Quarter 4

Learning Activity Sheets 9 (LAS_9, Qtr. 4)

for FABM 1 Grade 11

FUNDAMENTALS OF ACCOUNTANCY, BUSINESS & MANAGEMENT 1

ACTIVITY SHEET 9

Nature of Transactions in a Merchandising Business

I. Learning Competency with Code

• Describes the nature of transactions in a merchandising business.
• Records transactions of a merchandising business in the general and special
journals.
• Posts transactions in the general and subsidiary ledgers.

II. Activity Proper

A merchandising company is an enterprise that buys and sells goods to earn a

profit.

Activity 1: nature of merchandising business

Merchandise (or merchandise inventory) refers to goods that are held for sale to
customers in the normal course of business. This includes goods held for resale.

Example:
• Candies, canned goods, noodles sold at a grocery stores
• Juice, biscuits sold in a grocery store
• Medicines sold in a pharmacy

If a grocery store decided to sell an old computer used in the office, this would not
be merchandise because grocery stores do not normally sell computers and the store is
simply selling off old office equipment. But a computer would be merchandise for a
computer store who resells computer units. Merchandise for one firm may be a fixed
asset (or property and equipment) for another.

In another example, a pharmacy decided to sell a table used in their display area.
This table is not merchandise of a pharmacy. However, to a retail furniture store a table
is merchandise because the business of a furniture store involves the buying and selling
of tables.

A merchandiser’s primary source of revenue is sales revenue or sales.

Expenses for a merchandising company are divided into two categories:

1. Cost of goods sold (COGS) – the total cost of merchandise sold during the period;
and
2. Operating expenses (OP) - expenses incurred in the process of earning sales
revenue that are deducted from gross profit in the income statement. Examples are
sales salaries and insurance expenses.

Gross profit (GP) is equal to Sales Revenue less the Cost of Goods Sold.

Income measurement process for a merchandiser follows as:

Sales – COGS = Gross Profit – Operating Expense = Net Income (Loss)

The Operating Cycles for a merchandiser:

Merchandising Company operating cycle (cash to cash) involves:
1. buy merchandise inventory
2. sell inventory
3. obtain Accounts Receivable
4. receive cash

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Activity 2: journalizing the transactions in a merchandising business

Prior to the discussion on the journal entries, recall the first step in the accounting cycle
discussed in previous lessons on financial and non-financial transactions.

In step 1, transactions are identified and measured. At this stage, the documents used
by the business are analyzed to see whether these transactions have financial impact or
effect. Recall the rule that only financial transactions are recorded and that the amount
can be measured. These two conditions must exist in order for a particular transaction to
be recognized or recorded. As defined, financial transactions are those activities that
change the value of an asset, liability or equity.

Step 2 is the Preparation of Journal Entries (Journalizing)

A merchandising company may use special and general journals to record its
transactions.

SPECIAL JOURNALS

Some businesses encounter voluminous quantities of similar and recurring transactions,

which may create congestion if these transactions are recorded repeatedly in a single day
or monthly in the general journal. The use of special journals will eliminate this problem.

The following are the commonly used special journals:

1. Cash Receipts Journal –used to record all cash that had been received
2. Cash Disbursements Journal –used to record all transactions involving cash
payments
3. Sales Journal (Sales on Account Journal) –used to record all sales on credit (on
account)
4. Purchase Journal (Purchase on Account Journal) –used to record all purchases of
inventory on credit (or on account)

INVENTORY SYSTEMS

Maintaining inventory items is a unique set-up in a merchandising business. There are

two methods of accounting for inventory, namely: Perpetual Inventory System and
Periodic Inventory System.

Merchandising entities may use either of the following inventory systems:

1. Perpetual System — Detailed records of the cost of each item are maintained, and the
cost of each item sold is determined from records when the sale occurs. For example, a
car dealership has separate inventory records for each vehicle.
• Record purchase of Inventory.
• Record revenue and record cost of goods sold when the item is sold.
• At the end of the period, no entry is needed except to adjust inventory for losses,
etc.

2. Periodic System — Cost of goods sold is determined only at the end of an accounting
period. This system involves:
• Record purchase of Inventory.
• Record revenue only when the item is sold.
• At the end of the period, you must compute cost of goods sold (COGS):
1. Determine the cost of goods on hand at the beginning of the accounting period
(Beginning Inventory = BI),
2. Add it to the cost of goods purchased (COGP),
3. Subtract the cost of goods on hand at the end of the accounting period
4. (Ending Inventory = EI) illustrated as follows:
BI + COGP = Cost of Goods available for sale – EI = COGS

Additional Considerations:
➢ Perpetual systems have traditionally been used by companies that sell merchandise
with high unit values such as automobiles, furniture, and major home appliances.

