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ACC PLUS

Chapter 10

Merchandising business

Normal balance What is its accounting element Where are its

effects
represented?
Freight-in Debit Cost account- meaning it is It is a factor to be
initially recorded as capital added in order to
expenditure which is added achieve the value of
value to asset then is expensed the net purchases.
when related revenue is
recognized. Net purchases is
part of COGS.
Freight-out Debit Expense account- it is expensed It is a selling
directly/initially as it is incurred expense, which is
when related revenue is under operating
recognized. expense in order to
get profit.
Purchase returns and Credit Contra expense account- It It is a factor to be
allowances decreases expenses incurred deducted in order
because of returning purchased to arrive at the net
goods, goods are initially purchases.
recognized as assets then are
recorded as expenses when
related revenue is earned.
Sales returns and Debit Contra revenue account- Are to be deducted
allowances Decreases sales revenue since to total sales in
sold goods where returned to order to get the net
the business thus reducing sales. sales.
Sales discount Debit Contra revenue account- Are to be deducted
The amount from sales discounts to total sales in
are deducted from gross sales order to get the net
from a company to arrive at net sales.
sales. *Deduction of value, not a
consequence as a result of
indulging in services.
Purchase discount Credit Contra asset account- It is a factor to be
Decreases the value of the deducted in order
paired asset, meaning the to get net
difference between the two will purchases.
be the cash to be disbursed by
the customer to pay for the
asset.
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What is the difference from a service concern with that of a merchandising business by using the
income statements pro-forma, how they differ in terms of income statement format?

What are the buying and selling activities of the business?

How are stock cards used under perpetual inventory system?

What are the various discount terms?

What are the periodic and perpetual inventory system?

1. How do you compare the service concern form merchandising business as far as the manner
of generating revenue is concerned?

Service concern Merchandising concern

Generates income
Generates income by rendering services to
customers.
Example: Surgeon performs heart surgery,
accountant does tax filing auditor audits
businesses books
There is only 1 activity involved in a service
concern that is the rendering of services to a
client.
Generates revenue
Generates revenue by the selling of goods and
other commodities.
Example: Ikea sells goods and furniture, apple
sells cellular phones and laptops.
There are 2 activities involved within the
operations of a business concerning itself with
merchandise, it is 1. Buying, 2. Selling activities

Income statement forms for both service concern and merchandising concern

Service concern Merchandising concern

+ Service income∨Revenue Net sales
−( Expenses) −Cost of sales(COGS)
= Profit = Gross profit
Gross profit
−Expenses
= Profit
* Service concern is when profit is derived using *Merchandising concern needs to go through
a single step system. multiple steps in order to arrive at the profit.

2. What is the difference between perpetual from periodic inventory systems?

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What is an inventory system?

Perpetual inventory systems Periodic inventory systems

Keeps track of the activities within the
inventory balances continuously, meaning
that it will automatically update its records
whenever a product is received or sold.
With the perpetual system, the inventory
account is updated after every inventory
purchase or sale.
Continuously updated whenever there is
activity that involves receiving and selling a
product. Meaning it constantly evaluates the
balance of the inventory and COGS
The perpetual inventory system of recording
revolves around the merchandising inventory
account.
Periodic inventory systems uses a physical
count in order to measure the level of
inventory and the cost of goods sold (COGS)
A periodic inventory system is a careful
evaluation of inventory after the end of each
accounting period.
It only evaluates the inventory balance and
the COGS after the end of each accounting
period.
There are multiple accounts related towards
recording in terms of periodic inventory
system method, these range from asset
accounts, cost accounts, income accounts,
expense accounts.

Under periodic inventory system

This system is defined by using the following account titles:

“Asset accounts, Cost accounts, Income accounts, expense accounts”

Asset accounts-

Merchandising Inventory, end- This refers to the unsold merchandise at the

end of an accounting period, as determined by the physical counting of evaluating the inventory
balance. It is also usually dated at December 31 (end of the year accounting period). Its normal
balance is debit.

