FUNDAMENTALS OF ACCOUNTANCY,

BUSINESS AND MANAGEMENT 1

MODULE
Module No. 3: Week 3: Second Quarter
MERCHANDISING BUSINESS

Learning Competencies
Describes the nature of transactions in a merchandising business
Code: ABM_FABM11-IVe-j -35
Objective
After reading this module, the learners will be able to:
1. Define merchandising business
2. Identify the merchandising accounts
3. Describe the nature of merchandising business
4. Classify inventory systems
Let’s Recall
Have you ever wondered why there are a lot business within your area? How do you
they record their daily transactions? Are they the same according to their activities?
I guess these are some of the questions you have in mind! Well today, let us recall
how these businesses differ from each other.
There are different types of business according to activities. Three major types are service business,
merchandising and manufacturing business. Let us look the illustration below to have a better
understanding about these types of businesses.

These businesses are These

under Merchandising businesses are
Business. This type of under
business is commonly Manufacturing
known as the “buy and Business. This
sell” business. is the type of
Products are brought business
from manufacturers or wherein
other merchandisers materials are
and are sold as it is at bought to create
an amount higher than a new product.
the purchase price.

These businesses are under Service Business. Service

businesses focus on providing intangible products, such as
offering professional skills, proposals, and expertise.

Now that we know how these businesses differ from each other, which do you think is the best type of
business for you? Before you answer the question, let us find out more about the merchandising
business.

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 Let’s Understand
We have already completed the accounting cycle of a service business in the
previous module. This time, we will talk about merchandising business. Again,
a merchandising business is one that buys and sells goods without changing
their physical form. Also, we will discuss some concepts that are applicable to a merchandising
business but not to a service business. The main difference between a merchandising business and a
service business is that a merchandising business necessarily holds inventory of physical goods for
sale.

Merchandising Accounts
The following are the trading accounts used by a merchandising business. Refer to the sample income
statement of a merchandising business below to have a better understanding on the purpose and how to
use the accounts.

LTY INCOME MEDICAL SUPPLIES

Income Statement
For the month ended June 2019
REVENUE
Sales P350,000-
Sales returns and allowances 5,000-
Net Sales P345,000-
COST OF GOODS SOLD
Merchandise Inventory, June 1 P150,000-
Purchases 100,000-
Freight-in 10,000-
Cost of Goods Available for Sale P260,000-
Less: Ending Inventory, June 30 75,000-
Cost of Goods Sold P185,000-
Gross Profit P160,000-
OPERATING EXPENSE
Selling expense
Salaries expense P10,000-
Advertising expense 15,000-
Freight-out 5,000-
Total Selling expense P20,000-
General and administrative expense
Insurance expense P15,000-
Rent expense 20,000-
Supplies expense 5,000-
Utilities expense 10,000-
Total General and administrative expense P50,000-
Total Operating expense P70,000-
Net Income P90,000-

➢ Sales- is an income account which is credited when the goods or merchandise are sold either by
cash or on account basis.
➢ Sales Returns and allowances- are result from the return of any unsatisfactory merchandise; this
account is a deduction from sales and is debited when defective goods are returned by the buyer.
➢ Sales Discount- a sales discount is an account off the regular price of goods that is granted for
early payment. This is debited when an amount of discount is granted to the buyer. This account
can be deducted from sales or may be considered as other expense.

