INTRODUCTION OF MERCHANDISING BUSINESS

CHAPTER THREE
UCLM COLLEGE OF CUSTOMS ADMINISTRATION
 CHAPTER OUTLINE
1. Nature of Business
2. Inventory Systems
Periodic and Perpetual Inventory
3. Discount Terms
4. Cash Discounts and Trade Discounts
5. Freight-In and Freight-Out
6. Credit and Debit Memorandum
7. Accounting for Value-Added Tax
8. Application of VAT on Purchases and Related Accounts
9. Application of VAT on Sales and Related Accounts
10.Closing of Input to Output Tax
LEARNING OBJECTIVES
Understand the purchasing and selling activities of the
01 business

Differentiate between periodic from perpetual inventory

02 system

03 Find out that freight and freight out have different

treatment in accounting

04 Learn that cash discounts are recorded in the book of

the business while trade discounts are not

05 Learn and differentiate credit memorandum from debit

memorandum

06 Learn accounting for value-added tax

Acquaint with the VAT form 2550M and 2550Q

07
Nature of Merchandising Business
Merchandising Business generates revenue from sale of goods or
commodities that it buys. There are two major activities involved,
(1) Buying and (2) selling activities

Grocery Stores

Department Stores

Merchandise refers to goods or commodities bought by the

business for resale at a certain profit or margin.
 Merchandising
Service Business Business
Provide services at a fee Buys and sells finished
products

Service Income or Net Sales

Revenue minus
minus
Cost of Sales
Expenses
equals
equals
Gross Profit
Profit
minus

Expenses

equals

Profit
 Inventory Systems
There are two (2) systems used in keeping of merchandise inventory records.
These are Periodic and Perpetual Inventory System

Under Periodic Inventory

System
Inventory quantities are updated at the end
of the period
? Under Perpetual Inventory
System
Inventory quantities are updated after each
transactions.
 Under Periodic Inventory System
A. COST ACCOUNTS
1. Purchases
This account is debited when merchandise
are purchased either in cash or on credit.
This is recorded as follows:
Debit, Purchases Pxx
Credit, Cash/Accounts Payable Pxx
2. Purchase Discounts
This account is credited when there is
discount availed from a supplier for early
payment of merchandise purchased on
credit. This is recorded as follows:
Debit, Accounts Payable Pxx
Credit, Purchase Discounts Pxx
Credit, Cash
3. Purchase Returns & Allowances
This account is credited for merchandise
purchases either in cash or on credit that
were returned to the supplier. This is
recorded as follows:
Debit, Cash Pxx
Credit, Purchase Returns and Allow Pxx
4. Freight-in
This account is debited for the freight and handling
charges of merchandise purchased by the buyer
or customer and shipped via land, sea and air
transportation. This is recorded as follows:
Debit, Freight-in Pxx
Credit, Cash/Accounts Payable Pxx
xx
 Under Periodic Inventory System
B. INCOME ACCOUNTS
1. Sales 2. Sales Discounts
This account is debited for sales discount
This account is credited for merchandise
given to a customer for early collection from
that are sold either in cash or credit. This is
his/her account. This is recorded as follows:
recorded as follows:
Debit, Cash Pxx
Debit, Cash/Accounts Receivable Pxx Debit, Sales Discounts xx
Credit, Sales Pxx Credit, Accounts Receivable P xx

3. Sales Returns & Allowances

This account is debited for merchandise sold

either in cash or on credit that were returned by
the customer. This is recorded as follows:
Debit, Sales Returns and Allow Pxx
Credit, Cash/Accounts Receivable Pxx
Under Periodic Inventory System
C. EXPENSE ACCOUNTS

1. Freight-out
This account is debited for the freight and handling
charges of merchandise sold to customers and shipped
via land, sea and air transportation. This is recorded as
follows:
Debit, Freight-Out Pxx
Credit, Cash/Accounts Payable Pxx
Under Perpetual Inventory System
This is characterized by the
use of Merchandise
Inventory account as an
Asset with the following deb
it and credit postings.
Merchandise Inventory
Debit Credit
1. To record purchases 1. To record purchases returns and
2. To record freight-in allowances
3. Excess of actual inventory 1. To record purchase discounts
against stock-card 2. To record actual cost of goods sold
3. Excess of stock card against actual
inventory
Under this system, the use of stock card is a must.
The quantity and amounts of the stock cards are being
filled-up throughout the accounting period or even the whole
year round.
 STOCK CARD
Supplier: Sarangani Cattle Ranch
Description: TOP ROUND BEEF
RECEIVED ISSUED BALANCE
Date Unit Cost
Quantity Amount Quantity Amount Quantity Amount

Jan. 1 P240 50 kgs. P12, 000

8 P240 100 P24, 000 150 kgs. P36, 000

20 80 kgs. P19, 200 70 kgs. P16, 800

Note: Moreover, there are two (2) things that you should be remi
Cost of Sales
nded of under Perpetual Inventory System, and there are on the
next slides:
Ending Invtv.
 Moreover, there are two (2) things that you should be reminded of under
Perpetual Inventory System, and there are as follows:

