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 13 :

Week 16 :

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

Merchandise (or merchandise inventory) refers to goods that are held for sale to
customers in the normal course of business. This includes goods held for resale. For
example:

• Candies, canned goods, noodles sold at a grocery stores

• Juice, biscuits sold in a grocery store
• Medicines sold in a pharmacy
If a grocery store decided to sell an old computer used in the office, this would not be
merchandise because grocery stores do not normally sell computers and the store is
simply selling off old office equipment. But a computer would be merchandise for a
computer store who resells computer units. Merchandise for one firm may be a fixed asset
(or property and equipment) for another. In another example, a pharmacy decided to sell
a table used in their display area. This table is not merchandise of a pharmacy. However,
to a retail furniture store a table is merchandise because the business of a furniture store
involves the buying and selling of tables. A merchandiser’s primary source of revenue is
sales revenue or sales.
Expenses for a merchandising company are divided into two categories:
1. Cost of goods sold (COGS) – the total cost of merchandise sold during the period;
and
2. Operating expenses (OP) - expenses incurred in the process of earning sales
revenue that are deducted from gross profit in the income statement. Examples
are sales salaries and insurance expenses.
Gross profit (GP) is equal to Sales Revenue less the Cost of Goods Sold.
The Operating Cycles for a merchandiser: Merchandising Company operating cycle (cash
to cash) involves:
1. buy merchandise inventory
2. sell inventory
3. obtain Accounts Receivable
4. receive cash
JOURNALIZING THE TRANSACTIONS IN A MERCHANDISING BUSINESS
In step 1, transactions are identified and measured. At this stage, the documents
used by the business are analyzed to see whether these transactions have financial
impact or effect. Recall the rule that only financial transactions are recorded and that the
amount can be measured. These two conditions must exist in order for a particular

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transaction to be recognized or recorded. As defined, financial transactions are those

activities that change the value of an asset, liability or equity.
Step 2 is the Preparation of Journal Entries (Journalization) A merchandising
company may use special and general journals to record its transactions.

SPECIAL JOURNALS
Some businesses encounter voluminous quantities of similar and recurring
transactions, which may create congestion if these transactions are recorded repeatedly
in a single day or monthly in the general journal. The use of special journals will eliminate
this problem.
The following are the commonly used special journals:
1. Cash Receipts Journal –used to record all cash that had been received
2. Cash Disbursements Journal –used to record all transactions involving cash
payments
3. Sales Journal (Sales on Account Journal) –used to record all sales on credit (on
account)
4. Purchase Journal (Purchase on Account Journal) –used to record all purchases of
inventory on credit (or on account)
INVENTORY SYSTEMS
Maintaining inventory items is a unique set-up in a merchandising business. There
are two methods of accounting for inventory, namely: Perpetual Inventory System and
Periodic Inventory System.
Merchandising entities may use either of the following inventory systems:
1. Perpetual System — Detailed records of the cost of each item are maintained,
and the cost of each item sold is determined from records when the sale occurs.
For example, a car dealership has separate inventory records for each vehicle.
a. Record purchase of Inventory.
b. Record revenue and record cost of goods sold when the item is sold.
c. At the end of the period, no entry is needed except to adjust inventory
for losses, etc.
2. Periodic System — Cost of goods sold is determined only at the end of an
accounting period. This system involves:
a. Record purchase of Inventory.
b. Record revenue only when the item is sold.
c. At the end of the period, you must compute cost of goods sold (COGS):
i. Determine the cost of goods on hand at the beginning of the
accounting period (Beginning Inventory = BI),

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ii. Add it to the cost of goods purchased (COGP),

iii. Subtract the cost of goods on hand at the end of the accounting
period
iv. (Ending Inventory = EI)
Additional Considerations:
Perpetual systems have traditionally been used by companies that sell
merchandise with high unit values such as automobiles, furniture, and major home
appliances. With the use of computers and scanners, many companies now use the
perpetual inventory system.
The perpetual inventory system is named because the accounting records
continuously — perpetually —show the quantity and cost of the inventory that should be
on hand at any time. The periodic system only periodically updates the cost of inventory
on hand.
A perpetual inventory system provides better control over inventories than a
periodic inventory, since the records always show the quantity that should be on hand.
Then, any shortages from the actual quantity and what the records show can be
investigated immediately.
PERIODIC INVENTORY SYSTEM
Recording purchases and related transactions under the Periodic Inventory System
PURCHASES OF MERCHANDISE: PERIODIC SYSTEM
1. When merchandise is purchased for resale to customers, the account, Purchases,
is debited for the cost of goods purchased.
2. Like sales, purchases may be made for cash or on account (credit).
3. The purchase is normally recorded by the purchaser when the goods are received
from the seller.
a. Each credit purchase should be supported by a purchase invoice.
b. A purchase invoice received by the buyer is actually a sales invoice or a
charge invoice prepared by the supplier or vendor.
c. Note that only purchases of merchandise are debited to the ‘Purchase’
account. Acquisition (purchases) of other assets: supplies, equipment, and
similar items are debited to their respective accounts.
PURCHASE RETURNS AND ALLOWANCES
A purchaser may find the merchandise received to be unsatisfactory because the
goods are:
1. damaged or defective
2. of inferior quality
3. not in accord with the purchaser’s specifications

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The purchaser initiates the request for a reduction of the balance due through the
issuance of a debit memorandum. The debit memorandum is a document issued by a
buyer to inform a seller that the seller’s account has been debited because of
unsatisfactory goods.
A return of the merchandise (a deduction from the purchase price when
unsatisfactory goods are kept) is shown by the entry where Accounts Payable is debited
and Purchase Returns and Allowances is credited to show that the purchases was
reduced with a return or an allowance.
The Purchase Returns and Allowances account is a “contra purchases” account
when merchandise is returned to a supplier.