ACCOUNTING CYCLE for

MERCHANDISING
BUSINESS

Dr. Josefina R. Torres

MERCHANDISING BUSINESS
• Business organization that is engaged
in buying and selling of merchandise
MERCHANDISE
• Goods or articles acquired by the
business that are intended for sale
• Merchandise inventories Include only
goods that are held for sale in the
normal course of business operations
• Examples: office supplies for sale are
inventories for National Book Store but
“office supplies” for UST
Merchandise Inventory
Merchandise Inventory – Beginning
• Goods available at the start of the
accounting period

Merchandise Inventory - End

• Goods available or remain unsold at the
end of the accounting period
ACCOUNTING FOR
MERCHANDISING BUSINESS
• The accounting cycle for a service
business is also applied to
merchandising business.
• Measuring income for a
merchandising company is the same
as for a service business, however,
their operating cycle differs.
ACCOUNTING FOR
MERCHANDISING BUSINESS
• The operating cycle begins by
purchasing merchandise and ends by
collecting cash from selling the goods.
• The length of the operating cycle
depends on what type of merchandise
the business is into.
ACCOUNTING FOR
MERCHANDISING BUSINESS
• For example, fast food establishments
may have an operating cycle of only a
day but companies selling
merchandise on installment basis may
have operating cycle that can least for
years
ACCOUNTING FOR
MERCHANDISING BUSINESS

• The merchandising business uses

special accounts to record the buying
and selling of merchandise or goods
for sale.
SPECIAL MERCHANDISE ACCOUNTS
SALES
• Income account used to record
sale of merchandise
• Credit to record increase; debit to
record decrease //
SALES RETURN & ALLOWANCES

• Used to record the amount of goods

returned by the buyer
• Reduces the amount of sales
• Debit to record increase; credit to
record decrease
• It is evidenced by the issuance of a
credit memorandum //
CREDIT MEMORANDUM
• Document that informs a customer
that a credit has been made to the
customer’s account receivable arising
from discounts, returns and
allowances//
SALES DISCOUNT
• Discount granted by the seller to
encourage early payment of the
buyers
• Decreases the amount of sales
• Debit to record increase; credit to
record decrease //
FREIGHT OUT

• Freight charges or cost of

delivering the product to the
buyer’s place paid by the seller
• Debit to record increase; credit to
record decrease //
Note:
• These special merchandise accounts
are used to record sale of
merchandise only.
• For sale of non-merchandise items,
the ordinary account titles are used.
TERMS OF SALES

• n/30
– The amount of the invoice is payable
within 30 days from the date of sale.
– One of the most common modes of
purchase
– No discount is given by the seller
TERMS OF SALES

• 2/10, n/30
– A discount of 2% is deducted from the
invoice price if paid within 10 days from
date of sale
– The gross invoice price is to be paid if
payment is made after the discount
period.
– Account should be paid in 30 days from
the date of sale
TERMS OF SALES

• COD
– Cash on Delivery
– The invoice price is to be paid upon delivery of
the product
TERMS OF SALES
• EOM
– End of month
– Account should be paid on or before the
end of the month of sale
TERMS OF SALES
• 2/10, EOM, n/60
– 2% discount is given if the customer
pays by the tenth of the month following
the month of sale
– Beyond this period, the full amount must
be paid within 60 days from the date of
sale
SHIPPING CHARGES ON
MERCHANDISE SOLD OR PURCHASED

• The buyer and the seller must agree

on
– who is responsible for paying any freight
charges, and
– who bears the risk of loss while the
merchandise is on transit
FREIGHT TERMS

• FOB Shipping Point

– Free on Board at point of origin.
– The buyer pays for the freight or transportation
– The buyer debits “Freight In” for this.
– The buyer assumes the risk of loss while goods
are in transit
FREIGHT TERMS

• FOB Destination
– Free on Board up to destination.
– The seller pays for freight or
transportation
– The seller assumes the risk of loss while
the goods are in transit
– The seller debits “Freight Out” or
“Delivery Expense” account for this
CHART OF ACCOUNTS
• List of account titles used in recording
business transactions.
• Arranged in the ALPICE order
Chart of Account of a Merchandising
Business
Examples of Transactions Involving
Sale of Merchandise
The following transactions of Triple J Trading
occurred during the month of January 2009

