Chapter 10

Accounting Cycle
of a
Merchandising
Business

by: Zeus Vernon B. Millan

Rosario M. Perez
• Merchandising business is one that
buys and sells goods without
changing its physical form. Some
concepts are applicable to a
merchandising business but not to a
service business.
 Inventory

• Merchandising business holds

inventory of physical goods for sale.
• Inventory refers to the goods that a
merchandising business has
purchased and primarily intended for
resale, normally in their original form
and without any further processing.
Types of Inventory System

1. Perpetual Inventory system – from the

word perpetual, it means continuing
forever or “tuloy-tuloy” or walang
katapusan.
• The merchandise inventory is updated
each time a purchase or sale is made. It
shows a running balance or goods on
hand.
• 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
Merchandise Inventory account. Cost of
goods sold is also updated each time a
sale or sales return is made.
• Perpetual inventory system is commonly
used for specifically identifiable and are
relatively high value.
2. Periodic Inventory system. – from the
word periodic, it means occurring or
recurring at regular intervals or “pana-
panahon lamang”.
• The merchandise inventory account is
updated only when a physical count is
performed. Inventory and cost of goods
sold are determined only periodically.
• Used for low valued inventory and have a
fast turnover rate.
• Under the periodic inventory system, the
business does not maintain records the
running balances of inventory on hand.
• To determine this information, a physical
count of the quantity of goods on hand
must be performed periodically (daily,
weekly, monthly, annually).
• The quantity counted x unit cost =
Inventory balance.
 Important formulas:

• Beginning Inventory Pxx.xx

• Add: Net purchases xx.xx
• Total Goods Available for Sale xx.xx
• Less: Ending inventory (xx.xx)
• Cost of Goods Sold Pxx.xx
 Example

• At the start of the day, you have a 1

apple costing P10. During the day,
you purchased 5 apples for P10 each.
You returned 1 apple to the supplier
because it was rotten. If at the end of
the day, you have 2 apples left, how
much is your cost or good sold?
• Beginning inventory P10
• Purchases P50
• Freight-In
• Purchase discounts
• Purchase returns (10)_____40
• TGAS 50
• Less: Ending Inventory (20)
• COGS P30
To compute Net Purchases

• Purchases Pxx.xx
• Add: Freight-In xx.xx
• Less: Purchase returns (xx.xx)
• Less: Purchase discounts (xx.xx)
• Net Purchases Pxx.xx
• Purchases – the account used to record
purchases of inventory under the periodic
system
• Freight-in – the account used to record
the shipping costs incurred on purchased
of inventory under the periodic system
• Purchase returns – the account used to
record returns of purchased goods to the
supplier
• Purchase discounts – the account used
to record cash discounts availed of on the
purchased goods.

• Purchases - debit
• Freight in - debit
• Purchase returns - credit
• Purchase discount - credit
 Perpetual v. Periodic

You purchased goods worth P10,000 on account

Perpetual Periodic

Inventory 10,000 Purchases 10,000

Accounts Accounts
Payable 10,000 Payable 10,000
 Perpetual v. Periodic

You paid shipping cost of P1,000

Perpetual Periodic

Inventory 1,000 Freight-in 1,000

Cash 1,000 Cash 1,000

 Perpetual v. Periodic

You returned damaged goods worth P2,000

Perpetual Periodic

Accounts Accounts
Payable 2,000 Payable 2,000

Purchase
Inventory 2,000 returns 2,000
 Perpetual v. Periodic

You sold goods costing P5,000 for P20,000 on account

Perpetual Periodic
Accounts Accounts
Receivable 20,000 Receivable 20,000

Sales 20,000 Sales 20,000

Cost of Goods
Sold 5,000 No entry

Inventory 5,000
 Perpetual v. Periodic

A customer returned goods with sale price of P800 and cost P200

Perpetual Periodic

Sales Return 800 Sales Return 800

Accounts Accounts
Receivable 800 Receivable 800

Inventory 200 No entry

Cost of
Goods Sold 200
 Gross Profit

• (Gross income, Gross Margin, Sales Profit)

is simply Net Sales minus Cost of Goods
Sold.

• Net Sales Pxx.xx

• Less: Cost of Sales xx.xx
• Gros Profit Pxx.xx
• Net sales is total sales minus sales returns
and discounts.

