WHOLE BRAIN LEARNING SYSTEM

OUTCOME-BASED EDUCATION

SENIOR HIGH SCHOOL Grade

Fundamentals of Accountancy, Business 11/12
and Management 1

LEARNING QUARTER 2

MODULE WEEK 3- 4

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 Module in
Fundamentals of Accountancy,
Business and Management 1

Quarter 2
Weeks 3 - 4

Merchandising Business

Development Teams

Writer: Clarafina P. Verzosa

Editors/Reviewers: Veronica S. Rabang
Romeo Uganiza
Eliza G. Salvador
Illustrator: Jeshimon C. Patoc
Layout Artist: Clarafina P. Verzosa
Management Team:
Vilma D. Eda Arnel S. Bandiola
Lourdes B. Arucan Juanito V. Labao
Marlyn S. Ventura

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 CHAPTER 8

ACCOUNTING FOR A MERHANDISING BUSINESS

An organization which is engaged in the buying and selling of goods or merchandise is

a merchandising or trading concern. Merchandise refers to goods purchased and then resale
it in the same form. In any industry, the manager strives to shorten the cycle. The faster the
sale of inventory and the collection of cash, the higher the profits.

The merchandising entity purchases more inventory and the cycle continues. For cash
sales, the cycle is from cash to inventory and back to cash. For sales on account, the cycle is
from cash to inventory to accounts receivable and back to cash.

Most Essential Learning Competencies:

 The learner can describe the nature of transactions in a merchandising business.

 The learner can record transactions of a merchandising business in the general journal.
 The learner can post transactions in the general and subsidiary ledgers or “T” Accounts.

After going through this module, you are expected to:

1. Describe the nature of a merchandising business.
2. Record transactions of a merchandising business in the general journal.
3. Post transactions in the general and subsidiary ledgers or “T” Accounts.

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MULTIPLE CHOICE. Read each item carefully and choose ONE best answer. Write the letter
of your choice in a separate sheet of paper.
1. A supplier offers the following discounts: Trade discounts of 10% at list price and
another cash discount of 5% if paid in full before the due date. How much is to be paid if
a customer pays before due date at a list price of P16,000
A. 13,680
B. 15,520
C. 14,000
D. 16,000

2. Which account does a merchandiser, but not a service entity, use?

A. Sales
B. Inventory
C. Cost of Goods Sold
D. All of the above

3. A trade discount is:

A. Shown in the sales journal.
B. Shown in purchase journal.
C. Shown in the general journal.
D. Not shown anywhere.

4. The journal entry for the purchase of inventory on account is:

A. Inventory xxx
Accounts payable xxx

B. Accounts payable xxx

Inventory xxx

C. Inventory xxx
Accounts receivable xxx

D. Inventory xxx
Cash

5. Each of the following companies is a merchandising entity. except a

A. Candy store
B. Carwash
C. Furniture store
D. Wholesale parts entity
6. A physical count of inventory is usually taken
A. at the end of the fiscal year..
B. at the peak of a busy season.
C. at the start of the fiscal year.
D. In the middle of the fiscal year.

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7. A sale on March 21 with terms of n/10 eom is due to be collected by
A. March 31
B. April 1
C. April 10
D. April 30

8. An amount deducted from the catalog pice for an item of merchandise is called a
A. Customer discount
B. Purchases discount
C. Sales discount
D. Trade discount

9. The entry to record the return of goods from a customer would include a
A. Credit sales
B. Credit to sales returns and allowances
C. Debit to sales
D. Debit to sales returns and allowances

10. The entry to record a sale of P7,500 with terms 2/10, n/30 would include a
A. Credit to Accounts receivable for P7,500
B. Credit to Sales for P7,500
C. Debit to Sales discounts for P150
D. Debit to Sales for P7,350

11. The collection of a P5,000 account beyond the 2% discount period would result in a
A. Credit to Accounts receivable for P5,000.
B. Credit to Cash for P5,000
C. Debit to Cash for P4,900
D. Debit to Sales discounts for P100

12. The collection of P4,000 account within the 2% discount period would result in a
A. Credit to Accounts receivable for P3,920
B. Credit to Cash P3,920
C. Debit to Accounts receivable for P3,920
D. Debit to Sales discounts for P80.