Cost accounts-

Merchandising Inventory beginning- This refers to the merchandise inventory

at the beginning of the period when the business acquires inventory, this is usually dated at
January 1(beginning of the new year’s accounting period). It will turn an asset into cost when
the period has ended, this account is usually credited in the adjustment (adjusting entries.)

Periodic and perpetual inventory systems are a methods in order to record transactions regarding
merchandise inventory balances, the cost of goods sold, and the subsequent account titles which are
affected in each inventory systems.

Perpetual inventory systems Periodic inventory systems

There are 2 entries and 4 accounts affected There is only 1 entry and two accounts affected
whenever a sale is made when using the whenever a sale is made under the use of the
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perpetual inventory system. periodic inventory systems.

Whenever we make a sale we also record an
entry for the expensing of the assets cost as a
result of recognizing related revenue.
Has the same entry regarding the purchase and
the returns of allowances with that of the
periodic system.
The matching principle does not apply whenever
the business sells merchandise, it only applies at
the end of the accounting period when the
inventory balance needs to be evaluated as well
as the balance of the COGS.
Has a journal entry in regards to the purchase of
returns and allowances- this account is credited
from when the business returns purchased goods
back to the supplier in return for the businesses
cash.
Cash xx
Purchase returns allowances xx

Sale returns and allowances- Has 2 entries that Sale returns and allowances- Has only 1 journal
involve 4 accounts, wherein whenever a entry, that involves 2 accounts , wherein
customer returns inventory, 2 entries are made,

1st entry- is the debiting of the return of goods Sales returns & allowances xx
and the crediting of cash or receivables Cash / receivables xx
Sales returns or allowances xx
Cash/receivables xx

2nd entry- is the debiting of merchandise

inventory and the crediting of cost of sales
Merchandise inventory xx
Cost of sales xx

Are perpetual and periodic inventory systems different methods in order to record the different
effects that transactions have on inventory and other account titles related to inventory such as
discounts, transport ( freight-in and out) the buying and selling of merchandise inventory?

Does the stock card serve the same function with that of a cashflow statement? Wherein a cashflow
statement records the inflow and outflow of cash occurring in the business? But instead of recording
the inflow and outflows of cash , the stock card records the running balance of inventory?

Perpetual inventory systems Periodic inventory systems

It is when transactions are continuously updated
whenever there is buying selling of goods.
All the transactions that affect the inventory is
recorded within the merchandise or inventory
The inventory account is only updated at the end
of the accounting period, wherein a physical
count of the inventory is performed.
What is a physical count?
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account, meaning “purchases, freight-ins A physical count is when the quantity of

purchase returns “are all recorded in the
inventory account.
Cost of goods sold is also updated every time
related revenue is made.
The business will know the balance of their
inventory as well as their cost of goods sold since
it is regularly updated
The business will find out the balance of their
COG sold in real time
inventory is counted , the total number of
inventory( quantity ) is multiplied to its selling
price in order to get the balance of the inventory
The balance of the inventory is the total
amount of the inventory in terms of value of the
number of inventory units within it.
The cost of goods sold is derived from:
.”
“Cost of goods available for sales−Ending inventory=Cost of
The business will only know about the balance of
their COGs after the end of the accounting
period.

Steps on how to record transactions concerning inventory by using perpetual and periodic
inventory systems
Perpetual inventory systems Periodic inventory systems
Step 1: Last period’s closing inventory Step 1: Last period’s closing inventory
becomes this period’s opening inventory becomes this period’s opening inventory
*Beginning and ending inventories are not necessarily different account titles, it is more of a
presentation on how to arrive at COGS, the beginning inventory is only needed to get the
ending inventory
Step 2: Record additions in your inventory Step 2: Record additions in your purchases
account account
*Purchases accounts only exist under periodic
inventory systems
Step 3: Record revenue and recognize related Step 3: Record only revenue
expenses i.e.(Cost of goods sold)
1st entry: 1st entry:
Cash/receivables xx Cash/receivables xx
Revenue xx Revenue xx
2nd entry:
COGS (related expenses) xx
Merchandise inventory xx
Step 4: Perpetual inventory system, the Step 4: Transfer the balance of the purchases
closing balance and cost of goods sold are accounts to the inventory account to get your
constantly updated. This is because, as well additions which are then to be added to the
sell goods we also recognize related expenses opening balance to get the cost of goods
that would be the cost of goods sold. available for sale

Inventory xx
Purchases xx
Cost of goods available for sale is :
Opening inventory +additions=Cost of goods available for s
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Step 5: Update Closing inventory calculate

cost of goods sold.
Get the closing inventory by doing a physical
count of your inventory.