• Sales Pxx.xx
• Less: Sales Returns (xx.xx)
• Less: Sales Discounts (xx.xx)
• Net Sales Pxx.xx
• Sales – include both cash sales and credit
sales
• Sales returns – the account used to
record goods returned by customers
• Sales discounts – the account used to
record cash discounts given to customers.
• Sales – credit
• Sales returns – debit
• Sales discounts - debit
 How do you compute
Gross Profit?
Net Sales Beg. Inventory
Less: Cost of Goods Sold Add: Net Purchases
Gross Profit TGAS
Less: Inventory End
Cost Of Goods Sold
Sales
Less: Sales return Purchases
Less Sales discount Add: Freight In
Net Sales Less: Purchase return
How do you compute
Net Profit?
• Net Sales
• Less: Cost of Goods Sold
• Gross Profit
• Less: Expenses
• Net Profit before taxes
• Less: Income taxes
• Net Profit
Sept 2 Purchase of merchandise at
PHP 27,000.00 on credit,
terms 1/15, n/30
Purchases PHP 27,000.00
Accounts Payable PHP 27,000.00
3 Purchase of new computer for office
use on credit PHP 100,000.00
Computer Equipment PHP 100,000.00
Accounts Payable PHP 100,000.00
3 Sold merchandise on credit, terms 2/10, 1/30, n/60;
PHP 29,000.00
Accounts Receivable PHP 29,000.00
Sales PHP 29,000.00
4 Paid PHP 2,250.00 cash for freight charges on the
shipment of merchandise purchased
on Sept 2.
Freight in PHP 2,250.00
Cash PHP 2,250.00
8 Sold merchandise for cash, PHP 4,700.00
Cash PHP 4,700.00
Sales PHP 4,700.00
10 Purchased of merchandise on account;
terms 2/15, n/30, PHP 26,000.00
Purchases PHP 26,000.00
Accounts Payable PHP 26,000.00
12 Returned PHP 4,000.00 worth of
merchandise purchased on Sept 10,
returned for credit
Accounts Payable PHP 4,000.00
Purchase returns PHP 4,000.00
20 Sold merchandise on credit, term 2/10, n/30,
PHP 24,000.00
Accounts Receivable PHP 24,000.00
Sales PHP 24,000.00
22 Customer returned merchandise amounting
to PHP 335.00 (Sept 20 sales) on credit
Sales returns PHP 335.00
Accounts Receivable PHP 335.00
23 Purchased office supplies on account,
PHP 2,950.00
Office supplies PHP 2,950.00
Accounts Payable PHP 2,950.00
24 Paid for the merchandise purchased on
Sept 10, less the returns and discount
Accounts Payable PHP 22,000.00
Purchase discount PHP 440.00
Cash 21,560.00
29 Collected in full the sales on Sept 3,
less applicable discount
Cash PHP 28,710.00
Salesdiscount 290.00
Accounts Receivable PHP 29,000.00
29 Received payment for the merchandise
sold on Sept 20, less return and discount
Cash PHP 23,192.00
Salesdiscount 473.00
Accounts Receivable PHP 23,665.00
30 Paid for merchandise purchased on Sept 2.
Accounts Payable PHP 27,000.00
Cash PHP 27,000.00
 E Computer Sales
Unadjusted Trial Balance
As of September 30, xxxx

Cash 5,792.00

Accounts Receiable -

Office Supplies 2,950.00

Computer Equipment 100,000.00

Accounts payable 102,950.00
Sales 57,700.00

Sales returns 335.00

Sales Discount 763.00

Purchases 53,000.00
Purchase returns 4,000.00
Purchase discount 440.00

Freight in 2,250.00
How much is the Net Purchases?
Net Purchases

Purchases 53,000.00

Add: Freight in 2,250.00

55,250.00

Less: Purchase returns 4,000.00

Purchase discounts 440.00 4,440.00

50,810.00
=============
How much is the Net Sales?
Net Sales

Sales 57,700.00

Less: Sales Returns 335.00

Sales Discounts 763.00 1,098.00

56,602.00
========
If : Beginning Inventory 86,000.00

Ending Inventory 98,000.00

How much is the Cost of Sales?

Cost of Sales

Beg inventory 86,000.00

Add: Net Purchases 50,810.00

Total Goods
Available for sale 136,810.00
Less: Ending
Inventory 98,000.00

Cost of Sales 38,810.00

========
• How much is the Gross Profit?
Net Sales 56,602.00
Less: Cost of Sales 38,810.00
Gross Profit 17,792.00
Purchases 23,650.00

Add: Freight in ?

25,550.00

Less: Purchase returns 1,500.00

Purchase discounts ?______ ?_______

22,300.00
========
Purchases 23,650.00

Add: Freight in 1,900.00

25,550.00

Less: Purchase returns 1,500.00

Purchase discounts 1,750.00__ 3,250.00

22,300.00
========
Net Sales
Sales ?
Less: Sales Returns ?
Sales Discounts 1,000.00 2,500.00
53,600.00
=======
Net Sales
Sales 56,100.00
Less: Sales Returns 1,500.00
Sales Discounts 1,000.00 2,500.00
53,600.00
=======
How do you compute
Net Profit?
Net Sales
Less: Cost of Goods Sold
Gross Profit
Less: Expenses
Net Profit before taxes
Less: Income taxes
Net Profit