13. The purchases discount account is a contra-account to

A. Accounts payable
B. Purchases
C. Sales
D. Sales discount

14. The entry to record payment on a P15,000 account within the 2% discount period would
include a
A. Credit to Accounts payable for P15,000
B. Credit to Purchase discounts for P300
C. Debit to Accounts payable for P14,700
D. Debit to Cash for P15,000.

15. Goods totaling P50,000 were purchased February 2 with terms of 2/10, n/30. Returns of
P10,000 were made on February 10. What discounts, if any, can be availed of if the
invoice was paid on February 12?
A. None C. P800
B. P1,000 D. P200

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 In our previous lesson, we analyzed problems of a service business and prepared financial
reports (Statement of Comprehensive Income, Statement of Financial Position, Statement of
Changes in Equity and Statement of Cash Flows) and made the necessary corrections or
adjustments for transactions that were erroneously been recorded during the accounting period.
Then, prepared the Adjusted Trial Balance for the period until the closing of nominal and
temporary proprietorship accounts so as to prepare the Post-Closing Trial Balance (the
Statement of Financial Position in a Trial Balance Form). Then finally, the preparation of
Reversing entries to simplify the recording of certain regular transactions in the next accounting
period. Let’s recall by doing the following activity.

Activity 1

To check your mastery, you are required to prepare the Adjusting Journal Entries and
Reversing Entries of the following transactions: Write your answer in a Journal sheet.

1. Assume that Sienna Marketing has yearly insurance premiums of P12,000 are paid
every October 1. The first payment was made on October 1, 2020, covering a year up to
October 1, 2021.
2. On December 31, 2020, the business has an outstanding 60-day, 6% note payable,
dated December 16, 2020. The face value of the note is P40,000.

Lesson 1
Nature of a Merchandising Business

The activities of a merchandising concern that distinguish it from a service concern cover the
purchasing, handling, and selling of merchandise, briefly described as follows:
1. Purchasing. Information as to the kind, quality, quantity, and cost of goods bought
should be maintained for the use of the management. Records as to supplies or
merchandise bought are also maintained.
2. Handling. The cost of transporting and storing of goods bear an important relation to the
prices of goods bought. These should be recorded properly. Transportation costs
include freight, express, drayage, and cartage.
3. Returning of goods purchased. Some of the merchandise received may prove
unsatisfactory and must be returned to the vendors, or if not returned, may be allowed
some deductions from the original purchase price.

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 4. Selling. Goods purchased are sold at prices above the cost in order to provide adequate
margin of profit. It is therefore imperative that the cost of goods bought should be known
from the accounting records so that the desirable selling prices may be set.
5. Returning of goods sold. Some of the merchandise sold may be returned by the
customers. Deductions from the original selling prices must be allowed for such returns.
If the goods delivered are defective and no return is made, the customers are granted
reduction on the sales price.
6. Maintaining adequate stocks on hand. In order to satisfy orders of customers at all
times, a stock of merchandise must be maintained on hand. This is called inventory on
hand.