Closing inventory=(openinginventory + additionalinventor

*the inventory is in quantity amount not
amount in cash, and the price per quantity is
the price that would represent the price we
bought the goods for , since closing inventory
represents the unsold merchandise
You get the cost of goods sold by:
“Cost of goods available for sales−Ending inventory=Cos
Cost of goods available for sale is :
Opening inventory +additions=Cost of goods available for s

Opening inventory XX
Additions- ( additionally XX
purchased goods)
Cost of goods available for sale XXXX
(Cost of goods sold) (XX)
Closing inventory XX

3. Under perpetual inventory systems, why is there a need to conduct an inventory count at the
end of the period despite of having a stock card as a means of control?

4. What information can we derived from a stock card?

There are three parts to a stock card, each part relays information to a specific effect
regarding the inventory account.

Received column- Records the additional purchase of inventory made by the business
for the current month.
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Issued column- Records the effects of the transaction that involve the selling of goods

*The accumulated balance of the issued column is the cost of goods sold

Balance column- Records the running balance of the business. The quantity and amount
columns within the balance column accumulate in value of each of the effects that the
business receives after each transaction.

Received column transaction- Causes an increase in both quantity and amount

whenever the business buys additional inventory.

Issued column- Causes a decrease in both quantity and amount whenever a

business sells inventory.

*The last line item of the balance column is the running balance.
5. In what aspect that purchase discounts and sales discounts are similar?
What is a discount?
A deduction from the usual cost of something, typically given for prompt or
advance payment. A discount goes either way for a sale or a purchase of goods.

Inventory XX
Cash XX
Discount XX

Discount terms:
a.) 2/10, N/30- A discount of 2% is acquired when the account is paid in full within 10
days after the issuance of the invoice. No discount after 10 days starting on the 11 th
to the 30th day since the date of invoice.

2/10, 1/20, N/30- 2% discount when the account is paid in full within 10 days after
the issuance of the invoice, 1% discount after paying the account in full within 11 to
20 days of the invoice issuance. No discount after paying account within 20 to 30
days issuance of invoice.
b.) 2/10,EOM- 2% discount is availed if account is paid in full by the end of the month.
6. Are trade discounts similar with cash discounts?

Trade discounts Cash discounts

Are on the spot discounts that are the cause
of the cash account or sales.
Cash discounts can either be a purchase
discount or a sales discount.
It affects both buyer and seller.
Discounts given by the company in order to
encourage the buyer to pay their accounts in
full earlier.

Recorded as a sales discount from the seller’s

books. If you are a seller, the account that
you will use to record a sale is the sales
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discount.
Recorded as purchase discount from the
buyer’s books. If you are a buyer, the account
that you will use to record the purchase is a
purchase discount account.
The discount is not recorded in the books, The discount is recorded on the books,
meaning that the journal entry won’t reflect meaning that the discount is reflected in the
any form of discount. journal entry.
1st step : Get the value of the discount 1st step : Get the value of the discount
Discount=Price of goods sold∗x % discount Discount=Price of goods sold∗x % discount
2nd step: Get the Difference of the Price of 2nd step: Get the Difference of the Price of
goods sold and the discount goods sold and the discount
Difference=Price of goods sold−discount Difference=Price of goods sold−discount
3rd step: Record the difference as the new
price of goods sold amount, or revenue
received.
Perspective of buyer:
Goods (difference amount) XX
Cash (difference amount) XX
Perspective entry of seller :
Cash (difference amount) XX
Sales (difference amount) XX
*Keywords to remember: Trade discount

Trade discounts:

1st step : Get the value of the discount

Discount=Price of goods sold*x % discount

2nd step: Get the Difference of the Price of goods sold and the discount

Difference=Price of goods sold-discount

3rd step: Record the difference as the invoice price.

