ACC-101: FINANCIAL ACCOUNTING AND REPORTING

LESSON 4:
1ST SEMESTER | A.Y. 202Y – 202Y
LECTURER: SIR/MS.

Merchandising Business  Deduction from sales—debited when defective goods are

returned by the buyer; credit—cash
Merchandising Business
Sales Discount
 It is engaged in buying and selling of goods for profit.
o The accounting cycle will be the same as the service  It is an account off the regular price of goods that is
type of business. granted for early payment
o Inventory systems of recording merchandise  Contra-Sales Account
inventory.
o Invoice price and list price. Purchases
o Trade discount and cash discount.
 It is the accumulated cost of all merchandise bought for
o Freight terms.
resale during an accounting period.
o Shipment terms.
 It is debited when gods or merchandise are bought either
o Income statement.
on account or on cash basis.
Merchandising
Purchase Returns and Allowances
 It is the process of buying and selling merchandise.
 Merchandise returned by the company to the suppliers
Merchandise  This is a deduction from purchases.
 This is credited when defective merchandise is returned to
 It refers to goods for sale in the ordinary course of the supplier.
business operations.  Contra-Purchase account.

Merchandise Inventory Account Purchase Discounts

 An asset account of the firm representing unsold goods.  This account is credited when the supplier granted the
 Goods for sale buyer an amount of discount.

Sales Cost of Goods Sold

 Account used for goods sold to customers.  Refers to the amount of goods sold to customers.
 This is the revenue account for a merchandising type of  This is the biggest expense account of a merchandising
business. business
 An account only for Perpetual Inventory System
Sales Returns and Allowances  For Periodic Inventory System, accountant prepare a
Statement of Cost of Goods Sold
 Occur when customers return the products for reasons
such as but not limited to defects
 It may result from the return of any unsatisfactory
merchandise

Periodic Inventory System

 A traditional periodic inventory system operates as follows:

a) When merchandise is purchased, its cost is debited to an account called Purchases.
b) 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.
c) As the inventory records are not updated as transactions occur, there is no inventory subsidiary ledger.
d) At year end, a complete physical count of the merchandise on hand is conducted. The COGS for the entire year is then
determined.

(Inventory, beg, + Purchases - Inventory, end. = COGS)

 The cost of the goods bought is debited to an account called Purchases, which is classified as part of the account Cost of Goods
Sold upon sale or as Merchandise Inventory, an asset account, if unsold.
 The Purchases account at the end of the fiscal period appears in the Statement of Comprehensive Income. It determines the
inventory on hand by physically counting the merchandise in the storeroom.
 The counted inventory becomes the Merchandise Inventory at the end of the accounting period.
 This is what we usually do
 Purchases = pag bumili ka ng merchandises (para sa paninda mo)
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 We do not maintain stock card

Recording Of Purchases and Related Transactions

Transactions Periodic Inventory System

Purchase of merchandise for cash. Purchases XX
Cash XX
Purchase of merchandise on account, Purchases XX
freight charge to the buyer. Freight - in XX
Accounts payable XX
Return of merchandise to seller due to Cash or Accounts payable XX
damage or defect. Purchase returns and allowances XX
Granting of allowance on defective Cash or Accounts payable XX
merchandise. Purchase returns and allowances XX
Payment of accounts less cash discount. Accounts payable XX
Purchase discount XX
Cash XX
Payment of account, no cash discount Accounts payable XX
taken. Cash XX

Recording Of Sales and Related Transactions

Transactions Periodic Inventory System

Sale of merchandise for cash. Cash XX XX
Sales
Sale of merchandise on account. Accounts receivable XX
Sales XX
Payment of freight charges on the goods Freight-out XX
absorbed by the seller. Cash XX
Payment of freight charges on the goods Accounts receivable XX
absorbed by the buyer. Cash XX
Return of defective merchandise by the Sales returns and allowances XX
buyer. Cash or Accounts receivable XX
Granting of allowance for defective or Sales returns and allowances XX
damaged merchandise. Cash or Accounts receivable XX
Collection from customer, less discount. Cash XX
Sales discount XX
Accounts receivable XX
Collection from customer beyond the Cash XX
discount period. Accounts receivable XX