MERCHANDISE ACCOUNTS
1. Sales account. Sales of merchandise are recorded in this account at selling price.
2. Sales return account. This account is debited for all the merchandise returned by
customers. The debit entry is at the original selling price of the merchandise returned.
This account is a deduction from the Sales account.
3. Sales allowance account. When the goods delivered to a customer are found to be
defective or not as ordered and the purchaser desires to retain the goods as is, the
customer is permitted to deduct a certain amount from the selling prices of the goods
delivered. This deductions are debited to Sales allowance account.
4. Purchases account. This is a temporary account to which the cost of goods bought
during the period is debited. It has a debit balance at the end of the accounting period.
5. Purchase Returns account. Goods bought and returned to the supplier or creditor are
credited to this account at invoice prices. This account is a deduction from the
Purchases account.
6. Purchase allowances account. Goods bought and received as defective, or not as
ordered, when not returned to the supplier, maybe subject to certain reductions from
their acquisition prices. These deductions from the purchase price of goods are credited
to Purchase Allowances account.
7. Freight and Cartage In account. If the buyer pays the expenses of transporting the
goods from the place of the seller to the place of the buyer, such expenses are debited
to the Freight and Cartage In (Transportation In) account. This is an addition to
Purchases account
8. Merchandise Inventory account. At the end of the accounting period, a physical count of
the unsold merchandise on hand is taken. The total amount of these goods on hand is
debited to the Merchandise Inventory account.

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 Lesson 2
Accounting for Purchases

Merchandise bought and received is accompanied by a business form called purchase

invoice.

To illustrate:

1. Clyde purchase merchandise on cash, P6,000.

Journal entry:

Purchases 6,000
Cash 6,000
Merchandise bought on cash.

2. Clyde bought merchandise from Novelty Store, P10,000 on account.

Journal Entry at the time of purchase:

Purchases 10,000
Accounts Payable- Novelty Store 10,000
Merchandise bought on account.

Journal Entry at the time of payment:

Accounts Payable-Novelty Store 10,000

Cash 10,000
Full payment of account.

Accounting for Discounts on Purchases

Types:
1. Cash discounts- are special deductions from the prices of goods bought from the seller
to the buyer to induce the latter to pay within a specified period.

2. Trade discounts-deductions from the list prices of merchandise offered to promote the
sale of the merchandise. These are not shown in the books of account.

Terms attached to credit invoices:

3/10, n/30 – There is 3% discount if paid 10 days after the invoice date, Net Amount if paid
beyond 10 days but within 30 days.

20, 2/10, 1/20, n/30 – There is 20% trade discount immediately deducted from the list price of
the merchandise. There’s also 2% discount to be given to the buyer if the merchandise is paid
10 days after the invoice date, 1% discount if paid within the second 10 days (10 + 10 = 20

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days), Net Amount if paid beyond 20 days but within 30 days.

n/60 – NO Cash discount is offered. The full amount must be paid within 60 days from the
invoice date.

2%, 10 e.o.m. - this means that a 2% discount is allowed if payment is made 10 days after the
end of the month. of sale.

Accounting for Freight In

Transportation or freight in on merchandise bought is recorded as an expense in the books

of the party who, as per contract, should shoulder the expense. Merchandise may be billed to

the purchases on one of the following bases:

1. F.O.B. shipping point. Freight prepaid.

2. F.O.B. shipping point. Freight collect.
3. F.O.B. destination. Freight prepaid.
4. F.O.B. destination. Freight collect.

F.O.B. shipping point means that the goods are free on board up to the shipping point.
Therefore, if the seller is in Manila and the buyer is in Laoag, the seller absorbs all
transportation expenses up to the port of Manila while the buyer shoulders all transportation
expenses from Manila to Laoag. This also signifies that title to the goods passes to the buyer
upon the loading of the goods onto the carrier at Manila.

F.O.B. destination. Means that the goods are free on board up to the point of destination. If
the seller is in Manila and the buyer is in Laoag, the seller absorbs all transportation expenses
of the goods up to Laoag. The title to the goods passes to the buyer only upon the unloading of
the goods from the carrier in Laoag.

Freight prepaid. Means that the seller has paid the transportation up to the point of destination.

Freight Collect. Means that the buyer should pay the transportation expenses up the point of
destination.

F.O.B. Shipping point, freight collect - this means that the freight expenses should be
shouldered by the buyer but was actually paid by the buyer

F.O.B. shipping point. Freight prepaid- This means that the freight expense should be
shouldered by the buyer but was actually paid by the seller.

