Notes on BK 10

Merchandising Business
 
( Merchandising Business )
 
 This refers to a business that buys and sells various products in the same form.
 It is also termed a "Trading Business".
 Products that are bought and sold are considered as "Merchandise".
 
( Merchandising Bookkeeping vs Service Bookkeeping )
 
 ( Inventory Management )
 
 This includes the proper handling and storing of all merchandise bought and sold.
 One should consider deliveries, defects, allowances and ordering systems.
 
 ( Price Consideration )
 
 Just like of a service business, merchandise is to be priced competitively to sustain
development in the market and business as well.
 One should consider mark-ups, discounts and mark-downs when the need arises.
 
 ( Monitoring of the Purchase and Sale Activity )
 
 One must be able to handle various accounts from supplier and customers.
 
( Types of Merchandising Business )
 
 ( Wholesale )
 
 A merchandising business that engages in buying and selling of merchandise in
large quantities or in volumes.
 Generally, this tends to be cheaper as privileges are given to wholesale transactions
but entails more risk.

 ( Retail )
 
 Opposite to wholesale, this merchandising business engages in buying and selling
merchandise in smaller quantities.
 Merchandise can be bought and sold by pieces, bottles and in smaller quantities.
 Quite expensive but is deemed more controllable for owner to monitor merchandise.

 
 Unlike a service business, an owner takes two roles in a merchandising set-up:
"buyer" and "seller".
  On a daily basis, various suppliers and customer are being accommodated and it is
the task of owners to handle these accounts.
 
( Merchandising Activities )
 
 There are five (5) major activities in a merchandising business.
 Different entries and transaction are identified in each activity.
 
 ( Buying/ Purchasing Procedure )
 
 The owner identifies possible supplier for their intended merchandise to be sold to
the market.
 
 ( Handling and Storing )
 
 Once merchandises are available, owners are to identify transportation and storage
of merchandise bought.
 Agreement and mode of delivery are decided by both owner and supplier as to who
will oversee such.
 For storage, owners must consider the various expenses to aid in maintaining their
merchandise like, salaries of warehousemen, supplies used, utilities and rent (if
warehouse is rented) and others.
 
 ( Goods Returned to Supplier )
 
 Unavoidable, some merchandise bought may have defects and damages.
 Owners have the right to change these merchandises if purchases follow certain
guidelines.
 Once a defect/ damage is identified, a credit memo is prepared to monitor the
deductions to be made.
 
 ( Selling Procedure )
 
 The main source of income in the merchandising business. Owners should consider
the following when pricing their merchandise:
 "Mark-up"- additional cost that is added to come up with a reasonable selling price
or SRP.
 "Mark-down"- Lowering the price of merchandise from its SRP. This is done to
eliminate old stocks for it to be replenished or replaced with new stocks.
 
 ( Return and Allowances )
 
 Like Goods Returned to Supplier, the transaction is done by the business to the
customer.
( Merchandising Accounts )
 
  To fully appreciate and monitor transaction in a merchandising business, the
following accounts are to be identified and used:
 
 ( Purchases )
 
 Accounts that refer to merchandise bought for the intention of selling.
 Considered as an ASSET account.
 
 ( Purchase Discount )
 
 This account summarizes the various discounts given by the supplier to the
business.
 Discounts are deduction given for early payments made or privileges given.
 Considered as a CONTRA-ASSET account to Purchases.
 
 ( Purchase Return & Allowances )
 
 This summarizes all the returns and allowances granted by the supplier which are
deducted to the amount of purchases made.
 Considered as a CONTRA-ASSET account to Purchases.
 
 ( Sales )
 
 Refers to merchandise sold to customer.
 Considered as an INCOME account.
 
 ( Sales Discount )
 
 Refers to all discounts granted by the business to the customer.
 Considered as a CONTRA-INCOME account to Sales.
 
 ( Sales Return & Allowances )
 
 This summarizes all the returns and allowances granted by the business from the
customers.
 Are deducted to the amount of sales made.
 Considered as a CONTRA-INCOME account to Sales.
 
 ( Freight )
 
 A term used to identify delivery of merchandise.
 Considered as an EXPENSE ACCOUNT.
 Types of Freight: "Freight-In" and "Freight-Out".
 
 ( Freight-In )
 
  Refers to delivery charges which are shouldered by the buyer.
 
