CHAPTER 10 Accounting for Merchandising. Nature and Concept . Comparisons betweei : Merchandising Asie ermine Recording Sales and Purchases Discounts .. ‘Trade Discounts Cash Discounts Variations on Credit Terms . Payment within Discount Period Payment beyond Discount Period Net Method Recording Credit Sales-Purchases Returns and Allowances Freight Charges .. ‘Terms of Shipment ... FO.B. Shipping Point . FOLB. DestinationsCHAPTER 11 CHAPTER 12 - CHAPTER 13 Terms of Freight Payment .... Possible Combinations of Terms on Shipment and Freight Payment The Merchandise Inventory Account Inventory System ... Periodic Inventory System .. Perpetual Inventory System Chapter Review Discussion Problem Adjusting Entries and Worksheet for Merchandisinj Adjusting Entries for Merchandising .. Net Realizable Value Cost First in, First out (FIFO). Weighted Average Method Adjustments of Merchandise Inventory . Using Periodic Invéntory System .. Using Perpetual Inventory System Worksheet of Merchandising Business Extension of Account: Chapter Review Diseussion Problem Financial Statements, Closing Entries, Post-closing ‘Trial Balance and Reversing Entries for Merchandising . Financial Statements Statement of Comprehensive Income Gross Profit The Cost of Sales Operating Expenses Financing Charges Closing Entries Post-closing Trial Balance Reversing Entries Chapter Review Discussion Problem Special Journals with VAT Applications. Value-added Tax Input and Output Value-added Tax. Computation of Value-added Tax . VAT Billed Separately VAT not Billed Separately Accounting Procedures in Handling VATthe stud ndising busine Vhandise entities; is chaptet .¢ of merchal ice and merc’ accounts; chase accountss for discounts; At the end of thi ee 1. discuss the nature . differentiate servi identify merchandising discuss the CoO sale-pur oaeeribe accounting procedures seeeribe the various freight ter and payments differentiate pe ed periodic inventory systems ensive income. and rpecual 1 of comprehs voxvayn NATURE AND CONCEPT In previous chapters, We studied deeply the accounting procedures for service entities owned by one person. The remaining five chapters of this text discussed the accounting procedures for sole proprietorship merchandising entity. ‘Merchandising is a type of business that buys and sells goods. There are two major activities that are happening in merchandising, but not ‘occurring in service entities. These activities are the buying and selling of goods. ‘Merchandising business, in most instances, sells goods at a markup, that is, the selling price is higher than the acquisition cost. ‘When merchandising business sells goods, however, it does not transform or change the appearance of the goods. h aie eal 4 merchandising business is engaged in buy and sell of flour. Ae boys fea 8 art jacturer or distributor, and sells the goods as flour to . 1 there is no alternation or conversion process that takes place. a Atwnlaest a tomsforms the appearance or form of the goods it purchased is manufacturing The ing for manufacturing is lengthily discussed in higher That the primary focus of this text is the accounting procedures for 1g business owned by one person, the accounting procedures andgrinciples ar also applicable for partnership or corporate inerchandising, The accounting for the es of businesses differs only in the formation stage. ‘Amerchandising can either bea wholesaler or retailer. Wholesaler usually se bile retailer, in most instances, sells goods to individual consumers. IIs goods to retailers; COMPARISONS BETWEEN SERVICE AND MERCHANDISING Service entity and merchandising concern have similarities and differences in the following areas: the same processes in register the trade name and obtain Business Formation. Both service entity and merchandising undergo forming the business. They have to determine the appropriate business name, with the Department of ‘Trade and Industry (DTI), pay all required fees, taxes and licenses, the necessary city Or municipal permit after all requirements are fully complied. Supporting Documents. Both types of businesses use the same business documents to support the transactions recorded in the books of accounts. The design and physical appearanc®, however, of ‘business documents varies entirely depending upon the requirements of the business and the desired information needed by the management. ‘Accounting Cycle and Books of Accounts. Both the service the complete steps of accounting cycle, and use general journal transactions. The choice of the account title, record keeping and th¢ highly dependent upon the requirements of the business. In recording the business transactions and the preparation of financial statements, both businesses follow the same accounting principles prescribed by PERS. Financial Statements. Both businesses are required to prepare the same complete set of financial statements. However, service entity usually adopts the singl the other hand, merchandising business usually ado income. entity and merchandising follow J and ledger to record business e whole accounting system are lc step statement of comprehensive income. On pts multiple step statement of comprehensive Products Sold. Service entity provides purely services to customners. The merchandising, however sells goods to consumers in addition to some services it provide. For example, the packaging tance provided to shoppers is a type of service provided of goods in a convenience store, or the assist ty merchandising, The costs of providing services, however, are not usually charged t0 the cost of the products sold. MERCHANDISING ACCOUNTS There are account titles that are used only by merchandising business. These account titles are: 1. Sales ~ accounts used when merchandise are sold to customers, either cash or on account. This is a revenue account. 