F.O.B. shipping point. Freight collect - this means that freight expense should be
shouldered by the seller but the expense was actually paid by the buyer.

F.O.B. Destination. Freight prepaid. – this means that the freight expenses should be
shouldered by the seller and was actually paid by the seller

Accounting for Purchase Returns and Allowances

When merchandise bought is returned, or an allowance is requested, the buyer informs the
seller in writing called debit memorandum. If the return is accepted or the allowance is granted
by the seller, the seller usually sends to the buyer such acceptance or grant in writing through a
printed form called credit memorandum.

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To illustrate: Assume the following transactions:

Jan. 5, 2021 – Clyde bought merchandise from Novelty Store, P15,000. Freight is P1,800.
Terms: 15, 2/15,n/30
F.O.B. destination, freight collect.
Jan. 12, 2021 - Clyde returned P1,000 worth of merchandise to Novelty Store. This was
accepted by Novelty Store.
Jan. 20, 2021 – Clyde settled in full. His account to Novelty Store.

Journal entries:

Jan. 5, 2021 - Purchases 15,000

A/P- Novelty Store 15,000
Purchases on account.

- A/R-Novelty Store 1,800

Cash 1,800
Freight paid for the account of Novelty.

Jan. 12, 2021 – Accounts receivable- Novelty Store 1,000

Purchase Returns and Allowances 1,000
Returned merchandise.

Jan. 15, 2021 – A/P- Novelty Store 10,950

Purchase discount 255
Cash 10,695
Full payment of account.

Computation:
List Price 15,000
Less: Trade discount
(15,000 x .15) 2,250
Net price on Invoice 12,750
Less:Cash discount
(12,750 x .02) 255
Net after cash discount 12,495
Less: Freight paid 1,800
Amount due 10,695
vvvvv

Lesson 3 Accounting for Sales

Every sale is supported by an invoice. The sales invoice of the seller is the purchase invoice
of the buyer. When a sale is for cash, the seller receives money in return for his merchandise.
When the sale is made n credit, the seller acquires a receivable or right to collect from the
buyer. A credit sale is sometimes called account sale or charge sale.

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To illustrate:

1. CPV Merchandising sold merchandise, P25,000 cash.

Journal Entry:
Cash 25,000
Sales 25,000
Cash sales.

2. CPV Merchandising sold merchandise, P20,000 on account

Journal Entry:
Accounts receivable-customer 20,000
Sales 20,000
Sales on account.

Accounting for Sales Return and Allowances

When a customer returns goods to the seller or requests for a deduction from the price of
the goods delivered to him, and the seller accepts the return or grants the request, a credit
memorandum is sent to the customer.

Pro-forma entries:

Sales Return and Allowances xx

Name of customer xx
Return of goods.

Sales return and allowances xx

Cash xx
Cash refund for goods returned.

Accounting for Discounts on Sales

Trade discounts are not recorded or reflected while cash discounts are shown in the books
of the seller. Cash discounts are allowed only on cash settlements. It is computed on the
net amount of receivables, i.e. after deducting sales returns and allowances.

To illustrate:
Jan.5, 2021 – Sold merchandise to KVShop on account, P50,000. Terms: 10, 2/10, n/30
Jan. 15, 2021 – Received full payment from KVShop.

Journal entries:
Jan. 5, 2021 – Accounts Receivable-KVShop P45,000
Sales P45,000
Sales on account.
(50,000 x.10= 5,000); 50,000-5,000=45,000()

Jan. 15, 2021 – Cash 44,100

Sales discounts 900
Accounts receivable- KVShop 45,000
Collection on account.

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Accounting for Freight Out

Transportation on goods delivered are recorded in the Freight Out or Delivery Expense
accounts.

