Accounting for

Merchandising
Business
 Service Merchandising
Business Business

1 The simplest type of business Accounting is more complex than a

service business

2 Renders services to clients and

customers for a fee
Earning by buying and selling
products of merchandise

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Examples of
Merchandising
1. Grocery Store
Merchandise like meat, fruits, canned goods and
the likes.

2. Gasoline Station
Merchandise like gasoline, oil and car parts.
HOW IT
Cash

WORKS?

Accounts Buy
Receivable Merchandise

Sell

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 Service Merchandising
Business Business
REVENUE REVENUE FROM SALES
– COST OF GOODS SOLD
– EXPENSE GROSS PROFIT/MARGIN
____________________ - OPERTING EXPENSES
___ NET INCOME (LOSS)
NOTE: In merchandising business, it is necessary to
NET INCOME (LOSS) compute first the Gross Margin before deducting the
operating expenses to obtain NET INCOME.

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PARTS OF INCOME STATEMENT
REVENUE FROM SALES – COST OF GOODS SOLD = GROSS PROFIT/MARGIN
GROSS PROFIT/MARGIN - OPERTING EXPENSES = NET INCOME (LOSS)

REVENUES FROM SALES arise from sales of goods

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and merchandise

22 COST OF GOOD SOLD tells how much the merchandiser paid

for the goods or merchandised sold

33 GROSS MARGIN/GROSS PROFIT is the difference

between Revenues from Sales and Cost of Goods Sold

OPERATING EXPENSES are expenses other than the cost of

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goods sold, that are incurred in running the business

55 NET INCOME is the difference between Gross Margin and

Expense, loss if operating expenses is greater than gross margin
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Example #1
Company A reported P122,000 revenue from sales, P110,000 liabilities, P 76,000 cost of goods sold and
P5,00 for its operating expenses. How much is the net income?

REVENUE FROM SALES P 122, 000

COST OF GOODS SOLD 76,000
GROSS PROFIT/MARGIN 46,000
OPERTING EXPENSES 5,000
NET INCOME (LOSS) P 41,000

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Example #2
Company B enlisted P 36,000 for its operating expenses, P 89,000 revenues from sales, P 55,000 for cost
of goods sold and P 155,000 liabilities. How much is the net income?

REVENUE FROM SALES P 89,000

COST OF GOODS SOLD 55,000
GROSS PROFIT/MARGIN 34,000
OPERATING EXPENSES 36,000
NET INCOME (LOSS) P (2,000)

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Example #3
Given the following information below, how much is the cost of goods sold?
Sales P 175,000
Operating Expenses 28,000
Net Income 62,000

NET INCOME P 62,000

Add: OPERATING EXPENSES 28,000
GROSS PROFIT/MARGIN 90,000

REVENUE FROM SALES P 175,000

GROSS PROFIT/MARGIN 90,000
COST OF GOODS SOLD P 85,000
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Example #4
Using the following data, how much is the gross margin?
Sales P 2,755,000

Cost of Goods Sold 60% of Sales

Net Income 15% of Gross margin

REVENUE FROM SALES (100%) P 2,755,000

COST OF GOODS SOLD (60%) 1,653,000
GROSS PROFIT/MARGIN P 1,102,000

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Example #5
Using the following data, how much is the operating expenses?
Sales P 2,755,000

Cost of Goods Sold 60% of Sales

Net Income 15% of Gross Profit

REVENUE FROM SALES (100%) P 2,755,000

COST OF GOODS SOLD (60%) 1,653,000
GROSS PROFIT/MARGIN P 1,102,000

GROSS PROFIT/MARGIN P 1,102,000

NET INCOME (15% x 1,102,000) 165,300
OPERATING EXPENSES P 936,700
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Sales and Related Accounts
1. SALES
In a merchandising business, when a merchandise is sold, the
revenue is reported as sales.

Gross Sales = Cash Sales + Credit Sales

Under Accrual Accounting, revenues from sales of merchandise are
earned in the accounting period in which title of goods passes from
seller to buyer.

Invoice
A document used to record sales of merchandise for cash or for
credit. “Sales Invoice” for Seller and “Purchase Invoice” for Buyer.

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Entries
Example 1: January 2, Sheldon Company sold merchandise for cash to
Bernadette Company worth P20,000.
Sheldon Company
Cash 20,000
Sales 20,000
To record sale of merchandise for cash.

Example 2: January 4, Sheldon

Company sold merchandise to Bernadette Company worth P20,000, on credit
payable on January 8.
Sheldon Company
Accounts Receivable 20,000
Sales 20,000
To record sale of merch on account.

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2. TRADE DISCOUNTS
It is a percentage reduction from a published list price and it is immediately
deducted from list/catalog price. This may be granted to bulk buyers such as
wholesalers or dealers. Both sellers and buyers record only the invoice prices.

LIST /CATALOG PRICE – TRADE DISCOUNT = INVOICE PRICE

NOTE: TRADE DISCOUNTS AND LIST/CATALOG PRICE ARE NOT RECORDED.

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Illustration: Assume that Big Bang Company sold merchandise with a list price of P30,000
subject to 10% and 5% to Milky Way Company.

List Price P30,000

Less: 1st Trade Discount
(30,000x10%) 3,000
Balance after 1st Trade Discount P27,000 Big Bang Company (Seller)
Less: 2nd Trade Discount
(27,000x5%) 1,350 Accounts Receivable 25 650
Invoice Price P25,650
Sales 25 650

Milky Way Company (Buyer)

Alternative Computation:
Purchases 25 650
[(30,000 x .90) x .95] = P25,650 Accounts Payable 25 650

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3. SALES RETURNS
AND ALLOWANCES
It is a CONTRA REVENUE account. Normal balance is Debit.

