MERCHANDISING

Merchandising refers to the marketing and sales of products. The merchandiser earn profit by buying and
selling merchandise.
Merchandise Inventories represent goods intended for sale. Inventories include only
items that are held for sale in the normal course of business
operation.
Inventory Accounting Systems

PERIODIC INVENTORY SYSTEM

Periodic inventory system does not require continuous record of the movements of inventory.
Movements such as purchases, sales , returns etc. are not directly recorded in the inventory
account. Nominal accounts such as purchases, purchase returns and allowances, purchase discounts
and freight in are used. At the end of the period, an inventory physical count is necessary to
determine the ending balance of inventory.

PERPETUAL INVENTORY SYSTEM

Perpetual inventory system maintains continuous record of the movements of the inventory.
Increase and decreases in inventory account are regularly recorded so as to report the updated
inventory account. At the end of the period, an inventory physical count is not necessary to
determine the balance of the inventory account. However, for control purposes, a count may be
made to determine the correctness of the inventory account.
 Periodic Inventory System
Accounting for Sales
Sales – is the revenue account title used to record sale of all kinds of merchandise.
Sales are earned typically when the goods are transferred from the seller to the buyer.
Cash Sales
On September 1, 2023, sold P50,000 worth of merchandise for cash.
Cash 50,000
Sales 50,000
Sales on Account
On September 15, 2023, sold goods to customer A for P48,600 on account, terms: 2/10, n/30.
Accounts Receivable 48,600
Sales 48,600
 Accounting for Sales Returns and Allowances
Sales Returns- goods returned by customers due to wrong specifications, poor quality or
erroneous merchandise delivered.
Sales Allowances- downward adjustment in price due to certain defects of the goods
delivered. The customer is willing to accept the goods despite of certain defects.
Sales Returns and Allowances is a contra account deducted from Sales account to
arrive at Net Sales.
September 18, 2023, customer A ( Re: September 15,2023 sales), returned defective merchandise with
selling price of P12,400.
Sales Returns and Allowances 12,400
Accounts Receivable 12,400

For a sales return or allowance on a cash sale, cash refund is normally made. The return is
recorded by debiting Sales Returns and Allowances and crediting Cash.
 Accounting for Sales Discounts
Sales Discounts- cash discount offered to encourage customers to pay their accounts promptly.
Common cash discount terms are 2/10, n/20 or 2/10,EOM,n/60. Sales
discount account is also a contra account deducted from Sales account to
arrive at Net Sales.
On September 22, 2023, received full payment from customer A (Re: the sale made in
September 15,2023)
Cash 35,476
Sales Discounts 724
Accounts Receivable 36,200
Sales – September 15 48,600
Less: Sales Returns- September 18 12,400
Amount due before the discount 36,200
Less: Discount (36,200 x 2%) 724
Amount due from customer A 35,476
Accounting for Trade Discounts
Trade Discounts –are used to reduce the list price (catalog price) to Invoice(actual)
price. Trade discounts are not recorded. When a sale or purchase is
made, the amount recorded is always net of the trade discount.
ABC Merchandising sold merchandise with a list price of P88,000 and with trade discounts
of 20% and 10%.
Cash or Accounts Receivable 63,360
Sales 63,360

List price 88,000

First Discount (88,000 x 20%) (17,600)
Balance 70,400
Second Discount (70,400 x 10%) ( 7,040)
Invoice (Actual) Price 63,360
Accounting for Purchases

Purchases- this account represents cost of goods bought for resale

On October 10, 2023, Ace Merchandising purchased goods from Beta Company for
P358,400, terms: 2/10,n/30.

Purchases 358,400
Accounts Payable 358,000

If the purchase is in cash, the journal entry will be, debit Purchases and credit Cash
 Accounting for Purchase Returns and Allowances
Purchase Returns- these are goods purchased but returned due to damages, defects,
wrong specifications, poor quality or erroneous merchandise delivered.
Purchase Allowances- these are reductions in the price of goods purchased due to certain
defects of the goods delivered. The buyer is willing to accept the goods
despite of certain defects.
Purchase Returns and Allowances is a contra account deducted from Purchases account.
On October 12, 2023, Ace Merchandising returned goods to Beta Company P20,000 worth of
defective merchandise purchased on October 10,2023.
Accounts Payable 20,000
Purchase Returns and Allowances 20,000