Cash (difference amount) XX

Sales (difference amount) XX

Multiple trade discounts:

1st step: Get the value of the discount

Discount=Price of goods sold*x % discount

2nd step: Get the Difference of the Price of goods sold and the discount

Difference=Price of goods sold-discount

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3rd step: Get the value of the nth discount

Nth discount =Difference∗x %nthdiscount

4th step: Get the value of the nth value of the new discount

Nth discount =Difference∗x % of new discount

5th step: Get the value of the nth difference.

Nth difference=Difference−Nth discount

6th step: Record the Nth difference as the invoice price in the books

Cash XX

Sales XX

*Take note that both cash and sales amount are derived from your new invoice price.

Cash discounts:

What to take into account:

I – Initial date of invoice

T- Terms of agreement, e.g. (2/10, n/30).

IP- Invoice price

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E- Date of paying invoice

Find out whether customer can avail the discount or not?

Step 1: Get the difference between the initial date of invoice and the date of
paying the invoice.

Difference=E−I
Step 2: Find out whether the difference is less than or equal to ten, if not then
the customer cannot avail for a discount.

If Difference<¿=10 ,∴ buyer can avail discount

Step 3: Find the discounted amount

Discounted amount =(IP∗.02)

Step 4: Get the difference between the invoice price and the discounted
amount, this will be the cash disbursed if you are the buyer , or if you are the
seller , this will be your net cash received .

Cash disbursed=IP−( IP∗.02 )

Net cash received =IP−( IP∗.02 )
Step 5: Record the step 4 amount as net cash as well as its accompanying
discount

Purchase discount transaction : Payables (invoice price) XXX

Cash(Cash disbursed) XX
Purchase Discount X
Sales discount transaction : Cash ( Net cash received) XXX
Sales discount X
receivables XX

What is the difference between purchase discount and sales discount?

A discount is not an expense account, it is a contra account, purchase and sales

accounts are both contra accounts to their respective inventory, sales accounts.

purchase discount sales discount

Purchase discount is an effect from Sales discount is an effect from the
buying inventory selling of goods from a business
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The normal balance of inventory is a The normal balance of sales is a

debit balance credit balance
The normal balance of a purchase The normal balance of a sales
discount is credit balance discount is a debit balance
*The difference between the invoice *The difference between the sales
price and the discounted price is the price and the discounted price is the
cash disbursement to acquire net cash received through the sale
inventory of the item.
Initial transaction: Initial transaction:
Inventory XX Acc. Receivables XX
Acc. Payables XX Sales revenue XX
Acc. pay XX Cash (Net cash received) XX
Cash (disbursement) XX Sales discount XX
Purchase discount XX Receivables XX

Cash and trade discount problems:

What to take into account?

I- Initial date of invoice purchase/sale

IP-Invoice price

T-Trade discount terms

Ct- Credit discount terms

E- Date of invoice paid

1st step : Get the value of the Trade discount

Trade Discount=Invoice price*x % discount

2nd step: Get the Difference of the Price of goods sold and the trade discount

Difference=Invoice price- trade discount

3rd step: Record the difference as the new invoice price which will then be recorded as the
initial entry.

Cash/receivables (New invoice price) XX

Sales (New invoice price) XX

4th Step: Get the difference between the dates of initial invoice and date of paying invoice too
see if the customer is eligible for the cash discount stated in the credit terms.

Difference=E−I
5th step: Find the value of the cash discount, this will be the businesses net cash received, and
the buyers cash disbursed
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Cash disbursed=IP−( IP∗.02 )

Net cash received =IP−( IP∗.02 )
6th step: If you are the buyer, record the purchase discount transaction, if you are the seller,
record the sales discount transaction.

Legend:

Tdip = trade discount invoice price, Cd= Cash disbursed, Ncr= Net cash received.

