Merchandising Operation

Merchandising Activity
Buying and selling the products.

Merchandising companies purchase goods that are ready for sale and then sell them
to customers. Merchandising companies include auto dealerships, clothing stores,
and supermarkets, all of which earn revenue by selling goods to customers.

Operating Cycle of a merchandising business

Source Documents commonly used in Merchandising Operation:

1. Sales invoice - prepared by the seller.

2. Bill of lading - Prepared by the carrier
3. Statement of account- formal notice reminding the debtor about accounts already due.
4. Official Receipt - Evidences of receipt of cash. It notes the invoices paid.

5. Deposit slips
6. Check

7. Purchase Requisition
8. Purchase Order
9. Receiving Report
10. Credit Memorandum

Purchase Transactions :
1. Purchase Request by User Department.
2. If Acknowledge and Authorized, then prepare a purchase order.
3. Purchase order will then be sent to supplier that will prepare sales invoice.
4. If products received, receiving department will now then prepare receiving report.
5. the Accounts payable department then will review everything for them to prepare a vouche

Special Case:

Terms of transactions:

1. Trade Discounts - encourages the buyer to purchase the products.

- All accounting entries are based on INVOICE PRICE.

List Price : 200,000. Purchases

Trade Discount: 25%, 20% 10% ,5% Accounts Payable

How much is the invoice price? 102,600

2. Cash Discount - encourages customer to pay early.

Purchase date : March 1. 1+10

List Price : 200,000.
Trade Discount: 25%, 20% 10% ,5%
Cash Discount : 3/10 , 2/20 ,n/30

How much is the cash discount assuming the customer pay on March 11 ? March 13 ? March 3

Transportation Cost
Freight Terms Responsible
FOB Destination, Freight Prepaid Seller
FOB Destination, Freight Collect Seller
FOB Shipping point, Freight Collect Buyer
FOB Shipping point, Freight Prepaid Buyer

Example:
Renz Aguhob Fireworks engaged in the following purchase transactions during the month. T
that all returns are made one day after the goods are received, seller paid the freight and that

Purchase
Freight
List Price FOB Terms Returns and
Charges
Allowances

224,000 Shipping Pt. 4,000 21,000

126,000 Destination 9,000 0
90,000 Shipping Pt. 2,000 7,000
41,000 Shipping Pt. 1,000 9,000
357,000 Destination 14,000 24,000

Get the invoice price, cash discount if any, and journal entries for each transactions.

Periodic and Perpetual Inventory System

 High Value item Low value item

Example:

Merchandise Inventory Inclusion: (Inventoriable Cost)

- As a rule, all goods to which the entity has title shall be included in the inventory, regardle
- Recorded at cost, if the problem gives you a sales value, convert it into its cost.
1. Owned and on hand.
2. In transit, Sold FOB Destination.
3. In transit, Purchased FOB Shipping Point.
4. Out on consignment.
5. Out on approval/trial - Transfer of title only if approved.
6. In the hands of sales agent.
7. Sales with repurchase/ buyback agreement.
Problem:
Amiable Company provided the following data at year-end:

* Items counted in the bodega 4,000,000

* Items included in the count specifically segregated
for the sales contract 100,000
* Items in receiving department, returned by customer
in good condition 50,000
* Items ordered and in the receiving department,
invoice not received 400,000
* Items ordered, invoice received but goods not
received. Freight is paid by seller. 300,000
* Items shipped today, invoice mailed, FOB Shipping
point 250,000
* Items shipped today, invoice mailed, FOB Destination 150,000
* Items currently being used for window display 200,000
* Items on counter for sale 800,000
* Items in receiving department, refused by us
because of damage 180,000
* Items included in count, damaged and unsalable 50,000
* Items in the shipping department 250,000

How much is the inventory?

and then sell them
lothing stores,
tomers.
accounts already due.
 s invoice.
receiving report.
them to prepare a voucher for payment.

102,600
ccounts Payable 102,600

43,901.00 Accounts payable

Purchase Discount
Cash

43,903.00 Accounts payable

Purchase Discount
ch 11 ? March 13 ? March 30 Cash

43,920.00 Accounts Payable

Cash
 Who pay Effect : Purchase transaction
Seller Disregard
Buyer Decrease on Accounts Payable.
Buyer Transportation In
Seller Transportation In, Increase in accounts payable

ctions during the month. The entity observes the policy

er paid the freight and that all purchases are paid within the discount period.