2, Sales returns and allowances ~ account r returned by customers because of wrong speci from sales. 3. Sales discounts - amounts granted as reduction to the selling price because customers paid within the discount period. It is a contra account of sales. 4. Purchases — account representing the amount of goods or merchandise bought by the business from suppliers, either on account or cash basis. presenting the amount of goods or merchandise fication or defects. This account is deducted CHAPTER 10 + ACCOUNTING FOR MERCHANDISING | 315,6. Freight-in - account representing the amount paid for the a ba re nals boy » the business from various suppliers. The account Is mining g! cost of the product bought. ; Purchase eat and allowances = this account sateen the ae merc} in returned by the business to suppliers. It is deducted from p leterminin, the amount of net purchases. : : . Purchase aaesa — amounts of discounts granted by the wae of goods i Prompt payment of the business of its liability arising from purchases. This deducted from purchases. . Merchandise inventory — merchandise purchased that remains uns the end ofthe accounting period. This is presented as current asset 1 the ee of financial Position, and at the same time deducted from total goods available for sale. Cost of sales or cost of goods sold - an account title used that represents the cost Of the product sold. 0 View of aCcouny is 10. ‘The discussions the follow focus mainly on transactions affecting these merchandising accounts, RECORDING SALES AND PURCHASES The buying and selling activities differentiates merchandising business from service entity, These activities are regularly undertaken by merchandising. The usual routine, therefore, of merchandising business is to buy goods, and sells them tote customers. There is value received and value parted with in these two major activities. The values received in buying activities are the goods purchased, and the value parted with js either cash or payables. On the other hand, the value received in sellin; receivable, and-the value parted with is the merchandise. In buying activities, the cost of the goods purchases is debited to purchases accounts, Howere, in selling activities, the value of the goods sold is ctedit to sales account. ‘The pro-forma entry to record purchases is: g activities is either the cash or Purchases : Cash or accounts payable XXXXX In the pro-forma entry for purchases, cash is credited in case purchases are made on cash basis In the event, however, purchases are made on account, the credit is accounts payable, The momeat purchase on account is supported b 'Y Promissory notes, the account credited is notes payable. The pro-forma entry to record sale Cash or accounts receivable soxexxx Sales XXXKX Purchase and sales transactions are supported by an invoi a ither bea #® par] i ¥ an invoice. The invoice can either ~ invoice or purchase invoice. On the part of the seller, val eae hana ch ‘est the invoice is called sales invoices howe™ the part ofthe buyer, the invoice is called purchase inves: 316 | FUNDAMENTALS OF ACCOUNTINGroice indic: : ' ‘The inv ates the following information which serves as the basis of the journal entry: date of the transaction name of the buyer quantity of items description of the items unit cost of the items total cost terms of payment wmo nose There is a reciprocal relation existing between the buyer and the seller. The sale made by the selleris purchases on the part of the buyer. The sale on account gives rise to accounts receivable to the seller, but accounts payable to the buyer, Illustration 10.1 The transaction of February 14, 2015 is - Angel Merchandising purchased the following goods from Princess Mainland, a wholesaler, per invoice number 002915: Qty. Description Unit cost Total Cost. 25 pes Brand X shoes F630 F15,750 30pcs Brand SS t-shirt 450 13,500 20pcs Brand AA pants 900 18,000 Total 47,250 Required: Record the transaction of the seller and the buyer assuming the transaction is: a. cash basis b. on account Answer - Cash Basis: This transaction is sale transaction for Princess Mainland, but a purchase tansaction for Angel Merchandising. . : ‘The reciprocal entries between Angel Merchandising and Princess Mainland appear as follows: Books of SELLER (PRINCESS Mainland) Books of BUYER (ANGEL Merchandising) Cash 47,250 Purchases 47,250 Sales 47,250 Accounts payable 47,250 Itcan be observed that the value received by the seller is cash; while the value parted with by the buyer is cash, Similarly, the value of the goods parted with by the seller is entered in the sales account; While the value received by the buyer is entered to purchases account Clearly, sales and purchase