Merchandising Inventory

– is a company that buys merchandise (finished Computation of Net Purchases

goods) from other businesses with the intent of
reselling it to a customer at a higher price.
– represents goods intended for sale.
– it is also known as a trading business.
– it includes dealerships, clothing stores and
supermarkets, grocery stores, department
stores.
– the primary product of this kind of business is
known as “merchandise inventory”
Operating cycle of a merchandising business:
1. Purchase of merchandise
2. Sale of merchandise
3. Collection of cash
Comparison of the Income Statement of
Service and Merchandising
Service Merchandising
5. Gross Purchases – amount of total cost
6. Freight-in – amount of transportation cost
paid by the entity to acquire the
merchandise
7. Purchased Return and Allowance –
amount deducted from purchases for the
merchandise returned by the company and
the allowances granted by the suppliers due
to improper shipping or defective goods.
8. Net Purchases – amount after adding the
Gross Purchases and Freight-in, and
deducting the amounts of Purchased Return
and Allowance and Discount.
Gross Purchases xx
Add: Freight-in xx
Less: Purchase Discount xx
Purchase Return and Allowance xx xx
Net Purchases xx

Revenues xx Net Sales xx Cost of Goods Available for Sale vx. COGS
Less: Operating Less: Cost of Goods Cost of Goods Available for Sale
Expenses xx Sold xx – is computed by adding Net Purchases and
Net Income xx Gross Profit xx Beginning Inventory.
Less: Operating
Expenses xx
Cost of Goods Sold
Net Income xx
– is computed by deducting the Cost of Goods
Available for Sale and Ending Inventory.
Computation of Net Sales
1. Gross Sales – amount of all sales Beginning Inventory xx
2. Sales Return and Allowance – amount Add: Net Purchases xx
deducted from sales for the merchandise Total Cost of Goods Available for Sale xx
returned by the customer and the Less: Ending Inventory xx
allowances granted by the entity to its COGS xx
customer due to improper shipping or
defective goods. The Cost of Inventory
3. Sales Discount – amount reduction in the – should include:
price of a product or service acquired for the ● all cost of purchase
early payment by the buyer. ● net of trade discounts received
4. Net Sales – difference between Gross - including taxes, freight and handling
Sales, Sales Return and Allowance, and costs
Sales Discount. ● costs of conversion
- direct labor and factory overhead
Gross Sales xx ● other costs incurred in bringing the
Less: Sales Discount xx inventories of their present location and
Sales Return and Allowance xx xx condition
Net Sales xx
 However, the following costs are not included as
part of inventories:
1. Abnormal amounts of wasted materials, labor
and overhead.
2. Storage cost of finished goods. However,
storage costs of goods in process are part of
this inventory.
3. Administrative costs
4. Selling costs
The inventory in the storeroom should be
counted periodically to determine the inventory
on hand.
Items that are not in the storeroom, but should
be included:
1. Materials in transit purchased FOB shipping
point should be included in the count.
2. Finished goods in transit sold FOB
destination
3. Finished goods out on consignment
FOB - Freight in on board or Free on Board
FOB shipping point - ownership of goods is
transferred upon shipment therefore, the goods
in transit are property of the buyer.
FOB destination - ownership of the goods is
transferred upon receipt by the buyer at the
point of destination therefore, the goods in
transit are still owned by the seller.
Consignment - is a way of selling goods in
which the owner called the consignor transfers
the goods to the consignee (who sells the
goods) for a commission or a fee.
The consigned goods are still owned by the
consignor and as such should be in its inventory.
The freight and other handling costs on goods
out on consignment will be part of the cost of
goods consigned.
Trade Discounts and Cash Discounts
Trade Discounts - are deducted from the list
price or catalog price in order to arrive at the
invoice price. It encourages buyers of goods to
