11

Fundamentals of
Accountancy, Business
and Management 1

Quarter II – Module III

Nature of Transactions/Accounts in a
Merchandising Business

i
About the Module

This module was designed and written with you in mind. It is here to help you master
the different kinds or formats of transactions of a service business which will help
you in analyzing and preparing the journal entries. The scope of this module permits
it to be used in many different learning situations. The language used recognizes the
diverse vocabulary level of students. The lessons are arranged to follow the standard
sequence of the course. But the order in which you read them can be changed to
correspond with the textbook you are now using.

This module explains on the nature of transactions/accounts of a merchandising

business.

After going through this module, you are expected to:

• describe the nature of transactions in a; merchandising business;

What I Know (Pre-Test)

Activity – Multiple Choice

Instruction: Read the sentence carefully. Encircle the letter of the correct answer.
1. The business engaged in buying and selling of merchandise or goods.
a. Financing Business c. Merchandising or Trading
b. Manufacturing Business d. Service Business
2. The business engaged in delivering of services type of business.
a. Financing Business c. Merchandising or Trading
b. Manufacturing Business d. Service Business
3. The business engaged in buying materials and converting them into another
form is called.
a. Financing Business c. Merchandising or Trading
b. Manufacturing Business d. Service Business
4. It is a list of all the business customers with corresponding outstanding
account balances.
a. Cash Disbursement Journal c. Sales Journal
b. Purchase Journal d. Schedule of Accounts Receivable
5. It is the inventory system most applicable to sari-sari store.
a. Periodic System c. Both system
b. Perpetual System d. None of the two
6. It refers to the cost of goods unsold at the end of the accounting period.
a. Merchandise Inventory, Beg. c. Purchases
b. Merchandise Inventory, End d. Sales
7. It is the difference between sales revenue and cost of goods sold.
a. Gross Profit c. Operating Income
b. Net Income d. Sales

1
 8. Purchases on account with the term 2/10, n/30 means __________.
a. 2% discount if paid by the purchaser within 10 days or less
b. 2% discount if paid within 30 days
c. 10% discount is given if paid within 30 days
d. 10% discount is given to the purchaser if paid within 10 days or less
9. It is the business document commonly used as the basis of recording in the
cash receipts journal.
a. Disbursement Voucher c. Purchase Order
b. Official Receipt d. Sales Voucher
10. It refers to the number of days from the date of purchase that the supplier
has given the business to pay its account.
a. Credit Period/Terms c. Terms of Purchases
b. Terms of Payment d. Terms of Sales
11. It is the cost associated with transporting goods from seller’s to buyer’s place
of business.
a. Fare c. Transport
b. Freight d. None of the Choice
12. It is the business document issued by the buyer whenever there are returns
and allowances.
a. Credit Memo c. Memorandum of Agreement
b. Debit Memo d. None of the choice
13. Sales on account with the term 2/10, n/30.
a. 2% discount is given to the customer if paid within 10 days or less
b. 2% discount if paid within 30 days
c. 10% discount is given to the customer if paid within 10 days or less
d. 10% discount is given to the customer if paid within 30 days

14. Cost of Goods Sold is the actual cost of all the _________.
a. Merchandise Inventory c. Merchandise Sold
b. Merchandise Purchased d. None of the choice.
15. This is the contra account of Sales Account.
a. Sales Journal c. Sales Voucher
b. Sales Returns d. None of the choice

Lesson Describe the nature of transactions

of Merchandising Business

What I Need to Know

At the end of this lesson, you are expected to:

• describe the nature of transactions/accounts in a merchandising business and;
• learn on the different kinds of transactions/accounts of merchandising business.

