The recording process & books of accounts- Merchandising

This deals with the recording system & use of other forms of the journals & ledgers in the accounting for
merchandising operations.

Merchandising or Trading – refers to the buying & selling of goods or commodities in the same form,
substance or content. The quantity, volume, appearance or packaging may be different but basically the
items sold are the same as the items bought. For example: Sugar is bought in piculs/sacks & sold in
small packs in kilos or lesser weights. The main business of buying & selling may also include the
extending of services as other source of income.

Wholesale & Retail Merchandising

There is no specific distinction between whole selling & retailing types of merchandising operations.
Many large companies are engaged in both types of operation. Wholesalers usually sell goods in large
quantities or volumes (example: manufacturers, distributors); while retailers sell to end-consumers in
pieces, bottles, cans & other small units ( example: variety, neighborhood stores, peddlers, etc.).

Special Journals
Merchandising operations involve frequent buying & selling, as well as the usual cash receipts &
payments. These transactions, inspite of the number & complexity can be recorded in a two-column
journal. A journal with more than two-amount columns could be used to reduce the time & effort in
journalizing & posting.

Transactions may become too numerous as the business grow and additional accounting clerks would be
needed & division of work could be effected. Special journals for frequently occurring transactions
become preferable.

The number & design of the special journals are determined by the size, nature of the business and
prevailing business practice. Companies that buy merchandise mostly on credit & buys other items, like
supplies & equipment on cash would need a special journal for only purchases of merchandise on
account. On the other hand, a firm that sells mostly on credit would need a special journal for sale of
merchandise on account. If in selling, the seller pays in advance the transportation which is to be
shouldered by the buyer, the special journal should be designed to consider such accommodation. With
numerous, frequently occurring similar transactions, a very large business would need more specially
designed journals than a small one.

An average-sized merchandising operation usually used the following journals:

SPECIAL JOURNALS PURPOSE

1. Sales Journal (S) - selling merchandise on account

2. Purchase Journal (P) - buying of merchandise and other assets on

Account (if other assets are also mostly bought
on account)

3. Cash Receipts Journal (CR) - receiving cash from any source

4. Cash Disbursement Journal (CD)

or Cash Payment Journal (CP) - paying cash for any purpose
The two-column journal is still needed for transactions which are not to be recorded in the special
journals.
Selling & Buying procedures

A sale could be directly to walk-in customers, to customers ordering by phones, mails, internet, or to
customers solicited by sales people.

A form called the invoice is prepared for a sale made. For a small firm, at least 2 copies are prepared.
One copy is given to the customer & the remaining copy is retained as basis for accounting and other
purposes. Large companies may prepare additional copies for the delivery department, for the
collection department & for the sales people.

The sales invoice also serves as the basis of the buyer in recording his purchases.

A typical sales invoice for a merchandising store is illustrated in Figure 1 and purchase invoice (Sales
Invoice) which serves as basis of recording purchases is shown in Figure 2.

CITI MERCHANDISING
17TH, Mandau, Cebu
Tel. No. 262-95-54

SALES INVOICE
Sold to: RMR Trading No: 101
Address: 007 Lacson St., Bacolod City Date: June 1, 2012
Tel. No.: 432-4383 Terms: 2/15, n/30
Com. Tax No.: 16976232
UNIT QTY DESCRIPTION UNIT PRICE AMOUNT
Pc 10 Jeans; 400.00 4,000.00
Pc 40 TShirts 100.00 4,000.00
Dozen 10 Shorts 1,200.00 12,000.00
TOTAL P20,000.00
Less 10% 2,000.00
NET P18,000.00
Received the above goods in good Prepared by: Cecile
Order & condition Checked by: Louie
Approved by: Marimar

R M R
customer
Figure 1- SALES INVOICE (CITI MDSG)
 CEBU MANUFACTURING
010 St., Consolacion , Cebu
Tel. No. 266-8321