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 ➢ Revenue from Sales or Net Sales- consists of gross sales less returns and allowances and
discounts.
➢ Gross Profit from sales- is computed by subtracting cost of sales from net sales.
➢ Purchases- purchases account is the accumulated cost of all merchandise bought for resale during
an accounting period. It is debited when goods or merchandise are bought either on account or on
cash basis. This account used to record purchases of inventory under the periodic system.
➢ Purchase Returns and Allowances- this is a deduction from purchases. This is credited when
defective merchandise is returned to the supplier.
➢ Purchase discount- this account is credited when the supplier granted the buyer an amount of
discount. This can be treated as deduction from purchase or other income.
➢ Freight-In (Transportation-in) - this is debited if the business shoulders the payment for the
delivery of goods bought. This is added to purchases and a part of cost of sales. This account used
to record the shipping costs incurred on purchases of inventory under the periodic system.
➢ Freight-out- this is one of the operating expenses of the business. This is debited upon payment
of the delivery of the goods sold.
➢ Merchandise Inventory- Goods for sales. Merchandise that remains unsold at the end of the
account period.
➢ Cost of Goods sold- consists of the cost of merchandise on hand at the beginning of the accounting
period, net cost of merchandise purchased including cost of transporting of goods bought during
the period.

SALES DISCOUNTS
Two common discounts granted to customers are: Trade Discounts and Cash Discounts
Note: Sales discounts are already discussed in Module 6 of Business Mathematics.

Cash Discounts- To encourage prompt payment, companies offer an incentive of a cash discount if the invoice is
paid within a specified period. Cash discounts are calculated only after trade discounts are deducted. Cash
discounts do not apply on any merchandise that is returned and cash discounts do not apply on shipping charges
The usual credit terms which appear on the invoices are:
➢ Ordinary Dating Method: n/30 (which means that the gross amount is payable within 30 days from the
date of sale), or 2/10, n/30 (which means that the account is payable with 30 days with a 2% discount
given if the account is paid within 10 days from the date of sale). 2/10,1/15,n/30 (which means that the
account is payable within thirty days with a 2% discount given if the account is paid within ten days from
the date of sale, but only a 1% discount if the account is paid after ten days but within fifteen days from
date of sale).

➢ End of the Month Method: 3/10 EOM -If the bill is paid during the first 10 days of the next
month, the buyer receives a 3% discount. For example, if an invoice is dated June 6 and the
terms are 3/10 EOM, the buyer can pay the bill anytime up to and including the 10th of July
and still receive a 3% discount. Furthermore, if the invoice is dated on or after the twenty-sixth
day of the month, an additional month is given to make the payment. For example, suppose an
invoice is dated June 27 and the terms are 3/10 EOM. The owner can pay the bill anytime up
to and including August 10 and still receive a 3% discount.

➢ RECEIPT-OF-GOODS DISCOUNT (ROG) This type of discount would be stated as 2/ 10, n/30
ROG. Hence the buyer has 10 days after receiving the merchandise to pay the bill and take a
2% discount. The invoice date in this case is ignored.

Inventory Systems
Inventories are accounted for using either of the following inventory systems:
1. Perpetual inventory system; or
2. Periodic inventory system.

Perpetual inventory system

In layman’s terms, the word “perpetual” means continuing forever (or tuloy tuloy or walang hanggan’
in Filipino).

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The perpetual inventory system is called as such because under this system, the “Inventory” account
(or “Merchandise inventory” account) is updated each time a purchase or sale is made. Thus, the
“Inventory” account shows a continuing or running balance of the goods on hand.

Moreover, records called “stock cards” and “stock ledger cards” are maintained under this system, from
which the quantities and balance of goods on hand and goods sold can be determined at any given point
of time without the need of performing a physical count of inventories.

All increases and decreases in inventory, such as purchases, freight-in, purchase returns, purchase
discounts, cost of goods sold, and sales returns are recorded in the “inventory” for “Merchandise
inventory”) account. “Cost of goods sold” is also updated each time a sale or sale return is made.
The perpetual inventory system is commonly used for inventories that are specifically identified and
are relatively high valued, such as cars, machineries, furniture, and heavy equipment.

Under the Perpetual Inventory System, a company maintains a continuous record of the changes of the
physical quantities of inventory on hand.

In this system, all purchases recorded are debited and credited respectively to:

Particulars Dr Cr
Merchandise Inventory
Cash or Accounts Payable
To record purchases

Periodic Inventory System

In layman’s terms, the word “periodic” means occurring or recurring at regular intervals (or pana-
panahon” in Filipino)
The periodic inventory system is called as such because under this system, the “Inventory” account (or
“Merchandise inventory” account) is updated only when a physical count of inventory is performed.
Thus, the amounts of inventory and cost of goods sold are determined only periodically.

