ACCO 07BC FUNDAMENTALS OF

ACCOUNTING & REPORTING

LESSON 8: ACCOUNTING FOR MERCHANDISING

BUSINESS
NATURE OF MERCHANDISING BUSINESS
• A merchandising company acquires merchandise or goods from various
suppliers and sells these goods to customers without changing its forms.
• The primary source of revenue is the sale of merchandise and the
account use for this is sales.
• The gross profit of a merchandiser is determined by deducting the cost of
sales/ cost of goods sold from sales.
• The normal operating cycle for merchandising starts from purchasing of
goods, payment to suppliers, selling these goods to customers and
collecting receivables from customers.
INVENTORY SYSTEMS
Periodic Inventory System
Characteristics:
• No detailed record is maintained for the movements of inventory.
• No updated balance for merchandise inventory
• The only way to determine the amount of cost of goods sold and ending
inventory is to conduct a physical count of goods unsold at the end of an
accounting period.
• Uses additional accounts:
- Purchases for purchase of merchandise
- Freight-in for transportation costs
- Purchase Returns and Allowances for returns to suppliers.
- Purchase Discounts for cash discounts.
INVENTORY SYSTEMS
Perpetual Inventory System
Characteristics:
 Detailed records of inventory movements are necessary.
 Inventory ledger card or stock card is maintained.
 The current balance of the inventory is always shown in the stock card.
 Merchandise inventory account is used to summarize the movements of
inventory.
 Use Cost of Goods Sold or Cost of Sales Account
INVENTORY SYSTEMS
Pro-forma entry under perpetual and periodic inventory system:
Perpetual Inventory System Periodic Inventory System
Purchased goods from suppliers on account.
Inventory xxx Purchases xxx
Accounts Payable xxx Accounts Payable xxx

Paid shipping costs for merchandise purchased.

Inventory xxx Freight-in xxx
Cash xxx Cash xxx

Returned damaged goods to suppliers.

Accounts Payable xxx Accounts Payable xxx
Inventory xxx Purchase Returns & Allowances xxx
INVENTORY SYSTEMS
Pro-forma entry under perpetual and periodic inventory system:
Perpetual Inventory System Periodic Inventory System
Payment to Suppliers within the discount period.
Accounts Payable xxx Accounts Payable xxx
Inventory xxx Purchase Discounts xxx
Cash xxx Cash xxx

Sold merchandise to customers on account.

Accounts Receivable xxx Accounts Receivable xxx
Sales xxx Sales xxx
Cost of Goods Sold xxx No Entry
Inventory xxx
INVENTORY SYSTEMS
Pro-forma entry under perpetual and periodic inventory system:
Perpetual Inventory System Periodic Inventory System
Return of damaged goods from customers.
Sales Returns & Allowances xxx Sales Returns & Allowances xxx
Accounts Receivable xxx Accounts Receivable xxx
Inventory xxx No Entry
Cost of Goods Sold xxx

Received payment from customers within the discount period.

Cash xxx Cash xxx
Sales Discounts xxx Sales Discounts xxx
Accounts Receivable xxx Accounts Receivable xxx
VARIOUS ITEMS RELATING TO PURCHASES
AND SALES
1. Freight – in or Transportation Costs
2. Discounts
3. Returns and Allowances
FREIGHT – IN OR TRANSPORTATION COSTS