For a purchase return or allowance on a cash purchase, cash is normally received. The return
is recorded by debiting Cash and crediting Purchase Returns and Allowances
 Accounting for Purchase Discounts
Purchase Discount-This account is used to record the amount saved by paying promptly.
Purchase discount is also a contra account deducted from Purchases
account.
On October 15, 2023, Ace Merchandising paid Beta Company in full.
Accounts Payable 338,400
Cash 331,632
Purchase Discount 6,768

Purchases – October 10 358,400

Less: Purchase Returns – October 12 20,000
Amount due before discount 338,400
Less: Purchase Discount (338,400 x 2%) 6,768
Amount Due 331,632
 Alternative Methods of Accounting for Purchase Discounts
Gross method Purchases recorded at Gross Net method Purchases recorded Net of Discount
Purchase merchandise, P200,000, terms 2/10, n/30. Purchase merchandise, P200,000, terms 2/10, n/30.
Purchases 200,000 Purchases 196,000
Accounts payable 200,000 Accounts Payable 196,000
Returned defective merchandise, P20,000 Returned defective merchandise, P20,000
Accounts Payable 20,000 Accounts Payable 19.600
Purchase Return and Allowances 20,000 Purchase Return and Allowances 19,600
Assume payment within the discount period Assume payment within the discount period
Accounts Payable 180,000 Accounts Payable 176,400
Cash 176,400 Cash 176,400
Purchase Discount 3,600 Assume payment made beyond the discount period
Assume payment made beyond the discount period Accounts Payable 176,400
Accounts Payable 180,000 Purchase Discount Lost 3,600
Cash 180,000 Cash 180,000
 Shipping Charges on Merchandise Purchased or Sold
The point when ownership transfers from the seller to the buyer determines who pays the transportation
costs/shipping charges. This can be derived from the freight terms agreed between the seller and the buyer.
FOB Destination means that the seller has
agreed to pay all the shipping costs and the buyer
receives title to the goods at point of destination.
Since the seller still has title to the goods while the
same are in transit, the shipping costs is properly
an expense of the seller. The shipping charges are
debited to a selling expense account called Freight
Out in the books of accounts of the seller.
FOB Destination , freight prepaid means that the
freight cost is chargeable to seller who pays the
shipping company.
FOB Destination, freight collect means that the
freight cost is chargeable to the seller, but the
buyer has to pay the shipping company upon
receipt of the goods.
FOB Shipping Point means that the buyer
has agreed to shoulder all the shipping costs and
the buyer receives title to the goods at shipping
point.
Shipping charges are additional costs of the goods
purchased. These costs are debited to an account
Freight In in the books of the buyer, which is
shown in the Statement of Income as an addition to
the cost of merchandise purchased.
FOB Shipping Point, freight prepaid means all the
shipping cost is chargeable to buyer but the seller
advanced the payment to the shipping company.
FOB Shipping point, freight collect means that the
freight cost is chargeable to buyer who pays the
shipping company upon receipt of goods.
FOB DESTINATION
On July 5, 2023, Ace Company purchased goods with selling price of P66,000 from Black Store. Terms
2/10, n/30, FOB Destination, freight prepaid. Amount of freight cost is P2,500.

Ace Company Books Black Store Books

Buyer Seller

Purchases 66,000 Accounts Receivable 66,000

Accounts payable 66,000 Sales 66,000

No journal entry for the freight cost. Freight out 2,500

Cash 2,500
FOB DESTINATION
On July 5, 2023, Ace Company purchased goods with selling price of P66,000 from Black Store.
Terms 2/10, n/30, FOB Destination, freight collect. Amount of freight cost is P2,500.

Ace Company Books Black Store Books

Buyer Seller

Purchases 66,000 Accounts Receivable 66,000

Accounts payable 66,000 Sales 66,000

Accounts Payable 2,500 Freight out 2,500

Cash 2,500 Accounts Receivable 2,500
FOB SHIPPING POINT
On November 7,2023, Care Company purchased goods with selling price of P88,800 from Del Store.
Terms, 2/10, n/30, FOB Shipping Point, freight collect. Freight Cost was P4,250.
Care Company Books Del Store Books
Buyer Seller

Purchases 88,800 Accounts Receivable 88,800

Accounts payable 88,800 Sales 88,800

Freight In 4,250 No entry for the freight cost

Cash 4,250
FOB SHIPPING POINT
On November 7,2023, Care Company purchased goods with selling price of P88,800 from Del Store.
Terms, 2/10, n/30, FOB Shipping Point, freight prepaid. Freight Cost was P4,250.