Under this system, the business does not maintain records that show the running balances of inventory
on hand and cost of goods sold as at any given point of time. To determine this information, a physical
count of the quantity of goods on hand must be performed periodically (e.g.. on a daily, weekly,
monthly, or annual basis). The quantity counted is then multiplied by the unit cost to get the balance
of the “Inventory” account. This amount is then used to compute for the “Cost of goods sold,” which
is the residual amount in the formula below:
Beginning inventory P xx
Add: Net purchases xx
Total Goods Available for Sale (xx)
Less: Ending inventory (physical count) (xx)
Cost of Goods sold P xx
“Freight-in” is an adjunct
account (addition), while
Net purchases is computed as follows: “purchase returns” and
“purchase discounts” are
Purchases P xx contra accounts (deductions),
Add: Freight-in xx to “Purchases” when
Less: Purchase returns (xx) computing for “Net
Less: Purchase discounts (xx) purchases.”
Net purchases P xx

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Under the periodic inventory system, purchases of inventory are debited to the “Purchases” account,
shipping costs are debited to the “Freight-in” account, purchase returns are credited to the “purchase
returns” account, and purchase discounts are credited to the “Purchase discounts” account. NO entry is
made to recognize cost of goods sold when inventory is sold.

Because the “Inventory” account is updated only after a physical count, prior to the count, the balance
of the inventory account represents the beginning balance or the balance from the last physical count.
Consequently, the balance of “Cost of goods sold” prior to a physical count is zero.

The periodic inventory system is commonly used for inventories that are normally interchangeable,
relatively low valued, and have a fast turnover rate, such as grocery items, medicines, electrical parts,
and office supplies.

In this system, all purchases recorded are debited and credited respectively to:

Particulars Dr Cr
Purchases
Cash or Accounts Payable
To record purchases

Comparing Periodic and Perpetual Inventory System:

Transaction Periodic Perpetual

Accounts Affected
Dr. Cr. Dr. Cr.
1. Upon purchase of Goods Purchases Cash Merchandise Cash
on cash Inventory
2. Upon purchase of Goods Purchases Accounts Merchandise Accounts payable
on account payable Inventory
3. Upon paying Freight Freight-in Cash Merchandise Cash
(borne by buyer) Inventory
4. Upon paying Freight Freight-in Accounts Merchandise Accounts payable
(borne by buyer) on account payable Inventory
5. Upon cash purchase with Purchases Merchandise Cash
purchase discounts. Cash Inventory
Purchase
discount
6. Upon payment of Accounts Accounts Cash
accounts payable within the payable Cash payable Merchandise
discount period (purchase Purchase Inventory
discount on account discount
purchases)
7. Upon sales on cash Cash Sales Cash Sales
Cost of goods Merchandise
sold Inventory
8. Upon sales on account Accounts Sales Accounts Sales
Receivable Receivable
Cost of goods Merchandise
sold Inventory

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 9. Upon sales returns for Sales Cash Sales Returns Cash
sales on cash Returns and allowances
and
allowances
Merchandise Cost of goods sold
Inventory
10. Upon sales returns for Sales Accounts Sales Returns Accounts
sales on account Returns receivable and allowances receivable
and
allowances
Merchandise Cost of Goods Sold
Inventory
11. Upon Sales discounts Cash Sales Cash Sales discounts
discounts
Accounts Accounts
receivable receivable
12. Upon paying Freight Freight-out Cash Freight-out Cash
(borne by seller)
Illustration: Perpetual vs. Periodic (JOURNAL ENTRIES)