Sold to: Citi Merchandising No: 203

Address: 17th St., Mandaue, Cebu Date: June 1, 2012
Com. Tax No.: 16802527 Terms: 2/20, n/30

UNIT QTY DESCRIPTION UNIT PRICE AMOUNT

Pc 20 JEANS 250.00 5,000.00
Pc 50 TSHIRTS 60.00 3,000.00
Dozen 10 SOCKS 400.00 4,000.00
TOTAL P12,000.00

Received the above goods in Prepared by: Ryan

Good order & condition Checked by: Rean
Approved by: Relan
Customer C I TINO
Figure 2: Purchases Invoice for CITI (SALES INVOICE OF CEBU)

Terms of Sales/Purchases
If payment is upon receipt of the goods bought, the arrangement or term is called spot cash,
cash on delivery (C.O.D) or simply cash. If payment is to be made later, the term is referred to as on
account or on credit. The length of time that an account is to be paid is called the credit period. For a
credit period of 30 days or net 30 & a sale is made on Aug 1, the account is due on Aug 31.

Discounts – may either be trade discount or cash discount.

Trade discounts – are reductions from the list price, tag price or catalogue price granted by the
seller to the buyer for purchases in large quantities or volumes & to regular customers. Trade discounts
are not recorded in the books of accounts. They are deducted from the list price & only the net amount
is recognized as a sale or purchase.
For example, goods listed in the catalogue at P10,000 with 10% trade discount of 1,000 (10% x
P10,000) is recorded as a sale/purchase of 9,000 (P10,000 less P1000).

Cash Discounts – as an incentive to the buyer to pay his account earlier than the due date, a
deduction from the amount due is granted by the seller. These deductions are called cash discounts.
Cash discounts are recorded as sales discounts (DR) on the part of the seller & as purchase discounts
(CR) on the part of the buyer.
For example: Mdse is sold on July 1 with list price of P20,000 & credit terms of 2/15,n/30. The
credit terms mean that a 2% cash discount is to be given if payment of the account is made within 15
days (the discount period) & after 15 days up to 30 days no discount is granted. If the buyer pays on or
before 15 days from date of sale (July 1-16), he is entitled to a cash discount of P400 (2% x P20,000) &
he pays only P19,600 (P20,000 less P400). After July 16, he pays P20,000.

Cash Receipts & Payments

Cash is received from numerous sources, such as investments, sales, collection of accounts & notes,
advances to employees, refunds for overpayment of accounts, expense , prior cash purchases, interest,
other income, & borrowings/loans.
Payments for accounts, expenses, purchase of mdse. & other assets, refunds, withdrawals of the owner,
etc. may be taken from cash on hand or from a current or checking account with a bank by issuing
checks. Medium & large scale enterprises practiced some form of internal control over cash by
observing specific procedures & preparing prescribed forms. Approval of authorized officers are also
required before any payment is made. This system of control over cash payments called the voucher
system will be discussed in detail in higher courses. All cash received are deposited intact the following
banking day & a small amount of cash on hand is kept for payments in small amounts (petty cash fund).
In all illustrations using the special journals, all payments are assumed to be made by issuing checks.

Value-Added-Tax (VAT)

The value added tax became effective in the Philippines. On Jan. 1, 1988, per Executive Order no. 273,
which replaced & eliminated certain traditional business taxes, with the approval of R.A. nos. 7710 &
8241, more business taxes were abolished & replaced by VAT. R.A. 9337 removes the exemption of
several formerly exempt sectors of our economy.

VAT is an indirect tax & the tax maybe shifted or passed on to the buyer, lessee or transferee of goods &
services. Under the VAT system, firms with gross annual sale or receipts exceeding P1,500,000
(previously P750,000) or those whose sales are less but are subject to VAT registration are subject to the
tax.

The tax is determined by deducting the input VAT from the output VAT. Input VAT refers to the tax from
or paid by a VAT registered firm. Output VAT is the tax due on the sale, lease or transfer of properties,
goods or services. The VAT components of Sales returns/allowances & sales discounts are deductible
from the VAT liabilities.