1. In recording Sales, there are two entries that must be prepared:

1st Entry: Debit, Accounts Receivable Pxx

Credit, Sales Pxx

2nd Entry: Debit, Cost of Sales Pxx

Credit, Merchandise Invty Pxx

2. In recording Sales Returns and Allowances, there must also be another two
entries:
1st Entry: Debit, Sales Returns & Allowances Pxx
Credit, Accounts Receivable Pxx

2nd Entry: Debit, Merchandise Inventory Pxx

Credit, Cost of Sales Pxx
 THE USE OF FREIGHT-IN AND
FREIGHT-OUT ACCOUNTS
Freight or transportation expense on merchandise purchased is recorded as
a debit to freight-in or transportation-in

While, merchandise sold is recorded as a debit to freight-out or

transportation-out.

Buyer/Customer’s Book Seller/Supplier’s Book

Debit, Freight-In Pxx Debit, Freight-Out Pxx
Credit, Cash in Bank/Accounts Payable Pxx Credit, Cash in Bank/Accounts Payable Pxx
 DISCOUNT TERMS
The following are the common discount terms both for purchases and sales.

This means that if the This means that a 2%

account is paid/collected
within 10 days from the date
of the invoice, a 2% discount
can be availed or given and
no discount if the account is
paid/collected after the 10th
day or from the 11th to 30th
days
This means that a 2%
discount can be availed or
discount can be availed or
given if the account is being
given if the account is
paid/collected within 10 days
paid/collected 10 days after
from the invoice date, 1% if
the End of the Month.
paid/collected from the 11th
to 20th days, and no
discount if paid/collected
from the 21st to the 30th day

2/10, N/30 2/10, 1/20, N/30 2/10, EOM

CASH DISCOUNTS AND TRADE DISCOUNT
A. Cash Discounts
It can be either Purchase Discounts or Sales Discounts
Purchase Discounts – viewpoint of the buyer
Sales Discounts - viewpoint of the seller

In either way, cash discounts are inducements to both

buyer and seller for prompt payment or prompt collect
ion of account purchase and account sales.

B. Trade Discounts
These are Spot Discounts or Outright Discounts from a
cash or account sales that a buyer or seller can avail
but are not recorded in the books of the business
.
CASH DISCOUNTS
Example:
Amount of merchandise, P30, 000 and 2% cash
discount is given/availed if paid/collected within
10 days. The deadline for the payments was met.

Computation:
Amount of Merchandise P30, 000
TRADE DISCOUNTS
Less: 2%cash discount (30,000 x 2%) P600 Example:
Net Amount paid/collected P29, 400 2% trade discount on merchandise purchase
d/sold amounting to P30, 000

Computation:
List Price P30, 000
Less: Trade Discount (2% x 30,000) P600
Invoice Price P29, 400
CREDIT AND DEBIT
MEMORANDUM
 CREDIT MEMORANDUM
Credit Memorandum is
take from the viewpoint
of the seller or the
supplier who is the
creditor
Credit Memorandum
We credit your account for the
return of merchandise sold on
account
Supplier/Creditor
Record of Transaction
Seller or Supplier’s Book
(Credit Memo)
Upon sale of merchandise:
Debit, Accounts Receivable Pxx
Credit, Sales Pxx
Upon return of merchandise sold:
Debit, Sales Returns and Allowances Pxx
Credit, Accounts Receivable Pxx
 DEBIT MEMORANDUM
Debit Memorandum is
take from the viewpoint
of the buyer /customer
who is the debtor
Debit Memorandum
We debit your account for the
return of merchandise purchased
on account
Customer/Debtor
Record of Transaction
Buyer or Customer’s Book
(Debit Memo)
Upon purchase of merchandise:
Debit, Purchases Pxx
Credit, Accounts Payable Pxx
Upon return of merchandise purchased:
Debit, Accounts Payable Pxx
Credit, Purchase Returns and Allowances Pxx
 ACCOUNTING FOR VALUE-ADDED TAX
VAT is not entirely a new concept of business taxation but it is just another
form of tax-levied on a wide range of goods and services.
It means “tax on the value added” by the seller to purchase of goods
and service.