purchase items because of markdowns from the
list price.
There is no accounting entry for trade discounts.
Cash Discounts - are deducted from the invoice
price when payment is made within the discount
period. Its purpose is to encourage prompt
payment so that buyers can avail of the
discount.
Cash discount is recorded as a purchase
discount on the books of buyer and Sales
discount in the book of the seller.
Illustration: ABC sold goods to XYZ at a list price
of 100,00 less 10%, 5% trade discounts, with
credit terms of 1/10, n/30
List Price 100,000
Less: Trade Discount (!0%*100,000) 10,000
Total 90,000
Less: Trade Discount (5%*90,000) 4,500
Invoice Price 85,500
Less: Cash Discount (1%*85,500) 855
Payment within the discount period 84,645
Journal Entry:
Purchases 85,500
Accounts Payable 85,500
Note: The trade discount is not recorded.
The journal entry to record payment within
discount period:
Accounts Payable 85,500
Purchase Discount 855
Cash 84,645
If not paid within the period:
Accounts Payable 85,500
Cash 85,500
Methods of Recording Purchase of Inventory
1. Gross Method - Purchases and Accounts
Payable of merchandise purchase are
recorded at gross amount. This method
violates the matching principle because
the discounts are recorded only when the
buyer paid within the discount period instead
when the purchases that give rise to the
discount were made.
2. Net Method - Purchases and Accounts
Payable of merchandise purchase are
 recorded net of cash discount. The net Accounting for Merchandise Inventories
method of recording the cost inventory 1. Periodic Inventory System - does not
represents the cash equivalent price on the keep real time record of inventory in stock
date of payment, thus it is theoretically or goods sold to customers. The company
correct historical cost. will do periodic physical inventory counts of
goods on hand from time to time. The
Illustration: ABC Corp. purchased merchandise periodic inventory count might be done
at an invoice price of 10,000; terns 1/10, n/30 on every week, month, quarter, semi-annual
April 1, 2020 or annually. Nominal accounts such as
purchases, purchase returns and
A. Using the Gross Method allowances, purchase discounts and freight
Merchandise Inventory (Purchases) 100,000 in are used.
Accounts Payable 100,000 Applicable for companies whose cot of
inventory is in small perso value such as
Assume paid within the discount period: sari-sari stores, groceries, auto supplies,
Accounts Payable 100,000 etc.
Merch Inventory (Purchase Discount) 1,000 2. Perpetual Inventory System -
Cash 99,000 continuously updates the balance of its
inventory by maintaining an inventory
Assume not paid within the period: ledger card (stock cards). This inventory
Accounts Payable 100,000 ledger card is used to record each time an
Cash 100,000 inventory is received and sold.
It has an advantage over periodic as it
B. Using the Net Method provides real time balance of units and cost
Merchandise Inventory (Purchases) 99,000 of inventories and requires lesser physical
Accounts Payable 99,000 inventory count just to determine if there
are discrepancies with record and
Assume paid within the discount period: inventory on hand.
Accounts Payable 99,000 This system works best if combined with
Cash 99,000 computers because companies can
conveniently retrieve the inventory data.
Assume not paid within period: Applicable to companies whose cost of
Accounts Payable 99,000 inventory is in large perso value such as
Lost on purchase discount (expense) 1,000 real property, cars, jewelry, etc.
Cash 100,000
Periodic Perpetual
Methods of Costing Inventory
1. Assets held for sale in the ordinary course of 1. Purchase of inventory, 10,000
business (finished goods)
2. Assets in the production process for sale in Purchases 10,000 Merch. Inventory 10,000
Accounts Payable 10,000 Accounts Payable 10,000
the ordinary course of business (work in
process) 2. Payment of Freight on the purchase, 500
3. Materials or supply to be consumed in the
production process or in the rendering of Freight-in 500 Merch. Inventory 500
services (Materials) Cash 500 Cash 500

3. Return of inventory, purchase from supplier 1,200,

A merchandising company inventory would be 1/10, n/30
the goods purchased and held for resale.
 transferred to the buyer, at the point of
Accounts Payable 1,200 Accounts Payable 1,200
Purchase Return 1,200 Merch. Inventory 1,200 destination, which is upon receipt of the
buyer of the goods. Therefore, the seller is
4. Paid inventory purchase less 1% discount still the owner of the goods while in
transit so the seller will shoulder the
Accounts Payable 8,800 Accounts Payable 8,800
Cash 8,712 Cash 8,712 shipping costs.
Purchase Discount 88 Merch. Inventory 88
Freight Prepaid - the seller rays the shipping
5. Sale of Merchandise costing 10,000 on account for costs to the shipping company.
15,000, terms 1/10, n,30 Freight Collect - the buyer pays the shipping
Accounts Receivable 15,000 Accounts Receivable 15,000 costs to the shipping company.
Sales 15,000 Sales 15,000
Buyer’s POV - FREIGHT-IN
no entry COGS 10,000
Santons Company purchased merchandise
Merch. Inventory 10,000
amounting to 100,00 on account, FOB shipping
6. Return of inventory sold from customer, 1,500. The point, freight collect. The transportation costs
cost of inventory 1,000 amounted to 500.
Purchases 100,000
Sales Return 1,500 Sales Return 1,500 Freight-in 500
Accounts Receivable 1,500 Accounts Receivable 1,500
Cash 500
COGS 1,000 Accounts Payable 100,000
Merch Inventory 1,000
FOB shipping point, freight prepaid:
7. Received payment from customer within the
discount period Purchases 100,000
Freight-in 500
Cash Cash Accounts Payable 100,500
Sales Discount Sales Discount
Accounts Receivable 13,500 Accounts Receivable 13,500
FOB destination, freight collect:
8. Sale of equipment costing 100,000 for 150,000 Purchases 100,000
cash Cash 500
Accounts Payable 99,500
Cash 150,000 Cash 150,000
Equipment 100,000 Equipment 100,000
Gain on sale 50,000 Gain on sale 50,000
FOB destination, freight prepaid:
Purchases 100,000
Accounts Payable 100,500
Accounting for Transportation Costs
1. FOB Shipping Point - the buyer shoulders Seller’s POV - FREIGHT-OUT
the shipping costs of goods being Curry Company sold merchandise for 200,000
shipped by the seller once the goods leave on account, FOB destination, freight prepaid.
the seller’s shipping dock. The buyer The transportation costs paid amount to 1,000.
should record the increase in inventory Accounts Receivable 200,000
at the point of shipment because the risk Freight out 1,000
and rewards of ownership is already Sales 200,000
transferred by the seller. Therefore, the Cash 1,000
buyer already owns the goods while in
transit. FOB destination, freight collect
2. FOB Destination - the seller shoulders Accounts Receivable 199,000
the shipping costs of the goods being Freight out 1,000
shipped. The ownership is already Sales 200,000
 FOB shipping point, freight prepaid:
Accounts Receivable 201,000
Sales 200,000
Cash 1,000
FOB shipping point, freight collect:
Accounts Receivable 200,000
Sales 200,000
Freight Terms Pays the Pays the
transportatio carrier
n costs
Shipping point, Collect Buyer Buyer
Shipping point, Prepaid Buyer Seller
Destination, Collect Seller Buyer
Destination, Prepaid Seller Seller
The Use of Special and General Journals
A. Special Journals
1. Sales Journal - used to record the
sales of goods or services on account.
2. Purchase Journal - used to record the
purchases of inventory on account.
3. Cash Receipts Journal - used to
record all cash inflows of the company
4. Cash Disbursement Journal - used to
record all cash outflows of the company.
B. General Journal - refers to the book of
original entry that is used for transactions not
recorded in the special journals.
The Use of Subsidiary and General Ledgers
1. Subsidiary Ledgers - a record that
provides the details to support the
general ledger account. It is usually used for
accounts receivable and payable.
Two most common subsidiary ledgers:
a. Accounts Receivable Subsidiary
Ledger - data for each customer
who owes the company.
b. Accounts Payable Subsidiary
Ledger - data about individual
creditors of the company.
2. General Ledgers - book of final entry.
Contains all accounts recorded from the
journals which are used to prepare the
financial statements. It serves as the
control account as it summarizes the data
from the subsidiary ledger. Each general
ledger control account balance must equal
to the corresponding balance of the
related subsidiary ledger at the end of the
period.
Inventory Costing Methods
1. FIFO (First-in, First-out) - the materials
first purchased should be the first to
be issued to production. Therefore,
the ending balance is based on the most
recent purchase prices and the
materials issued are based on the
earliest and oldest prices.
In the period of rising prices, this
method results in higher net income.
However, in the period of declining
prices, this method will result in
lower income.
2. Weighted Average - the average unit
price is computed each time a purchase
of material is made and the new unit
price is used to determine the cost of
materials issued until another purchase
of the material is made and a new unit is
computed. This method produces an
inventory valuation that approximates
the current value if there is a rapid
turnover of inventory.
In the period of rising prices, the
inventory value is less than the
current costs. In the declining
prices, the inventory value will be
more than the current cost.
3. LIFO (Last-in, First-out) - the materials
last purchased should be the first to
be issued to production. Therefore,
the ending balance is based on the
earliest or oldest purchase prices and
the materials issued are based on the
recent prices.
 In the period of rising prices, this
method results in lower net income.
However, in the period of declining
prices, this method will result in
higher income.
4. Specific Identification Method - the
specific costs are attributed to the
identified items of inventories issued to
production. This method is most
applicable for items that are segregated
for a specific job princess of a project
and inventories that are not ordinarily
interchangeable.
The Source Documents
1. Purchase Requisition Form - documents
used by any department of the company to
inform the purchasing department of the
itens it needs to order.
2. Purchase Order (PO) - document issued by
the buyer to place an order with the seller
indicating the types of items needed,
quantities, price per unit, delivery date,
location and payment terms.
8. Check - written order that directs the bank
to pay a specific amount of money to the
bearer.
9. Official Receipts (OR) - document issued
by the seller to the buyer as written evidence
on sale of goods or services, as well as
acknowledgement of cash collection from
the buyer.
10. Credit Memorandum (Credit Memo) -
document issued by the seller of goods or
service as an evidence of reduction of the
amount owed by the buyer from the previous
invoice.
11. Debit Memorandum (Debit Memo) -
document issued by the seller to inform the
buyer that the seller is increasing its amount
in the accounts receivable, therefore
increasing the amount owed by the buyer.

3. Packing Slip - shipping document that lists

all items included in each shipment.

4. Delivery Receipt - document that shows

that the goods have been delivered to the
buyer.

5. Bill of Lading - document issued by the

carrier to a shipper that detailed the name of
the receiver, type, quantity, description, date
and destination of the goods.

6. Receiving Report - internal document used

to record the materials or goods received by
the company from the seller (supplier)

7. Accounts Payable Voucher - prenumbered

document used in the accounts payable
department to standardize and enhance a
company;s internal control over payments to
its suppliers.
 Partnership
– two or more persons bind themselves to
contribute money, property, or industry to a
common fund, with the intention of dividing the
profit among themselves.
– two or more persons may also form a
partnership for the exercise of a profession (Civil
Code of the Philippines, Article 1767)

Characteristics of a Partnership
- Mutual Contribution
- Division of Profit/Losses
- Co-ownership of Contributed Assets
- Mutual Agency
- Limited Life
- Unlimited Liability
- Income taxes
- Partner’s Equity Accounts

Advantages vs. Proprietorships

1. Brings greater financial capability to the
business
2. Combine special skills, expertise and
experience of the partners