Purchase discount transaction Sales discount transaction

Payables ( tdip) XX Cash (Ncr) XX
Cash(cd) XX Sales discount XX
Purchase discount XX Receivables (tdip) XX

* Remember, the amount to record for payables and receivables in this situation is the one
derived from the new invoice price which is the difference from the previous invoice price and the
trade discount.

7. What the difference between freight-in from freight-out?

freight-in freight-out
Debit to freight in account Debit to freight-out account
Freight-in XX Freight-out XX
Cash/receivables XX Cash/receivables XX
Transaction related to receiving of goods. Transactions related to the selling of goods.
The effects of freight-in are represented in Freight-out is a selling expense, meaning its
the Cost of goods sold effects are represented on the operating
expenses.

8. What is the difference between a credit memorandums from a debit memorandum?

Credit memorandum Debit memorandum

Is a notice of returns from the perspective of Is a notice of returns from the perspective of
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the seller . the buyer.

The business will inform the buyer that they The buyer will inform the business that they
will credit their accounts receivable from the will debit their accounts payable to the
customer due to the return of goods sold. business due to them returning the goods sold.
Initial transaction: Initial transaction:
Acc. Receivables XX Purchases XX
Sales revenue XX Accounts payable XX
Adjusting entry:
Adjusting entry: Accounts payable XX
Sale returns &allowances XX Purchase returns & allowances XX
Acc. Receivables XX
*Sales returns & allowances are a contra * Purchase returns & allowances are contra
revenue account, meaning that they must be expense accounts, meaning they must be
deducted from the revenue account when deducted from the expense accounts while
preparing the financial statement. preparing the financial statement

9. Why is there a need to conduct physical inventory count under periodic inventory system?

10. Despite using a stock card under perpetual inventory system, for what purpose the inventory
is still conducted?

11. When is there an inventory short or over?

12. Compare VAT input from VAT output Tax.
13. How VAT input is presented in the balance sheet?
14. How is VAT output presented in the balance sheet?

Accounting for value-added tax

What is value-added tax?

It is a value added by the seller of goods and services. A value-added tax (VAT) is paid at
every stage of a product's production from the sale of the raw materials to its final purchase by a

consumer. From the acquisition of raw materials to the development of the product until the selling of
the product, every stage of production is taxed.
What is the difference between sales tax and value added tax?
sales tax
It is the tax that the consumer pays whenever
they purchase goods or service. Raw materials
that are bought and sold for the production of
other goods are only issued resales certificates,
meaning it is not liable for sales tax.
*Sales tax is not collected until the final sale of
the completed product to the consumer.
Example of finished products liable for sales tax:
Smartphones, watches, computers etc.
What is input tax?
What is output tax?
What is VAT payable?
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value added tax
VAT, on the other hand, is collected by all sellers
in each stage of the supply chain. Suppliers,
manufacturers, distributors, and retailers all
collect VAT on taxable sales. VAT is charged at
every stage of production, meaning from the
buying and selling of raw materials to the
purchase of the final product by the consumer ,
VAT is charged. It is the final consumer who pays
for the VAT , specifically the one who bought the
final goods .
VAT is paid every stage by the buyer of the goods,
and subsequently the seller is reimbursed by the
buyer of the goods. Meaning, if the seller bought
goods he would have to pay for the VAT but upon
selling of the goods to another buyer ,the seller
will be reimbursed by the VAT and the VAT
received will be remitted to the government.
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Input tax Output tax

Is incurred by the buyer, whenever a customer Is incurred by the seller, whenever the seller sells
buys a product. a product.
Situations involving input tax: a. Situations involving output tax:
a. For account purchases b. Sales on cash
b. Return of merchandise purchased in cash c. Sales on account
c. “ “on d. Received merchandised returned by
account customer sold for cash
d. Payment of account at a discount e. “ “ sold on
account

What is VAT payable?

It is the account wherein both input and output taxes are closed to. The amount found within
VAT payable is to be remitted to the government.

Input tax−Output tax=credit balance=VAT payable

Input tax−Output tax =debit balance= prepaid tax