Credit Terms Trade Discount

2/10,n/30 30%
1/10, n/30 20%
2/10, n/30 -
n/30 25%
3/10, n/30 20%

ach transactions.

Perpetual
 Merchandising Inventory
Cash
#
Cash
Sales
#
Cost of Sales
Merchanding Inventory

None

alue item

in the inventory, regardless of location.

it into its cost.
Add 4,000,000.00

Minus (100,000.00)

Add 50,000.00

Add 400,000.00

Disregard

Disregard
Add 150,000.00
Add 200,000.00
Add 800,000.00

Disregard
Minus (50,000.00)
Add 250,000.00

5,700,000.00
102,600.00
3,078.00
99,522.00

102,600.00
2,052.00
100,548.00

102,600.00
102,600.00
 Effect : Sales transaction
Transportation out
Transportation out, Decrease in Accounts Receivable
Disregard
Increase in Accounts Receivable

Periodic
Purchases
Cash

Cash
Sales

Merchandising Inventory
Income Summary
Example:
Renz Aguhob Fireworks engaged in the following sale transactions during the month. The e
that all returns are made one day after the goods are received, seller paid the freight and that

Freight
List Price FOB Terms
Charges

224,000 Shipping Pt. 4,000

126,000 Destination 9,000
90,000 Shipping Pt. 2,000
41,000 Shipping Pt. 1,000
357,000 Destination 14,000

Get the invoice price, cash discount if any, and journal entries for each transactions.

Purchase Transactions
1. Invoice Price: 156,800
Purchases 156,800.00
Transportation In 4,000.00
Accounts Payable
#
Accounts Payable 21,000.00
Purchases Returns and Allowances
#
Accounts Payable 139,800.00
Purchase Discount
Cash

2 Purchases 100,800.00
Accounts Payable
#
Accounts Payable 100,800.00
Purchases Discount (100,800 X 1%)
Cash

3 Purchase 90,000
 Transportation In 2,000
Accounts Payable
#
Accounts Payable 7,000.00
Purchase Returns and Allowances
#
Accounts Payable 85,000.00
Purchase Discount
Cash

4 Purchases 30750
Transportation In 1000
Accounts Payable
#
Accounts Payable 9000
Purchase Returns and Allowances
#
Accounts Payable 22750
Cash

5 Purchases 285,600.00
Accounts Payable
#
Accounts Payable 24,000.00
Purchase Returns and Allowances
#
Accounts Payable 261,600.00
Purchase Discount
Cash
ctions during the month. The entity observes the policy
seller paid the freight and that all sales are paid within the discount period.

Sales Returns
and Credit Terms Trade Discount
Allowances

21,000 2/10,n/30 30%

0 1/10, n/30 20%
7,000 2/10, n/30 -
9,000 n/30 25%
24,000 3/10, n/30 20%

or each transactions.

Seller Transactions

Accounts Receivable 160,800.00

Cash 4,000.00
160,800.00 Sales 156,800.00
#
Sales Returns and Allowances 21,000.00
21,000.00 Accounts Receivable 21,000.00
#
Cash 137,084.00
2,716.00 Sales Discount 2,716.00
137,084.00 Accounts Receivale 139,800.00

2 Accounts Receivable 100,800.00

100,800.00 Transportation Out 9,000.00
Cash 9,000.00
Sales 100,800.00
1,008.00 #
99,792.00 Cash 99,792.00
Sales Discount 1,008.00
Accounts Receivable 100,800.00
 92,000 3 Accounts Receivable 92,000.00
Cash 2,000.00
Sales 90,000.00
7,000.00 #
Sales Returns and Allowances 7,000.00
Accounts Receivable 7,000.00
1,660.00 #
83,340.00 Cash 83,340.00
Sales Discount 1,660.00
Accounts Receivable 85,000.00

31750 4 Accounts Receivable 31,750.00

Cash 1,000.00
Sales 30,750.00
9000 #
Sales Returns and Allowances 9,000.00
Accounts Receivable 9,000.00
22750 #
Cash 21,750.00
Accounts Receivable 21,750.00
285,600.00 #
5 Accounts Receivable 285,600.00
Transportation Out 14,000.00
24,000.00 Cash 14,000.00
Sales 285,600.00
#
7,848.00 Sales Returns and Allowances 24,000.00
253,752.00 Accounts Receivable 24,000.00
#
Cash 253,752.00
Sales Discount 7,848.00
Accounts Receivable 261,600.00
Inventories
Definition: PAS 2, " Inventories are assets which are held for sale in the ordinary course of
business, in the process of production for such sale or in the form of materials or supplies to be
consumed in the production process or in the rendering of services"

Inventories encompass goods purchased and held for resale, for example, merchandise
purchased by a retailer and held for resale, or land and other property held for resale by a
subdivision entity and real estate developer.

