ACCOUNTING CYCLE OF A MERCHANDISING BUSINESS Administrative expenses or general expenses, are

expenses incurred by the seller from day-to-day

Merchandise refers to an item bought by a business for
operations of the business but are not directly related
the purpose of reselling it, referred to as goods.
to selling activities; common examples: office salaries,
Merchandise inventory, end - merchandise that remains insurance on building, depreciation on office
unsold at the end of the accounting period, commonly equipment, office supplies used, rent on office space,
referred to as stocks. office utilities, and all other expenses INCURRED IN THE
OFFICE
Merchandise inventory, beginning - refers to a
merchandise that remains unsold from the previous Credit Period refers to the numbers of days from date
accounting period and is expected to be sold this period of purchase that the supplier has given the business to
pay its account
Cost of Goods Sold or Cost of Sales - the amount
merchandise sold by the business for a given period of Discount Period refers to the number of days from date
time of purchase that the supplier’s offer of a percentage
reduction in liability remains valid
Merchandise Inventory, Beginning xx Freight Forwarder transports goods from one place to
Add: Net cost of purchases xx
another using various modes of transportation via land
Cost of Goods Available for Sale xx
(train or truck), sea (ship), and air (plane)
Less: Merchandise Inventory, End xx
Cost of Goods Sold P xx Freight is the cost associated with transporting goods
Service Business: (income statement) from seller to buyer’s place of business, commonly
Revenues P xx referred to as shipping costs.

Less: Operating expenses xx Freight on merchandise purchased means that the

amount of freight is recorded by the buyer and because
Net Income (loss) P xx merchandise is coming in to the buyer’s place of
business, the Freight-in account is used in the buyer’s
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Merchandising Business: (income statement) books.

Net sales revenue P xx
Freight on merchandise sold means that the amount of
Less: COGS xx freight is recorded in the seller’s books as Freight-out
because the merchandise is going out of the seller’s
Gross Profit xx
place of business.
Less: Operating expenses xx
Delivery expense is the seller who delivered the goods
Net Income (loss) P xx to the buyer’s place of business, while the Freight-out it
is the freight forwarder who delivered the goods.
Sales revenue or Sales - the amount of merchandise
Property, Plant, and Equipment are tangible assets with
sold by a business for a specific period of time
estimated useful life of more than one year which are
Operating expenses refer to expenses incurred by used in business operations. It includes:
businesses in their day-to-day operations
 Store furniture and fixtures refers to pieces of
Distribution costs or selling expenses, are expenses furniture used in the store
incurred by the seller in order to place the merchandise  Store equipment is a mechanical item used to
in the hands of the buyer; common examples: sales facilitate sales activity and requires regular
salaries and commissions, advertising, depreciation on maintenance (ex: cash registers)
store equipment, store supplies used, rent on store  Delivery equipment Is used to transport
space, store utilities, delivery, and all other expenses merchandise and is to be distinguished from
INCURRED IN THE STORE
 transportation equipment used to transport
people.
Source document, commonly referred to as business
document, provides evidence that a business
transaction has occurred.
Invoice, also known as bill, is issued by the seller to the
buyer to indicate that merchandise has been delivered,
therefore, the buyer is requested to pay the amount
due.
Delivery receipt is a document issued by the seller to
confirm if merchandise has been delivered to the billing
address or the buyer’s place of business.
Voucher, also known as a payment voucher, is an
internal document which indicates authorization for
payment.
 Cash voucher is approval of payment in cash
 Check voucher is approval of payment in the
form of a check
Official receipt is a document which acknowledges
receipt of cash or check. It is issued by the party who
collects the payment.
Two methods in recording purchase of equipment with
Accounts Payable:
 Gross method recognizes cash discount on the
date of full payment of account within the
discount period
 Net method deducts immediately the cash
discount on date of purchase base don the
assumption that the business will avail of the
cash discount
Incidental costs are costs that are necessary and
reasonable to be incurred in order for the business to
make use of the purchased equipment. A common
example is freight.
MANUFACTURERS OF A MERCHANDISE:
Wholesalers are those who sell only in large quantity
Retailers may sell in smaller quantity
(Both wholesalers and retailers are into merchandising
business)
TWO SYSTEMS OF MAINTAINING INVENTORY:
 Periodic Inventory System is traditionally used by
the business selling inexpensive goods; updating
of inventory is done periodically which is usually
once or twice a year through physical counting;
examples are supermarkets, convenience stores,
hardware stores, and sari-sari stores (ina-
update ka lang ng jowa mo once or twice a year
kasi hindi ka kamahalan) [I know, corny]
 Perpetual Inventory System the updating is done
every time there are changes in the quantity of
the goods; is traditionally used by businesses
selling few expensive goods; examples are
jewelry stores, car dealers, and furniture shops
(ina-update ka ng jowa mo every time na
nakikita niyang may changes sa relationship
niyo kasi mahal ka) [I know, corny]
The transactions for a service business are similar to
those in a merchandising business. Both types of
business generate revenues, incur expenses, collect
bills, pay-off obligations, and enter into transactions
with individuals or other businesses. The following
transactions for a merchandising business are:
 Purchase of merchandise – this merchandise
may have been invested by the owner into the
business or may have been bought by the
business from suppliers
o Purchase of merchandise on cash basis
Journal Entry:
Purchases
Cash
o Purchase of merchandise on account
Journal Entry:
Purchases
Accounts Payable
o Purchase of merchandise with down
payment
Journal Entry:
Purchases
Cash
Accounts Payable
 Accounts Payable
Cash
Purchase Discount
 Purchase Returns and Allowances – can only
happen if there was a purchase of merchandise
to begin with
 Sale of merchandise – the business is considered
as the seller and the analyses that show the
o Purchase of returns and allowances
effects on the seller’s books
(cash basis)
Journal Entry:
o Sale of merchandise on cash basis
Cash
Purchase of Returns and Journal Entry:
Allowances Cash
Sales
o Purchase of returns and allowances (on
account) o Sale of merchandise on account
Journal Entry: Journal Entry:
Accounts Payable Accounts Receivable
Purchase of Returns and Sales
Allowances
o Sale of merchandise with down payment
o Purchase of returns and allowances (with Journal Entry:
down payment) Cash
Accounts Receivable
Journal Entry:
Sales
Accounts Payable
Purchase Returns and
Allowances
 Sales Returns and Allowances – is the seller’s
counterpart for the Purchase Returns and
 Partial payment of account with supplier – this Allowances account maintained in the buyer’s
transaction assumes that the business has a books
remaining unpaid liability to its supplier after
the purchase transaction has been made o Sales of returns and allowances (cash
basis)
o Partial payment of account with supplier Journal Entry:
Sales Returns and Allowances
Journal Entry:
Cash
Accounts Payable
Cash
o Sales of returns and allowances (on
 Full payment of account with supplier – this account)
payment transaction happens on or before the Journal Entry:
Sales Returns and Allowances
last day of the credit period
Accounts Receivable
o Sales of returns and allowances (with
o Full payment of account beyond discount
down payment)
period
Journal Entry:
Journal Entry: Sales Returns and Allowances
Accounts Payable Accounts Receivable
Cash