1. TY Company purchased goods worth P100,000 on account

Particulars Dr Cr Particulars Dr Cr
Merchandise Inventory P100,000- Purchases P100,000-
Accounts Payable P100,000- Accounts Payable P100,000-
2. TY Company paid shipping costs of P1,000 on the purchase above.
Particulars Dr Cr Particulars Dr Cr
Merchandise Inventory P1,000- Freight-in P1,000-
Cash P1,000- Cash P1,000-
3. TY Company returned damaged goods worth P2,000 to the supplier
Particulars Dr Cr Particulars Dr Cr
Accounts payable P2,000- Accounts Payable P2,000-
Merchandise
Inventory P2,000- Purchase returns P2,000-
4. TY Company sold goods costing P5,000 for P20,000 on account
Particulars Dr Cr Particulars Dr Cr
Accounts receivable P20,000- Accounts receivable P20,000-
Sales P20,000- Sales P20,000-

Cost of goods sold P5,000-

Merchandise Inventory P5,000-
5. A customer returned goods with sale price of P800 and cost of P200.
Particulars Dr Cr Particulars Dr Cr
Sales returns P800- Sales returns P800-
Accounts receivable P800- Accounts receivable P800-

Merchandise Inventory P200-

Cost of goods sold P200-

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Notes:
➢ Under the perpetual inventory system, all increases and decreases in the goods on hand are
recorded through the “inventory” account. Also, cost of goods sold is debited when inventory is
sold and credited when there is a sales return.
➢ Under the periodic inventory system, the increases and decreases in the goods on hand are
recorded through the purchases, freight-in, purchase returns, and purchase discounts. Cos of
goods sold is not recorded.

Let’s Apply
GENERAL INSTRUCTION:
1.Read and follow instructions carefully.
2. COPY and ANSWER on a separate sheet of paper.
3. Answer this activity with all HONESTY and INTEGRITY.

Activity 1: Match column A with the correct answer on column B, write only the letter of
answer on the blank space provided preceding column A.

COLUMN A COLUMN B.
1. The amount of merchandise sold by a business for a A. Perpetual inventory system
specific period of time
2. The primary purpose of this business is to engage in the B. Purchase returns and
buying and selling of goods or merchandise. allowances
3. It is the total amount of merchandise bought including C. Freight-out
shipping costs, but net of returns and discounts.
4. This system is traditionally used by businesses selling D. Merchandising business
few expensive goods.
5. The account used to record returns of purchased goods E. Purchase discounts
to the supplier.
6. The account used to record cash discounts availed of F. Freight-in
on the purchased goods
7. The account used to record the shipping costs incurred G. Merchandise Inventory.
on purchases of inventory under the periodic system
8. This is debited upon payment of the delivery of the H. Sales
goods sold.
9. Merchandise that remains unsold at the end of the I. Net Sales
account period.
10. Consists of gross sales less returns and allowances and J. Net purchases
discounts
Activity 2: Write TRUE if the statement is correct and write FALSE if the statement is incorrect.
1. The “Purchases,” “Freight-in,” “Purchase returns and allowances” and “Purchase discounts” accounts
are used to record movements in the monetary balance of inventory under the perpetual inventory
system.
2. Cost of goods sold represents a residual amount under the periodic inventory system.
3. Under the perpetual inventory system, two sets of entries are recorded each time the entity makes a
sale- one to record the sale and the other one to record the cost of goods sold.
4. Under the periodic inventory system, no entry is made for cost of goods sold when the entity makes
a sale.
5. MT company purchases goods worth P100 and incurs transportation costs of P5 in having the goods
delivered to its warehouse. If MT company uses the perpetual inventory system, the P5 transportation
costs are recorded in the “Merchandise Inventory” account rather than in the “Freight-in” account.
6. WT grocery store had a beginning inventory of P10. During the period, WT grocery store’s net
purchases totaled P100. WT grocery store’s total goods available for sale during the period was P90.