January
3 - Triple J sold merchandise worth P20,000 to
Mr. Vargas. Terms: COD
3 - Sold merchandise worth P 30,000 to ABC Co.
Terms: P10,000 downpayment, balance: 2/10;
n/30
4 - Mr. Vargas returned defective merchandise
amounting to P300. A cash refund was given
to him.
Jan 5 - ABC Co. returned defective
merchandise amounting to P500.
6 - Sold merchandise to various customers –
P13,000. Paid freight charges amounting to
P400.
12 - Received full payment from ABC Co.
13 - Sold an old office table for P1,000. COD //
ACCOUNTING FOR PURCHASES

• PURCHASES
– Means goods bought for the purpose of
resale without any change in the
physical form
– Debited when goods are acquired on
cash basis or on account //
PURCHASE RETURNS AND
ALLOWANCES

– Used to record the goods returned by

the buyer to the seller
– This usually happens because the goods
are faulty or damaged
– Decreases the cost of goods bought
– Credit for increases, debit for
decreases //
PURCHASE DISCOUNTS
– Used to record the amount of discounts
granted by the seller
– Decreases the cost of goods bought
– Credit for increases, debit for
decreases //
FREIGHT IN
– Account debited by the buyer for the
transportation expense of goods
purchased
– Debit for increases, credit for
decreases //
• Note:
– These special merchandise accounts are
used to record purchase of merchandise
only.
– For purchase of non-merchandise items,
the ordinary account tiles will be used.
Examples of Transactions Involving
Purchase of Merchadise
The following transactions took place during the
month of January 2009:

Jan. 16 - AB Enterprises bought shoes, slippers and

handbags from their Marikina supplier
amounting to P95,000 under the purchase
term of 2/10, n/30. It was agreed
between buyer and supplier that the freight
in or transportation from Marikina to
Makati, amounting to P500, is to be paid by
the buyer, AB Enterprises.
Jan 17 - AB Enterprises received deliveries of
handbags from Celine amounting to
P20,000. Terms: COD

18 - AB Enterprises ordered and received delivery

from Manel, shoes costing P35,000. Terms:
n/30.

19 - AB Enterprises paid to the Marikina supplier

the P95,000 less 2% discount. (see Jan. 16)

20 - The buyer AB Enterprises found some

defective goods and made complaint to
Celine. Supplier Celine agreed to refund
P1,200 and promptly paid this amount to AB
Enterprises.
23 - AB Enterprises complained to Manel on some
unpolished shoes for which Manel gave
the buyer rebate of P1,000. A credit
memorandum was received from Manels
29 - Purchased supplies for office use, P1,000 on
cash basis.
30 - Purchased goods amounting to P30,000 less
20%

Credit memorandum – a note issued by the seller to

acknowledge the return of merchandise and to
inform the buyer that his account has been
reduced accordingly.
DISCOUNTS
• Reduction in the original price of
goods
• Types of Discounts
a. Cash discount
b. Trade discount
A. CASH DISCOUNT
– Reduction in price to encourage a
customer to pay immediately
– Recorded in the books as
• Sales discount (by seller)
• Purchase discount (by buyer) //
B. TRADE DISCOUNT
– Reductions from the published list price
granted to dealers or wholesalers for
buying large quantities or for regularly
patronizing the business
– Granted to customers who buy items to
resell or who will use the items to
produce other salable goods
– Often listed in catalogs that contain the
list price as well as the amount of trade
discount available.
B. TRADE DISCOUNT (cont’n)

– It has no relationship to whether a

customer is paying a bill early.
– Trade discounts and list price are not
shown in the accounts of either the
buyer or the seller.
– Computed as: List price x rate of
discount //
ACCOUNTING FOR TRADE DISCOUNT

• Trade discounts and list price are not

shown in the accounts of either the buyer
or the seller.
• From the point of view of the buyer, only
the net price paid is recorded in the books
• From the point of view of the seller, the
price received from the buyer is recorded in
the books
Example 1:
Example 2: