Paete Science and Business College, Inc.
J. P. Rizal Street, Paete, Laguna
Course code : Bridge 1 (Fundamentals of ABM 1)
Course : This is an introductory course in accounting,
Description business, and management data analysis that will develop
students’ appreciation of accounting as a language of
business and an understanding of basic accounting
concepts and principles that will help them analyze
business transactions.
Instructor : Ian Eldrick R. Dela Cruz
Module 14 :
Week 17 :
Instructions : After reading the content of this module, answer the
assessment at the end of the module, please send me
your answers via google classroom prior or until the
date of submission. If you have questions and queries
please do not hesitate to contact me during the schedule
time of this subject.
Week 17| Fundamental of ABM 1 | Module 14| I.E. Dela Cruz
Chapter XIII
Accounting Cycle of a Merchandising Business
ACCOUNTING FOR FREIGHT COSTS
The sales agreement should indicate whether the seller or the buyer is to pay the
cost of transporting the goods to the buyer’s place of business. The two most common
arrangements for freight costs are FOB SHIPPING POINT AND FOB DESTINATION.
FOB Shipping Point:
• Goods placed free on board (FOB) the carrier by seller.
• Buyer pays freight costs.
o Freight-In is debited if buyer pays freight.
o Cash is credited if the goods come on cash on delivery (COD), for
example, and was paid immediately. Accounts Payable would be
credited if on account.
o Ownership over the goods is transferred to the buyer once it is out of
the premises of the seller.
FOB Destination
• Goods placed free on board (FOB) at buyer’s business.
• Seller pays freight costs.
• Delivery Expense is debited if seller pays freight on outgoing merchandise to a
buyer. This is an operating expense to the seller.
• Ownership over the goods is transferred to the buyer once the goods are delivered
and received by the buyer.
If the terms are FOB Destination, no entry is recorded in the books of Magaling. The
PHP3,000 will be paid by the seller, in this case Delta, Inc.
PURCHASE DISCOUNTS:
• Credit terms (specify the amount of cash discount and time period during which a
discount is offered) may permit the buyer to claim a cash discount for the prompt
payment of a balance due. If the credit terms show 2/10, n/30 means a 2% discount
is given if paid within 10 days (called the discount period); otherwise, the invoice
is due in 30 days.
• The buyer calls this discount a purchase discount.
• A purchase discount is normally based on the invoice cost less returns and
allowances, if any.
Recording of sales and related transactions under the Periodic Inventory System
SALES TRANSACTIONS: REVENUE ENTRIES FOR A MERCHANDISER
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Week 17| Fundamental of ABM 1 | Module 14| I.E. Dela Cruz
• Revenues are reported when earned in accordance with the revenue recognition
principle, and in a merchandising company, revenues are earned when the goods
are transferred from seller to buyer.
• All sales should be supported by a document such as a cash register tape (to
provide evidence of cash sales) or cash receipt, or office receipt for cash sales,
and charge invoice for credit sales, or sales on account.
• One entry is made with each sale:
o Debit — Accounts Receivable (if a credit sale) or Cash (if a cash sale) which
increases assets for the sales amount
o Credit — Sales which increases revenues
• The sales account is credited only for sales of goods held for resale. Sales of
assets not held for resale (such as equipment, buildings, land, etc.) are credited
directly to the asset account.
SALES RETURNS AND ALLOWANCES:
• Sales Returns result when customers are dissatisfied with merchandise and are
allowed to return the goods to the seller for credit or a refund.
• Sales Allowances result when customers are dissatisfied, and the seller allows a
deduction from the selling price.
• To grant the return or allowance, the seller prepares a credit memorandum to
inform the customer that a credit has been made to the customer’s account
receivable.
• Sales Returns and Allowances is a contra revenue account to the Sales account.
A contra account is a reduction to a particular account.
• A contra account is used, instead of debiting sales, to disclose the amount of sales
returns and allowances in the accounts.
• This information is important to management as excessive returns and allowances
suggest inferior merchandise, inefficiencies in filling orders, errors in billing
customers, and mistakes in delivery or shipment of goods.
• The normal balance of Sales Returns and Allowances is a debit.
• One entry is made with each sales return and allowance:
The entry to record the sales return or allowance:
• Debit — Sales Return and Allowances which decreases revenues for
the amount of the sale
• Credit — Accounts Receivable (if a credit sale) or Cash (if a cash sale)
which decreases assets
SALES DISCOUNTS
1. A sales discount is the offer of a cash discount to encourage customers to pay the
balance at an earlier date.
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Week 17| Fundamental of ABM 1 | Module 14| I.E. Dela Cruz
2. An example of a discount term is commonly expressed as: 2/10, n/30, which
means that the customer is given 2% discount if payment is made within 10 days.
After 10 days there is no discount, and the balance is due in 30 days.
3. Sales Discounts is a contra revenue account with a normal debit balance.