transactions are reciprocal transactions between the seller and the yer. CHAPTER 10 # ACCOUNTING FOR MERCHANDISING | 317Answer On Account, In case the transaction is made on account, the reciprocal entry between the buyer and seller appears as follows Books of SELLER (PRINCESS Mainland) Books of BUYER (ANGEL Merchandising) Accounts receivable 47,250 Purchases 47,250 Sales 47,250 ‘Accounts payable 47,259 the transaction gives rise to receivable ang fe right to collect which is receivable. On the Technically, this is payable. Since the fic accounts affected, therefore, are Since the sale or purchase was made on account, payable. On the part of the seller, the value received is th part of the buyer, the value parted with is the obligation to pay. Tec credit transaction is not supported by a promissory note, the speci! accounts receivable and accounts payable. : ‘Again, sale or purchase transaction on credit is a reciprocal transaction between the seller an the buyer. The reciprocal accounts affected are receivable and payable. We do not, however, record the transactions of both the seller and the buyer. It would then be your primary obligation to determine whether you are recording the transactions of the business as a seller, or as a buyer. In case the business acts as the seller in credit transaction, sales and receivable accounts are affected. However, if the business is the buyer in credit transaction, purchases and payable accounts are used. DISCOUNTS Another ordinary transaction affecting merchandising is the granting of discounts to customers. The promotional act of giving discounts attracts new customers, and usually retains old customers. The primary objective of giving discount is to improve the profitability level of the business by having more sales. Discount is deduction from invoice price. It is usually provided by the seller in order to promote sales or improve collection efficiency. In merchandising, there are two types of discounts. These are - 1. trade discounts; and 2. cash discounts. Trade Discounts ‘Trade discount is deduction from the list price in order to promote sale of the merchandise It simply encourages consumers to buy. In other words, the moment consumer buys the products whether cash or on account, trade discount is immediately provided. ‘Trade discounts are not recorded either in the books of the seller or buyer. In the invoice, discounts are not expressed in percentage. The practice is just to indicate amount of the discount without necessarily attaching the percentage sign, For example, the trade discount indicated in the list price of 15,000 is - 20, n/30. ‘What is the meaning of this term — 20, n/30, 7 ee ‘The amount twenty means that twenty percent is immediatel i g - count UP * purchase, whether on cash basis or on account. The percentage erie cota dhe wc 316 | FUNDAMENTALS OF ACCOUNTINGThe term n/30 means tha words, the last day of payment j ‘ount of the account is payable within 30 days. In other The purchase price ig co List price Trade discount (F 15,099 P15,000 000 x 2 Purchase price 2 3,000 12,000 In case the transaction is ¢; uel ‘ash basis, the entries in the books of the seller and buyer appear as Books of SELLER Books of BUYER eas 1 12,000 Purchases 12,000 . 12,000 Cash 12,000 In can be observed that trade di buyer. és In case the transaction is on credit, the entries in the books of the seller and the buyer appear as lows: iscount is not recorded in the books of both the seller and the Books of SELLER Books of BUYER Accounts receivable 12,000 Purchases 12,000 Sales 12,000 Accounts payable 12,000 Cash Discounts Cash discount is a deduction from the prices of the goods for prompt payment of accounts. It implies that the account is paid within the discount period. Cash discount is recorded both in the books of the seller and the buyer. The basic premise of granting cash discount is to induce the buyer to pay within the discount Period. In case payment is made within the discount period, the buyer enjoys the discount by paying lesser amount.’ However, if the buyer pays the account beyond the discount period, he is penalized by paying the whole amount. oa no The percentage sign of the cash discount is likewise not indicated after the amount of the unt. For example, the cash discount indicated in the purchase price of 15,000 is ~ 5/10, 1/30. ‘What does the term 5/10, n/30 means? ; The term 5/10 means that five percent discount is granted if payment is made within 10 days after purchase. Impliedly, no discount is granted if payment is made beyond 10 days. The term n/30 likewise means that the whole amount is payable within 30 days after purchase. The discount is computed as: Purchase price PL 50 a Multiplied by - cash discount — Amount of discount if paid within 10 days ¥iso CHAPTER 10 + ACCOUNTING FOR MERCHANDISING | 319Tn case the buyer pays within 10 days from the date of purchase, the discount of F750 is deduc, from the purchase price. The amount payable by the buyer, which is also the amount receivable yy the seller is 14,250 computed as follows: Purchase price 15,000 Less: Cash discount was Amount payable within discount period of 10 days 14,250 How one will know whether the discount granted is trade or cash? ae In trade discount, there is no prescribed period since the discount is granted to induce the buyer to buy. However, there is a time prescribed in cash discount since the discount is provided tg encourage buyers to pay within the prescribed period. In other words, if there is no time, the discount is trade discount. In the event there is prescribed time for payment, the discount is cash discount. Variations on Credit Terms The following variations on credit terms may also be attached to credit invoices: 1. 3/10, 2/20, n/30 — This means that 3% cash discount is given if paid within 10 days afer invoice date, 2% cash discount is granted if paid within 20 days and the account is payable in full within 30 days from the date of purchase 2. 10, 3/10, n/30 ‘This means that 10% trade discounts is provided upon purchase, 3 Percent cash discount is provided if payment is made within 10 days, and the whole account is payable within 30 days from date of purchase 2. 0/60 - This means that no cash discount is offered, but the full amount must be paid within 60 days from the invoice date This means that no cash discount is offered, but the account must be paid at the end of the month. In case there are returns and allowances, cash discounts are computed based on the invoice amount less returns and allowances. Also, in the computation of discounts, incidental costs 4 expenses related to the acquisition which are add e led to the cost of purchases like freight, matil® insurance, taxes and other charges are disregarded,Ilustration 10.2 For example, the invoice appears as follows: PRING) Quezon Ave. Sold to: Angel Merchandising Address: Sto, Nifio St, Midsavap Cotabato Qty Description 25 Brand x shoes 30 Brand $S-T shit 20 Brand AA pants Total Received the above items in good condition. igeawayan, Cotabato INLAND. Invoice No, 002195 Date: Feb. 14, 2015, “Terms: 2/10, 9/30 Price Amount 630.00 15750.00 450.00 13500.00 900.00 18000.00 47250,00 Authorized Signature Required: Record the transaction per information provided in the invoice on the part of the seller and buyer under the following assumptions: 1. payment is within discount period 2. payment is beyond discount period. Before answering the requirements, let us evaluate first what information are provided in the invoice. The invoice provides the following information: The buyer yvapyr The seller is Princess Mainland. is Angel Merchandising. The credit term is 2/10, n/20. The discount is cash discount. The date is February 14, 2015; hence, the last day of discount period is February 24, 2015. The invoice number is 002195. It is considered sales invoice on the part of the seller, and treated as purchase invoice on the part of the buyer. a The total amount of purchases for the buyer, or total sales for the seller is F'47,250. Sales and purchases are reciprocal accounts of seller and buyer. Payment within Discount Period The entries in the books of the seller and buyer in case payment is made within the discount Period appear as follows: CHAPTER 10 + ACCOUNTING FOR MERCHANDISING | 321To record the sale-purchase transaction Books of SELLER (PRINCESS Mainland) __ Books of BUYER (ANGEL Merchandising) Accounts receivable 47,250 Purchases 47,250 Sales 47,250 ‘Accounts payable 47,250 To record payment within discount period Books of SELLER (PRINCESS Mainland) Books of BUYER (ANGEL Merchandising) Cash 46,305 ‘Accounts payable 47,250 Sales discount 945 Cash 46,305 Accounts receivable 47,250 Purchase discount 945 The discount is computed as follows: Purchase price 47,250 Multiplied by: 2% Discount 945 de that the discount is recorded in the sales discount discount is recorded in the purchase discount account. sales discount and purchase It can be observed from the entries ma account of the seller. In the books of the buyer, ‘Similar to the reciprocal relation of sales and purchases account, discount have also reciprocal relation. Payment Beyond Discount Period ‘The journal entries in the books of the seller and buyer, discount period of February 24, 2105, are as follows: in case payment is made beyond the ‘To record the sale- purchase transaction Books of SELLER (PRINCESS Mainland) _ Books of BUYER (ANGEL Merchandising) ‘Accounts receivable 47,250 Purchases 47,250 Sales 47,250 ‘Accounts payable 47,250 To record payment beyond discount period Books of SELLER (PRINCESS Mainland) Books of BUYER (ANGEL Merchandising) Cash 47,250 Accounts payable 47,250 Accounts receivable 47,250 Cash 47,250 It can be observed that no cash discount has been provided by the seller, neither enjoyed by the buyer in the event payment is made beyond February 24, 2015. 