Merchandising Operations
In accounting for merchandising operations, we always record the Gross Invoice Price in the books. Merchandises
are always quoted in the original price, called List Price and deductions are given by the seller to encourage the buyer to
buy more, called Trade Discounts.
Accounts
Types of Accounts
ASSETS (+, -)
CONTRA-ASSET (-, +)
LIABILITIES (-, +)
REVENUES (-, +)
CONTRA-REVENUE (+, -)
COSTS AND EXPENSES (+, -)
Examples
Cash
Accounts receivable
Merchandise inventory
Prepaid insurance
Store supplies
Office supplies
Store furniture and fixtures
Office furniture and fixtures
Store equipment
Office equipment
Delivery equipment
Transportation equipment
Allowance for doubtful accounts
Accumulated depreciations
Accounts payable
Notes payable
Unearned sales revenue
Sales revenue
Sales returns and allowances
Sales discount
Purchases
Freight-in
Freight-out
Office salaries
Office supplies expense
Store supplies expense
 CONTRA-COST (-, +) Purchase returns and allowances
Purchase discounts

Sales
In sales transactions, the legal ownership of goods is transferred from the seller of the goods to the buyer of
the merchandise. Revenue is earned each time a sale is made. Can be accepted in cash or account. When goods are
sold on account, the terms of payment must be specified on the invoice. This term of payment is called the Credit Term.
2/10, n/30 = will give you 2% discount if you pay within 10 days, but your deadline of your payment is
30 days (without discount).
2/15, 5/10, n/60 = will give you 2% discount if paid within 15 days, but will give you 5% discount if paid
within 10 days, but the deadline of your payment is in 60 days (without discount).
5/10, n/EOM = will give you 5% discount if paid within 10 days, but the deadline of the payment is at
the end of the month.

Sales, whether in cash or account, are sometimes returned to the seller because of wrong color, wrong size,
inferior quality, and many other reasons.
Sales Returns are merchandise returned to the seller, which implies a cancellation of sale.
Sales Allowances are granted to customers if customers keep the merchandise although unsatisfied with
what they bought. We use the account Sales Returns and Allowances to record these types of transactions.

Journalizing for Sales

Normal Transactions
April 01 Cash 12 000
Sales Revenue 12 000
02 Accounts Receivable – Rose Company 8 000
Sales Revenue 8 000

Sales and Return Journalizing

05 Sales and Return Allowances 3 000
Cash 3 000

Credit Term Journalizing

 11 Cash 7 840
Sales Discount 160
Accounts Receivable – Rose Company 8 000

Purchases
The cash collected by the merchandising entity will then be used to purchase goods that will be sold by the
firm.
Merchandising entities need to be purchase inventory in order to be able to sell and gain profit. We can say
Purchases are also sales transactions, however, the viewpoint here is that the company that accounts for the transaction
will be the buyer of merchandise.

Journalizing for Purchases

Normal Purchases
May 01 Purchases 15 000
Cash 15 000
02 Purchases 6 000
Accounts Payable – Kim Company 6 000

Purchase Return and Allowances

07 Cash 3 000
Purchase Return and Allowances 3 000

Credit Term
10 Accounts Payable – Kim Company 6 000
Cash 5 700
Purchase Discount 300

Merchandising Operations: Transportation

Freight Terms
1. FOB Shipping Point – ownership will be passed unto the buyer in transit.
2. FOB Destination Point – ownership will be passed unto the buyer when merchandise is delivered and received by
him/her.
 3. Freight Prepaid – seller remit to the freight company.
4. Freight Collect – buyer remit to the freight company.
5. Freight-in – buyer pays for the freight charges. An adjunct account to purchases and thus added as cost in
inventory in bringing it to its present location and condition.
6. Freight-out – seller pays for the freight charges. It is recorded by the seller as an operating expense, under the
selling expenses line item.

Freight-in and Freight-out

1. ABC Company purchased merchandise worth Php 15 000 with terms 5/10, n/30. Freight charges paid by the ABC
Company amounts to Php 3 000.

Purchases 15 000
Freight-in 3 000
Accounts Payable 15 000
Cash 3 000

2. DEF Company sold merchandise priced at Php 8 000 with terms 2/10, n/30. Freight charges paid by DEF amounts to
Php 2 00 and will not be reimbursed by their buyer.

Accounts Receivable 8 000

Freight-out 2 000
Sales 8 000
Cash 2 000

Merchandising Operations: Income Statement

Adjusting Entry
Profit or Loss Summary xxx
Merchandise Inventory (Beg.) xxx
To close beginning inventory

Merchandise inventory (end.) xxx

Profit or Loss Summary xxx
To record ending inventory
Income Statement
Net Sales
Less: Cost of Goods Sold
Gross Profit
Add: Other Income
Total Revenue
Less: Operating Expenses
Net Income

Two methods of presenting the income statement:

Function of Expense Method – classifies expenses according to their function as cost of goods sold.
Nature of Expense Method – expenses are aggregated according to their nature and not by function.

