CH7: MERCHANDISING OPERATIONS
Basic Financial Accounting and Reporting (Discussion Notes)
BS Accountancy 1 - 1 | Prof. Isolde Rodil-Sustrina | Sem 1 2022
MERCHANDISING COMPANY
❖they usually sell stocks held for sale.
❖compared to a service company,
merchandising companies have sales
accounts and purchase accounts.
❖they also use a different format for
income statements.
❖merchandiser buys a ready-for-sale
product and puts a markup on its
original price.
➔Markup - is added to the total
cost incurred by the producer of a
good or service in order to cover
the costs of doing business and
create a profit.
➔Benchmark - a tool for assessing
and comparing performance in
order to achieve continuous
improvement.
Important!
➔Debiting or crediting trucks or cars in
a merchandise inventory of a
non-vehicle company is wrong. It
should be recorded in PPE.
INCOME STATEMENT COMPUTATION
OF MERCHANDISING COMPANY
➢ Selling Expenses - these
expenses are responsible for the
maintenance of the store.
➢ Administrative Expenses -
expenses that are responsible for
the maintenance of the offices.
➢ Gross Profit - is not the total or
net profit of a certain business as
they still have Operating
Expenses & Finance Costs that
they need to cover.
ACCOUNTS/TERMINOLOGIES SEEN
IN A MERCHANDISING COMPANY
● Transportation-in - the freight cost
incurred by the buyer to have
purchased goods delivered.
CH7: MERCHANDISING OPERATIONS
Basic Financial Accounting and Reporting (Discussion Notes)
BS Accountancy 1 - 1 | Prof. Isolde Rodil-Sustrina | Sem 1 2022
● Transportation-out - the freight cost
incurred by a seller to ship goods to its
customers.
● Trade Discount - volume discount,
given to the wholesaler. Encourage
buyers using markdowns of the price
of a product. For example, buying
10,000 pieces of a pencil for Php 5.00
original price, sold to a wholesaler at
Php 4.00. Discounted price is what is
usually recorded in a sales invoice.
● Cash Discount - assuming that you’ll
see in the sales invoice a credit term
of “2/10, 1/15, n/EOM”. The discount
we got from the credit term in the
issued sales invoice is what we call
cash discount.
● Free on Board (F.O.B) - when cargo
is used to the point that it will use
shipments such as planes and ships.
The buyer bears the shipping cost
when the term is FOB Shipping Point.
When the term is FOB Destination the
seller shoulders the transportation
cost.
➢ Freight Prepaid - accounts
payable of a buyer, will
increase in accordance with the
freight.
➢ Freight Collect - not yet paid
until the cargo is delivered.
● Value-Added Tax - to know how
much tax you should pay, subtract the
input tax from the output tax.
➢ Input Tax - increase the
amount to be paid.
➢ Output Tax - increase the
amount to be collected.
Three (3) Types of Taxes for a Business
1. Percentage Tax - 3%
2. Graduated Tax - 8%
3. VAT - 12%
NEEDED FILES UPON REQUESTING
MERCHANDISE
1. Purchase Requisition - an employee
in your organization makes an order
request if a need arises for certain
goods or services.
2. Purchase Order - issued by a
business' purchasing department
when placing an order with its vendors
or suppliers.
3. Sales Invoice - when the goods is
sold to the buyer, whether cash or on
credit.
4. Receiving Report - used to document
the contents of delivery to a business.
5. Check/Disbursement Voucher -
processed when there is an invoice or
contract on file.
6. Check - made upon the approval of
the check voucher, this usually needs
two signatories from authorized
personnel inside the company (eg.
business owners).
INVENTORY METHODS
● Periodic Inventory System
- used when a business produces
high-volume products but with low
prices (eg. groceries).
- can’t be monitored on a daily
basis, counted at the end of the
accounting period; physical count.
● Perpetual Inventory System
- used when a business produces
low-volume products but with high
prices (eg. cars).
- in & out and the balances of the
product can be monitored on a
daily basis.
- account title used: merchandise
inventories & cost of sales
- no purchase, purchase return &
allowances, purchase discounts,
CH7: MERCHANDISING OPERATIONS
Basic Financial Accounting and Reporting (Discussion Notes)
BS Accountancy 1 - 1 | Prof. Isolde Rodil-Sustrina | Sem 1 2022

and transportation-in account - used in the multi-step format of

present. income statement
- most large and medium-sized
Physical Count businesses use this method
● Inventory Sheet - we need this to
compute the cost of sales in a periodic
inventory system.
Qty. Particulars Unit Cost Total Cost

Grand Total _________

- represents merchandise
inventory, ending

Important!

➔there is still a need for physical

counting in perpetual inventory.
➔an entity cannot use two (2) inventory
systems at the same time.

Two (2) Types of Income Statement

a. Nature of Expense
- the cost of sales is not yet
categorized
- accounts are categorized broadly:
revenue and expense
- disclosure of expenses is used in
a single-step income statement
- usually employed by small
businesses as it is simple and
relatively easier to be
implemented
- it cannot be used to calculate
gross profit within the income
statement.

b. Function of Expense
- the cost of sales is already
categorized.
- usually utilized in merchandising
business
- allows us to calculate gross profit
and operating profit within the
income statement