Inventories also encompass finished goods produced, goods in process and materials and
supplies awaiting use in the production process.

In case of service provider, the inventories include the cost of the service for which the entity has
not yet recognized the related revenue.
The cost of service consist primarily of the labor and other cost of personnel directly engaged in
providing the service, inclusing supervisory personnel and attributable overhead.

Classes of inventories:

Inventories are broadly classified into two, namely inventories of a trading concern and
inventories on manufacturing concern.

Trading concern : Merchandise Inventory

Manufacturing Concern:
Finished Goods - Completed products which are ready for sale.
Goods in Process or work in Process- Partially completed products which require further process.
Raw materials- goods to be used. Not yet in process.
Factory or manufaturing supplies- Indirect materials.

Goods includible in the inventory

* as a rule, all goods to which the entity has title shall be included in the inventory, regardless of location.
Where title has already passed from the seller to the buyer, the goods form part of the inventory of the
latter.

* Is the entity the owner of the goods to be inventoried?

if the answer is in affirmative, the goods shall be included in the inventory. If the answer is in negative,
the goods shall be excluded from the inventory.
 * Applying the legal test, goods owned and on hand, goods in transit and sold FOB Destination, goods in
transit an purchased FOB shiping point, goods out on consigment, goods in the hands of salesmen or
agents and goods held by customer on approval or on trial, are all includible in inventory.

* the goods sold on installment are included in the inventory of the buyer and excluded from that of the
seller, the legal test to the contrary nothwithstanding.

Maritime Shipping terms

1. FAS or free along side - A seller who ships FAS must bear all expense and risk involved in delivering
the goods to the dock next to or alongside the vessel on which the goods are to be shipped. The buyer
bears the cost of loading and shipment and thus, title passes to the buyer when the carrier takes
possession of the goods.

2. CIF or Cost, insurance and freight- Under this hipping contract, the buyer agrees to pay in lump sum
the cost of the goods, insurance cost and freight charge. The shipping contract may be modified as CF
which means that the buyer agrees to pay in lump sum the cost of the goods and freight charge only. In
either case, the seller must pay for the cost of loading. Thus, title and risk of loss shall pass to the buyer
upon delivery of the goods to the carrier.

3. Ex-ship- A seller delivers the goods ex-ship bears all expenses and risk of loss until the goods are
unloaded at which time title and risk of loss shall pass to the buyer.

not included

not included

included

included
 not included

Invoice amount :324,000 ; to

Invoice amount: 325,000 ; to

Consigned Goods
A consignment is a method of marketing goods in which the owner called the consignor transfer
physical possession of certain goods to an agent called the consignee who sells then on the owenr's
behalf

* Consigned goods shall be included in the consignor's inventory and exluded from the
consignee's inventory.

* Freight and other handling charges on goods out on consignment are part of the cost of goods
consigned.

* When consigned goods are sold by the consignee, a report is made to the consignor
together with the cash remittance for the amount of sales minus commission and other
expenses chargeable to the consignor.
Statement Presentation:
Since inventories are acquired for production, sale or consumption and acquisition normally
approximate the entity's need for the current operating cycle, these are generally classifed as
current asset.

Accounting for Inventories:

The periodic system:
* calls for the physical counting of goods on hand at the end of the accounting period to determine quantities.
* the quantities are then multiplied by the corresponding unit costs to get the inventory value for balance sheet pu
* The periodic inventory procedure is generally used when the individual inventory items have small peso investm

The perpetual system:

* Requires the maintenance of records called stck cards that usually offer a running summary of the inventory inf
* Commonly used where the inventory items treated individually represent a relatively large peso investment suc
* A physical count of the units on hand should atleast be made once a year or at frequent intervals to confirm the

Illustration: Periodic System Perpetual System

1. Purchase of merchandise on account, P300,000
Purchases 300,000 Merchandise Inventory
Accounts payable 300,000 Accounts payable

2. Payment of freight on the purchase, P20,000.

Transportation in Merchandise Inventory
Cash cash

3. Return of merchandise purchased to supplier, P30,000

Accounts payable 30,000 Accounts payable
Purchase returns and allowances 30,000 Merchandise inventory

4. Sale of merchandise on account, P400,000 at gross profit of 40%.

Accounts receivable 400,000 Accounts Receivable
Sales 400,000 Sales
#
Cost of goods sold
Merchandise Inventory
5. Return of merchandise sold from the customer, P25,000.
 Sales returns and allowances 25,000 Sales returns and allowances
Accounts Receivable 25,000 Accounts receibavle
#
Merchandise Inventory
Cost of goods sold
6. Adjustment of ending inventory, P65,000.
Merchandise inventory 65,000 NONE
Income summary 65,000

Inventory shortage or overage:

* If at the end of accounting period, a physical count indicates a different amount, an adjustment is necessary to

Example, If the physical count shows inventory on hand of P55,000.

Inventory shortage 10,000
Merchandise inventory 10,000

* the inventory shortage is usually closed to cost of goods sold because this is often the result of normal shrinkag
* If abnormal, will be classified as other expense.

Methods of recording purchases

1. Gross method- Purchases and accounts payable are recorded at gross.
2. Net method- Purchases and accounts payable are recorded at net.

Illustration: Gross method Net Method

1. Purchases on account, P200,000, 2/10, n/30
Purchases 200,000 Purchases
Accounts payable 200,000 Accounts payable

2. Assume payment is made within the discount period.

Accounts payable 200,000 Accounts payable
Cash 196,000 Cash
Purchase Discount 4,000

3. Assume payment is made beyond the discount period.

Accounts payable 200,000 Accounts payable
Cash 200,000 Purchase discount lost (other expense)
Cash

4. Assume it is the end of accounting period, no payment is made

and discount period has expired.
Dec. 31 Purchase discount lost
Accounts payable
Cost of inventories

1. Cost of purchase: comprises the purchase price, import duties, and irrevocable taxes, freight, handling
and other cost directly attributable to the acquisition of finished goods, materials and services.

* trade discounts, rebates and other similar items are deducted in determining the cost of purchase.
* the cost of purchase shall not include foreign exchange differences which arise directly from the recent
acquisition of inventories involving a foreign currency.

2. Other cost: included in the cost of inventories only to the extent that it is incurred in bringing
the inventories to their present location and condition.

The following cost are excluded from the cost of inventories:

a. Abnormal amounts of wasted materials, labor and other production cost.
b. Storage cost, unless these costs are necessary in the production process prior to a further production stage.
c. Administrative overheads.
d. Distribution or selling cost.
rther process.

egardless of location.
he inventory of the

swer is in negative,
 Destination, goods in
nds of salesmen or
ntory.

ded from that of the

nvolved in delivering
shipped. The buyer
e carrier takes

to pay in lump sum

y be modified as CF
eight charge only. In
all pass to the buyer

ntil the goods are

not included

not included
not included

Invoice amount :324,000 ; to be paid: 317,520

Invoice amount: 325,000 ; to be paid: 318,500

gnor transfer
en on the owenr's

ost of goods

650,000
 d to determine quantities.
ory value for balance sheet purposes.
tems have small peso investment, such as groceries, hardware and auto parts.

summary of the inventory inflow or outflow.

ely large peso investment such as jewelry and cars.
quent intervals to confirm the balances appearing on the stock cards.

ise Inventory 300,000

300,000

ise Inventory 20,000

20,000

30000
ndise inventory 30000

Receivable 400,000
400,000

240,000
andise Inventory 240,000
rns and allowances 25,000
ts receibavle 25,000

ise Inventory 15,000

goods sold 15,000

n adjustment is necessary to recognize any inventory shortage or overage.

n the result of normal shrinkage and breakage of inventory.

196,000
196,000

196,000
196,000

196,000
discount lost (other expense) 4,000
200,000

discount lost 4,000.00

4,000.00
s, freight, handling
ervices.

ost of purchase.
ectly from the recent

o a further production stage.

5,000,000

400,000
1000000
100000
200,000
6,700,000
760,000