account, no cash Accounts Payable xxxx

discount taken Cash xxxx
 A. RECORDING OF PURCHASES AND RELATED TRANSACTIONS

Under the periodic inventory system:

- The purchase merchandise in an expense account PURCHASES.

- Freight charges that will be absorbed by buyer are debited to Freight-In account,
which is shown in the income statement as an addition to Purchases.

- Merchandise returns and allowances are recorded in a separate nominal account

Purchases Returns and Allowances, which is a contra expense account.

- Purchase discounts are also recorded in a separate contra expense account

Purchases Discounts.
 B. RECORDING OF SALES AND RELATED TRANSACTIONS

Transactions Periodic Inventory System

Sale of merchandise for cash Cash xxxx

Sales xxxx

Recording of cost of merchandise No Entry

sold

Sale of merchandise for cash Accounts Receivable xxxx

Sales xxxx

Recording of cost of merchandise No entry

sold
 B. RECORDING OF SALES AND RELATED TRANSACTIONS

Transactions Periodic Inventory System

Payment of freight charges on the

goods:
a. Freight charges to be Freight-out or Delivery expense xxxx
absorbed by the seller Cash xxxx

b. Freight charges to be Accounts Receivable xxxx

absorbed by the buyer Cash xxxx

Return of defective or damaged Sales Returns and Allowances xxxx

merchandise by buyer Cash xxxx

Sales Return and Allowances xxxx

Accounts Receivable xxxx
 B. RECORDING OF SALES AND RELATED TRANSACTIONS

Transactions Periodic Inventory System

Recording the cost of returned No entry

merchandise

Granting of allowance for defective Sales Returns and Allowances xxxx

or damaged merchandise Cash xxxx

Sales Return and Allowances xxxx

Accounts Receivable xxxx

Collection from customer, less Cash xxxx

discount Sales Discount xxxx
Accounts Receivable xxxx

Collection from customer beyond Cash xxxx

the discount period. Accounts Receivable xxxx
 RECORDING INVENTORY AND COST OF GOODS SOLD

- In a periodic system, the ending inventory and the cost of goods sold are recorded during the
company’s year-end closing procedures.
- The term CLOSING PROCEDURES refers to end-of-period adjusting and closing entries.

a. To set-up the inventory at the end of the period, the entry will be:
Merchandise Inventory(year-end balance) xxxx
Cost of goods sold or Income Summary xxxx

b. To close the inventory at the beginning of the period, purchases and other related accounts, the
entry will be:
Cost of goods sold or income summary xxxx
Purchase returns and allowances xxxx
Merchandise inventory(beginning balance) xxxx
Purchases xxxx
Freight in xxxx
Thank you