2
 What’s In

In this module you are going to describe the nature of transactions of

merchandising business. Here, we will check your prior knowledge of the previous
module before we will connect it to the new topic.
Activity:
Instruction: Below is the Trial balance of XYZ Company.
Trial Balance
XYZ Delivery
For the Month of December 31, 2019
ACCOUNTS DEBIT CREDIT
Cash P 90,000
Accounts Receivable 45,000
Inventory 95,000
Prepaid Insurance 25,000
Property, Plant & Equipment 100,000
Accounts Payable P 67,500
Unearned Revenue 82,500
Notes Payable 50,000
XYZ, Capital 215,000
Sales 200,000
Cost of Sales 70,000
Salaries Expense 65,000
Interest Expense 6,500
Rent Expense 13,500
TOTALS P 510,000 P 510,000

Prepare the closing entries:

Sales: Debit Credit

Cost of Sales:

Expenses:

Net Income:

3
 What’s New

In the previous module, you learned the steps in completing the accounting
cycle. The nominal accounts (income statement accounts) should be closed to capital
and drawings also will be closed to capital account. The closing entries will be posted
to the ledger to zero out the account.
After posting, you need to prepare the Post-closing trial balance. This will serve
as the Beginning balance of the next accounting period.
Here in this lesson you will learn on the nature of the accounts used in
Merchandising type of business. You will also learn on the different accounts used
and the types of inventories it uses.

What Is It

MERCHANDISING BUSINESS ON A TRADING BUSINESS

This is a type of business that buys goods and resells them, without making
any modifications, at a price higher than its purchase price for the purpose of making
a profit. This type of business is much common in the country and can range from
small to large size entities. Hence, INVENTORY is the MOST IMPORTANT ASSET of
a business as this is where the company derives its regular revenue streams.
The normal operations of the merchandising business is buying merchandise,
selling merchandise, billing customers and collecting customer accounts. The cash
collected from customers would be used to buy a new set of merchandise so the
process repeats. Merchandise refers to an item bought by the business for the
purpose of selling it. It is referred to as goods.
For a small merchandising store that buy supplies for selling, these are
referred to as merchandise. But sometimes the store uses supplies for office use,
these are not merchandise but just supplies that are consumable.
Merchandise that remains unsold at the end of the accounting period is known
as merchandise inventory end which is more commonly referred to as stocks.
Merchandise inventory beginning refers to merchandise that remains unsold from
the previous accounting period as is expected to be sold next period. If sold within
the previous period, it will form part of cost of goods sold in the income statement.
Cost of goods sold or Cost of sales is the amount of merchandise sold by the
business for a given period of time. It is computed by adding the net cost of purchases
to beginning inventory to get the cost of goods available for sale from which the
ending inventory is deducted from. Cost of goods available for sale refers to total

4
amount of merchandise that the business can sell to its customers for a given period
of time.
This is the formula to compute the cost of goods sold:
Merchandise Inventory, beginning P xxxxx
Add: Net cost of purchases xxxxx
---------------
Cost of Goods Available for sale P xxxxx
Less: Merchandise Inventory, end xxxxx
---------------
Cost of Goods Sold P xxxxx
==========

Formula for the Income Statement of a Merchandising Business:

Net Sales Revenue P xxxxx
Less: Cost of goods sold xxxxx
---------------
Gross Profit P xxxxx
Less: Operating Expenses xxxxx
---------------
Net Income (loss) P xxxxx
==========

Sales Revenue or Sales is the amount of merchandise sold by a business for

a specific period of time. Since a merchandising business is into buying and selling
of merchandise, sales revenue is the primary source of revenue in this kind of
business.
Gross Profit is the difference between net sales revenue and cost of goods
sold. This refers to the income of the business after deducting cost of goods sold but
before deducting any other expenses.
Operating Expenses refer to expenses incurred by business in their day to
day operations. Examples are salaries, utilities, rent, supplies, insurance,
transportation, depreciation, delivery, and advertising. This are deducted from gross
profit in order to determine the net income or loss for a given period.
Observe that there are additional steps in the computation of net income for
a merchandising business. That is the reason why the income statement format used
by the Merchandising business is known as the Multi-Step Income Statement
while that of a service business is known as the Single-step Income Statement.
Multi-step income statement or commonly referred to as the functional
form income statement classifies costs and expenses according to their function or
use. This means that salaries paid to employees working in the office are office
expense, while salaries paid to employees working in the office are office expenses.
For purpose of preparation, we group together all office expenses in one category and
all store expenses in another category.
In this type, operating expenses are typically classified into two. These are
distribution cost and administrative expenses. Distribution Cost or selling
expenses are expenses incurred by the seller in order to place the merchandise in
the hands of the buyer. Examples are salaries, commissions, advertising,
depreciation on store equipment, store supplies used, rent on store space, utilities,
deliver and other expenses. Administrative expenses or general expenses are
expenses incurred by the seller from day-to-day operations of the business but are