Function of Expense Method

Sales and other income:
Gross Sales 900 000
Sales returns and allowances 15 000
Sales discount 10 000
Other income 45 000
Purchases and freight:
Gross purchases 300 000
Freight-in 80 000
Purchase returns and 20 000
allowances
Purchase discount 10 000
Operating expenses:
Salaries expenses 70 000
Utilities expenses 60 000
Rent expense 50 000
Depreciation expense 40 000
Inventory
Beginning inventory 120 000
 Ending inventory 150 000

Note 7 – Net Sales

Gross Sales Php 900 000
Less: Sales Returns and Allowances Php 15 000
Sales Discount 10 000 (25 000)
Net Sales Php 875 000

Note 8 – Net Purchases

Gross Purchases Php 300 000
Add: Freight-in 80 000
Total Purchases Php 380 000
Less: Purchases Returns and 20 000
Allowances
Purchases Discount 10 000 (30 000)
Net Purchases Php 350 000

Note 9 – Cost of Goods Sold

Beginning Inventory Php120 000
Add: Net Purchase 350 000
Cost of Goods Sold Available for Php 470 000
Sale
Less: Ending Inventory 150 000
Cost of Goods Sold Php 320 000

Note 10 – Operating Expenses

Salaries expenses Php 70 000
Utilities expenses 60 000
Rent expense 50 000
Depreciation expense 40 000
Salaries expenses 70 000
Total Operating Expenses Php 220 000
EXCELLENT RETAIL COMPANY
Income Statement
For the month ended April 30, 2020

Net Sales Php 875 000

Less: Cost of Goods Sold (Php 320 000)
Gross Profit Php 555 000
Add: Other Income Php 45 000
Less: Operating Expenses (Php 220 000)
Net Income Php 380 000

Nature of Expense Method

If increased in merchandising inventory… (xx xxx)
If decreased in merchandising inventory … xx xxx

EXCELLENT RETAIL COMPANY

Income Statement
For the month ended April 30, 2020

Revenues
Net Sales (Note 7) Php 875 000
Other Income Php 45 000
 Total Revenue Php 920 000

Expenses
Increase in Merchandise Inventory (Php 30 000)
Net Purchases Php 350 000
Salaries Expense Php 70 000
Utilities Expense Php 60 000
Rent Expense Php 50 000
Depreciation Expense Php 40 000
Total Expenses Php 540 000

Net Income Php 380 000

Merchandising Operations: Periodic and Perpetual Inventory System

• Periodic Inventory System – no detailed record of inventory is being maintained during the year. An actual
physical count of the goods remaining on hand is required at the end of each period.
• Perpetual Inventory System – involves maintenance of detailed inventory records in the accounting system.
Continuous record is maintained on a transaction-by-transaction basis throughout the period.

May 01 Purchased merchandise from Ryu Merchandising for Php 30 050, terms
2/10, n/30.
May 02 Returned Php 1 200 worth of defective merchandise to Ryu
Merchandising.
May 03 Sold merchandise on account to Ms. Friday Vargas for Php 16 550 selling
price, 2/10, n/30. The merchandise costs Php 10 440.
May 05 Sold merchandise for cash to Miss Yoon for Php 5 680. The merchandise
costs Php 3 500.
May 08 Purchased computer set from Eun-Soo amounting Php 57 880.
May 10 Paid Ryu Merchandising in full.
May 11 Sold merchandise on account to Lana Cala at Pho 25 00 selling price,
2/10, n/30. The merchandise costs Php 22 000
May 12 Friday Vargas paid her account in full.
May 15 Lana Cala paid her account in full.

Orange – Periodical
White – Perpetual
Date Account Title and Explanation JR Debit Credit
May 01 Purchases 30 050
Accounts Payable – Ryu Merchandising 30 050
Purchased merchandise from Ryu Merchandising on account.
May 01 Merchandise Inventory 30 050
Accounts Payable – Ryu Merchandising 30 050
Purchased merchandise from Ryu Merchandising on account.
May 02 Accounts Payable – Ryu Merchandising 1 200
Purchases Return and Allowances 1 200
Returned defective merchandise to Ryu Merchandising.
May 02 Accounts Payable – Ryu Merchandising 1 200
Merchandise Inventory 1 200
Returned defective merchandise to Ryu Merchandising.
May 03 Accounts Receivable – Friday Vargas 16 550
Sales Revue 16 550
Sold merchandise to Friday Vargas on account.
May 03 Accounts Receivable – Friday Vargas 16 550
Sales Revenue 16 550
Sold merchandise to Friday Vargas on account.

May 03 Cost of Goods Sold 10 440

Merchandise Inventory 10 440
Goods sold to Friday Vargas.
May 05 Cash 5 680
Sales Revenue 5 680
Sold Merchandise to Ms. Yoon.
May 05 Cash 5 680
Sales Revenue 5 680
Sold Merchandise to Ms. Yoon
May 05 Cost of Goods Sold 3 500
Merchandise Inventory 3 500
Sold Merchandise to Ms. Yoon.
May 08 Office Equipment 57 880
Cash 57 880
Purchased computer sets.
May 08 Office Equipment 57 880
Cash 57 880
Purchased computer sets.
May 10 Accounts Payable – Ryu Merchandising 28 850
Cash 28 273
Purchase Discount 577
Paid Ryu Merchandising.
May 10 Accounts Payable – Ryu Merchandising 28 850
Cash 28 273
Merchandise Inventory 577
Paid Ryu Merchandising.