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ACCOUNTING FOR MERCHANDISING BUSINESS
Learning Outcomes
After reading this chapter, the learners should be able to
1. Define merchandising business and explain its difference from
service type of business;
2. Explain the operating cycle of a merchandising business;
3. Compare the statement of profit or loss of service business and
merchandising business;
4. Explain the accounting for trade and cash discounts on the
acquisition of inventories;
5. Identify the rules to be applied for goods in transit;
6. Distinguish the perpetual inventory system from the periodic
inventory system in accounting for acquisition and sales of
inventories; and
7. Explain the concept of cost formula as applied to inventory
accounting.
inventory and the sale of inventory. If sales are made on account (credit
sales) another transaction occurs after the sale, that is, the collection of
receivable.
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Chapter 5 – Accounting Merchandising Type of Business
will be made available for sale in the next accounting period, which then
becomes beginning merchandise inventory.
Other than sales, an entity may also earn other income such as rent
income, gains from sale of asset, and investment income. Operating
expenses are other expenses incurred from operating the business such as
selling and admin expenses.
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Chapter 5 – Accounting Merchandising Type of Business
The costs and quantities of inventory are accounted for using either
the perpetual inventory system or the periodic inventory system.
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Chapter 5 – Accounting Merchandising Type of Business
Purchase of merchandise
Merchandise Inventory xx
Cash or Accounts Payable xx
Sale of merchandise
Cash or Accounts Receivable xx
Sales xx
Cost of Sales xx
Merchandise Inventory xx
Merchandise Inventory xx
Cost of Sales xx
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Chapter 5 – Accounting Merchandising Type of Business
balance of inventory is used to determine the cost of goods sold during the
period.
Purchase of merchandise
Purchases xx
Cash or Accounts Payable xx
Sale of merchandise
Cash or Accounts Receivable xx
Sales xx
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Chapter 5 – Accounting Merchandising Type of Business
COST OF INVENTORIES
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Chapter 5 – Accounting Merchandising Type of Business
Freight Charges
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Chapter 5 – Accounting Merchandising Type of Business
Purchases 100,000
Freight-In 5,000
Accounts Payable 105,000
Purchases 100,000
Freight-In 5,000
Accounts Payable 100,000
Cash 5,000
Purchases 100,000
Accounts Payable 100,000
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Chapter 5 – Accounting Merchandising Type of Business
Purchases 100,000
Accounts Payable 95,000
Cash 5,000
Purchase Discounts
List price xx
- Trade discount xx
Invoice price xx
- Cash discount xx
Cash payment or payable xx
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Chapter 5 – Accounting Merchandising Type of Business
Cash discount may be accounted using either the gross method and
the allowance method. Using the gross method, the purchases and
accounts payable accounts are recorded at gross invoice price. Upon
payment within the discount period, the account purchase discount is
credited for the amount of the discount taken.
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Chapter 5 – Accounting Merchandising Type of Business
If the account is paid beyond the discount period, say January 15,
2019, the journal entry for the payment is:
If the account is paid after the end of the reporting period but
within the discount period, say January 3, 2019, an adjusting journal entry
is necessary to match the discount with the purchases. This entry is dated
as of the end of the reporting period although it not necessarily prepared
on the said date. The said adjusting entry is reversed at the beginning of
the following year so that the entry to record the payment is made in the
usual manner.
On the other hand, using the net method, purchases and accounts
payable are recorded at invoice price net of the related discount. If the
related account payable is not paid within the discount period, an account
purchase discount lost is debited for the discount forfeited.
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Chapter 5 – Accounting Merchandising Type of Business
If the account is paid beyond the discount period, say January 15,
2019, an adjusting journal entry is necessary at yearend to bring the
balance of the account payable account to the original invoice price.
If the account is paid after the end of the reporting period but
within the discount period, say January 3, 2019, no adjusting journal entry
is necessary.
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Chapter 5 – Accounting Merchandising Type of Business
brokerage while in transit, or if the buyer agrees not to return the goods
with an equivalent reduction of the purchase price.
Purchases xx
+ Freight-in xx
Total Purchases xx
- Purchase discount xx
- Purchase returns and allowances xx
Net Purchases xx
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Chapter 5 – Accounting Merchandising Type of Business
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