Topic 4: Accounting for Merchandising

Merchandising Business ●​ Buy and Sell

Income Statement for Merchandising Business

Revenue from Sales ●​ Arise from the sale of goods

●​ Tells how much the business paid for the goods

Cost of Good Sold
or merchandise sold

●​ Tells the difference between the revenue from

Gross Margin from Sales
sales and cost of good sold

●​ Expenses other than the cost of good sold

Operating Expenses
incurred to run the merchandising business

●​ Net income is what is left after deducting

Net Income
operating expense from gross margin

Trade Discount
 ●​ Buyers and sellers do not record the list price
Catalog or List Price
and trade discounts in their books of accounts.

●​ A percentage reduction from a published list

Trade Discount price granted to customers such as wholesaler
buying frequently and in large quantities.

●​ Basic for invoicing and recording after trade

Invoice Price
discount is deducted from a published list price.

Illustration: Company S sold merchandise with a list price of P120,000 subject to trade
discount of 15% and 10%.

Company S Company B

Accounts Receivable 91,800 Purchases 91,800

Sales 91,800 Accounts Payable 91,800

To record sales on account To record purchases on account

To compute:
List Price P120,000
Less: 1st Trade Discount (15% x P120,000) 18,000
Balance after 1st discount P102,000
Less: 2nd Trade Discount (10% x P102,000) 10,200
Invoice Price P91,800
 Returns and Allowances

●​ Defective, poor quality or erroneous

Returns
merchandise returned and delivered to source

●​ Merchandise with some defects accepted by

Allowance customers provided a reduction in the invoice
price.

Illustration: On May 9, 2020, Company S issued a Credit Memo to Company B for

defective merchandise returned amounting to P15,000.

Illustration: Defective merchandise returned for cash purchase P21,000.

Cash Discounts

●​ To encourage customers to pay their accounts

Discount
promptly or earlier, sellers offer a cash discount.

●​ 2% discount if paid within 10 days. Payable in 30

2/10, n/30
days.

●​ 2% discount if paid within 10 days, 1% discount if

2/10, 1/15, n/30
paid within 15 days. Payable in 60 days.

●​ 2% discount until the end of the month only even

2/eom, n/60
if purchased late. Payable in 60 days,

●​ 2% discount if paid on or before the 10th day of

2/10/eom, n/60
the following the month of sale
Illustration: Company S sold P120,000 worth of merchandise to Company B on May 2,
2020. Term 2/10, 1/20, n/60.

Income Statement Presentation

Transportation Cost

●​ The buyer agreed to shoulder all the

transportation cost from the point of shipment
up to the point of destination.
FOB Shipping point
●​ When will the buyer receive the title of the
goods? The buyer receives the title to the goods
at the shipping point.

●​ The seller agreed to shoulder all the

FOB Destination transportation cost from shipping point up to the
destination point.
 ●​ When will the buyer receive the title of the
goods? The buyer received title to the goods at
point of destination.

●​ When the seller pays the transportation cost at

Freight Prepaid
the time of shipment.

●​ The buyer pays the transportation costs upon

Freight Collect
receipt of the goods at the place of destination.

●​ The Shipping term is FOB shipping point, so

transportation cost is to be shouldered by the
FOB Shipping point, Freight buyer.
Collect ●​ The buyer pays the transportation cost.
●​ Si buyer ang dapat na magbabayad; si buyer
ang nagbayad.

Illustration:

●​ The Shipping term is FOB shipping point, so

transportation cost is to be shouldered by the
buyer.
FOB Shipping Point, Freight
●​ The seller prepaid the freight but it is charged to
Prepaid
the buyer.
●​ Si buyer ang dapat na magbabayad pero
inabonohan ni seller.

Illustration:
 ●​ The shipping term is FOB destination, so
transportation cost is to be shouldered by the
seller but the buyer advanced the payment of
the freight.
FOB Destination, Freight
●​ The buyer paid the freight and will be collected
Collect
from the seller because the goods in transit are
still owned by the seller.
●​ Si seller ang dapat na magbayad, pero
inabonohan ni buyer

Illustration:

●​ The shipping term is FOB destination, so

transportation cost is to be shouldered by the
seller.
FOB Destination, Freight
●​ The seller paid the freight and will not be
Prepaid
collected from the buyer because the goods in
transit are still owned by the seller.
●​ Si seller ang dapat magbayad; si seller ang
 nagbayad

Illustration:

Cost of Goods Sold

Accounting System for Inventories

●​ Inventory management that provides detailed

records of real-time transactions of received or
Perpertual Inventory
sold stock and continuously shows the cost of
System
goods on hand
●​ Uses the Merchandise Inventory Account

●​ A method of inventory valuation for financial

reporting purposes in which a physical count of
Periodic Inventory System
the inventory is performed at specific intervals.
●​ Uses the Purchases and Sales Account

Illustration:
 Transactions Perpetual Inventory Periodic Inventory

Dr: Merchandise Inventory,

a.​ Purchased Dr: Purchases, 500,000
500,000
merchandise on Cr: Accounts Payable,
Cr. Accounts Payable,
account, P500,000 500,000
500,000

Dr: Merchandise Inventory,

b.​ Paid transportation Dr: Freight In, 20,000
20,000
cost, P20,000 Cr: Cash, 20,000
Cr: Cash, 20,000

Dr: Accounts Payable,

c.​ Returned P30,000 Dr: Accounts Payable
30,000
worth of goods Cr: Purchases Returns and
Cr: Merchandise Inventory,
purchased. Allowances
30,000

Dr: Accounts Payable, Dr: Accounts Payable,

470,000 470,000
d.​ Paid within the
Cr: Merchandise Inventory, Cr: Purchase Discount,
discount period.
9,400 9,400
Cr: Cash, 460,000 Cr: Cash, 460,000

e.​ Merchandise Dr: Accounts Receivable,

costing P100,000 200,000
Dr: Accounts Receivable,
were sold on Cr: Sales, 200,000
200,000
account for
Cr: Sales, 200,000
P200,000. Terms Dr: Cost of Good Sold
2/10, n/30. Cr: Merchandise Inventory

Dr: Sales Returns and

Allowances, 40,000
Cr: Accounts Receivable,
f.​ Merchandise Dr: Sales Returns and
40,000
costing P20,000 Allowance, 40,000
were returned sold Cr: Accounts Receivable,
Dr: Merchandise Inventory,
for P40,000. 40,000
20,000
Cr: Cost of Goods Sold,
20,000

g.​ Collected within the Dr: Cash, 156,800 Dr: Cash, 156,800
 discount period. Dr: Sales Discount, 3,200 Dr: Sales Discount, 3,200
Cr: Accounts Receivable, Cr: Accounts Receivable,
160,000 160,000

Value Added Tax (VAT)

●​ A form of sales tax

●​ It is a tax on the consumption levied on the sale
of goods and services and on the imports of
VAT
goods in the Philippines.
●​ It is an indirect tax which can be passed to
consumers.

●​ 12% Input VAT is paid by suppliers + purchase

VAT for Buyers price - Invoice Price
●​ Normal Balance – Debit

●​ 12% Output VAT + selling price = Invoice Price

VAT for Sellers
●​ Normal Balance – Credit

●​ VAT Payable is remitted to the BIR

VAT Payable
●​ 12% Output VAT – 12% Input VAT = VAT Payable

Illustration: