UM Digos College

Department of Accounting Education

Roxas Extension, Digos City

Big Picture in Focus: ULOc. Account for entries of merchandising entity.

Metalanguage

The most essential terms below are operationally defined for you to have a better
understanding of this section in the course.

1. Merchandising. A type of business where the business buys merchandise and sells the
same to customers.
2. Manufacturing. A type of business where the business buys raw materials and converting
these materials to goods to be sold to customers.
3. Goods. Also called merchandise. This is the product being sold by businesses.
4. Source documents. These are business forms and documents to help identify the
transactions that should be recorded in the books.
5. Credit period. Time allowed by seller for the buyer to pay.
6. Cash discount. A discount given to customers for prompt payment.
6.1 Cash discounts are called purchase discounts from buyer’s viewpoint and sales
discount form the seller’s viewpoint.
7. Trade discount. A discount given to customers to encourage them to purchase products
because of markdowns from the list price.
7.1 Trade discounts are not recorded in the books. Only the invoice price is recognized
in recording the sale.
8. List price. This is the original price or the catalog price.
9. Invoice price. This is the net price after deducting trade discount from the list price.
10. Discount period. The time allowed by the seller for the buyer to take the cash discount.
11. Freight bill. This is the transportation costs given by a carrier and provides information on
who should pay the transportation cost.
12. F.O.B. This is an abbreviation for "free on board".
13. FOB shipping point. The buyer shoulders the shipping costs; ownership over the goods
passes from seller to, the buyer when the inventory leaves the seller's place of business—
the shipping point.
13.1 The buyer already owns the goods while still in transit and therefore, shoulders
the transportation costs.
14. FOB destination. The seller bears the shipping costs. Title passes only when the goods
are received by the buyer at the point of destination.
14.1 While in transit, the seller is still the owner of the goods so the seller shoulders
the transportation costs.
15. Freight prepaid. The seller pays the transportation costs before shipping the goods sold.
16. Freight collect. The freight company collects from the buyer.
17. Perpetual Inventory System. An inventory system where the inventory account is
continuously updated.

ACCBP 100 *Property of UMDC

Page 53 of 125
 UM Digos College
Department of Accounting Education
Roxas Extension, Digos City

18. Periodic Inventory System. An inventory system where the inventory is not updated
whenever the merchandise is sold or bought. At end of reporting period, the inventory
account is adjusted with the physical count of inventories.
19. Purchases. A temporary account used only for merchandise purchased for resale.
Recording merchandise purchases at invoice price is known as the gross price method of
recording purchases.
19.1 Purchases of other assets such as equipment should be recorded in the
appropriate asset account.
20. Purchases Returns and Allowances. A contra account and is deducted from purchases in
the income statement.
21. Transportation out. Transportation costs for goods sold.
22. Transportation in. Transportation costs for goods bought.

Essential Knowledge

Source Documents
1. Sales invoice is prepared by the seller of goods and sent to the buyer. This document
contains the name and address of the buyer, the date of sale and information—
quantity, description and price—about the goods sold. It also Specifies the amount
of sales, and the transportation and payment terms.
2. The bill of lading is a document issued by the carrier—a trucking, shipping or
airline—that specifies contractual conditions and terms of delivery such as freight
terms, time, place, and the person named to receive the goods.
3. The statement of account is a formal notice to the debtor detailing the accounts
already due.
4. The official receipt evidences the receipt of cash by the seller or the authorized
representative. It notes the invoices paid and other details of payment.
5. Deposit slips are printed forms with depositor's name, account number and space
for details of the deposit. A validated deposit slip indicates that cash and checks with
the supplied details were actually deposited or credited to the account holder.
6. A check is a written order to a bank by a depositor to pay the amount specified in
the check from his checking account to the person named in the check. The entity
issuing the check is the payor while the receiver is the payee.
7. The purchase requisition is a written request to the purchaser of an entity from an
employee or user department of the same entity that goods be purchased.
8. The purchase order is an authorization made by the buyer to the seller to deliver
the merchandise as detailed in the form.
9. Receiving report is a document containing information about goods received from
a vendor. It formally records the quantities and description of the goods delivered.
10. A credit memorandum is a form used by the seller to notify the buyer that his
account is being decreased due to errors or other factors requiring adjustments.

Terms of Transactions
Merchandise may be purchased and sold either on credit terms or for cash on
delivery. When goods are sold on account, a period of time called the credit period is
ACCBP 100 *Property of UMDC
Page 54 of 125
 UM Digos College
Department of Accounting Education
Roxas Extension, Digos City

allowed for payment. The length of the credit period varies across industries and may even
vary within an entity, depending on the product.

When goods are sold on credit, both parties should have an understanding as to the
amount and time of payment. These terms are usually printed on the sales invoice and
constitute part of the sales agreement. If the credit period is 30 days, then payment is
expected within 30 days from the invoice date. The credit period is usually described as the
net credit period or net terms. The credit period of 30 days is noted as "n/30”. If the invoice
is due ten days after the end of the month, it may be marked "n/10 eom."

Cash Discount
Some businesses give discounts for prompt payment called cash discounts. If a trade
discount is also offered, cash discount is computed on the net amount after the trade
discount. This practice improves the seller's cash position by reducing the amount of money
in accounts receivable. Cash discount is designated by such notation as "2/10" which means
the buyer may avail of a two percent discount if the invoice is paid within ten days from the
invoice date. The period covered by the discount, in this case—ten days, is called the
discount period.

Transportation costs
The freight bill designates which party shoulders the costs, and whether the
shipment is freight prepaid or freight collect. Freight bills usually show whether the shipping
terms are FOB shipping point or FOB destination. In freight prepaid, the seller pays the
transportation costs before shipping the goods sold; while in freight collect, the freight
company collects from the buyer. Payment by either party will not dictate who should
ultimately shoulder the costs.

Normally, the party bearing the freight cost pays the carrier. Thus, goods are typically
shipped freight collect when the terms are FOB shipping point; and freight prepaid when
the terms are FOB destination.

Sometimes, as a matter of convenience, the firm not bearing the freight cost pays
the carrier. When this situation occurs, the seller and buyer simply adjust the amount of the
payment for the merchandise. The figure below shows which party—the buyer or the
seller— shoulders the transportation costs and pays the shipper for various freight terms:

Freight Terms Who Shoulders the Who Pays the

Transportation Costs? Shipper?
FOB Destination, Freight Prepaid Seller Seller
FOB Shipping Point, Freight Collect Buyer Buyer
FOB Destination, Freight Collect Seller Buyer
FOB Shipping Point, Freight Prepaid Buyer Seller

The shipping costs borne by the buyer using the periodic inventory system are
debited to transportation in account. In accounting, the cost of an asset—the merchandise
ACCBP 100 *Property of UMDC
Page 55 of 125
 UM Digos College
Department of Accounting Education
Roxas Extension, Digos City

inventory—includes all costs (e.g. shipping costs) incurred to bring the asset to its intended
use. In the cost of sales section of the income statement, the balance in this account is
added to purchases in computing for the net cost of purchases for the period.

Shipping costs borne by the seller are debited to transportation out account. This
account which is also called delivery expense, is an operating expense in the income
statement.

Inventory Systems

Perpetual Inventory System

Perpetually updating the inventory account requires that at the time of purchase,
merchandise acquisitions be recorded as debits to the inventory account. At the time of
sale, the cost of sales is determined and recorded by a debit to the cost of sales account
and a credit to the inventory account. With a perpetual inventory system, both the
inventory and cost of sales accounts receive entries throughout the accounting period.

Many merchandising entities are now using the perpetual inventory system with
point-of-sale equipment. These powerful machines have dramatically reduced the time
required to manage inventory. Supermarkets and department stores use point-of-sale
scanners built into checkout counters to collect transactional data for the cash register and
to update their perpetual inventory system. In the absence of point-of-sale scanners, the
perpetual inventory system is more advisable for firms that sell low-volume, high-priced
goods such as motor vehicles, jewelry and furniture.

When a company uses the perpetual inventory system, the ending inventory should
reconcile with the actual physical count at the end of the period assuming that no theft,
spoilage, or error has occurred. Even if there is a little chance for or suspicion of inventory
discrepancy, most entities make a physical count. At that time, the account is adjusted for
any inaccuracies discovered. The count provides an independent check on the amount of
inventory that should be reported at the end of the period.

Periodic Inventory System

The periodic inventory system is primarily used by businesses that sell relatively
inexpensive goods and that are not yet using computerized scanning systems to analyze
goods sold. When goods are purchased, a separate set of accounts—purchases, purchases
discounts, purchases returns and allowances, and transportation in—is used to accumulate
information on the net cost of the purchases. Only at the end of the period, when the
inventory is counted, will entries be made to the inventory account to establish its proper
balance.

Journal entries
PERIODIC INVENTORY SYSTEM PERPETUAL INVENTORY SYSTEM
1. To record sale of merchandise on account:
ACCBP 100 *Property of UMDC
Page 56 of 125
 UM Digos College
Department of Accounting Education
Roxas Extension, Digos City

Accounts Receivable xx Accounts Receivable xx

Sales xx Sales xx

Cost of Sales xx
Inventory xx
2. To record return of sold merchandise:
Sales Returns and Allowances xx Sales Returns and Allowances xx
Accounts Receivable xx Accounts Receivable xx

Inventory xx
Cost of Sales xx
3. Received payment from customer within
discount period:
Cash xx Cash xx
Sales discount xx Sales discount xx
Accounts Receivable xx Accounts Receivable xx
4. Purchased merchandise on account:
Purchases xx Inventory xx
Accounts Payable xx Accounts Payable xX
5. Paid freight on purchase; terms FOB
shipping point, freight collect:
Transportation In xx Inventory xx
Cash xx Cash xX
6. Returned merchandise bought:
Accounts Payable xx Accounts Payable xx
Purchase Returns and Allowances xx Inventory xx
7. Paid merchandise within discount period:
Accounts Payable xx Accounts Payable xx
Purchase discounts xx Inventory xx
Cash xx Cash xx
8. To transfer beginning inventory balance to
Income Summary account (closing entry):
Income Summary xx No entry required
Inventory xx
9. To record ending inventory balance (closing
entry):
Inventory xx No entry required
Income Summary xx
10. To adjust ending perpetual ending balance
for shrinkage during the year: Cost of sales xx
Shrinkage already affected in no. 9 entry Inventory xx

ACCBP 100 *Property of UMDC

Page 57 of 125
 UM Digos College
Department of Accounting Education
Roxas Extension, Digos City

Journal entries for Merchandising Entity

Journal entries related to Sales

The journal entry to record the sale of merchandise:

Cash xx Accounts Receivable xx
Sales xx Sales xx
To record sale for cash. To record sale on credit.

The journal entry to record sale on account with 2/10, n/60 as terms for P3,000:

Accounts Receivable 3,000

Sales 3,000
To record collection on account: Cash 3,000
Cash 2,940 Accounts Receivable 3,000
Sales discount 60 To record collection beyond the
Accounts Receivable 3,000 discount period.
To record collection within discount
period.
*Sales discount is treated as a contra-account and
deducted from the Gross sales.

To record return of merchandise:

Sales Returns and Allowances xx
Accounts Receivable (Cash) xx

Transportation Out
Assume that Blue Dragon Traders sold merchandise totaling P17,000. Transportation
costs amounted to P1,900.

Case 1: FOB destination, freight prepaid; terms 2/10, n/30

Accounts Receivable 17,000 If account collected within the discount
Transportation Out 1,900 period:
Sales 17,000 Cash 16,660
Cash 1,900 Sales Discount 340
Accounts Receivable 17,000

Case 2: FOB shipping point, freight collect; terms 2/10, n/30

Accounts Receivable 17,000 If account collected within the discount
Sales 17,000 period:
Cash 16,660
Note: No entry for transportation out since shipping Sales Discount 340
term provided that buyer should shoulder the Accounts Receivable 17,000
transportation costs.

ACCBP 100 *Property of UMDC

Page 58 of 125
 UM Digos College
Department of Accounting Education
Roxas Extension, Digos City

Case 3: FOB destination, freight collect; terms 2/10, n/30

Accounts Receivable 15,100 If account collected within the discount
Transportation Out 1,900 period:
Sales 17,000 Cash 14,760
Sales Discount 340
Note: Accounts receivable is reduced by the Accounts Receivable 15,100
transportation charges paid by buyer for the benefit
of the seller.

Case 4: FOB shipping point, freight prepaid; terms 2/10, n/30

Accounts Receivable 18,900 If account collected within the discount
Sales 17,000 period:
Cash 1,900 Cash 18,560
Sales Discount 340
Accounts Receivable 18,900

Journal entries related to Purchases

The journal entry to record the purchase of merchandise:

Purchases xx Purchases xx
Cash xx Accounts Payable xx
To record purchases for cash. To record purchases on credit.

The journal entry to record purchases on account with 2/10, n/30 as terms for P13,000:

Purchases 13,000
Accounts Payable 13,000
To record payment on account: Accounts Payable 13,000
Accounts Payable 13,000 Cash 13,000
Purchase discount 260 To record payment beyond the
Cash 12,740 discount period.
To record payment within discount
period.

To record return of merchandise:

Accounts Payable xx
Purchase Returns and Allowances xx

Transportation In
Assume that Blue Dragon Traders sold merchandise totaling P17,000. Transportation
costs amounted to P1,900.

Case 1: FOB destination, freight prepaid; terms 2/10, n/30

Purchases 17,000 If account is paid within the discount period:
Accounts Payable 17,000 Accounts Payable 17,000
ACCBP 100 *Property of UMDC
Page 59 of 125
 UM Digos College
Department of Accounting Education
Roxas Extension, Digos City

Note: There is no entry for transportation in since Purchase discount 340

shipping term provided that the seller should Cash 16,660
shoulder the costs.

Case 2: FOB shipping point, freight collect; terms 2/10, n/30

Purchases 17,000 If account collected within the discount
Transportation In 1,900 period:
Accounts Payable 17,000 Accounts Payable 17,000
Cash 1,900 Purchase discount 340
Cash 16,660

Case 3: FOB destination, freight collect; terms 2/10, n/30

Purchases 17,000 If account collected within the discount
Accounts Payable 15,100 period:
Cash 1,900 Accounts Payable 15,100
Purchase discount 340
Note: Accounts payable is reduced by the Cash 14,760
transportation charges paid by buyer for the benefit
of the seller.

Case 4: FOB shipping point, freight prepaid; terms 2/10, n/30

Purchases 17,000 If account collected within the discount
Transportation In 1,900 period:
Accounts Payable 17,000 Accounts Payable 18,900
Purchase discount 340
Cash 18,560

Self-Help: You can also refer to the sources below to help you further
understand the lesson:

Ballada, W. (2016). Basic Accounting 2016 issue (21st edition). DomDane Publishers and Made
Easy Books: Manila

BASIC ACCOUNTING: BASIC ACCOUNTING CONCEPTS, PRINCIPLES, AND PROCEDURES,

VOLUME 2, 2ND EDITION. (2018). Kirkus Reviews, Retrieved from
https://www.proquest.com/docview/1991915978?accountid=31259

Comish, N. W. (1956). Retail merchandising accounting. Journal of Marketing (Pre-1986), 21,

499. Retrieved from
https://www.proquest.com/docview/209280110?accountid=31259

ACCBP 100 *Property of UMDC

Page 60 of 125
 UM Digos College
Department of Accounting Education
Roxas Extension, Digos City

Let’s Check
Activity 1. Trade and Cash Discount Calculations

On June 1, 2020, Marie Chavez Products sold merchandise with a P120,000 list price.
Trade Discount Credit Terms Date Paid
a. 30% 2/10, n/30 June 8
b. 40% 2/10, n/30 June 15
c. - 2/10, n/30 June 11
d. 20% 1/15, n/30 June 14
e. 40% n/30 June 28

Required: For each of the sales terms, determine the following:

1. the amount recorded as a sale.
2. the amount of cash received.

Activity 2. Cash Discount and Remittance Calculations

For each of the following Paz Abad Company purchases, assume that credit terms 2/10,
n/30 and that any credit memorandum was issued and known before Paz Abad made the
payments.
Purchases Shipping Terms Prepaid Freight Credit Memo
(by seller)
a. 12,000 FOB Shipping point 1,000 3,000
b. 24,000 FOB Destination 2,400 2,000
c. 28,000 FOB Shipping point 4,000
d. 40,000 FOB Shipping point 3,000

Required:
1. Determine the cash discount available.
2. Determine the cash remitted if the payment is made within the discount period.

Let’s Analyze
Activity 1. Transportation Costs

On June 16, 2020, Vergara Co. sold merchandise to Pascual Co. for terms 2/10, n/30.
Shipping costs were P600. Pascual Co. received the goods and Vergara Co.'s invoice on June
17. On June 24, Pascual Co. sent the payment to Vergara Co., which Vergara Co. received
on June 25. Both Vergara Co. and Pascual Co. use the periodic inventory system. The
following are several arrangements regarding the shipping costs:

a. Shipping terms are F.O.B. shipping point, freight collect. Pascual Co. paid the
shipping costs on June 17 and remitted P5,880 on June 24.

ACCBP 100 *Property of UMDC

Page 61 of 125
 UM Digos College
Department of Accounting Education
Roxas Extension, Digos City

Required:
1. Prepare the entries for Vergara Co. to record the sale and the cash receipt.
2. Prepare the entries for Pascual Co. to record the purchase, the payment of shipping
costs, and the cash remittance.

b. Shipping terms are F.O.B. destination, freight prepaid. Vergara Co. paid the shipping
costs on June 16. Pascual Co. remitted P5,880 on June 24.

Required:
1. Prepare the entries for Vergara Co. to record the sale, the payment of shipping costs,
and the cash receipt.
2. Prepare the entries for Pascual Co. to record the purchase and the cash remittance.

c. Shipping terms are F.O.B. shipping point, freight prepaid. Vergara Co. paid the
shipping costs on June 16 and added the P600 cost to the invoice sent to Pascual Co.
Pascual Co. remitted P6,480 on June 24.

Required:
1. Prepare the entries for Vergara Co. to record the sale and freight payment, and the
cash receipt.
2. Prepare the entries for Pascual Co. to record the purchase (with shipping costs
added to the invoice from Vergara Co.) and the cash remittance.

d. Shipping terms are F.O.B. destination, freight collect. Pascual Co. paid the shipping
costs on June 17 and deducted the P600 from the amount owed to Vergara Co. A
copy of the freight bill to Vergara Co. was provided with the June 24 cash remittance.
Pascual Co. remitted P5,280 on June 24.

Required:
1. Prepare the entries for Vergara Co. to record the sale and the cash receipt.
2. Prepare the entries for Pascual Co. to record the purchase, the freight payment, and
the cash remittance.

Activity 2. Journalizing Merchandising Transactions

Virginia Ruben Company engaged in the following transactions in August 2020:

Aug. 1 Sold merchandise to O. Lacierda Trading on credit, terms n/30, FOB shipping
point, P21,000.
3 Purchased merchandise on credit from R. Cabellon Stores, terms n/30, FOB
shipping point, P38,000.
5 Paid SouthMin Freight for freight charges on merchandise received, P290.
6 Purchased store supplies on credit from Ipil Supplies, terms n/20, P6,360.
8 Purchased merchandise on credit from Pagadian Company, terms n/30, FOB
shipping point, P36,000. Pagadian Company paid P200 for freight costs.
12 Returned some of the merchandise received on Aug. 3 for credit, P6,000.
ACCBP 100 *Property of UMDC
Page 62 of 125
 UM Digos College
Department of Accounting Education
Roxas Extension, Digos City

15 Sold merchandise on credit to Columban Stores, terms n/30, FOB shipping

point, P12,000.
16 Returned some of the store supplies purchased on Aug. 6 for credit, P2,000.
17 Sold merchandise for cash, P10,000.
18 Accepted for full credit a return from O. Lacierda Trading, P2,000.
24 Paid accounts to R. Cabellon Stores.
27 Received full payment from O. Lacierda Trading.

Required: Prepare the journal entries.

In a Nutshell

Activity 1. New account titles related to merchandising company has been introduced in this
unit. This is important in distinguishing service operations from merchandising. In this part,
you will be required to draw conclusions, perspectives, arguments and ideas from the unit
lesson. I will supply the first item and you will continue the rest.

1. Merchandising entities uses similar account titles with the service industry except for sales,
sales discounts, sales returns and allowance and related accounts for purchases. It is
important for an accountant to be familiar with such accounts to better prepare financial
statements.

2.

3.

4.

ACCBP 100 *Property of UMDC

Page 63 of 125
 UM Digos College
Department of Accounting Education
Roxas Extension, Digos City

5.

6.

7.

8.

9.

10.

ACCBP 100 *Property of UMDC

Page 64 of 125