Care Company Books Del Store Books

Buyer Seller

Purchases 88,800 Accounts Receivable 88,800

Accounts Payable 88,800 Sales 88,800

Freight In 4,250 Accounts Receivable 4,250

Accounts Payable 4.250 Cash 4,250
FINANCIAL STATEMENT PRESENTATION
Statement of Profit or Loss

Sales and related accounts Purchases and related accounts

Sales xx Purchases xx
Less: Sales Returns and Allowances xx Add: Freight In xx
Sales Discount xx xx Total xx
NET SALES xx Less: Purchase Returns and Allowances xx
Purchase Discount xx xx
NET PURCHASES xx
Comparison of the Periodic and Perpetual Inventory System
PERIODIC INVENTORY SYSTEM
When goods for resale are purchased, account
Purchases, is debited at the amount of acquisition cost.
Upon making a sale, income is recognized by crediting
the account Sales, based on the selling price of the
goods.
No separate entry is prepared to record the decrease in
inventory balance as a result of sale and Inventory
ledger balance need not be updated as buying and
selling transactions occur.
At the end of the period, the company takes physical
count to determine the ending balance of merchandise
inventory. This ending balance of inventory is used to
determine the cost of goods sold during the period.
PERPETUAL INVENTORY SYSTEM
The cost of each item is debited to the Merchandise
Inventory account upon purchase.
Upon making a sale, income is recognized by crediting
the account Sales based on the selling price of the goods.
At the time of sale, the cost of each item is transferred
from Merchandise Inventory account to Cost of Goods
Sold account (by debiting Cost of Goods Sold and crediting
Merchandise Inventory)
Thus, the Cost of Goods Sold account at all times equals
the cost of merchandise sold during the period, and the
Merchandise Inventory account at all times equals the cost
of merchandise on hand.
Purchases, purchase return and allowances, purchase
discounts and freight in accounts are not used.
 Comparison of Entries Between Periodic and
Perpetual Inventory System

Periodic System Perpetual System

July 3- Purchase merchandise worth P124,000, 2/10, July 3 - Purchase merchandise worth P124,000, 2/10,
n/30, FOB Shipping Point. n/30, FOB Shipping Point.
Purchases 124,000 Merchandise Inventory 124,000
Accounts Payable 124,000 Accounts Payable 124,000

July 5- Paid the shipping company, P6,500. July 5- Paid the shipping company, P6,500.
Freight In 6,500 Merchandise Inventory 6,500
Cash 6,500 Cash 6,500
 Comparison of Entries Between Periodic and
Perpetual Inventory System
Periodic System Perpetual System
July 6 - Returned defective merchandise worth July 6 - Returned defective merchandise worth
P12,000. P12,000.
Accounts Payable 12,000 Accounts payable 12,000
Purchase Returns and Allowances 12,000 Merchandise Inventory 12,000
July 10 – Paid merchandise purchased on July 3. July 10 – Paid merchandise purchased on July 3.
Accounts Payable 112,000 Accounts Payable 112,000
Cash 109,760 Cash 109,760
Purchase Discount 2, 240 Merchandise Inventory 2,240
Accounts payable = 124,000 – 12,000 = 112,000 Accounts payable = 124,000 – 12,000 = 112,000
Purchase Discount = 112,000 x 2% = 2,240 Purchase Discount = 112,000 x 2% = 2,240
Cash Paid = 112,000 – 2,240 = 109,760 Cash Paid = 112,000 – 2,240 = 109,760
 Comparison of Entries Between Periodic and
Perpetual Inventory System

Periodic System Perpetual System

July 15 – Sold merchandise costing P35,000 for July 15 – Sold merchandise costing P35,000 for
P49,000, terms 2/10, n/30. P49,000., terms 2/10, n/30.
Accounts Receivable 49,000 Accounts Receivable 49,000
Sales 49,000 Sales 49,000

Cost of Goods Sold 35,000

Merchandise Inventory 35,000
 Comparison of Entries Between Periodic and
Perpetual Inventory System

Periodic System Perpetual System

July 17 – Merchandise costing P5,000 and sold at July 17 – Merchandise costing P5,000 and sold at
P7,000 on July 15 is returned by the customer. P7,000 on July 15 is returned by the customer.

Sales Returns and Allowances 7,000 Sales Returns and Allowances 7,000
Accounts Receivable 7,000 Accounts Receivable 7,000
Merchandise Inventory 5,000
Cost of Goods Sold 5,000