 ( Freight-Out )
 
 Refers to delivery charges which are shouldered by the seller.
 
 ( Merchandise Inventory )
 
 An account that identifies merchandise that is left on- hand or unsold over a certain
accounting period.
 Considered as an ASSET account.
 
 ( Accounts Receivable )
 
 Claims or collectibles from customers for rendered service or sale of unpaid
merchandise.
 Mostly used during the selling procedure.
 Considered as an ASSET account.
 
 ( Accounts Payable )
 
 Unpaid debts to clients or to suppliers for merchandise bought.
 Mostly used during the buying/purchasing procedure.
 Considered as a LIABILITY account.
 
 ( Cash )
 
 Includes currency, coins, checking account balances, petty cash funds, and
customers' check that have not yet been deposited.
 Considered as an ASSET account.
 
( Understanding Discounts )
 
( Discount )
 
 Is a reduction made to the price of the merchandise whether bought or sold.
 
( Why give a discounts? )
 
 Encourages customer rebate and loyalty.
 Eliminate old merchandise.
 To aid in the introduction of a new merchandise.
 Can be a method to generate more income than regular priced items.
 
( Types of Discount )
 
  ( Trade Discount )
 
 A discount granted from the list price of the merchandise, and is in percent form.
 As the name suggest, it is done during the buying of merchandise or selling of it,
depending on which point of view is taken into consideration.
 
( Other Terms to Know )
 
 "LIST PRICE"- monetary value of the merchandise
 "TRADE DISCOUNT AMOUNT"- value of the discount to be deducted of the list
price
 "NET PRICE"- the price of the merchandise once trade discount is applied.
 
 ( Cash Discount )

 A discount deducted from the price of the merchandise if payment is made early to
supplier OR collection received from customers were done, and is also known as
"Early Bird Discount".
 It motivates early payments and collections within a specific date.
 Cash discounts are granted for transactions that were previously done on “Account”
basis whether as Purchase Discount or Sales Discount (POV of owner).
 Cash discounts are expressed in the form of credit term.
 
( Credit Term )
 
 It presents the available cash discount within a given period.
 It is in a form of a fraction but doesn't function as one.
 Example is "1/10, n/30".
 
( Decoding Credit Terms )
 
 ( 2/10, n/30 )
 
 If payment/ collection is made within the 10-day period after the date of purchase or
sale, a two percent (2%) cash discount is granted.
 Beyond the 10 days, no discount is granted.
 Client has 30 days to settle the account.
 
 ( 1/15, n/25 )
 
 If payment/ collection is made within the 15-day period after the date of purchase or
sale, a one percent (1%) cash discount is granted.
 Beyond the 15 days, no discount is granted.
 Client has 25 days to settle the account.
 ( 2/10, 1/15, n/30 )
 
  If payment/ collection is made within the 10-day period after the date of purchase or
sale, a two percent (2%) cash discount is granted.
 After 10 days, discount is reduced to one percent (1%) for the next 5 days.
 Beyond the 15 days, no discount is granted.
 Client has 30 days to settle the account.
 
( In other words )
 
 "Numerator"- available cash discount.
 "Denominator"- number of days to avail cash discount.
 
( Sample Problems applying Trade Discount )
 
 ( Ms. Gomez bought a casual shirt worth P 2,000 which was granted a discount
of 20%. )
 
 What is the List Price? - "P 2,000"
 How much is the trade discount amount? - "P 400"
 How much will Ms. Gomez pay for the shirt? - "P 1,600"
 
( Exercise: Solve for the missing elements )
 
 ( List Price: P 90,500, Trade Discount: 35% )
 
 Trade Discount Amount = "P 31,675"
 Net Price = "P 58,825"
 
 ( List Price: P 7,650, Trade Discount: 10% )
 
 Trade Discount Amount = "P 765"
 Net Price = "P 6,885"
 
 ( List Price: P 10,165, Trade Discount: 3% )
 
 Trade Discount Amount = "P 304.95"
 Net Price = "P 9,860.05"

 
( Sample Problems applying Cash Discount )
 
  ( On June 1, Ms. Rogers sold bulks of merchandise of P 10,000 to Ms. Dixon,
on account with terms: 2/10, n/30. On June 10, Ms. Ms. Dixon paid her
account. )
 