VAT is taken up in detail in TAXATION & partly in some higher accounting courses.

Returns & Allowances

The buyer of mdse. & other assets may return the goods bought due to the defects or inferior quality
than what is ordered, etc. and ask for an adjustment on the original billings or for a refund. He may
actually return the goods or just request for an adjustment or allowance without returning the goods.

As an acknowledgement of returns &/or allowance, the seller issues a credit memorandum (credit
memo) indicating that the customer’s account (accounts receivable) is credited & the description of the
items returned.

A sample form follows:

CITI MERCHANDISING
17TH St. Mandaue, Cebu
Tel. No. 261-9253
To: RMR Merchandising CM No. __________
Address: 007 Lacson St., Bacolod City Date: June 9, 2014
CREDIT MEMORANDA
We credit your account as follows:
QTY UNIT DESCRIPTION UNIT PRICE AMOUNT
30 Pc T-shirt 100.00 3,000.00
1 Dozen Shorts 1,200.00 1,200.00
TOTAL P 4,200.00
Signed: C.I. TINO
Proprietor/Manager
Figure 3 – Credit Memorandum
The buyer on the other hand, may use his own form, the Debit Memo or just notify the seller. Upon
receipt of the sellers’ credit memo, he records the decrease in accounts payable (DR) & a credit to
purchases or purchase returns and allowance for mdse. Returns/allowance or to the specific asset
account for returns/allowance on other assets like supplies, equipment, etc. for a previous cash
purchases, the buyer receives a cash refund from the seller.

Transportation on Mdse. & other assets

The seller & buyer agree on who will shoulder the expenses of sending the goods to the buyer. The
seller usually provides for free delivery within the vicinity of his place of business ( ex.: within city limits).
However, if the goods are to be delivered for quite a distance from the place of business of the seller,
the terms of delivery must be agreed upon by both parties. If the seller agrees to pay for transportation,
the amount is either charged or debited to Delivery Expense or Freight Out account in the books of the
seller. If the buyer agreed to shoulder the transportation costs, the buyer debits Freight In or
Transportation In in his records.

In inter-island transactions, if the seller assumes the transportation costs, the term is indicated in the
invoice as FOB (free on board)-destination. On the other hand, if the buyer agrees to shoulder the
expenses, the term is stated as FOB-shipping point. For example, the seller in Manila shipped the goods
via Negros Navigation to the buyer in Bacolod. If the term is FOB-destination, the responsibility of the
seller is up to Banago port in Bacolod & he pays the shipping cost to Negros Navigation. If the term is
FOB-shipping point, the title to the goods passes to the buyer upon turnover of the goods to Negros
Navigation & the buyer is responsible for goods & shipping costs.

The cost of merchandise & other assets bought include the transportation. Transportation of
merchandise bought may be charged to the purchases accounts. A separate account; Freight In or
Transportation-In is used. Transportation costs on other assets such as supplies & equipment are
debited to the asset account.

Business Documents/papers

Cash slips or cash register tapes are issued to customers for cash sales. Similar information is found on
both the cash slips & sales/purchase invoice except that the former is used only for cash sales, while the
latter could be used for cash sales & mostly sales on account. An official receipt is also issued for cash
received from investment, collection of customer accounts & other sources.

Payments in small amounts maybe made out of cash on hand set aside for such purpose & other
payments are made by issuing checks. In all illustrations in this section, payments are assumed to be
made by checks. Some typical forms/papers used for cash receipts & payments are illustrated in figures
4 to 6.
CITRUS COMPANY
Cor, Burgos-Hilado Sts., Bacolod City
Tel. No. 435-4950
Sold to: RMR TRADING Cash Slip No.: ______
Address: 007 Lacson St., B.C. Date: June __, 20___
Com. Tax No.: 16893647
UNIT QTY DESCRIPTION UNIT PRICE AMOUNT
Pc 10 JEANS-RAMCO 350.00 3,500.00
Pc 20 SHIRTS-BENCH 200.00 4,000.00
Pc 100 HANDKERCHIEF-LG 25.00 2,500.00
TOTAL P 10,000.00
Less: 10% discount 0001,000.00
NET 9,000.00
Sales Clerk________________
Print World: 5,000 stus, 50x2, #204-77-24000 1/1/2005