5
not directly related to selling activities. Examples are office salaries, insurance on
building, depreciation on office equipment, supplies used in office.
The single-step income statement or commonly referred to as the
natural form classifies cost and expenses according to their nature. This means
that salaries paid to employees, regardless of assignment are combined in one
Salaries Expense account for purpose of income statement presentation.

In accounting, to purchase means to buy. In a merchandising business,

there are two systems of maintaining Inventory. These are the PERIODIC and
PERPETUAL inventory systems.
a. PERIODIC inventory – traditionally used by businesses selling inexpensive
goods. Examples of these businesses would be supermarkets, convenient
stores, hardware stores, and sari-sari stores. Under this system, the
updating of inventory is done periodically which is usually once or twice a
year through physical counting.
b. PERPETUAL inventory – updating of inventory is done everytime there are
changes in the quantity of the goods. This system is traditionally used by
business selling few expensive goods. Examples of these businesses would
be jewelry stores, car dealers and furniture shops.

Perpetual Periodic
- used both expensive & - Used for inexpensive items
inexpensive items
- Most costly to implement - Cheaper to implement
- Records exists in every - No record is kept for transactions
movement of inventory involving inventory movement
- Inventory physical count is - Inventory physical count is made at
made at least once a year least once a year
- Inventory physical count is made at
year-end to establish ending
inventory amounts

Transactions/Accounts in a Merchandising Business

a. Purchase of merchandise – this may have been invested by the owner
into the business or may have been bought by the business from suppliers.
Transaction: Purchase of merchandise worth P 10,000 and paid in cash. (cash
basis)
Perpetual Periodic
Merch. Inventory P 10,000 Purchases P 10,000
Cash P 10,000 Cash P 10,000
# #

Transaction: Purchased of inventory worth P 10,000 in credit or on account.

Perpetual Periodic
Merch. Inventory P 10,000 Purchases P 10,000
Accts. Payable P 10,000 Accts. Payable P 10,000
# #

6
 b. Purchase returns & allowances – this may happen if there was a
purchase of merchandise to begin and returned of having defective or
having incorrect specification. In there will be no replacement there will be
an option to return the merchandise and expect a cash refund or reduction
of liability
Transaction: Received P 2,000 cash as refund for returned defective merchandise.
Perpetual Periodic
Cash P 2,000 Cash P 2,000
Merchandise Inventory P 2,000 Purchase Ret. & Allow. P 2,000
# #
Note: For the perpetual inventory system inventory account is used because it is a
deduction form the inventory. For the periodic, since we used the purchase account
then the return should be charged to Purchased Returns & Allowances.

Transaction: Received a memo from the supplier for returned defective

merchandise worth P 2,000.
Perpetual Periodic
Accts. Payable P 2,000 Accts. Payable P 2,000
Merchandise Inventory P 2,000 Purchased Ret. & Allow. P 2,000
# #

c. Purchase Discounts – these are discounts given to the buyer or what we

called us credit terms.
Sample credit terms: 2/10. n/30 which means that a two (2) percent
discount is given to the buyer if he/she will pay within ten days otherwise,
the whole amount will be paid in 30 days.
Transaction: Mr. A purchased merchandise worth P 5,000 on account with
terms 2/10, n/30 on Oct. 1, 2020 then he pays on Oct 9, 2020. What is the entry
during payment.

Perpetual Periodic
Accounts Payable P 5,000 Accounts payable P 5,000
Merch. Inventory P 100 Purchase Discount P 100
Cash 4,900 Cash 4,900
# #
Note: For the perpetual inventory system, inventory account is used instead of
Purchase discount because it does not use purchase account so it is a deduction to
the inventory. For the periodic, since we used the purchase account then the
discount should be charged to Purchased Discount account.

Perpetual Periodic
Accounts Payable P 5,000 Accts. Payable P 5,000
Cash P 5,000 Cash P 5,000
# #
Note: If no discount given then the whole amount will be paid.

d. Freight payments on purchases – this is sometimes called as Freight-

In (account is used only in periodic system), these are expenses
incurred during transporting the merchandise from the seller to the buyer.

7
 If the business uses perpetual system, the expense incurred will be
charged to merchandise inventory account.

Transaction: Paid the P 1,000 delivery expense of the merchandise purchased.

Perpetual Periodic
Merchandise Inventory P 1,000 Freight-In P 1,000
Cash P 1,000 Cash P 1,000
# #

e. Sale of merchandise – this time the seller sells merchandise to its

customers. The business is the seller and the customer is the buyer.
NOTE: In every SALE transaction, the Cost of Sale/Cost of Goods Sold
should be journalized in Perpetual Inventory System. Debiting the
Cost of Sales and crediting the Merchandise Inventory.

Transaction: Sale of merchandise in October 2, 2002, cash P 7,000. The cost of goods
sold is P 4,000. (cash basis)
Perpetual Periodic
Cash P 7,000 Cash P 7,000
Sales/Sales Revenue P 7,000 Sales/Sales Revenue P 7,000
# #

Cost of Goods Sold P 4,000 No entry

Merchandise Inventory P 4,000
Take up cost of the goods sold.

Transaction: Sale of merchandise worth P 7,000 in credit on Oct. 2, 2020. The

cost of goods sold is P 4,000. Terms 2/10,n/30
Perpetual Periodic
Accounts Receivable P 7,000 Accounts Receivable P 7,000
Sales/Sales Revenue P 7,000 Sales/Sales Revenue P 7,000
# #

Cost of Goods Sold P 4,000 No entry

Merchandise Inventory P 4,000
Take up cost of goods sold.

f. Sales returns & allowances – this may happen if there are sale of
merchandise and the buyer returned the merchandise for having found it
defective or having incorrect specification. If there will be no replacement
there will be an option to return the merchandise to the seller and the
buyer expects a cash refund or reduction of liability.

Transaction: Paid refund to customer for defective merchandise sold P 2,000 in

which he paid in cash. (cash basis)
Perpetual Periodic
Sales Returns & Allow. P 2,000 Sales Returns & Allow. P 2,000
Cash P 2,000 Cash P 2,000
# #
Note: Both have the same entries because both use Sales Account.

8
 Transaction: Paid refund to customer for defective merchandise sold on account
P 2,000.
Perpetual Periodic
Sales Returns & Allow. P 2,000 Sales Returns & Allow. P 2,000
Accounts receivable P 2,000 Accounts Receivable P 2,000
# #
Note: Both have the same entries because both use Sales Account.

g. Sales Discounts – these are discounts given by the seller to the buyer or
what we called us credit terms.
Sample credit terms: 2/10. n/30 which means that a two (2) percent
discount is given by the seller to the buyer if he/she will pay within ten
days otherwise, the whole amount will be paid in 30 days.

Transaction: Customer Mr. A(buyer) paid his account to you(seller) worth P

5,000 on account with terms 2/10, n/30 on Oct. 1, 2020 then he pays on Oct 9,
2020. What is the entry during payment of the customer?

Perpetual Periodic
Cash P 4,900 Cash P 4,900
Sales Discount P 100 Sales Discount P 100
Accounts Receivable 5,000 Accounts Receivable 5,000
# #
Note: Both have the same entries because both use Sales Account.

