total purchases of goods available for sale

ACCOUNTING CYCLE FOR during the current period.

MERCHANDISING BUSINESS
SALES RETURNS
- customer returns stock if found defective or
MERCHANDISING BUSINESS
not the right stock ordered.
- Carries a stock of goods called
Merchandise Inventory
SALES ALLOWANCE
- Computes for profit by putting a mark up on
- or instead of returning the stock, the
the cost of merchandise
customer keeps it but asks for a reduction in
- Determines gross profit by deducting from
the price.
sales the cost of sales or the cost of goods
sold.
TRADE DISCOUNT
- Classifies operating expenses into two:
- reduction from the list price given to
selling and administrative which are
customers at sale date.
practically the same except for freight for
- not recognized in the books or general
goods delivered
journal
- Determines taxable net profit by deducting
- granted to a customer for the following
from gross profit the operating expenses.
reasons:
- Determine tax obligations
● For being a regular customer
● Customer buys in bulk or wholesale
PURCHASE
● Customer pays in cash
- Supported by a supplier’s invoice
SALES DISCOUNT
SALES
- reduction from the invoice price given to the
- Supported by a sales invoice
customer for prompt payment made.
- granted to account customers.
PERPETUAL METHOD
- recorded in the books or general journal
- record merchandise inventory
when discount is given.
- record cost of sales and sales revenue
- a contra revenue account like Sales Returns
- balance at year end should tally with
and Allowances
inventory count
- granted only after the total account is paid
- There is complete or continuous recording of
within the discount period.
the merchandise (cost price, freight,
insurance), from the time it is purchased to
PURCHASE RETURNS
the time it is sold. This method is usually
- goods bought may be returned if found
adopted by a business which sells high
defective or not as ordered.
priced - low volume goods such as car
dealers and real estate companies.
PURCHASE ALLOWANCES
- purchasers may opt to keep the defective
PERIODIC METHOD
merchandise but will ask for a reduction in
- record purchases
the invoice price.
- record only sales revenue
- count unsold and record ending inventory
PURCHASE DISCOUNT
- Merchandise bought is recorded as
- a rebate or reduction in the invoice price
Purchases representing goods available for
granted to the purchaser for paying promptly
sale. Adds freight in and deducts returns,
its account. Since it is granted at payment
allowances and discounts. No entry is made
date, it is recognized in the book or general
for the cost of merchandise sold. It is only at
journal.
the end of the accounting period that the
cost of goods sold will be determined after
Cash Discount Terms
making an inventory count of the goods that
When goods are sold or purchased on credit,
were not sold and deducting this from the
the term of payment depends on the custom of the
industry. The usual credit terms which will appear on OPERATING EXPENSES
the invoices are: - need not be classified if the business has
● n/30 - the gross amount is due within 30 only a small office to administer to its needs.
days from the date of sale
● 2/10, n/30 - the account is due within 30 INPUT TAX
days with a 2% discount given if the account - Each time a purchase is made a 12% VAT is
is paid within 10 days from date of included increasing the amount to be paid by
sale/purchase. the buyer which must be debited.
● 3/EOM, n/60 - the account is due within sixty - This tax in turn may be shifted when it sells
days with a 3% discount given if the account goods to customers.
is paid until the end of the month from the
date of sale/purchase OUTPUT TAX
● 2/10, 1/15, n/n/630 - the account is due - Each time a sale is made VAT is charged to
within thirty days with a 2% discount offered the customer increasing the amount to be
if the account is paid within ten days from collected which is credited.
date of sale/purchase, but only a 1%
discount if the account is paid after ten days TAX PAYABLE
but within fifteen days from sale or purchase - Input tax and output tax are closed every
date. month with the difference credited to a tax
payable to the government if the output tax is
FREIGHT IN higher than the input tax.
- The cost of transporting the goods may be
paid by the buyer or by the seller depending VALUE ADDED TAX
on the term of shipment. - Paid monthly and a report filed to the BIR 25
days after each quarter.
FOB SHIPPING POINT
- ownership passes to the buyer as soon as PERCENTAGE TAX
seller turns over the goods to a common - instead of a 12% VAT, is levied if annual
carrier for delivery of the goods to the buyer gross revenues exceed P250,000 but does
not reach P3,000,000. In this case, the
FOB DESTINATION company does not record an Output Tax
- free on board at destination, the seller is when recording sales nor does it record
liable for the freight and is still considered Input Tax when recording purchases or
owner of the goods until it reaches the services received even if there is a 12% VAT
buyer’s place. included in the price.