Figure 4- CASH SLIPS

 CITI MERCHANDISING
17 St., Mandaue, Cebu
Tel. No. 261-9253
No. 210
Date: June 16, 20___
OFICIAL RECEIPT
Received from: RMR Trading the amount of fifteen thousand two hundred eighty eight & 00/100
(P15,288.00) in partial/ payment of:
INVOICE NO. AMOUNT
201 P 15,600
Less: 2% discount ___ 312
P 15,288
Cashier
Cash: _________________
Check No.: 002362 Bank: Negros Banking Corp.
Figure 5- OFFICIAL RECEIPT

Account Name : RMR Trading

Account No. : 23264 Date:____________

Pay to the order of CITI MERCHANDISING

PESOS: fifteen thousand two hundred eighty eight & 00/100 (P15,288.00) only

Cash ( )
Check ( ) No. 002362 _______________ _______________
Bank : Negros Banking
Figure 6 – CHECK

Accounting for Merchandising operations

Merchandising involves both buying & selling of merchandise. Merchandising firms may adapt either
the perpetual or periodic system. The perpetual system is usually used by companies trading in limited
kinds of expensive items. The system requires maintaining individual records for each item which
enables the company to record the cost of merchandise sold for sale & return. Merchandise bought is
recorded to the asset account: mdse. Inventory. The periodic system is used by companies dealing with
numerous kinds & less expensive merchandise. Cost of mdse. Sold is determined by conducting a
physical inventory of unsold mdse.

The perpetual system of accounting for mdse. Is presented in more detail in a later course. An analysis
of transactions & entries in the general journal under the periodic system are given below. Details of
the transactions are taken from the source documents previously illustrated.
 Transactions Books of CITI Merchandising
June 1 – CITI Mdsg sold mdse. To RMR Trading June 1 – A/R RMR Trading P18,000
(Figure 1 – Sales Invoice) Sales P18,000

4 – CITI Mdsg. Bought mdse. From CEBU Mftg. 4 – Purchases P12,000

(Figure 2 – Purchases Invoice) A/P-Cebu Mftg. P12,000

9 – CITI Mdsg. Acknowledges returns by RMR Trading 9 – Sales Ret.& Allow. P 4,200
(Figure 3 – Credit Memo) A/R – RMR Trading P4,200

16 – CITI Mdsg. Received full payment of RMR’s account balance 16 – Cash P13,524
Sales Discount P 276
A/R-RMR Trading 13,800
Analysis: Since RMR paid on June 16, the company is entitled to a 2% cash discount (Terms: 2/15, n/30),
computed as follows:
June 1 - A/R P18,000
9 - returns 4,200
Balance P13,800
16 - Collection w/ discount.
(Acct. is paid w/ in the discount period of
15 days, June 1-16)
(P13,800 x 2%) 276
Cash Received P13,524

PERIODIC AND PERPETUAL INVENTORY SYSTEMS COMPARED

This will demonstrate the entries typically used with the periodic inventory system contrasted to the
entries used with the perpetual inventory system. Assume that the beginning inventory for the year is
P250,000. Assuming the transactions (nos. 1 to 7) were the only transactions for the entire year, the
balance in the inventory account at year-end under the periodic inventory system is P250,000
(beginning inventory). The year-end balance in the inventory account under the perpetual inventory
system is P231,860.

Under the perpetual inventory system, the inventory account is increased by purchases, transportation
in, and sales returns and is decreased by cost of sales, purchases returns and allowances, and purchases
discounts.

At year-end, the physical inventory is taken, and it revealed that the actual inventory on and is
P231,500. The year-end journal entries (nos. 8 to 10) are then made to bring the inventory account
balance into agreement with the amount of the physical inventory. When posted to the general ledger,
both the periodic and perpetual inventory systems result in the same ending inventory amount,
P231,500.