Perpetual Periodic
Cash P 5,000 Cash P 5,000
Accounts Receivable P 5,000 Accounts Receivable P 5,000
# #
Note: If no discount given then the whole amount will be paid.
h. Freight payments on sales – this is sometimes called as Freight-Out,
these are expenses incurred during transporting the merchandise by the
seller to its customers. If the business uses perpetual system, the expense
incurred will be charged to merchandise inventory account.

Transaction: Paid the P 1,000 delivery expense on the merchandise sold.

Perpetual Periodic
Freight-Out P 1,000 Freight-Out P 1,000
Cash P 1,000 Cash P 1,000
# #

What’s More

Activity 1: Journalizing transactions in Merchandising business

Instruction: Please include the explanation.
a. Purchase merchandise to Gaisano Inc. worth P 15,000 in cash.
Perpetual Periodic

9
b. Purchase merchandise to Gaisano Inc. worth P 15,000 on account.
Perpetual Periodic

c. Received P 1,500 cash from Gaisano Inc. as refund for your returned defective
merchandise.

d. Received a memo from Gaisano Inc. for your returned defective merchandise
worth P 2,000.
Perpetual Periodic

e. Purchased again to Gaisano Inc. merchandise worth P 5,000 on account with

terms 2/10, n/30 on Sept. 1, 2020 then you paid on Sept. 9, 2020. What is the
entry during your payment.
Perpetual Periodic

f. Purchased again to Gaisano Inc. merchandise worth P 6,000 on account with

terms 2/10, n/30 on Oct. 3, 2020 then you paid on Oct. 20, 2020. What is the
entry during your payment.
Perpetual Periodic

g. Paid the P 1,000 delivery expense of the merchandise you purchased from
Gaisano Inc.
Perpetual Periodic

h. Sale of merchandise in October 2, 2002, cash P 7,000.

Perpetual Periodic

10
i. Sale of merchandise worth P 7,000 in credit on Oct. 12, 2020.
Perpetual Periodic

j. Oct. 5, 2010 you paid refund to customer for defective merchandise sold P 1,000
in which he customer pays in cash.
Perpetual Periodic

k. Oct. 10, 2020 you paid refund to customer for defective merchandise which was
sold on account P 4,000.
Perpetual Periodic

l. Oct. 9, 2020 your customer Mr. Anduyan paid his Oct. 1, 2020 account to
you(seller) worth P 5,000, terms 2/10, n/30.
Perpetual Periodic

m. Oct. 20, 2020 your customer Mr. Anduyan paid his Oct. 1, 2020 account to
you(seller) worth P 15,000, terms 2/10, n/30.
Perpetual Periodic

n. Paid the P 1,000 delivery expense on the merchandise sold to Mr. Anduyan.
Perpetual Periodic

11
 What I Need to Remember

MERCHANDISING BUSINESS OR A TRADING BUSINESS

This is a type of business that buys goods and resells them without making
any modifications, at a price higher than its purchase price for the purpose of making
a profit. This type of business is much common in the country and can range from
small to large size entities.

INVENTORY is the MOST IMPORTANT ASSET of a business as this is where the

company derives its regular revenue streams.

Merchandise inventory end -merchandise that remains unsold which is more

commonly referred to as stocks.
Merchandise inventory, beginning refers to merchandise that remains unsold
from the previous accounting period as is expected to be sold next period. If sold
within the previous period, it will form part of cost of goods sold in the income
statement.
Cost of goods sold or Cost of sales is the amount of merchandise sold by the
business for a given period of time
Cost of goods available for sale refers to total amount of merchandise that the
business can sell to its customers for a given period of time.

In a merchandising business, there are two systems of maintaining

Inventory. These are the PERIODIC and PERPETUAL inventory systems.
c. PERIODIC inventory – traditionally used by businesses selling inexpensive
goods.
d. PERPETUAL inventory – updating of inventory is done every time there
are changes in the quantity of the goods. This system is traditionally used
by business selling few expensive goods.