Pro-forma entries:

1. If transportation expense is paid in cash

Freight out xx
Cash xx

2. If the transportation expense is not paid in cash

Freight out xx
Accounts payable-name of delivery company xx

Upon payment of the delivery company, the entry will be:

Accounts payable-delivery company xx

Cash xx
Payment of delivery bill.

The Merchandise Inventory Account

In a trading concern, an adequate amount of merchandise is maintained on hand to

meet possible emergency requirements of customers. The amount of merchandise on
hand at the end of the accounting period is recorded under the account Merchandise
Inventory account.

Purchases account-representing the total amount of goods bought during the

accounting period.
Merchandise Inventory account- representing the amount of goods bought but
remaining unsold at the end of the accounting period.

Recording Transactions of a Merchandising Business in the

Lesson 3
General Journal

Activity 2. Jerry Cruz began a merchandising business on January 1, 2021. His transactions
for the month follow:

Jan. 1- Invested in the business cash, P340,000; merchandise, P100,000; and furniture,
P160,000
Jan. 5- Bought merchandise on account from Diaz Bazar, P150,000
Jan. 8- Sold merchandise for cash to Korina Roxas , P30,000.
Jan. 12- Paid the Daily Inquirer P5,000 for advertising.
Jan. 14- Sold merchandise on account to Sarah and Company, P350,000
Jan. 20- Wages and salaries paid, P55,000.
Jan. 22- Bought merchandise on account from Ricky Lo, P75,000 for which a down payment of
P25,000 was made.
Jan. 25- Sold merchandise on account to Korina Roxas,P125,000

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Jan. 29- Received P100,000 as partial payment of account from Korina Roxas.
Jan. 31- Wages and salaries paid, P55,000.

Required: Prepare Journal Entries of the above transactions. USE JOURNAL SHEET.

Activity 3

Write Relax if the statement is correct and Stress if it is not. Write your answer in a
separate sheet of paper.

1. Sales return and allowances is described as a contra-revenue account.

2. A physical inventory is usually taken at the end of the accounting period.
3. Merchandise inventory could include goods that are in transit.
4. The term freight prepaid or collect will dictate who shoulders the transportation costs.
5. If the seller is to shoulder the cost of delivery, the term is stated as F.O.B. destination.
6. Purchase returns and allowances is a deduction from Purchases
7. The sales discounts account is a contra-income account and will have a debit balance.
8. Cash discounts are called purchases discounts from the buyer’s view point
9. Discounts offered to the buyer to encourage early payment are Trade discounts.
10. The chart of accounts for a merchandising entity differs from that of a service entity.

In this Module, it includes the discussion and presentation of the nature of a merchandising
business, different account titles used in a merchandising business, accounting for purchases,
purchase returns and allowances, freight In, trade and cash discounts, accounting for sales,
sales returns and allowances, freight out and the merchandise inventory account.

It also includes the recording of business transactions of a merchandising business in the

general journal and posting in the subsidiary ledgers or using the “T” accounts.

Activity 4. Get the final balance of every account by posting immediately the transactions of
Jerry Cruz to “T” accounts.

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 Assessment

MULTIPLE CHOICE. Read each item carefully and choose ONE best answer. Write the letter
of your choice in a separate sheet of paper.
1. A supplier offers the following discounts: Trade discounts of 10% at list price and
another cash discount of 5% if paid in full before the due date. How much is to be
paid if a customer pays before due date at a list price of P16,000
A. 13,680
B. 15,520
C. 14,000
D. 16,000

2. Which account does a merchandiser, but not a service entity, use?

A. Sales
B. Inventory
C. Cost of Goods Sold
D. All of the above

3. A trade discount is:

A. Shown in the sales journal.
B. Shown in purchase journal.
C. Shown in the general journal.
D. Not shown anywhere.

4. The journal entry for the purchase of inventory on account is:

A. Inventory xxx
Accounts payable xxx

B. Accounts payable xxx

Inventory xxx

C. Inventory xxx
Accounts receivable xxx

D. Inventory xxx
Cash

5. Each of the following companies is a merchandising entity. except a

A. Candy store
B. Carwash
C. Furniture store
D. Wholesale parts entity

6. A physical count of inventory is usually taken

A. at the end of the fiscal year..
B. at the peak of a busy season.
C. at the start of the fiscal year.
D. In the middle of the fiscal year.