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7. CT supermarket’s total goods available for sale during the period was P110. If the physical count of
inventory on hand at the end of the period reveals a balance of P20, cost of goods sold must be P90.
8. One day, you decided to develop your entrepreneurial skills. You bought 10 rambutan from Mr.
Rambo for P1 each. You set a unit price of P5 per rambutan. At the end of the day, you have two
rambutans left. Your gross profit must be P32.
9. Mama gave you P10 allowance for the day. You spent P7 on cellphone load and P2 on food. When
you checked your pocket, you found out that it was empty. You have an excess of P1.
10. A merchandising business is one that buys and sells goods without changing their physical form

Let’s Analyze
GENERAL INSTRUCTION:
1.Read and follow instructions carefully.
2. COPY and ANSWER (show your solution) on a separate sheet of paper.
3. Answer this activity with all HONESTY and INTEGRITY.

Complete the table: Analyze the transaction made by LT Store for the month of October 2020.
Identify the accountants affected for Perpetual and Periodic Inventory System.

Periodic Perpetual
Transaction Accounts Affected
Date Dr. Cr. Dr. Cr.
3-
Oct Lucas Ty, the owner, invested P500,000 to LT store.
4- LT store purchased merchandise worth P150,000 on
Oct account.
10- Purchased Furnitures and Fixtures from Blims Homes at
Oct a selling price of P180,800 less 4% trade discount
11- Paid P1,670 for the delivery cost of the purchases on
Oct October 4.
15- Sold merchandise worth P80,000 and cost of P60,000 to
Oct Robilita sari-sari store on account
17- Received 50% payment from Robilita sari-sari store for
Oct her purchases on October 15.
20-
Oct Paid salaries of staff, P15,000
21- Sold to Mocha merchandise with a cost of P20,000 and
Oct worth P30,000.
22- Collected the outsanding account balance of Robilita sari-
Oct sari store
23- Return defective merchandise worth P20,000 to the
Oct supplier.
24- Sold to JPearson merchandise worth P19,200 on terms
Oct 2/10, n/30.
25-
Oct Mocha returned goods worth P5,000, and cost of P3,000.
26-
Oct JPearson paid its outstanding balance in full.

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 Let’s Try
GENERAL INSTRUCTION:
1.Read and follow instructions carefully.
2. COPY and ANSWER on a separate sheet of paper.
3. Answer this activity with all HONESTY and INTEGRITY.
Read and answer each statement/problem carefully.
1. Each of the following companies is a merchandising company except
A. Candy Store C. Furniture Store
B. Car Wash D. Wholesale Parts Company
2. A merchandiser will earn a Net Income of exactly zero when
A. Cost of Goods Sold equals profit C. Net sales equals Cost of Goods sold
B. Gross Profit equals operating D. Operating expenses equals net sales
Expenses
3. Under the perpetual inventory system, which of the following accounts would not be used?
A. Cost of goods sold C. Purchases
B. Merchandise Inventory D. Sales
4. The entry record the return of goods from a customer would include a____.
A. Credit to Sales C. Debit to Sales
B. Credit to Sales returns and allowances D. Debit to Sales returns and allowances
5. Merchandise Inventory becomes part of cost of goods sold when a company
A. Pays for the inventory C. receives payment from the customer
B. Purchases the inventory D. Sells the inventory
6. If the terms on an invoice are 2 /15, n/30 and it is dated July 24, what is the last day the payment can
be made in order to get the 2% discount?
7. If the terms on an invoice are 3/10, n/30 EOM and the invoice is dated August 12, what is the last
day the payment can be made in order to get the 3% discount?
8. The terms on an invoice are 5/10, n 30 ROG. The invoice is dated May 16 and the merchandise is
received on May 22, what is the last day the payment can be made in order to get the 5% discount?
9. The terms on an invoice are 3 /10, n /30 EOM. If the invoice is dated January 30, what is the last day
the payment can be made in order to get the 3% discount?
10. The terms on an invoice are 3/10, 1/ 15, n/ 30, and the invoice is dated February 18. (a) What is the
last day the payment can be made to get the 3% discount? (b) What is the last day the payment can be
made to get the 1% discount?
SUCCESS without INTEGRITY is WORTHLESS.

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