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 With the use of computers and scanners, many companies now use the perpetual
inventory system.
➢ The perpetual inventory system is named because the accounting records
continuously — perpetually —show the quantity and cost of the inventory that
should be on hand at any time. The periodic system only periodically updates the
cost of inventory on hand.
➢ A perpetual inventory system provides better control over inventories than a
periodic inventory, since the records always show the quantity that should be on
hand. Then, any shortages from the actual quantity and what the records show
can be investigated immediately.

PERIODIC INVENTORY SYSTEM

Recording purchases and related transactions under the Periodic Inventory System
PURCHASES OF MERCHANDISE: PERIODIC SYSTEM

1. When merchandise is purchased for resale to customers, the account, Purchases, is

debited for the cost of goods purchased.
2. Like sales, purchases may be made for cash or on account (credit).
3. The purchase is normally recorded by the purchaser when the goods are received
from the seller.
• Each credit purchase should be supported by a purchase invoice.
• A purchase invoice received by the buyer is actually a sales invoice or a
charge invoice prepared by the supplier or vendor.
• Note that only purchases of merchandise are debited to the ‘Purchase’
account. Acquisition (purchases) of other assets: supplies, equipment, and
similar items are debited to their respective accounts.

Comparison of Periodic and Perpetual Inventory System

Method Periodic Perpetual
When commonly used When individual inventory When individual inventory
by business items have small peso items represent a relatively
amounts large peso amount. When
advanced computer software
are used.
Account used to Purchases Inventory
record purchases
Accounts used related Purchases Merchandise Inventory
to purchases and Purchase returns and Cost of Sales
sales allowance
Purchase discount
Freight in
Merchandise Inventory
Income Summary
Adjustment to No adjustment to inventory Cost of inventory sold is
inventory account account. transferred to Cost of Goods
Inventory account at Cost of goods sold is Balance to agree with the
year end computed with physical count physical count and
and merchandise value. merchandise value when
Set up ending merchandise necessary
inventory.
Cost of goods sold and Requires physical counting of Cost of goods sold and
ending inventory goods. ending inventory may be
balance determination Cost of goods available for sale determined from the
less ending inventory equals accounting records without
Cost of goods sold physical counting of goods.
Need of physical count To determine the ending To confirm the presence of
inventory the ending inventory as
recorded in the books.

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Illustration 9.1 Periodic Inventory System vs Perpetual Inventory System

Periodic Inventory System Perpetual Inventory System

1. Sold merchandise on account costing P8,000 at a selling price of P10,000; Terms
were 2/10, n/30
Accounts Receivable 10,000 Accounts Receivable 10,000
Sales 10,000 Sales 10,000

Cost of Sales 8,000

Inventory 8,000

2. Customer returned merchandise costing P400 that had been sold on account for
P500 (part of P10,000 sales).
Sales Returns & Allow 500 Sales Returns & Allow 500
Accounts Receivable 500 Accounts Receivable 500

Inventory 500
Cost of Sales 500

3. Received payment from customer for merchandise sold above cash discount.
Cash Discount (P10,000 sales P500 returns) x 2% discount = P190
Cash 9,310 Cash 9,310
Sales Discount 190 Sales Discount 190
Accounts Receivable 9.500 Accounts Receivable 9,500

4. Purchased on account merchandise for resale for P6,000; Terms were 2/10, n/30
(purchases recorded at invoice price).
Purchases 6,000 Inventory 6,000
Accounts Payable 6,000 Accounts Payable 6,000

5. Paid P200 freight on theP6,000 purchases: Terms were FOB Shipping Point.
Freight in 200 Inventory 200
Cash 200 Cash 200

6. Returned merchandise costing P300 (part of P6,000 purchases).

Accounts Payable 300 Accounts Payable 300
Purchases Ret. & Allow. 300 Inventory 300

7. Paid for merchandise purchased (cash discount taken: P6,000 purchases – P300 returns x
2% discount = P114)
Accounts Payable 5,700 Accounts Payable 5,700
Purchase Discount 114 Inventory 114
Cash 5,586 Cash 5,586

8. To transfer the beginning inventory balance to the Income Summary account (closing entries
under the periodic inventory system.)
Income Summary 25,000 No entry required
Inventory 25,000

9. To record ending balance (closing entries under the periodic inventory system.)
Inventory 23,150 No entry required.
Income Summary 23,150

10. To adjust the ending perpetual inventory balance for the shrinkage during the year.

Shrinkage already effected Cost of Goods Sold 36

in No. 9
Inventory 36

F.O.B. Shipping point means free on board at the shipping point, that is, buyer
incurs all transportation costs after the merchandise is loaded on trucks at the point of
shipment. The term F.O.B. destination means that the seller incurs all transportation
charges to the destination of the shipment. In general, title to the goods passes from the
seller to the buyer at the point at which the buyer becomes responsible for the
transportation charges.