Perpetual Inventory System

 In a Perpetual inventory system, an entity keeps a continual record of the transaction affecting the quantity and amount of
inventory.
 Merchandising transactions are recorded as they occur. All transactions affecting the inventory, the asset account “Merchandise
inventory” is used.
 Everytime the inventory account is affected, the Merchandise inventory account is recorded and therefore will change.
 The quantity and amount of inventory is determined right away because of this.
 The account Cost of goods sold is used when inventory is sold and/or returned. Thereby two entries are required when the
inventory are sold and/or returned.
o The company maintains detailed records of the cost of each inventory item and continuously show the inventory that should
be on hand.
o This is also known as the stock card system.
o This record of inventory ins and outs is called the stock card. the stock card readily provides the balance of inventory as of
a given date. It also easily determines the total purchase and cost of sales made during the period.
o e.g. – jewelry, vehicles, furniture, appliance
o Maintaining of stock card
o Stock Card—everytime may movement yung inventory, dito mo irerecod

Example:
Date Purchase Sold Unit Cost Total
1/1 1,000 1 1,000
1/31 1,000 1 2,000
2/2 500 1,500

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 o By simply looking at the stock card, alam mo na kung ilan at magkano inventory mo
o Whether there is an increase or decrease, merchandise inventory account is used
o COGS is used when inventory is sold

Recording Of Purchase and Related Transactions

Transactions Perpetual Inventory System

Purchase of merchandise for cash. Merchandise inventory XX
Cash XX
Purchase of merchandise on account, the freight Merchandise inventory (Freight included) XX
charges to be shouldered by the buyer. Cash or Accounts Payable XX
Return of merchandise to seller due to defect and Cash or Accounts payable XX
damage. Merchandise inventory XX
Granting of allowance by seller on defective Cash or Accounts payable XX
merchandise. Merchandise inventory XX
Payment of accounts less cash discount. Accounts payable XX
Merchandise inventory XX
Cash XX
Payment of account, beyond the discount period. Accounts payable XX
Cash XX

Recording Of Sales and Related Transactions

Transactions Perpetual Inventory System

Sale of merchandise for cash. Cash XX
Sales XX
Cost of goods sold XX
Merchandise inventory (at cost) XX
Sale of merchandise on account. Accounts receivable XX XX
Sales
Cost of goods sold XX
Merchandise inventory (at cost) XX
Payment of freight absorbed by the seller. Freight-out XX
Cash XX
Payment of freight absorbed by the buyer. Accounts receivable XX
Cash XX
Return of defective merchandise by the Sales returns and allowances XX
buyer. Cash or Accounts receivable XX
Recording the cost of returned Merchandise inventory (at cost) XX
merchandise. Cost of goods sold XX
Granting of allowance for defective or Sales returns and allowances XX
damaged merchandise. Cash or Accounts receivable XX
Collection from customer, less discount. Cash XX
Sales discount XX
Accounts receivable XX
Collection from customer beyond the Cash XX
discount period. Accounts receivable XX

o Sale of Merchandise
Sales = amount with markup already
Cost of Goods Sold = amount kung magkano bili mo dun sa merchandise (merchandise inventory at cost)

SUMMARY

Periodic Inventory System

Buyer = Purchases
Seller = Sales

Perpetual Inventory System

Buyer = Merchandise Inventory
Seller = Sales with COGS & Merchandise Inventory

Trade Discount VS. Cash Discount

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TRADE DISCOUNT

 Trade discount is a direct deduction to the List price.

 This is not recorded.
 This is used to reduce the list price to actual sales price which may be due to the volume of transactions (for example, discounts
for bulk orders).
 This is given to customers to induce or promote sale.
 Invoice price is what we record
 Whatever you are a buyer or a seller—trade discount is not recorded

Example: Invoice price, P100,000; 10% trade discount; terms 2/10;n/30

List price P100,000

Less: 10% trade discount 10,000
Invoice price 90,000

Trade discount terms 10%; 10%: 10%

Example:

List price P500,000

List price P500,000

Less: 10% trade discount (500,000 x 10%) 50,000
Balance 450,000
Less: 10% trade discount (450,000 x 10%) 45,000
Balance 45,000
Less: 10% trade discount (405,000 x 10%) 405,000
Invoice price P364,500

Shortcut: P500,000 x .9 x .9 x .9 = P364,500

CASH DISCOUNT

 Cash discount is a deduction to the Invoice price.