2005
Removes the VAT exemption
February 2006
The approval has increase
of several formerly, exempt VAT from 10% to 12%
sector of our economy.
Notes:
R.A 9337 No. 14-2005
• Input tax and Prepaid tax are presented in the
Current Asset section of the Balance Sheet
Output Tax – tax on our sales • Output tax and VAT Payable are presented in
the Current Liability section of the Balance Sheet
Input Tax – tax on our purchases is our VAT
payable which will be remitted to the BIR within 25 • The revenue regulation also emphasizes that
days after the end of each month VAT Input/output should be shown separately in
the voices,
Bought merchandise for cash from P. Tao Grocery, P100,000 plus 12% VAT. This
is recorded as
follows:
Debit, Purchases P100, 000
Debit, Input Tax 12,000
Credit, Cash in Bank P112,000

For Cash Purchases

Bought merchandise on account from J. Alegado Mall, P75,000 plus 12%VAT.
Term 2/10, N/30.
This is recorded as follows:
Debit, Purchases P75,000
Debit, Input Tax 9,000
Credit, Accounts Payable P84,000

For Account Purchases

 Return P5,000 cost of merchandise bought for cash from P. Tao Grocery for not
conforming with order and was not replaced. VAT is 12%. This is recorded as fol
lows:
Debit, Cash in Bank P5, 600
Credit, Purchase Returns and Allowances P5,000
Credit, Input Tax 600

Return of Merchandise Purchased in Cash

Return P10, 000 cost of merchandise bought on account from J. Alegado Mall for
not conforming with the order and was not replaced. VAT is 12%.
This is recorded as follows:
Debit, Accounts Payable P11, 200
Credit, Purchase Returns and Allowances P10, 000
Credit, Input Tax 1, 200

Return of Merchandise Purchased on

Account
Payment of account with J. Alegado Mall within the discount period. This
is recorded as follows:
Debit, Accounts Payable P72, 800
Credit, Purchase Discounts P1, 300
Cash, Input Tax 156
Credit, Cash In Bank P71, 344

Payment of Account at a Discount

Observation:
The purchase discount availed is P1,300
(P75,000-P10,000 = P65,000 x 2% =P1,300) and VAT Input Tax is P156
(P1,300x12%)

As a result, Input Tax registers a debit balance of P19,044

(P12,000+P9,000-P1,200-156= P19,044) or it can be gleaned from the
T-account below
Input Tax
1) 12,000 600 3)
2) 9,000 1,200 4)
156
21,000 1,956

P19,044
Sold merchandise for cash to Matero Conveniencce Center, P190,000 plus 12%
VAT. This is recorded as
follows:
Debit, Cash in Bank P212,800
Credit, Sales P190,000
Credit, Output Tax 22, 800

For Sales on Cash

Sold merchandise on account to E. Detoya and Sons, P180,000 plus 12% VAT.
Term: 2/10, N/30. This is recorded as follows:
Debit, Accounts Receivable P201,600
Credit ,Sales P180, 000
Credit, Accounts Payable 221,600

For Sales on Account

Received P6,000 worth of merchandise returned by Matero Convenience Center
due to bad order. It was not replaces, so it was refunded. This is recorded as foll
ows:
Debit, Sales Returns and Allowances P6,000
Debit, Output Tax 720
Credit, Cash In Bank P6, 720

Received Merch. Sold for Cash that

were Returned by a customer
Received P10,000 worth of merchandise returned by E. Detoya and Sons and was
not replaced. VAT is 12%. This is recorded as follows:

Debit, Sales Returns and Allowances P10,000

Debit, Output Tax 1, 200
Credit, Accounts Receivable P11,200

Received Merch Sold on Account that were

Returned by a Customer
Collected the account of E. Detoya and Sons within the discount period.
This is recorded as follows:
Debit, Cash in Bank P186,592
Credit, Sales Discount 3, 400
Debit, Output Tax 408
Credit, Accounts Receivable P190,400

Collected the Account with a Discount

Observation:
The sales discount availed is P3,400
(P180,000-P10,000 = P170,000 x 12% =P3,400) and;
Output Tax is P408 (P3,400x12%)

As a result, Output Tax registers a credit balance of P42,072

(P22,800+P21,600-P720-P1,200-408= P19,044) or it can be gleaned fr
om the T-account below
Output Tax
1) 720 22,800 3)
2) 1,200 21,600 4)
408
2,328 44,400

P42, 072
 CLOSING OF THE INPUT TAX AGAINST
OUTPUT TAX
The Input Tax of P19,044 is closed against Output Tax of P42,072 and the difference
of P23,028 is the VAT Payable. In an instance wherein Input tax shows a bigger bala
nce than the Output Tax, the amount of difference is called Prepaid Tax. This is being
brought forward to the next month. No remittance until Output Tax exceeds Input Tax

This is recorded as follows:

Debit, Output Tax P42, 072
Credit, Input Tax P19,044
Credit, VAT Payable 23,028
REMITTANCE OF VAT PAYABLE TO THE
BUREAU OF INTERNAL REVENUE
VAT Payable of P23,028 represents the amount that we should remit to the
Bureau of the Internal Revenue.

This is recorded as follows:

Debit, VAT Payable P23,028
Credit, Cash in Bank P23,028
Thank you!
 References
Book:
Prepared by: Basic Accounting for Non Accountants by Rafael M. Lope
z Jr.

Kristine Joy P. Bayon-on

Joemarie Belarmino Online:
https://courses.lumenlearning.com/suny-finaccounting/ch
Lariza Jane Aying apter/the-account-needed-for-a-merchandising-business/
Erica Bailon
https://www.coursehero.com/file/26311807/Introduction-t
o-Merchandising-Businessppt/