Freight payments, may be paid in cash or incurred on account. It is carried in the

books as freight out or freight in. a debit account balance and may either be prepaid or
collect.

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 Transportation or freight on merchandise bought is recorded as an expense in the
books of the party who, as per contract, should shoulder the expense. Merchandise may
be billed to the buyer on the following basis:
1. F.O.B. shipping point. Freight prepaid.
2. F.O.B. shipping point. Freight collect.
3. F.O.B. destination. Freight prepaid.
4. F.O.B. destination. Freight collect.

Illustration 9.2
ACD Company sold merchandise to LMN Company of Iloilo, the invoice showed the
following:
Price Merchandise P10,000
Freight cost to Manila 1,000
P11,000

The journal entries of the buyer and the seller are presented below with the
following freight terms.

1. F.O.B. Shipping Point. Freight Prepaid.

Buyer’s Book Seller’s Book

Purchases 10,000 Accounts Receivable 11,000
Freight in 1,000 Sales 10,000
Accounts Payable 11,000 Cash 1,000
Purchase on account. Sales on account.

Analysis: FOB Shipping point means that the cost of freight will be shouldered by the
buyer from shipping point to destination. The freight cost was paid in advance by the
seller. Since the buyer will be shouldering the freight cost but was paid by the seller,
therefore the buyer has an additional liability to the seller. Buyer’s accountability to the
seller is the cost of merchandise plus the freight cost.

2. F.O.B Shipping Point. Freight Collect.

Buyer’s Book Seller’s Book

Purchases 10,000 Accounts Receivable 10,000
Freight in 1,000 Sales 10,000
Accounts Payable 10,000 Sales on account.
Cash 1,000
Purchase on account.

Analysis: The buyer will shoulder the cost of freight and at the same time pays for the
freight cost upon delivery of the goods. Buyer’s accountability will be the cost of
merchandise only.

3. F.O.B. Destination. Freight Prepaid.

Buyer’s Book Seller’s Book

Purchases 10,000 Accounts Receivable 10,000
Accounts Payable 10,000 Freight Out 1,000
Purchases on account. Sales 10,000
Cash 1,000
Sales on account.

Analysis: In FOB Destination, the seller will shoulder the cost of freight, and also pays
the freight in advance before goods are delivered to the buyer. Buyer’s accountability will
be the cost of merchandise only.

4.F.O.B. Destination. Freight Collect.

Buyer’s Book Seller’s Book

Purchases 10,000 Accounts Receivable 9,000
Accounts Payable 9,000 Freight Out 1,000
Cash 1,000 Sales 10,000
Purchases on account. Sales on account.

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Analysis: The seller will shoulder the cost of freight but it was the buyer who pays for the
freight in behalf of the seller upon delivery of the goods to the buyer’s place. Therefore,
buyer’s accountability to the seller is the cost of merchandise minus the freight cost.

SALES RETURNS AND ALLOWANCES:

▪ Sales Returns result when customers are dissatisfied with merchandise and are
allowed to return the goods to the seller for credit or a refund.
▪ Sales Allowances result when customers are dissatisfied, and the seller allows a
deduction from the selling price.
▪ To grant the return or allowance, the seller prepares a credit memorandum to
inform the customer that a credit has been made to the customer’s account
receivable.
▪ Sales Returns and Allowances is a contra revenue account to the Sales account. A
contra account is a reduction to a particular account.
▪ A contra account is used, instead of debiting sales, to disclose the amount of sales
returns and allowances in the accounts.
▪ This information is important to management as excessive returns and allowances
suggest inferior merchandise, inefficiencies in filling orders, errors in billing
customers, and mistakes in delivery or shipment of goods.
▪ The normal balance of Sales Returns and Allowances is a debit.
▪ One entry is made with each sales return and allowance:
The entry to record the sales return or allowance:
• Debit — Sales Return and Allowances which decreases revenues for the
amount of the sale
• Credit — Accounts Receivable (if a credit sale) or Cash (if a cash sale) which
decreases assets

Illustration 9.3 Sales Return & Allowances

On January 16, 2022, Rafael Reyes returned one unit of the computers purchased
last January 15, 2022 under Charge Invoice 001. The unit returned was in good
condition. However, Rafael Reyes returned the unit because it is one unit more than what
they need. The return was approved and accepted by Magaling Enterprise. The price will
be deducted from the account of Rafael Reyes.

General Journal
Date Account Title PR Debit Credit
01/16/2022 Sales Ret & Allowances 19,500
Accounts Receivable 19,500

SALES DISCOUNTS

1. A sales discount is the offer of a cash discount to encourage customers to pay the
balance at an earlier date.
2. An example of a discount term is commonly expressed as: 2/10, n/30, which means
that the customer is given 2% discount if payment is made within 10 days. After 10 days
there is no discount, and the balance is due in 30 days.
3. Sales Discounts is a contra revenue account with a normal debit balance.

Illustration 9.4 Sales Discount

Assume that Magaling Enterprise purchased on cash, five units of computers at

PHP10,000 per unit from a supplier on January 15, 2022. These units were subsequently
sold to Jun Cruz on January 17, 2022 under Charge Invoice (ChI) No. 002 amounting to
PHP90,000 (PHP18,000 per unit) with terms 2/10, n/30, FOB Shipping Point. On
January 23, 2016, Cruz paid the said account in full.

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 General Journal
Date Account Title PR Debit Credit
01/15/2022 Purchases 50,000
Cash 50,000
To record purchased of 5 units.

01/17/2020 Account Receivable 90,000

Sales 90,000
To record sales on account.

01/25/2020 Cash 88,200

Sales Discount 1,800
Accounts Receivable 90,000
To record collection of A/R net
of 2% sales discount.

Notice in the entry on January 25, 2022, that the cash received from Jun Cruz was net of
the 2% discount because he made the payment within the discount period. Take note
that the discount period in this case was from June 17, 2022, to January 27, 2022 (10
days).

If Jun Cruz paid the account on January 30, 2022, instead of January 25, 2022, entry
would be:

General Journal
Date Account Title PR Debit Credit
01/30/2022 Cash 90,000
Accounts Receivable 90,000
To record collection of A/R.

Prepared by: Noted by:

NECCA T. PALCAT-BERIN LOURENE J. GUANZON

Subject Teacher ABM Group Head

Approved by:

SALVADOR J. SEMBRAN, PhD

Asst. Principal II - SHS

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 Learning Activity Sheets 9 (LAS_9, Qtr. 4)
for FABM 1 Grade 11

Name of Learner: ________________________________ Date: _______________

Grade & Section: _________________________ Score: ____________________

ACTIVITY SHEET 9
Nature of Merchandising Business

III. Exercises

Written Task 9.1

A. True or False. Direction: Write True if the answer is correct, and False if
otherwise.
______________ 1. The general principles of accounting applicable to a service type of firm
also apply to a merchandising firm.
______________ 2. If the seller is to shoulder the cost of delivering the goods, the terms are
state FOB Shipping point.
______________ 3. There is no physical inventory count in the perpetual inventory system
since the accounts are continuously updated.
______________ 4. Sales returns and allowances, and sales discount are contra revenue
accounts and will have debit balance.
______________ 5. The terms freight prepaid and freight collect will dictate who shoulders
the transportation costs.

Performance Task 9.1

A. Short Problems. Direction: Write your answers on a separate sheet of paper. Show
your solutions. (5 points each)

________________1. A buyer receives an invoice for P12,000 dated August 13, 2022. If the
terms are 2/10. n/30 and the buyer pays the invoice within the discount period, what
amount will the seller receive?
________________ 2. Elsa purchased merchandise from SNA Company for P11,200 list
price, subject to a trade discount of 25%. The goods were purchases on terms of 3/10,
n/30, FOB destination. Elsa paid P200 transportation costs and returned P800 (list
price) of the merchandise to SNA Company and later paid the amount due to SNA within
the discount period. What will the amount paid be?
________________ 3. December 31, 2022, trial balance for ABM Inc. included the following
purchases, P50,000, purchase returns and allowances, P2,000, freight in, P3,000, and
ending inventory, P5,000. What is the cost of goods sold for 2022?

Performance Task 9.2

B. Problem. Write your answer on a separate sheet of paper.
During March 15, of the current year 2023, the company located in Antique ordered
merchandise worth P100,000 from NKPB Incorporated in Roxas. The cost of freight
amount to P8,000. Record the transaction on the books of the buyer and the seller
assuming the following freight terms:
1. FOB Destination, Freight Prepaid.
2. FOB Destination, Freight Collect.
3. FOB Shipping Point, Freight Collect.
4. FOB Shipping Point, Freight Prepaid.

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