PERIODIC INVENTORY SYSTEM PERPETUAL INVENTORY SYSTEM

1. Sold merchandise on account costing P8,000 for 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 the
P10,000 sale)
Sales Returns & Allowances 500 Sales Returns & Allowances 500
Accounts Receivable 500 Accounts Receivable 500
Inventory 400
Cost of Sales 400

3. Received payment from customer for merchandise sold above ( cash discount taken: [P10,000 sale –
P500 return] x 2% discount = P190)
Cash 9,310 Cash 9,310
Sales Discounts 190 Sales Discounts 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 the P6,000 purchase; terms were FOB shipping point, freight collect:
Transportation In 200 Inventory 200
Cash 200 Cash 200

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

Accounts Payable 300 Accounts Payable 300
Purchases Returns & Allowances 300 Inventory 300

7. Paid for merchandise purchased, refer to no.4 [cash discount taken: (P6,000 purchase – P300 return)
x 2% discount = P114]:
Accounts Payable 5,700 Accounts Payable 5,700
Purchase Discounts 114 Inventory 114
Cash 5,586 Cash 5,586

8. To transfer the beginning inventory balance to the Income Summary account (part of the closing
entries under the periodic inventory system)
Income Summary 250,000
Inventory 250,000 (No entry required)

9. To record the ending inventory balance (part of the closing entries under the periodic inventory
system)
Inventory 231,500
Income Summary 231,500 (No entry required )

10. To adjust the ending perpetual inventory balance for the shrinkage during the year:
Cost of Sales 360
Shrinkage already effected in the no. 9 entry Inventory 360
Recording Transactions in the Special Journals

Sales of merchandise on account are recorded in the Sales Journal (Figure 7). Only one amount column
is provided for both the debit & credit to accounts receivables & sales respectively. A separate column
for the terms of sale may be inserted in the Sales Journal or the terms maybe written under the items
column of the accounts receivable subsidiary ledger when individual sales are posted right away.

The names of the customers are written under the account debited (sold to) column. At the end of
every month, the totals of the columns are posted to the appropriate accounts in the general ledger.

SALES JOURNAL Page ____

DATE INV. NO. ACCOUpurchases of NT DEBITED (sold to) PR A/R-DR
Sales-CR

Figure 7 – Sales Journal

Goods are bought for sale to customers or for use in the operations of the business. Goods for sale are
debited to the purchases account. Purchases of other assets which are intended for use in the
operations of the firm are charged to the appropriated asset accounts.

Merchandise & other assets bought on account are recorded in Purchases Journal (Figure 8). Aside from
mdse., purchases of store & office supplies on account are frequent enough to warrant special columns.
Other assets bought on account are recorded in the sundry column. The individual amounts for every
purchase is posted to the Accounts Payable (subsidiary) ledger. The entries under the sundry column
are posted individually to the accounts in the general ledger. Only the totals of the other columns
including accounts payable are posted to the appropriate accounts in the general ledger.

Purchases Journal Page____

DATE INV. Account PR A/P PURCHASES STORE OFFICE SUNDRY ACCOUNTS
NO. Credited CR DR SUPPLIE SUPPLIES DR
S DR DR
Acct. PR Amount
Title

Figure 8 – Purchases Journal

Cash receipts are recorded as debits to the cash account & credits to the sources of cash. The usual
sources of cash are from cash sales & collections to customers’ accounts. Hence, special columns for
sales (CR) & Accounts Receivable (CR) are provided in the Cash Receipts Journal (figure 9). Other
sources of cash are recorded under the sundry column (CR). If cash discounts are usually availed by the
customer, a special column for sales discounts (DR) may be provided.
Each amount under the sundry column is posted individually to the proper accounts in the general
ledger. Only the totals of the other (special) columns are posted.

CASH RECEIPTS JOURNAL Page ___