 It is recorded.
 It is called Sales discount on the part of the seller and Purchase discount on the part of the buyer.
 It is given to customers to encourage payment within the discount period.

Invoice price P90,000

Less: 2% discount 1,800
Net price 88,200

 Example:

Cash discount terms: 2/10;n/30 - means the buyer receives a 2% cash discount if the account is paid within 10 days. After
10 days, no discount will be received. However, the account should be paid in 30 days.

Freight

Freight-In Account

o It is an account used by the buyer for the cost of delivery expenses.

o This is when the buyer shoulders the cost of delivery.
o Account used by the buyer representing amount paid for delivering the merchandise.
o This is also called transportation-in and added to the amount of Purchases in computing for Net Purchases.
o This is debited if the business shoulders the payment for the delivery of goods bought
o If you are the buyer, papunta sayo yung merchandise
o An addition to your purchases account

Freight-Out Account

o It is an account used by the seller for delivering the goods to the buyer.
o This is an expense account of the seller.
o Account used by the seller representing cost of delivering the merchandise to the buyer.

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 o This is an expense account of the seller.
o This is one of the operating expenses of the business.
o This is debited upon payment of the delivery of the goods sold.
o If you are the seller
o Part of selling expense

Freight Prepaid

o This means that the seller paid the delivery expenses when transporting the goods.
o The amount of shipping cost paid in advance by the seller

If buyer has the responsibility to shoulder the freight cost, but seller shoulder first the shipping cost (Freight Prepaid)

Accounts Receivable xx
Cash xx

Freight Collect

o This means that the buyer will pay the transportation expenses once the merchandise is delivered to him
o The amount of shipping cost paid by the buyer once the goods are received.

If the buyer will already pay for the transportation in

Freight In xx
Cash xx

Freight on Board (FOB) terms

o Who owns the merchandise while it is in transit?

o FOB shipping point - buyer shoulders the cost of freight.
o FOB destination - seller shoulders the cost of freight.
o Note: Whoever shoulders the cost of freight will be the owner of the merchandise while it is still in transit.

FOB Shipping point – buyer shoulders the cost of freight.

o This means that the purchaser has agreed to shoulder all the shipping costs and the purchaser receives title to the goods at
shipping point.

Freight – in xx
Cash or Accounts payable xx

FOB Destination - seller shoulders the cost of freight.

o This means that the seller has agreed to pay all the shipping costs and the purchaser receives title to the goods at the point
of destination.

Freight – out xx
Cash or Accounts payable xx

There are several combinations of freight on board (FOB) and freight payment as discussed below:

Terms Memo
FOB shipping point, freight collect The goods are already owned by the buyer while in transit, and
therefore he should pay for the freight. The freight payment is
freight collect which means the buyer shall pay the freight
forwarding
company.
FOB shipping point, freight prepaid The goods are already owned by the buyer while in transit, and
therefore he should pay for the freight. The freight payment is
freight prepaid which means the seller has already paid it. The
seller should increase his receivables from the buyer, and in the
same process the buyer should increase his payable to the seller.
FOB destination, freight collect The goods are still owned by the seller while in transit, and
therefore he should pay for the freight. The freight payment is
freight collect which means the buyer will pay the freight. The
seller should decrease his receivables from the buyer, and in the

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 same process the buyer should decrease his payable to the
seller.
FOB destination, freight prepaid The goods are still owned by the seller while in transit, and
therefore he should pay for the freight. The freight payment is
freight prepaid which means the seller has already paid the
freight.

(1) FOB Shipping Point – Freight Collect computations to arrive at the amount of net income
(multiple-step form).
SELLER  The main source of revenue for a merchandising business
— No Entry is the account Sales while for a service type of business,
account such as Service revenue, Professional fees and the
BUYER likes are being used.

