MERCHANDISING ORGANIZED

AS A PARTNERSHIP BUSINESS
 Accounts Account Type Financial statement

1. Cash Asset Statement of Financial Position

2. Accounts Payable Liability Statement of Financial Position

3. Service Revenue Revenue Income Statement

4. Rent Revenue Revenue Income Statement

5. Rent Expense Expense Income Statement
Statement of Financial Position
6. Prepaid Rent Asset
Statement of Financial Position
7. Unearned Revenue Liability
8. Accrued Expenses Liability Statement of financial position
Topic Outline:
I. Operating Cycle of the merchandising
business
II. Accounts used in merchandising business
III. Journalizing merchandising transactions
Operating Cycle of a Merchandising Business
Accounts used in Merchandising Business

• Revenues • Expenses
• Sales • Purchases
• Sales returns and • Freight in
allowances • Purchase returns and
allowances
• Sales discounts
• Purchase discounts
 ❏ Sales or Sales revenue
❏ increases owner’s equity, its normal balance is credit
An entry to record the receipt of 10,000 on march 1 for the sale of
merchandise will be:

DEBIT CREDIT
MARCH 1 CASH 10,000
Sales Revenue 10,000
To record cash sales
MARCH 1 ACCOUNTS RECEIVABLE 10,000
SALES 10,000
To record credit sales
❏ Sales Returns and allowances
❏ sales returns - the value of the goods returned by the customer
❏ sales allowance - the amount of reduction in sales price
❏ Sales returns and allowances has a normal debit balance
If a customer returns goods worth P2,000, the journal entry would be

DEBIT CREDIT
MARCH 2 Sales returns and allowances 2,000
Cash or (accounts receivable) 2,000
To record sales returns and allowances
❏ Sales discounts
❏ Trade discounts - reduction in sales price given to customers to
encourage them to buy the entity’s merchandise
If an entity gives a 40% trade discount for a merchandise with a list
price of 10,000, the sales price to be recorded is:
List price: 10,000
Less: 40% 4,000
Sales price 6,000

DEBIT CREDIT
MARCH 30 Cash or (A/R) 6,000
Sales 6,000
To record sales at 40% trade discount
❏ Cash discounts - is a reward for prompt payment
Assume that an entity sells P10,000 worth of merchandise on
account with credit terms of 2/10; n/30

DEBIT CREDIT
MARCH 1 Accounts Receivable 10,000
Sales 10,000
To record the sale of merchandise 2/10; n/30
If the customer pays within the discount period:

DEBIT CREDIT
MARCH 10 Cash 9,800
Sales discount 200
Accounts receivable 10,000
To record the collection within the discount period.

DEBIT CREDIT
MARCH 31 Cash 10,000
Accounts Receivable 10,000
To record the collection of accounts receivable.
 When preparing an income statement. The
revenue section in the income statement of a
merchandising business will appear as:

Sales 10,000
Less: Sales returns and allowances 2,000
Sales discounts 200 2,200
Net sales P7,800
❖ Purchases
➢ used to record the cost of merchandise acquired for resale
➢ normal debit balance

DEBIT CREDIT
MARCH 1 Purchases 5,000
Cash 5,000
To record the cash purchase of merchandise

DEBIT CREDIT
MARCH 1 Purchases 5,000
Accounts Payable 5,000
To record the purchase of merchandise on account.
❖ Purchase returns and allowances
➢ it is used to record the value of goods returned to a supplier or the
reduction in the purchase price for defective goods bought from a
supplier.
➢ The journal entry to record the return of goods to a supplier costing
P1,000

DEBIT CREDIT
MARCH Cash (Accounts payable) 1,000
Purchase returns and allowances 1,000
To record the purchase return
❖ Purchase discount
➢ reduces the cost of purchases
➢ the normal balance is credit
Assume that on March 1, the entity buys merchandise on
account for 5,000 with credit terms of 1/10; n/30. The journal
entry to record the purchase would be:
DEBIT CREDIT
MARCH 1 Purchases 5,000
Accounts Payable 5,000
To record the purchase of merchandise on account
 Payment within the discount period
DEBIT CREDIT
MARCH 2 Accounts payable 5,000
Cash 4,950
Purchase discounts 50
To record the payment within the discount period

DEBIT CREDIT
MARCH 31 Accounts payable 5,000
Cash 5,000
To record the payment of accounts payable
❖ Freight - in
➢ used to record the transportation cost of the merchandise
purchased.
To record the payment of P200 to transport the cost of
merchandise purchased, the journal entry would be
DEBIT CREDIT
MARCH 1 Freight in 200
Cash 200
To record freight on merchandise purchased.
Purchases 5,000
Add: Freight in 200
Total 5,200
Less: Purchase returns and allowances 1,000
Purchase discounts 50 1,050
Net Purchases P4,150
Example:
Kim trading had the following transactions in June:
1 Purchased merchandise and paid cash of 50,000
Paid 500 for freight charges related to the above purchase
4 Returned 10,000 of goods purchased and received a cash refund.
12 Purchased merchandise on account from ABC wholesalers, 20,000, terms
1/15; n/30
13 Purchased merchandise on credit form XYZ company, 10,000 terms 2/10 n/30
20 Returned 2,000 of the goods purchased from XYZ company.
24 Paid the account with ABC
25 PAid the account with XYZ
1 Purchased merchandise and paid cash of 50,000
Paid 500 for freight charges related to the above purchase
DEBIT CREDIT
June 1 Purchases 50,000
Freight in 500
Cash 5,500
To record the cash purchase of merchandise
4 Returned 10,000 of goods purchased and received a cash refund.

DEBIT CREDIT
June 4 Cash 10,000
Purchase returns and allowances 10,000
To record the purchase return
12 Purchased merchandise on account from ABC wholesalers, 20,000, terms
1/15; n/30

DEBIT CREDIT
June 12 Purchases 20,000
Accounts Payable 20,000
To record the purchase of merchandise on account

13 Purchased merchandise on credit form XYZ company, 10,000 terms 2/10

n/30
DEBIT CREDIT
June 13 Purchases 10,000
Accounts Payable 10,000
To record the purchase of merchandise on account
 20 Returned 2,000 of the goods purchased from XYZ company.

DEBIT CREDIT
June 20 Accounts Payable 2,000
Purchase Returns and allowances 2,000
To record the purchase return

24 Paid the account with ABC

DEBIT CREDIT
June 24 Accounts payable 20,000
Cash 19,800
Purchase discoun 200
To record the payment within the discount period
25 PAid the account with XYZ

DEBIT CREDIT
June 25 Accounts payable 8,000
Cash 8,000
To record the payment of accounts payable
Practice Problem
Cai Trading had the following transactions in January
2 Sold merchandise to a customer and received cash of P80,000.
5 Customer returned defective goods and a cash refund of P15,000 was paid by Cai.
10 Sold merchandise on account to Van store, P50,000, terms 2/15; n/30
17 Sold merchandise on account to San Company, P10,000, terms 2/10; n/30
20 Sales allowance of P2,000 was given to San Company, because the goods were exposed to
rain while in transit.
24 Collected the full amount due from VAn store.
31 Collected the remaining amount due from San Company.
Required:
Prepare the journal entries to record the above transactions.
What is the net sales for the period?