 What is the List Price? - "P 10,000"
 What is the Trade Discount? - "N/A"
 When did the transaction happen? - "June 1"
 Which credit term will apply? - "2/10"
 On June 10, how much will Ms. Dixon pay? - "P 9,800"
 
 ( On Oct. 15, Mr. Jorge purchased P 9,000 worth of merchandise from his
supplier, on credit. He was granted 10% discount and with terms: 2/15, 1/20,
n/40. Mr. Jorge decided paid his supplier on November 3. )
 
 What is the List Price? - "P 9,000"
 What is the Trade Discount? - "10%"
 When did the transaction happen? - "October 15"
 Which credit term will apply? - "1/20"
 On June 10, how much will Ms. Dixon pay? - "P 8,019"
 
( Exercise: Define the following credit terms in statement form. )
 
 ( 3/10, n/15 )
 
 If payment/ collection is made within the 10-day period after the date of purchase or
sale, a three percent (3%) cash discount is granted. Beyond the 10 days, no discount
is granted. Client has 15 days to settle the account.
 
 ( 1/15, n/20 )
 
 If payment/ collection is made within the 15-day period after the date of purchase or
sale, a one percent (1%) cash discount is granted. Beyond the 15 days, no discount
is granted. Client has 20 days to settle the account.
 
 ( 5/15, 2/25, n/30 )
 
 If payment/ collection is made within the 15-day period after the date of purchase or
sale, a five percent (5%) cash discount is granted. After 15 days, discount is reduced
to two percent (2%) for the next 10 days. Beyond the 25 days, no discount is
granted. Client has 30 days to settle the account.

 
( Exercise: Convert the statements into the correct credit terms. )
 
  ( Transaction is good for 35 days. A three percent (3%) cash discount is given
within a 15- day period after date of sale/purchase. Afterwards, no cash
discount is given. )
 
 3/15, n/35
 
 ( A two percent (2%) cash discount is given if payment is made within a 10-day
period. After 10 days, one percent (1%) cash discount is given for the next 5
days. Transaction is good for 20 days with no more cash discount. )
 
 2/10, 1/15, n/20
 
 ( A one percent (1%) cash discount is given if payment is made within a 15-day
period. No cash discount is given further until the 20-day period. )
 
 1/15, n/20
 
 ( Transaction is good for 30 days. If payment is made within the 15-day period
after the date of purchase or sale, a two percent (2%) cash discount is granted.
After 15 days, a cash discount of one percent (1%) is given if payment is made
on the next five days. Beyond the 20-day period, no discount is granted. )
 
 2/15, 1/20, n/30
 
( Number of days for each month )
 
 January = "1 - 31"
 February = "1 - 28 or 29"
 March = "1 - 31"
 April = "1 - 30"
 May = "1 - 31"
 June = "1 - 30"
 July = "1 - 31"
 August = "1 - 31"
 September = "1 - 30"
 October = "1 - 31"
 November = "1 - 30"
 December = "1 - 31"

 
( Exercise: Determine the last day of discount from the given credit term. )
 
 ( Date of Entry: March 1, Credit Term: 1/15, n/30 )
 
 First Term = "March 2 - March 16"
 Second Term = "March 17 - March 31
 Third Term = "X"
 Fourth Term = "X"
 
 ( Date of Entry: August 12, Credit Term: 2/15, 1/25, n/40 )
 
 First Term = "August 13 - August 27"
 Second Term = "August 28 - September 6"
 Third Term = "September 7 - September 21"
 Fourth Term = "X"
 
 ( Date of Entry: November 8, Credit Term: 3/5, 2/10, 1/15, n/20 )
 
 First Term = "November 9 - November 13"
 Second Term = "November 14 - November 18"
 Third Term = "November 19 - November 23"
 Fourth Term = "November 24 - November 28"
 
( Exercise: Solve for what is asked by applying both Trade and Cash discount. )
 
 ( Ms. Amber Lee bought wholesale, 30 boxes of ballpens worth P5,800 on
March 20. She was granted a 2% discount and agreed settlement for two
months. Terms agreed were: 5/30, 3/45, n/60. )
 
 Solve for the NET PRICE. = "P 5,684"
 If settlement was made on April 28, how much will Ms. Lee pay? Show your
answer with supporting details/explanation. = "P 5,513.48"
 "Since it will be settled on April 28, she will get a three percent (3%) discount. So
net price - trade discount amount would result to this answer."