Freight In xx
Cash xx
GROSS PROFIT

(2) FOB shipping point – Freight Prepaid Net Sales xx

Less: Cost of Goods Sold xx
SELLER Gross Profit xx

Accounts Receivable xx
Cash xx

NET INCOME
BUYER
Net Sales xx 100
Freight In xx
Less: Cost of Goods Sold xx 50
Accounts Payable xx
Gross Profit xx 50
Less: Operating Expenses xx 25
Net Income from Operation xx 25

(3) FOB Destination – Freight Collect

o Sales have corresponding mark-up already
SELLER
o Purchase Price is when you buy a bicycle or sale
o Gross Profit is the initial profit, in which expenses are not
Freight Out xx
yet deducted
Accounts Receivable xx
o Net Income is your profit that expenses are already
deducted
BUYER

Accounts Payable xx
NET SALES
Cash xx
Sales xx
Less: Sales Discounts xx 15
(4) FOB Destination – Freight Prepaid
Sales Returns xx 25 xx 40
SELLER Net Sales xx

o Sales (Cash Sales / Credit Sales) Sales on Account

Freight Out xx
Cash xx

NET PURCHASES
BUYER
Purchases xx
— No Entry Add: Freight-In xx
Total xx
Less: Purchase Discounts xx
Statement of Comprehensive Income for a Merchandising Purchase Returns and Allowances xx xx
Business Net Purchases xx

 For a service type of business where we simply compare o Freight-In = added to purchases
the amount of revenue and expenses (single-step form). o Freight-Out = selling expense
A merchandising business will undergo a series of

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COST OF GOODS SOLD o Selling Expenses - expenses incurred for the sale of
merchandise
Merchandise Inventory, Beginning xx 0  Ex. Freight-out, advertising. commission, salaries-
Add: Net Purchases xx 500 store (basta me store)
Total Goods Available for Sale xx 500
Less: Merchandise Inventory, Ending xx 150 o General And Administrative Expenses - expenses incurred
Cost of Goods Sold xx 350 in the office or administrative concerns
 Ex. Salaries - office salaries, office supplies expense,
insurance, rent - office, bad debts/doubtful accounts
o e.g. – Squid Balls Business (accounts receivables - not collected)
Our Merchandise Inventory, Beginning is 0 because
we still don’t have anything for sale
o If we bought a merchandise—that is a purchase (at cost /
Comparison of Income Statements
acquisition price)
o It means that we have already merchandise ready for sale NATURE OF EXPENSE METHOD
o Merchandise Inventory, Ending is when we count the
remaining stock or inventory after a day of operating — Straightforward method
o In the following day, Merchandise Inventory, Beginning is — Single-step approach
no longer 0—the Ending Balance will be the Beginning — Expenses are aggregated or combined in the income
Balance of the following day statement according to their nature
o Merchandise Inventory, Ending is presented as Asset — No allocation of operating expenses between
(Balance Sheet functional classifications

FUNCTION EXPENSE METHOD

OPERATING EXPENSES — Classifies expenses according to their function as part

of cost of sales, distribution/selling, administrative,
Selling Expenses xx and other operating expenses
General and Administrative Expenses xx
Total Operating Expenses xx

Business Documents

Business Documents

The following are the usual business documents used in merchandising transactions:

Business Document Issued by MEMO

Purchase order Buyer Details the quantity, specifications, significant dates, buyer, and other
important matters with regards to the merchandise being ordered.
Receiving report Buyer Validates the details of the merchandise received.
Delivery receipt Seller This is to be signed by the buyer to confirm the correctness of the
merchandise delivered to him in good condition.
Sales invoice Seller This is a more formal document confirming the transaction entered
into by the seller and the buyer with the needed transaction details
such as the trade terms.
Official receipt Seller A document confirming seller's receipt of money from the buver.
Billing statement Seller A formal communication to the buyer reminding him of his purchase
and its related credit terms.
Credit memo Seller A notice issued to the buyer informing him that his account, ie.
Accounts receivable has been credited, ie. decreased, due to the
merchandise the buyer retums.
Debit memo Buyer A notice issued to the seller informing him that his account, ie.
Accounts payable, has been debited, ie. Decreased, due to the
merchandise the buyer had returned.
Inventory count Buyer It shows a list of inventory physically counted as of a given date.

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