322 | FUNDAMENTALS OF ACCOUNTING ae£26 owstanwiowsn od sMUNNOOOY + or LAO SOE'96 219@8od ssunoo9y Soe'oP oon ms soE'9p sosoypung soe'9p 219001090 suanong, Guystpueyo:9W TADNV) YAANE JO MI0q —_(PUETWIEW SSTONIUA) UATTAS 30 400g, uosronsunssasyoand-2pos 4 pies 9 ‘smog se sede 224 put soq]9s ap Jo S009 ayp uy sauna ay, “Poe TuNoDsIC{ PuOseG WoW, ZrOASuy SOE‘9P ys79. SOE sENOOND spy sos'op angeod s1uno2.y 50694 482% Gusipueys!oW TEONY) AAANIC A —_(PUPTUTEW SSHONTd) UATTASJ0 Yoo pouod runozsp ies ruouutd paooes 9 soe'or 21q@8od ssunoooy s0e'9b ss soeor sosmyoind 0896 agqnasz004 stunozoy GursipurqaeW TEONV) MAANG IO soon —_(PUETIEW SSAONTAA) UATTASIO 0° uomsosurss ssoyind- 90s 2 p40204 0 sonst _readde zasng pure Joys axa Jo sfoog ayp UH SoLNUD ay, “pouIag WMODSsIC| UIA IuWAEY “TOASTY porrod sunoostp puogoq apeur st yuomtsed *q ‘poliod 1unoostp uns apeur st iuoused :soqumnsst sang pue soq[9s oup Jo wonsesten aseypsndl-qes ayp proses ‘poyrout tow ov Sus) pombe “OGM O12 SIAL, “OST'Lh.g J0 29H aot0ANT [HOLA gay on sxpueyoxowr snotsea plos puourEyy ssaDUTg “ST0z “FT AzenAGe UO EL “€'01 UoNEnsNIT] wt papraozd wonoestresn sures axp ast S027] Sor uoneNSTM ae Suys4puEyDs -aonoestta ‘gum ay) ae paisnpap Ayprexpauruy st aunossyp aqp ‘porpau 19u om) PEA asoyound-20s e - syoand-s3yes osye puooay Sear sous surstpueqoio ge syunoooe aseyan sranoooe safes PUEATAPA GAUSVHOUNA-SATVS LCI ONICAOOTA AO COHLAW LINTo record payment beyond discount period nd) Books of. BUYER (ANGEL Merchandising _Books of SELLER (PRINCESS Mani 7 ‘Accounts payable 46,305 Cash 47,250 a : Accounts receivable 46,305 Purchase discount lost 945 45 Cash ae Sales discount forfeited unt is shown as other income in the statement of ‘comprehensing The sales discount forfeited acco income of the seller. The purchase disco unt lost is presented as other expenses jn the statement of comprehensin income of the buyer. . : Since the accounting procedure of the seller is totally independent with the buyer the seller may use the gross method while the buyer adopts the net method, or the other bed ese Le Tn this text, unless otherwise specified in the problem, the gross method of recording sale, purchase transaction is adopted. RETURNS AND ALLOWANCES Returning of goodsis regularly happening in merchandising. The common reasons merchandise are returned by the buyer are: a. goods are defective b. wrong specifications c. erroneous quantity ‘When goods are returned, the entry during the sale or purchase transaction supposedly shouldbe reversed. However, sound accounting practice dictates that merchandise returns should be recorded tusing the account title returns and allowances. yuyer is recorded in sales returns and ‘On the part of the seller, the cost of goods returned by the bi allowances account. The buyer, on the other hand, records returned. merchandise to purchase returns and allowances account. ‘Returns and allowances is a contra-accol main account. The main account of sales returns is sales, is purchases. ‘Sales account is credited by the seller, while purchase account is debited by the buyer during the sale purchase transaction. Upon return of merchandise, sales returns and allowances is debited by 4* seller, and purchase returns and allowances is credited by the buyer. “The pro-forma entries to records returns and allowances are as follows: In the books of the buyer, the entry to record returns is: unt, In other words, the account is recorded opposite ie and the main account of purchase retu™s Cash accounts payable Purchase returns and allowances xxx 324 | FUNDAMENTALS OF ACCOUNTING -tn the books of the seller, the entry to record returns is ‘Sales returns and allowances xxx Cash or accounts receivable a f merchandise is evidenced by a orandum or debit memorandum eturn of by a credit memora his account Rewweit memorandum is issued by the seller to inform the buyer ht eT iA gon account of returned merchandise, On the other hand, a debit memorandum is issued DY ceayer tothe seller informing the latter that his account has been debited already. Uustration 10.4 For example, On February 15, 2015 Angel Merchandising returned (0 pai pecause of wrong specification, and does not intend to be replaced. ‘The debit memorandum issued by Angel Merchandising to Princess ‘Mainland appears as follows: irs of Brand X shoes DEBIT MEMO No. 0012 ANGEL MERCHANDISING ‘Date: 15 February 2015 Sto, Nifo St. Midsayap Cotabato DEBIT TO THE ACCOUNT OF: PRINCESS MINLAND REASON, AMOUNT. Zpairs of Brand X shoes because of defects 1,260 Approved by: Prepared by: Required: Record the return of the merchandise in the books of the seller and the buyer under the following assumptions: a. sale-purchase transaction is cash basis b. sale-purchase transaction is on account ‘Answer 1 - Transaction is cash basis eng IB bi pemis of edi or debit memorandum that the sale-purchase transaction is made Tete words hers no eredior debit memorandum o i bas uation v1 basis and there is return of merchandise, to whom shall the sell i Simiany to whom shall the buyer debit the return? prmerrrerr banana Credit or debit memorandum, therefore, does not exist in cash basis sale-purchase transaction. CHAPTER 10 + ACCOUNTING FOR MERCHANDISING | 325 { i iIn other words in case the sale-purchase transaction is made on cash basis, the seller has to refund the buyer equivalent to the cost of merchandise sold. : Base on the information provided in debit memorandum, the entries in the books of the Seller and buyer appear as follows: Books of SELLER (PRINCESS Mainland) Books of BUYER (ANGEL Merchandising) Sales returns & allowances 1,260 Cash 1,260 Cash 1,260 Purchase returns & allowances 1,269 The entries reveal that the seller refunded the buyer because cash has been credited in the books of the seller. The value parted of the seller is cash, and the value received is a reduction of his income. The buyer, on the other hand, received cash refund since cash has