7. A sale on March 21 with terms of n/10 eom is due to be collected by

A. March 31
B. April 1

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 C. April 10
D. April 30

8. An amount deducted from the catalog pice for an item of merchandise is called a
A. Customer discount
B. Purchases discount
C. Sales discount
D. Trade discount

9. The entry to record the return of goods from a customer would include a
A. Credit sales
B. Credit to sales returns and allowances
C. Debit to sales
D. Debit to sales returns and allowances

10. The entry to record a sale of P7,500 with terms 2/10, n/30 would include a
A. Credit to Accounts receivable for P7,500
B. Credit to Sales for P7,500
C. Debit to Sales discounts for P150
D. Debit to Sales for P7,350

11. The collection of a P5,000 account beyond the 2% discount period would result in a
A. Credit to Accounts receivable for P5,000.
B. Credit to Cash for P5,000
C. Debit to Cash for P4,900
D. Debit to Sales discounts for P100

12. The collection of P4,000 account within the 2% discount period would result in a
A. Credit to Accounts receivable for P3,920
B. Credit to Cash P3,920
C. Debit to Accounts receivable for P3,920
D. Debit to Sales discounts for P80.

13. The purchases discount account is a contra-account to

A. Accounts payable
B. Purchases
C. Sales
D. Sales discount

14. The entry to record payment on a P15,000 account within the 2% discount period
would include a
A. Credit to Accounts payable for P15,000
B. Credit to Purchase discounts for P300
C. Debit to Accounts payable for P14,700
D. Debit to Cash for P15,000.

15. Goods totaling P50,000 were purchased February 2 with terms of 2/10, n/30.
Returns of P10,000 were made on February 10. What discounts, if any, can be
availed of if the invoice was paid on February 12?
A. None
B. P1,000
C. P800
D. P200

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 Answer Key

What I Know, pp. 4-5 ACTIVITY 1, p. 6

1. A 1.) Adjusting Journal Entry:

2. D Dec. 31, 2020 Prepaid insurance 9,000
3. D Insurance exp. 9,000
4. A
5. B Insurance paid in
6. A advance.
7. A Reversing Entry:
8. D
9. D Jan. 1, 2021 Insurance expense 9,000
10. B
Prepaid insurance 9,000
11. A
12. D To reverse the entry.
13. B
14. B
15. C 2.) Adjusting Journal Entry:
Dec. 31, 2020 Interest expense 100
Accrued Interest Payable 100
Interest accrued for 15 days.
Reversing entry:

Jan. 1, 2021 Acc. Interest Payable 100

Interest expense 100

To reverse he entry.

Activity 3, p. 13

1. Relax
2. Relax
3. Relax
Assessment, pp. 14-16
4. Stress
5. Relax 1. A 6. A 11. A
6. Relax 2. D 7. A 12. D
7. Relax 3. D 8. D 13. B
8. Relax 4. A 9. D 14. B
9. Stress 5. B 10. B 15. C
10. Relax

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References:

D.S. Pasion, et. al. 1990, Introductory Accounting, pp. 80-85.

Ballada, W. 2015. Basic Accounting Made Easy 20th Edition, pp. 390-396

Rabo, Tugas, Selendrez, 2016. Fundamentals of Accountancy, Business and Management 1,

pp. 115-125.

For inquiries or feedback, please write or call:

Department of Education – Schools Division of Laoag City

Curriculum Implementation Division
Brgy. 23 San Matias, Laoag City, 2900
Contact Number: (077)-771-3678
Email Address: laoag.city@deped.gov.ph

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