3 major types of business

» Service Enterprise
 Provides services not tangible
products
» Merchandising Enterprise
 Engaged in “buying and selling”
» Manufacturing Enterprise
 Produces the product it sells
Merchandising
operations
Merchandising operations
» They buy ready-to-use goods and then sell it to their
customers

 WHOLESALERS
⋄ Buys in large quantities
durectly from the
manufacturers and sell them to
merchandisers
 RETAILERS
⋄ Sell the goods directly to end
consumers
Computation of profit
SERVICE MERCHANDISING

Revenue Net Sales

xxx xxx
Expenses Cost of Sales
(xxx) (xxx)
Profit Gross Profit
xxx xxx
Other Income
xxx
Expenses
Components of Income Statement
» Net Sales sale of goods net of discounts
» Cost of sales cost of inventory the entity
has sold
» Gross Profit difference of net sales and
cost of sales

» Other income investment revenues and

other gains
» Expenses distribution costs, administrative
 Operating cycle
CASH SALES SALES ON ACCOUNT

C
Cash
P
A
U
S
R
H
C
H
S
A
A
S
L
E
E
S
S Accounts Invento
Receivable ry
Sales on
account
 Source documents
» Contains vital information about the
nature and amount of transactions
Source documents
1. Sales invoice
 Contains the name and address of the buyer,
date of sale, and information about the goods
sold
2. Bill of Lading
 Issued by the carrier that specifies contractual
conditions and terms of delivery
3. Statement of Account
 A formal notice to the debtor detailing the
accounts already due
Source documents
6. Check
 A written order to a bank by a depositor to pay
amount specified in the check from his checking
account to the person named in the check
7. Purchase Requisition
 Written request to the purchaser of an entity
from an employee or user department
8. Purchase Order
 Authorization made by the buyer to the seller
to deliver the merchandise as described in the
Purchase transaction
 The buyer and seller must agree
on
 the price of the merchandise
 The payment terms
 To shoulder the transportation
 Payment
Receiving

Receives Vendor’s
Receives and checks Invoice
goods

Invoice

Receiving report
Receiving report
Receiving report
Purchase Order

Purchase Requisition
Terms of transaction
Merchandise may be purchased/sold on:
 Credit terms
 Cash on delivery
CREDIT PERIOD
-length of time for the payment of goods sold on account
-varies accross industries and may even vary within an entity
 Trade Discounts
 Encourage the buyers to purchase products
 Not reflected in the books
 Netted immediately against the price to
arrive at invoice price
Illustration
Pinnacle Tech. quoted a list price of 2,500
for each 7 gigabyte flashdrive, less trade
discount of 20%.

List Price(2500*7) 17,500

Less: 20% trade discount (3,500)
Invoice Price 14,000
Illustration
Pinnacle Tech. quoted a list price of 2,500 for
each 7 gigabyte flashdrive, less trade
discount of 20% and 10%. Terms. 2/12, n/30

List Price(2500*7)
17,500
Less: 20% trade discount (3,500)
Invoice Price 14,000
Less: 10% trade discount (1,400)
Invoice Price 12,600
Discounts
 Cash Discounts
 Discounts granted to encourage prompt
payment

 Called PURCHASE DISCOUNT(buyer

POV) SALES DISCOUNT(seller POV)
Illustration
Pinnacle Tech. quoted a list price of 2,500 for
each 7 gigabyte flashdrive, less trade
discount of 20% and 10%. The terms of the
purchase is 2/10 n/30.