been debited in his books, The value received cash, and the value parted with is a reduction of his cost. Answer 2 - Transaction is on account The entries on the books of the seller and buyer for the return of merchandise assuming the sale. Purchase transaction is on account appear as follows: Books of SELLER (PRINCESS Mainland) Books of BUYER (ANGEL Merchandising) Sales returns & allowances 1,260 Accounts payable 1,260 Accounts receivable 1,260 Purchase returns & allowances 1,260 The entries reveal that in the books of the seller, the account of the buyer has been credited. On the books of the buyer likewise reveals that the account of the seller has been debited. The receivable of the seller decreases every time he credits the account of the buyer, Similarly, the liability of the buyer decreases the moment he debits the account of the seller. Remember always that there is reciprocal relation between the seller and the buyer undér the following transactions: a. sale-purchase transaction; b. grants of discounts; and c. returns of merchandise. FREIGHT CHARGES In a sale-purchase transaction, merchandise is transported from the seller to the buyer. In othe Words, every time there is sale-purchase transaction, merchandise is physically transferred from the seller to the buyer. The physical and actual transport of especially if the seller and buyer are far fro cargo forwarder. The cost of transportation is recorde be freight-in or freight-out. Goods is not usually free. There is cost involved most m each other, or the merchandise is forwarded through d using the freight account, The freight account can eithet 326 | FUNDAMENTALS OF ACCOUNTINGae jkewis® freight-in account nis sale transaction je, the seller does not Use freight-in = par Fe ose freight-out in his purchase transaction. hand freight Out's included 4 P' buy eight-in is addition to the cost of purchases: wn the othe , a ating expenses of the business. he buyer and pier oeaae oF OP Crearly, freight of merchandise is additional cost of both the on? st : pay the elePh ine sie question that needs £0 DE settled straightly is— We sould Pay or pay the cost of TRE straightforward answer ‘¢ = whoever owns the sgoods is Tes? —_ tion or freight. -ieemuncd bye ter ceanspore ownership of the goods, most especially ——— dete! ent. : - spapter: of shipriconcept on terms of payment is discussed in succeeding section of this chaP' istration 10.5 a i z pandising ‘On May 6, 2015 IZZY Trading bought merchandise 02 credit from HY2EE As 7 ounting t 50,000. “Terms is (0, 2/30. Freight for the delivery ‘amounted to T 10°" equired: Record the transaction in the books of the seller and buyer assuming: ‘a, freight is paid by the seller” >. freight is paid by the buyer Answer Freight paid by the seller Books of SELLER (HYZEL Merchandising) Books of BUYER (IZZY Trading) “Accounts receivable 50,000 ‘Purchases 50,000 : Sales 50,000 ‘Accounts payable 50,000 ‘Freight-out 1,800 Cash 7 1,800 “The second entry of the seller indicates th 4 : buyer, since he is peaie who id the aie ie owner ofthe goods uni properly received BY the Answer ~ Freight paid by the buyer Books of SELL] ee 5 ER (HYZEL Merchandising) Books of BUYER (IZZY Trading) ieee par receivable 50,000 Purchases a 50,000 ‘Accounts payable 7,000 50,000 Freight-out Cash 1,800 1,800 r ; ' buyer in the second entry indicates that he is the owner of the The payment of freight by t parts from the custody of the seller. Bood ls the moment merchandise de CHAPTER 10 © ACCOUNTING FOR MERCHANDISING | 327= ‘TERMS OF SHIPMENT ily determines ownership of merchandise most especially if the ust ‘The terms of shipment goods are in transit, ‘The term ‘in transit’ means t] recived by te buyer. In other words the merchandise nox phYSNY MOET the seer and the buyer. The goods, Se iled ut, this situation may create confusion as Tn case the terms of shipment are not , ie i it. The buyer may refuse payment of goods vnership especially if the goods are lost while in trans! Aen since ichis ant reccived ities ‘and the seller will demand payment because he has shipped already the merchandise. There are two terms in shipping the mercl i the seller but not wve been shipped already by but not ye shee Lees is not physically under the possession of both handise. These are — 1. FOB shipping point, and 2. EO. destination The term “EO.B.” means freight on board. dite : FO.B shipping point means that the goods are free on board up to the shipping point. This term of shipment indicates the following: a. the seller is the owner of the goods up to shipping point only b. the buyer is the owner of the goods while in transit c. the buyer is held responsible for payment of freight, For example, the buyer stays in Davao City, while the seller resides in Cebu City. Under FOB shipping point, the buyer becomes the owner of the goods the moment the shipping carrier leaves the port of Cebu City. As owner of the goods, the buyer shall pay for the freight. + Incase the goods are lost ini transit, the buyer has still the responsibility to pay the seller since the legal title of the goods has been transferred already to the buyer. FOB. destination means that the goods are free on board up to the point of destination. This | term of shipment implies the following: a. the seller is the owner of the goods up to destination . the seller is the owner of the goods while in transit c. the seller is responsible for the freight ‘ In the above example, the seller is the owner of the goods up to Davao City, the point of destination. The legal title of the goods is only transferred to the buyer the moment the shipping carrier arrives the port of Davao City. Under this term of shipment, the buy are lost in transit. yer does not have any obligation to pay in case the goods TERMS OF FREIGHT PAYMENT The basic concept on payment of freight is that whoever owns the ‘Anid the owneeship of merchandise © i merchandise should pay the freight. ighly determined by the terms of shipment. 