Perpetual Periodic
- used both expensive & - Used for inexpensive items
inexpensive items
- Most costly to implement - Cheaper to implement
- Records exists in every - No record is kept for transactions
movement of inventory involving inventory movement
- Inventory physical count is - Inventory physical count is made at
made at least once a year least once a year
- Inventory physical count is made at
year-end to establish ending
inventory amounts

What I Can Do
Activity – Fill in the blanks

12
Instruction: From the given choices in the box write the correct answer in the space
provided for.

Merchandising Manufacturing Inventory

Merchandise Inv.-End Cost of Sales Merchandise Inv.-Beg.
Gross Profit Freight-In Perpetual Inv. System
Periodic Inv. System Freight-Out Net Income

____________________1. This is a type of business that buys goods and resells them
without making any modifications.
____________________2. The most important asset of a business as this is where the
company derives its regular revenue streams.
____________________3. Merchandise that remains unsold at the end of the
accounting period.
____________________4. Refers to merchandise that remains unsold from the previous
accounting period as is expected to be sold next period.
____________________5. It is the amount of merchandise sold by the business for a
given period of time.
____________________6. This is the difference between net sales revenue and cost of
goods sold. This refers to the income of the business after deducting cost of goods
sold but before deducting any other expenses
____________________7. Type of inventory system where recording is done every time
there are changes in the inventory account.
____________________8. The Delivery expense related to sales.
____________________9. Type of inventory system where there is no record kept in
transactions involving inventory movement.
____________________10. The delivery expense related to purchases.

Assessment (Post-Test)

Activity: Multiple Choice

Instruction: Read the sentence carefully. Encircle the letter of the correct answer.
1. It refers to the number of days from the date of purchase that the supplier
has given the business to pay its account.
a. Credit Period/Terms c. Terms of Purchases
b. Terms of Payment d. Terms of Sales
2. It is the cost associated with transporting goods from seller’s to buyer’s place
of business.
a. Fare c. Transport
b. Freight d. None of the Choice
3. It is the business document issued by the buyer whenever there are returns
and allowances.
a. Credit Memo c. Memorandum of Agreement
b. Debit Memo d. None of the choice
4. Sales on account with the term 2/10, n/30.
a. 2% discount is given to the customer if paid within 10 days or less
b. 2% discount if paid within 30 days
c. 10% discount is given to the customer if paid within 10 days or less
d. 10% discount is given to the customer if paid within 30 days

13
5. Cost of Goods Sold is the actual cost of all the _________.
a. Merchandise Inventory c. Merchandise Sold
b. Merchandise Purchased d. None of the choice.
6. This is the contra account of Sales Account.
a. Sales Journal c. Sales Voucher
b. Sales Returns d. None of the choice
7. The business engaged in buying and selling of merchandise or goods.
a. Financing Business c. Merchandising or Trading
b. Manufacturing Business d. Service Business
8. The business engaged in delivering of services type of business.
a. Financing Business c. Merchandising or Trading
b. Manufacturing Business d. Service Business
9. The business engaged in buying materials and converting them into another
form is called.
a. Financing Business c. Merchandising or Trading
b. Manufacturing Business d. Service Business
10. It is a list of all the business customers with corresponding outstanding
account balances.
a. Cash Disbursement Journal c. Sales Journal
b. Purchase Journal d. Schedule of Accounts Receivable
11. It is the inventory system most applicable to sari-sari store.
a. Periodic System c. Both system
b. Perpetual System d. None of the two
12. It refers to the cost of goods unsold at the end of the accounting period.
a. Merchandise Inventory, Beg. c. Purchases
b. Merchandise Inventory, End d. Sales
13. It is the difference between sales revenue and cost of goods sold.
a. Gross Profit c. Operating Income
b. Net Income d. Sales
14. Purchases on account with the term 2/10, n/30 means __________.
a. 2% discount if paid by the purchaser within 10 days or less
b. 2% discount if paid within 30 days
c. 10% discount is given if paid within 30 days
d. 10% discount is given to the purchaser if paid within 10 days or less
15. It is the business document commonly used as the basis of recording in the
cash receipts journal.
a. Disbursement Voucher c. Purchase Order
b. Official Receipt d. Sales Voucher

14