List Price(2500*7) 17,500

Less: 20% trade discount (3,500)
Invoice Price
Invoice Price 14,000
12,600
Less: 10% trade discount
Less: 2% cash discount
(1,400)
Invoice Price (252) 12,600
Transportation costs
 Freight on goods delivered

FREIGHT BILL
-shows which party shoulders the cost
and other terms of the shipment
FREIGHT TERMS

 FOB Shipping point

 The ownership passes to the buyer when
the goods leaves the seller’s place
 The buyer shoulders the shipping costs

 FOB Destination
 The ownership passes to the buyer only
when the buyer receives the goods
 The seller shoulders the shipping costs
FREIGHT TERMS
 Freight Prepaid
 Seller pays the transportation costs
before shipping the good
 Freight Collect
 Buyer pays the transportation costs
Fundamentals of
Accountancy,
Business and
Management, Part
2
 23

Completing the Cycle

for a Merchandising
Business
 24

Need for a physical count

» Periodic inventory system
⋄ physical count determines the ending
inventory
» Perpetual inventory system
⋄ physical count should reconcile the
balance of inventory per ledger
 25

Accounting for ending

inventory
» Entries to reflect the ending inventory
balance are made:
⋄ to remove the beginning balance from
the merchandise inventory account and
to transfer it to income summary;
⋄ to enter the ending balance in the
merchandise inventory account and to
establish it in the income summary
 26

Accounting for ending

inventory
» To adjust the inventory:
Income summary xx
Merchandise inventory, beg xx

Merchandise inventory, end xx

Income summary xx
 27

Accounting for ending

inventory
» To close temporary accounts:
Income summary xx
Temp accounts w/ DR balances
xx

Temp accounts w/ CR balances xx

Income summary xx
 28

Preparing the worksheet

» same idea with the service business with the
addition of new accounts related to
merchandising operations (e.g. sales, sales
returns and allowances, sales discounts,
purchases, purchases returns and
allowances, purchases discounts,
transportation in, merchandise inventory, and
transportation out)
 29

Preparing the worksheet

» For extension of beginning and ending
inventory:
⋄ Beginning inventory is extended to the
debit column of the income statement
⋄ Ending inventory is extended to the
credit column of the income statement
⋄ Ending inventory is also extended to the
debit column of the balance sheet
 30

Preparing the worksheet

» Under perpetual inventory system:
⋄ The inventory amount in the trial balance is
the year-end balance (extended to the debit
column of the balance sheet)
⋄ There is a cost of sales account.
⋄ The adjustments are handled in exactly the
same way as they are handled in the periodic
worksheet.
⋄ An adjusting entry is necessary when the
year-end inventory account balance does not
tally with the physical count.
Inventory Systems
Periodic Inventory system
» Involves the maintenance of a detailed
inventory records
» Primarily used by business that sell relatively
inexpensive goods
» No entries are made to the merchandise
inventory account when it is purchased and
sold
Perpetual Inventory System
» The inventory account is continuously
updated

» At time of purchase: merchandise

acquisitions are recorded as debits in
inventory account
» At time of sale: the cost of sale is
determined and recorded by debit to cost of
sales and credit to inventory account.
Net Sales

Gross Sales

xxx
Less: Sales Return and Allowances xxx

Sales Discounts
xxx (xxx)
Net Sales

xxx
Gross Sales: revenues from the sale of merchandise
may be either for cash or for
credit
Sept.16 Cash 25,000
Sales 25,000
To record sale for cash

Sept.16 Accounts Receivable 25,000

Sales 25,000
To record sale on credit
Sales Discounts
Traders sold merchandise on Sept. 20 for 3,000; terms 2/10, n/60.
Sales Discount
accumulates in the whole
period and is considered
Sept.20 Accounts Receivable 3,000 as contra income
Sales 3,000 account

To record sale on credit; terms 2/10,n/60

Sept.30 Cash 2,940

Sales Discounts 60
Accounts Receivable 3,000
To record the collection within the discount period
Sales Returns and Allowances
when the buyer is dissatisfied because the goods are damaged or inferior in quality or not in
accordance with their specifications

Sept.17 Sales Return and Allowances 760

Accounts Receivable (or Cash) 760
To record return or allowance on unsatisfactory merchandise

The seller issues the CREDIT MEMORANDUM, as a formal

acknowledgement that seller has reduced the amount owed by the
customer
Transportation Out
the cost or freight on the goods sold

Case1: Sold Merchandise totaling 17,000 FOB Destination, freight prepaid; terms 2/10, n/30. Transportation costs amounts
1,900.

Nov. 25 Accounts Receivable 17,000

Transportation Out 1,900
Sales 17,000
Cash 1,900
Sales on account; terms 2/10, n/30; FOB destination, freight prepaid 1,900

Dec.5 Cash 16,660

Sales Discount 340

Accounts Receivable 17,000

Case2: Sold Merchandise totaling 17,000 FOB Shipping point, freight collect; terms 2/10, n/30. Transportation costs
amounts 1,900.

Nov. 25 Accounts Receivable 17,000

Sales 17,000

Dec. 5 Cash 16,660

Sales Discounts 340
Accounts receivable 17,000
Case 3: Sold merchandise totaling 17,000 FOB Destination, freight collect; terms 2/10,n/30. The transportation costs
amounted to 1,900. The entry to record this transaction would be:

Nov. 25 Accounts Receivable 15,100

Transportation Out 1,900

Sales 17,000

Dec. 5 Cash 14,760

Sales Discount 340

Accounts Receivable 15,100

Case 4: Sold Merchandise totaling 17,000 FOB Shipping point, freight prepaid; terms 2/10, n/30. Transportation costs
amounts 1,900.

Nov. 25 Accounts Receivable 18,900

Sales 17,000

Cash 1,900

Dec.5 Cash 18,560

Sales Discount 340

Accounts Receivable 18,900

COST OF SALES
 Also called COST of goods sold
 The largest single expense in the
merchandising business
 The cost of inventory sold to customers
Computation of COS
Merchandise Inventory, beg
xxx
Purchases
xxx
Less: Purchase returns and allowances
(xxx)
Purchase Discounts
(xxx)
Net Purchases
xxx
PURCHASES
-a temporary account
-purpose is to accumulate the total cost of
merchandise
purchased during the year
Sept.17 Purchases 15,000

Accounts payable (or Cash) 15,000

PURCHASE RETURNS AND ALLOWANCES
-a contra account and deducted from purchases
-purpose is to accumulate the total cost of
merchandised
purchased during the year
Sept.17 Accounts Payable 2,000

Purchase returns and allowances 2,000

To record return or allowance on unsatisfactory merchandise

PURCHASE Discounts
-also contra account and deducted from purchases

Sept.17 Accounts Payable 13,000

Purchase discounts 260

Cash 12,740
Transportation In
the cost or freight on the goods purchased

Case1: Purchased Merchandise totaling 17,000 FOB Destination, freight prepaid; terms 2/10, n/30. Transportation costs
amounts 1,900.

Nov. 25 Purchases 17,000

Accounts Payable 17,000

Dec.5 Accounts Payable 17,000

Purchase Discounts 340

Cash 16,660
Case 2: Purchased Merchandise totaling 17,000 FOB shipping point, freight collect; terms 2/10, n/30. Transportation costs
amounts 1,900.

Nov. 25 Purchases 17,000

Transportation In 1,900
Accounts Payable 17,000
Cash 1,900

Dec.5 Accounts Payable 17,000

Purchase discount 340

Cash 16,660
Case 3: Purchased Merchandise totaling 17,000 FOB destination, freight collect; terms 2/10, n/30. Transportation costs
amounts 1,900.

Nov. 25 Purchases 17,000

Accounts Payable 15,100
Cash 1,900

Dec.5 Accounts Payable 15,100

Purchase discount 340

Cash 14,760
Case 4: Purchased Merchandise totaling 17,000 FOB shipping point, freight prepaid; terms 2/10, n/30. Transportation
costs amounts 1,900.

Nov. 25 Purchases 17,000

Transportation In 1,900
Accounts Payable 18,900

Dec.5 Accounts Payable 18,900

Purchase discount 340

Cash 18560
OPERATING EXPENSES
» Make up the third major part of the income statement for
merchandiding operations

DISTRIBUTION COSTS/SELLING EXPENSES

-related to company’s efforts to generate sales (sales
salaries and commissions, advertising, store
displays,trportation out, dep’n of delivery property)

ADMINISTRATIVE EXPENSES
- related to the general administration of the business

OTHER OPERATING EXPENSES