FREIGHT OUT Who is exempt from VAT or privilege tax?

- a selling expense Some companies are exempted from paying
VAT or privilege tax. If annual gross revenues or
SELLING OR DISTRIBUTION EXPENSES receipts do not exceed P250,000 or if the business is
- incurred in storing, promoting, packaging, a/an : provider of educational services duly accredited
and delivering the merchandise such as by the DECS or CHED; publishers, dealers and
Freight Out, Sales Salaries, Advertising, distributors of magazines, newspapers, books and
Sales Commission, and Depreciation bulletins; seller of agricultural and marine products in
Expense - Store Furniture and Equipment. its original state, poultry, livestock, fish, to name a few.

GENERAL OR ADMINISTRATIVE EXPENSES STATEMENT OF INCOME

- needed in the general administration of the - shows the costs and expenses according to
office other than the store such as Bad Debts function: cost of sales, selling expenses,
Expense, Office Supplies Expense, Office administrative expenses and finance cost
Salaries, Utilities Expense, and Depreciation
- Office Furniture and Equipment.
 Steps in a Purchase Transaction:
OPERATING CYCLE OF MERCHANDISING
BUSINESS
Whenever a purchase or sale or
merchandise occurs, thebuyerandtheseller should
MERCHANDISING ENTITY agree on the price of the merchandise, the payment
- purchases inventory, sells the inventory and terms,and the party to shoulder the transportation
uses the cash to purchase more inventory costs.
and the cycle continues.
The procedures are as follows:
CASH SALES 1. When certain items are needed, the user
- The cycle is from cash to inventory and back department fills in a purchase requisition
to cash. form and sends it to the purchasing
department.
SALES ON ACCOUNT 2. The purchasing department then prepares a
- The cycle is from cash to inventory to purchase order after checking with the price
accounts receivable and back to cash. lists, quotations or catalog of approved
vendors.
Source Documents: 3. After receiving the purchase order, the seller
1. SALES INVOICE - is prepared by the seller of forwards a sales invoice to the purchaser
goods and sent to the buyer. It specifies the upon shipment of the merchandise.
amount of sales, and the transportation and 4. Upon receiving the shipment of
payment terms. merchandise, the purchaser's receiving
2. BILL OF LADING - document issued by the department sees to it that the terms in
carrier-trucking,shipping or airline that specifies purchase order are complied with, and
contractual conditions and terms of delivery such prepares a receiving report.
as freight terms, time, place and the person 5. Before approving the invoice for payment,
named to receive the goods. the accounts payable department compares
3. STATEMENT OF ACCOUNT - formal notice to copies of purchase requisition, purchase
the debt or detailing the accounts already due. order, receiving report and sales invoice to
4. OFFICIAL RECEIPT - evidences the receipt of ensure that quantities,descriptions, and
cash by the seller. prices agree.
5. DEPOSIT SLIPS - a validated deposit slips
indicates that cash and checks were actually
deposited to the account holder.
6. CHECK - written order to a bank by a deposit or
to pay the amount specified in the check from his
checking account to the person named in the
check.
7. PURCHASE REQUISITION - is a written request
to the purchaser of an entity from an employee of
the same entity the goods be purchased.
8. PURCHASE ORDER - is an authorization made
by the buyer to the seller to deliver the
merchandise as detailed in the form.
9. RECEIVING REPORT - is a document containing
information about the goods received from a
vendor.
10. CREDIT MEMORANDUM - a form used by the
seller to notify the buyer that his account is being
decreased due to errors or other factors requiring
adjustments.