328 | FUNDAMENTALS OF ACCOUNTINGThe terms on payment of shipment can either be . 1, freight prepaid; or 2. freight collect Freight prepaid means that the sc other words, before the shipping carrie Freight collect means that the bi point of destination. let paid the freight charges at the point of shipping point. In + leaves the shipping point, the freight has been paid already. vuyer will pay the freight charges once the goods arrive at the POSSIBLE COMBINATIONS OF TERMS ON SHIPMENT AND FREIGHT PAYMENT There are four possible combinations on the terms of shipment and payment of freight. These are 1. FOB shipping point. Freight prepaid. 2. EOB shipping point. Freight collect 3. FOB destination. Freight prepaid 4, FOB destination. Freight collect goods from shipping point; hence the buyer should pay the freight. However, it is the seller who pays the freight. It appears, therefore, that the buyer owes the seller freight charges. EO Shipping point. Freight collect. This term indicates that the buyer is the owner of the goods while in transit. As owner, he has the responsibility to pay the freight charges, and he is the one who pays. FOL Destination. Freight prepaid. Under this term, the seller is the owner of the goods up to destination point. In other words, the seller is held responsible for freight charges, and he is the one who pays. FOB Destination. Freight collect. This term means that the seller is the owner of the goods while in transit. The seller should be the one to pay for freight charges. However, the buyer paid on behalf of the seller. The seller, therefore, owes the buyer on account of freight charges. | | aes ‘| ; | FOB Shipping point. Freight prepaid. This term indicates that the buyer is the owner of the | Ilustration 10.6 On November 30, Nicanor Trading sold various merchandise to YVONE Merchandising for 80,000. Terms 2/10, n/30. Freight charges, 1,200. Required: Record the sale-purchase transaction and freight charges under the following assumptio: 1. EO. shipping point, freight prepaid. 2. KOLB shipping point, freight collect 3. ROL destination, freight prepaid. 4. FOB destination, freight collect Answer and analysis 1. The term of sale-purchase transaction is EO.Bshipping point, freight prepaid. the owner of the goods up to the shipping point only. The buyer, This term means that seller is ‘As owner, the buyer is held responsible for the freight. re, is the owner of the goods while in transit. CHAPTER 10 + ACCOUNTING FOR MERCHANDISING | 329However, the seller paid the freight since the shipment was freight prepaid. Ue ee that the seller hae collectible from the buyer relative to freight charges in addition to the merchandise sold, On the buyer has the obligation to refund the seller for payment of freight charges. The entries in the books of the seller and the buyer are as follows: Books of SELLER (NICANOR Trading) Books of BUYER (YVONE Merch’dising) To record sale-purchase transaction Accounts receivable 80,000 Purchases 80,000 Sales 30,000 Accounts payable 80,000 To record payment of freight Accounts receivable 1,200 Freight-in 1,200 Cash 1,200 Accounts payable 1,200 ‘The total receivable of the seller, or the total payable of the buyer to is 81,200. Answer and analysis 2, The term of the purchase is OB shipping point, freight collect. ‘Under this term, the buyer is the owner of the goods from the shipping point up to destination Point. Otherwise stated, the buyer is the owner of the goods in transit. As owner of the goods, the buyer is responsible for payment of transportation cost. The term of paying the freight is freight collect. Hence, the buyer will pay the freight once the goods arrive at the point of destination. ‘The entries in the books of the seller and the buyer are as follows: Books of SELLER (NICANOR Trading) Books of BUYER (YVONE Merch’dising) To record sale-purchase transaction Accounts receivable 80,000 Purchases 80,000 Sales 80,000 Accounts payable 80,000 ‘To record payment of freight Ne ee Freight-in 1,200 i Accounts payable 1,200 The freight-in account is added to purchases, Answer and analysis 3. The term is FOR destination, tight prepaid ‘This term indicates that: the seller is the: ‘owner of | E ates that th the good ination poi edly the title of the goods in transit is vested with the sell "Theselle, ae aE eoean ean charges. : S tore, is responsible for ‘The term on freight payment is frei s ight prepaid. Thi - f before the goods are shipped to the buyer Prepaid. This means that the seller paid the freight 330 | FuNoamenTas oF AocOUNTINGThe