Freight terms on purchases and sales are clearly indicated in the agreement
between the buyer and seller.
The freight terms are usually expressed as F.O.B (Free on Board) Shipping Point
and F.O. B. Destination.
1. FOB Shipping Point – the freight is shouldered by the buyer. The title or
ownership (risk and rewards) of the goods is transferred to the buyer at the
shipment.
2. FOB Destination – the seller shoulders the freight from shipment up to the
place of the buyer. The title or ownership (risk and rewards) of the goods is
transferred to the buyer only upon receipt of goods.
FREIGHT – IN OR TRANSPORTATION COSTS
ACCOUNTING FOR FREIGHT CHARGES
FOB Shipping Point –The title or ownership of the goods is transferred to the buyer at the
shipment. Under FOB Shipping point, the freight is shouldered by the buyer.
FOB Destination –The title or ownership of the goods is transferred to the buyer only upon
receipt of goods. under FOB destination, the seller shoulders the freight from shipment up to the
place of the buyer.
Freight Prepaid – Freight is already paid in advance by the seller before shipment, but it does
not mean that the seller is the one who is supposed to pay for the freight charges.
Freight Collect – freight is not yet paid upon shipment. The carrier will collect the shipping costs
from the buyer upon delivery. The freight is actually paid by the buyer, but it does not mean the
buyer is the one who is supposed to pay for the freight charges.
ACCOUNTING FOR FREIGHT CHARGES
No special accounting is necessary if the term of the sales contract is either FOB shipping point,
freight collect or FOB destination, freight prepaid.
However, special accounting arises when the term is either FOB shipping point, freight prepaid
or FOB destination, freight collect.

Terms of Shipment Expense of Actual Effects of claims

Payor or obligation
a. FOB Shipping Point, Freight Collect Buyer Buyer No Effect
b. FOB Shipping Point, Freight Prepaid Buyer Seller Increase
c. FOB Destination, Freight Collect Seller Buyer Decrease
d. FOB Destination, Freight Prepaid Seller Seller No Effect
ILLUSTRATION 1:
Nobenta sold merchandise to LaPambili totaling P15, 000; terms 2/10, n/30. The transportation
cost is P1, 500.
Prepare the necessary entries using the following shipping terms:
a. FOB Shipping Point, Freight Collect
Expense of buyer, paid by the buyer. No effect on claims and obligations
Nobenta (Seller)
Accounts Receivable 15, 000
Sales 15, 000

LaPambili (Buyer)
Purchases 15, 000
Accounts Payable 15, 000
Freight-In 1, 500
Cash 1, 500
ILLUSTRATION 1:
Nobenta sold merchandise to LaPambili totaling P15, 000; terms 2/10, n/30. The transportation
cost is P1, 500.
Prepare the necessary entries using the following shipping terms:
b. FOB Shipping Point, Freight Prepaid
Expense of buyer, paid by the seller. Increase on claims and obligations
Nobenta (Seller)
Accounts Receivable 16, 500
Sales 15, 000
Cash 1, 500
LaPambili (Buyer)
Purchases 15, 000
Freight-In 1, 500
Accounts Payable 16, 500
ILLUSTRATION 1:
Nobenta sold merchandise to LaPambili totaling P15, 000; terms 2/10, n/30. The transportation
cost is P1, 500.
Prepare the necessary entries using the following shipping terms:
c. FOB Destination, Freight Collect
Expense of seller, paid by the buyer. Decrease on claims and obligations
Nobenta (Seller)
Accounts Receivable 13, 500
Freight-out (delivery expense) 1, 500
Sales 15, 000
LaPambili (Buyer)
Purchases 15, 000
Cash 1, 500
Accounts Payable 13, 500
ILLUSTRATION 1:
Nobenta sold merchandise to LaPambili totaling P15, 000; terms 2/10, n/30. The transportation
cost is P1, 500.
Prepare the necessary entries using the following shipping terms:
d. FOB Destination, Freight Prepaid
Expense of seller, paid by the Seller. No effect on claims and obligations
Nobenta (Seller)
Accounts Receivable 15, 000
Sales 15, 000
Freight-out (delivery expense) 1, 500
Cash 1, 500

LaPambili (Buyer)
Purchases 15, 000
Accounts Payable 15, 000
DISCOUNTS
1. Trade Discounts – it is given to the wholesaler to encourage them
to buy larger volumes. It is not recorded in the books, only the net
amount (list price minus trade discounts) will be recorded as
purchases.
2. Cash discount – this will be granted if the buyer pays with the
discount period. It is recorded as purchase discount/sale discount
DISCOUNTS
Credit Terms - Describe the amounts and timing of payments that a buyer agrees to make in the
future.
Credit Period – the period that can pass before a customer’s payment is due.
Merchandisers normally sell their goods on credit. The most common credit terms are:

n/30 The buyer must pay their account within 30 days from invoice date.
10 EOM The buyer must pay 10 days after the end of the month.
2/10, n/30 A 2% discount will be deducted from the amount due if the buyer pays within 10 days from
the invoice date.
2/10, EOM, A 2% discount will be deducted from the amount due if the buyer pays within 10 days after
n/60 the end of the month.
5, 2/10, A 5% discount will be deducted from the list price. In addition, a 2% discount will be
n/30 deducted from the amount due if the buyer pays within 10 days from the invoice date.
ILLUSTRATION 2:
BeSay Corporation sells merchandise on account to ACCTG Company with a list price of P20,
000 under credit terms of 20%, 10%, 2/10, n/30.
Entry to record the sales transaction is:

BeSay Corporation (Seller)

Accounts Receivable 14, 400
Sales (P20, 000 x 80% x 90%) 14, 400

ACCTG Company (Buyer)

Purchases (Inventory) 14, 400
Accounts Payable (P20, 000 x 80% x 90%) 14, 400

Trade discounts are not recorded. Sales and Purchases are recorded net of trade discounts of
20% and 10%.
ILLUSTRATION 2:
BeSay Corporation sells merchandise on account ACCTG Company with a list price of P20, 000
under credit terms of 20%, 10%, 2/10, n/30.
Assume that the customer pays within the discount period, the entry is

BeSay Corporation (Seller)

Cash (14, 400 – 288) 14, 112
Sales Discount (14, 400 x 2%) 288
Accounts Receivable 14, 400

ACCTG Company (Buyer)

Accounts Payable 14, 400
Purchase Discount (Inventory) (14, 400 x 2%) 288
Cash (14, 400 – 288) 14, 112
ILLUSTRATION 2:
BeSay Corporation sells merchandise on account ACCTG Company with a list price of P20, 000
under credit terms of 20%, 10%, 2/10, n/30.
Assume that the customer pays beyond the discount period, the entry is

BeSay Corporation (Seller)

Cash 14, 400
Accounts Receivable 14, 400

ACCTG Company (Buyer)

Accounts Payable 14, 400
Cash 14, 400
RETURNS AND ALLOWANCES
If the goods are defective or in unsatisfactory condition, the buyer has the option
to return the goods to the seller and ask for refund (if the sale was made on cash
or already paid) or reduction in amount due (if the sale was on credit).
Credit Memo - issued by the seller, is a formal acknowledgement that the seller
has reduced the amount owed by the customer.
Debit Memo - issued by the buyer to inform the seller that the amount payable
has been debited for the cost of merchandise returned.
MARK – UP AND PROFIT MARGIN
Is the seller selling at a margin or at a mark-up?
Profit margin refers to sales minus the cost of goods sold
while markup refers to the amount by which the cost of a good is
increased in order to get to the final selling price.
Mark-up is an amount added to the cost price to determine the
selling price; broadly: profit.
GP = Sales – Cost of sales
Markup + Cost = Sales
MARK – UP AND PROFIT MARGIN
Assume the ALPHAMART buys a merchandise for P800 and sells it for P1, 000 to have a profit
of P200. In terms of percentage, it will be either:

Mark-up (based on cost) Margin (Sales)

Sales 125% P1, 000 Sales 100% P1, 000
Cost of Sales 100% 800 Cost of Sales 80% 800
Mark-up 25% P200 Margin 20% P200

ALPHAMART is selling at 25% Mark-up on cost ALPHAMART is selling at 20% Margin

(200 ÷ 800) (200 ÷ 1, 000)

Markup based on sales