Sales Return
used to record return of merchandise
Sales Allowances
when the customer is willing to accept the goods despite of some defects but a
reduction in invoice price is provided.

NOTE: Whether a transaction is about sales returns or sales allowance, the title to used to
describe both situations is SALES RETUNRS AND ALLOWANCES.

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Seller issues credit memorandum to evidence sales return. This memo
informs a customer that a credit has been made to his or her account for
sales return or sales allowance granted.

Entries
Example 3: On January 5, Sheldon
Company issued a credit memo to Bernadette Company for defective merchandise
returned previously purchased on January 4. The merchandise returned is worth
P5,000.

Sheldon Company

Sales Returns and Allowances 5,000

Accounts Receivable 5,000

To record merchandise returned.  

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Entries
Example 4: On January 3, Sheldon Company granted a cash refund of P 1,000 for
allowance of merchandise with minimal defects received by Bernadette Company on
January 2.

Sheldon Company

Sales Returns and Allowances 1,000

Cash 1,000
To record cash refund for sales allowance.

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4. CASH DISCOUNTS
It is a discount granted if payments are received within the cash discount terms.

Sales Discount – Seller’s POV

Purchase Discount – Buyer’s POV

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Examples of Cash Discount Terms
1. 2/10, n/30 – 2% deduction from amount due if the buyer pays in full within
10 days from the date of sales invoice. Full amount must be paid within
30 days from the date of sales invoice.
2. 2/10, 1/15, n/30 - 2% deduction from amount due if the buyer pays in full
within 10 days from the date of sales invoice. 1% deduction from amount
due if the buyer pays in full within 15 days from the date of sales invoice.
Full amount must be paid within 30 days from the date of sales invoice.
3. 2/EOM, n/60 - 2% deduction from amount due if the buyer pays in full at
end of month. Full amount must be paid within 60 days from the date of
sales invoice.
4. 2/10/EOM, n/60 – This means that the buyer may deduct 2% from the
amount due if full payment is made by the 10th day of the month following
the date of sale. Full amount must be paid within 60 days from the date of
sales invoice. 23
SALES DISCOUNT
It is debited by seller when a customer avails of cash discount. Sales Discount
and Sales Returns and Allowances are deducted from Gross Sales to get Net Sales
in the Income Statement.

Example 5: Assume that Sheldon Company received full payment from Bernadette
Company on January 10. Cash Discount terms :2/10, n/30

Sheldon Company
Cash 14 700
Computation:
Sales Discount 300 Sales Discount = 15,000x.02
Accts Receivable 15 000 Sales Discount = P 300

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Purchases and Related
Accounts
1. PURCHASES
When a merchandising business buys goods or merchandise for sale,
“Purchases” account is debited. Purchases account is used only for merchandise
purchased for sale.

If ABC Company resell “backpacks,” once they buy backpacks, a debit to purchases
account will be made because it is for sale.

If ABC Company buy an office equipment, then a debit to Office Equipment will be
made and not to Purchases because it is not intended for sale.

Purchase Invoice
Once a sale (cash or credit sale) is made between the seller and the buyer, an invoice is
issued to the buyer and the buyer calls it
“Purchase Invoice.”

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ENTRIES
Example 1: Bernadette Company bought merchandise for cash,
P10,000.
Purchases Bernadette Company
10,000
Accounts Payable 10,000
Purchased merchandise for on credit.

Example 2: June 10, Bernadette Company bought merchandise on

credit, P10,000 with terms of 2/10,n/EOM.
Bernadette Company

Purchases 10,000
Cash 10,000
Purchased merchandise for cash.

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2. PURCHASE RETURNS
AND ALLOWANCES
It is a contra account to Purchases and the normal balance is Credit.

Example 3: On June 11, Bernadette Company returned P2,000 worth of merchandise due to defects.
(Please refer to Example 2.)

Accounts Payable 2,000

Purchase Returns and Allowances 2,000

Returned merchandise due to defective merchandise.

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3. PURCHASE DISCOUNT
It is a contra account and has a normal balance of Credit used to record the deduction
made to the invoice price if the cash discount term is met. (same concept with Sales
Discount)

Example 4: On June 15, Bernadette Company paid in full.

Since June 15 is within 10 days from the date of the invoice, she will be granted a 2%
discount.

Accounts Payable 8 000

Computation:
Purchase Discount 160
Purchase Discount = 8 000x.02
Cash 7 840 Purchase Discount = P160

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APPLICATION
On October 5 of the current year, Vico Co. purchased merchandise with a list price of P
90,000. The merchandise is subject to a trade discount of 15%, 10% and 20% with a credit
terms of 2/10, n/30. (Vico Co. is a non-VAT registered business)

1. How much is the catalog price? P 90,000

2. How much is the invoice price? P 55,080
3. How much is the trade discount? P 34,920
4. How much is the cash discount? P 1,101.60
5. Up to what date is the discount period? October 15
6. If he pays on October 9, how much it should pay in full settlement
of its account? P 53,978.40
7. If he pays on October 20, how much it should pay in full settlement
of its account? P 55,080
8. At what amount should they record Purchases? P 55,080

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APPLICATION
On October 1 of the current year, Maligaya Co. purchased merchandise with a list price of
P 120,000. The merchandise is subject to a trade discount of 3%, 4% and 5% with a credit
terms of 2/10,1/15,n/30. (Maligaya Co. is a non-VAT registered business)

1. How much is the catalog price? P 120,000

2. How much is the invoice price? P 106,156.80
3. How much is the trade discount? P 13,843.20
4. How much is the cash discount when paid within 10 days? P 2,123.14
5. How much is the cash discount when paid within 15 days? P 1,061.57
6. At what amount should they record Purchases? P 106,156.80

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“ THANK YOU

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