entries on the books of the seller and buyer are as follows: Books of SELLER (NICANOR Trading) Books of BUYER (¥VONE Merch’dising) To record sale-purchase transaction Accounts receivable — 80,000 Purchases 80,000 | oe 80,000 Accounts payable 80,000 | To record payment of freight | Freight-in 1,200 » ‘Accounts payable 1200 ne, { js | Freight out account is treated as operating expenses. It is shown as part of selling or marketing expenses. Answer and analysis 4. The terms of the shipment is EO.B destination, freight collect ‘The term indicates that the seller is the owner of the goods up to destination point. As owner, heis liable for payment of transportation costs. Since the term on payment of freight is freight collect, the buyer pays the freight. Apparently, freight cost is incurred by the seller but paid by the buyer. The seller has liability to the buyer relative to freight. This term on shipment and freight payment creates a situation where the seller has receivable from the buyer relative to goods sold. Similarly, the buyer has receivable from the seller because of freight charges. The most logical and soundest eritry, therefore, is to offset the liability of the seller to the buyer by reducing the accounts receivable at the time of sale. In the same manner, the liability of the buyer to the seller is reduced because of paying the freight. The compound entry on the books of the seller and buyer appears as follows: Books of SELLER (NICANOR Trading) Books of BUYER (YVONE Merchdising) Torecord sale-purchase and payment of freight Accounts receivable 78,800 Purchases 80,000 Freight-out 1,200 Accounts payable 78,800 Sales 80,000 Cash 1,200 THE MERCHANDISE INVENTORY ACCOUNT One of the differences in recording business transactions of service entity and merchandising business is the use of merchandise inventory account. . : ' ‘Merchandise inventory is the amount of goods remaining unsold at the end of the accounting Period. This account does not appear in service entity. cS The ending merchandise inventory of the concurrent period is the beginning inventory of the ext accounting period. CHAPTER 10 + ACCOUNTING FOR MERCHANDISING | 331_-—— AMR. ——eyy INVENTORY SYSTEM Inventory system refers to the set of procedures followed in handling, recording, controling and valuing the inventory of a business organization. The inventory system is one of the factors that *nAwence the procedure in determining the value of ending inventory. ‘There are two types of inventory systems in accounting for inventories. These are the - 1. periodic system; and 2. perpetual system. Periodic Inventory System ‘The periodic inventory system has the following features: uses the account title purchases for merchandise purchased | physical count is made at the end of the accounting period to determine unsold quantities does not maintain stock card ly adopted by business-with very fast turn-over, and the cost of ractical to record inflow and outflow of goods This inventory system is usuall the product is not material. Business also that finds imp: may adopt periodic inventory system. Business entities that may adopt periodic inventory system are convenience grocery store, bardware, auto parts dealer or pharmacy. Perpetual Inventory System ‘The perpetual inventory system may be adopted by a business with slow turn-over of the goods, and the cost of the goods is usually material. ‘The perpetual inventory system has the following characteristi uses the account title merchandise inventory to record goods purchase * b. maintain inventory stock card ©. conducts periodic physical count to confirm actual quantities with balances appearing in the stock card Usually, dealers of automobile, household appliances, machinery, and dealer of heavy equipment adopt perpetual inventory system. The choice of inventory system is highly dependent on the nature of business operation. The management should adopt an inventory system that provides safety measures against theft, commission of fraud, or obsolescence, The inventory system employed leads towards Propet inventory control.Jllustration 10.7 system: Periodic System ‘The transactions th i hat follow illustrate the recording system of periodic and perpetua inventory Purchas andise on a Merchandise inventory 180,000 account, 180,000 Payable 180,000 "Accounts payable 180,000 Paidfeighton | Freightin — $10,000 10,000 ‘Merchandise inventory 10,000 vm ein 10,000 | Cash 10,000 merchandise | Accounts pa = . ints payable 15,000, ‘Accounts payable 15,000 Rewplie, P1000 | Purchase re. & allow. sooo | Merchandise inventory 000 Sold merchandise | Accounts receivable 200,000 7 val r ‘Accounts receivable 200,000 ‘on credit, 200,000. Sales 200,000 Sales 100,000 Gross profit rate is an Cost of sales 12,000 Merchandise inventory 12,000 ‘Under perpetual system, the cost of ence andi sold is immediately recorded mercrlary entry after sales because che 2s corofjon is leary determinable from the profi is 40% the Return of merchandise from ‘customer, P10,000. Gross profit on this is 40%. Sales ‘Accounts. returns & allow. receivable 10,000 10,000 stock cards, Since the gross cost of sales is equal t0 60%. Sales returns & allows. 10,000 ‘Accounts receivable 10,000 “Merchandise inventory 6,000 6,000 Cost of sales