 Partial collection of customer account – this

o Full payment of account within the
affects only one side if the accounting equation
discount period
which is the left side (assets)
Journal Entry:
 o Purchase of supplies on account
o Partial collection of customer account Journal Entry:
Journal Entry: Supplies
Cash Accounts Payable
Accounts Receivable
 Full collection of customer account – there are
different analyses based on whether the o Returns on supplies purchased
account was collected in full within or beyond Journal Entry:
Accounts Payable
the discount period
Supplies

o Full payment of account beyond discount

 Purchase of Property, Plant, and Equipment
period
Journal Entry: o Purchase of equipment on cash basis
Cash
Accounts Receivable
Journal Entry:
Equipment
Cash
o Full payment of account within the
discount period o Allowance granted on equipment
Journal Entry:
purchased
Cash
Sales Discount
Journal Entry:
Accounts Receivable Cash
Equipment
 Payment of freight – services of a third party to o Purchase of equipment with down
deliver the merchandise payment
Journal Entry:
Equipment
o Payment of freight on merchandise
Cash
purchased Accounts Payable
Journal Entry:
Freight-in o Allowance granted on equipment
Cash
purchased
Journal Entry:
o Payment of freight on merchandise sold
Accounts Payable
Journal Entry: Equipment
Freight-out
Cash
 Incurrence of expenses – incurred the expenses
 Purchase of supplies – are bought with the but had not yet paid for it
intention of using them in business operations
o Incurrence of expense
o Purchase of supplies on cash basis Journal Entry:
_____ Expense
Journal Entry:
_____ Payable
Supplies
Cash
o Example: incurrence of salaries
o Returns on supplies purchased Journal Entry:
Salaries Expense
Journal Entry:
Salaries Payable
Cash
Supplies
 Payment of expenses – incurrence and payment
of expenses happened on the same date
 o Payment of expenses
Journal Entry:
_____ Expense
Cash

o Payment of expenses already recorded

Journal Entry:
_____ Payable
Cash

 Owner’s investment of merchandise – it matters

whether the investment made is an initial
investment or an additional investment

o Initial investment of merchandise by

owner
Journal Entry:
Merchandise Inventory
Owner, Capital

o Initial investment of merchandise with

liability
Journal Entry:
Merchandise Inventory
Accounts Payable
Owner, Capital

o Additional investment of merchandise by

owner
Journal Entry:
Purchases
Owner, Capital

 Owner’s withdrawal of merchandise

o Withdrawal of merchandise by owner
Journal Entry:
Owner, Drawing
Purchases