MANAGEMENT ADVISORY SERVICES

TOPIC

Prepared by:

RHAD VIC F. ESTOQUE, CPA, MBA, RCA,

MICB, CAT, CMA

MAS Reviewer
ACCOUNTING FOR
MERCHANDISING
BUSINESS
 TOPIC OVERVIEW:
1. Merchandising terminologies
2. Discount, freight and shipping terms
3. Recording, adjusting and closing merchandising
accounts
4. Financial statement preparation for a merchandising
concern

CHAPTER OBJECTIVE:
At the end of this chapter, students must be able to:
1. Compute discounts on credit sales
2. Use proper merchandising accounts in journalizing
3. Account for shipping and freight terms
4. Record merchandising transactions using both gross and net
method
5. Prepare financial statements for a merchandising concern
INTRODUCTION
The accounting for a merchandising concern depends upon
the inventory system employed by the business entity. There
are two inventory systems in practice: periodic system and
the perpetual system. To optimize your understanding, we
will first set our discussion on the traditional and most
commonly used periodic system to be followed later by the
perpetual system.
 ACCOUNTING FOR A MERCHANDISING CONCERN
The accounting cycle of a merchandising concern which is
illustrated in the previous chapters is basically the same with a
servicing concern. The same rules of debit and credit apply. A
merchandiser also incurs the same expenses as those incurred by
servicing concerns and may earn those incidental income earned
by a servicing concern. The only peculiarity is the accounting for
the buy-and-sell operation of a merchandiser.
 PECULIARITY OF A MERCHANDISING OPERATION
A merchandising business buys goods (i.e. inventories) and sells
them to customers for a profit. The goods bought by the
merchandising business from its suppliers are called purchases.
The merchandiser add-up a value (i.e. mark-up or gross profit) to
the purchase prices of goods and charges the total amount to the
customer. The total amount charged to customers is called sales.
Illustration
Purchase price (cost) ₱ 100,000
Plus: Mark-up 25,000
Sales price (Sales) ₱ 125,000

Merchandisers make profits by the mark-up they add on their costs. Ignoring quality,
supply and other considerations, higher mark-up means higher profits but also
means fewer customers. Lesser mark-up means more customers. Merchandisers
basically balance greed and customer’s interest in making business.
The mark-up is usually expressed either as:

Computation Rate Common Name

Percentage of cost ₱ 125,000/₱100,000 125% on cost Billing rate or mark-up rate
Percentage of sales ₱25,000/₱125,000 20% on sales Gross margin or gross profit rate
Merchandising terminologies:
Your appreciation and understanding of the following merchandising terms is necessary:

Seller’s perspective Buyer’s perspective

Agreed selling price of the goods Sales Purchases
Return by the buyer of defective or non-
Sales return Purchase returns
conforming goods to the seller
Agreed reduction in selling price Sales discount Purchase discount
Agreed reduction in selling price for poor quality
goods which the buyer agreed to retake at Sales allowances Purchases allowances
reduced price
Transportation cost of bringing the goods to
Freight-out Freight-in
buyer’s place of business
Pricing Terminologies
a. List price – This is an established price determined by reference to a catalog or
general price list before deducting any discounts.
b. Invoice price – This is list price less any trade discounts. This is the gross billable
amount by the seller to the buyer. This is the amount that is indicated in the billing
statement of the seller.
Types of Discounts
a. Trade discount – Also called volume discount or quantity discount, trade discount
pertains to a direct deduction to the invoice price on account of volume purchases made
by a buyer. This discount is usually given when the buyer is a fellow merchandiser in
order to allow him profit for the resale of the goods to his customers.
b. Cash discount – Also called settlement discount, this is an additional discount to the
invoice price aside from the trade discount which is given to the buyer for early
payment.
 DISCOUNT PERIOD
Discount period is the period of time granted by the seller to the
buyer to settle the latter’s account for him to be entitled to a cash
discount. Only those buyers who pay within the discount period
shall entitle for any cash discount. In calculating discount days, the
first day is excluded while the last day is included.
Illustration
Assume a ten-day discount period. The buyer bought merchandise on account on January 2.
Subsequently, the buyer paid his account on January 10. Was the buyer able to avail of the
discount?

Yes, since it is still within the discount period. From January 2 to January 10 is only eight days.

But if the buyer paid his account only on January 13, the buyer can no longer avail of the discount
because he only paid his account on the 11th day, that is beyond the ten-day discount period.
Types of Cash Discount Terms:
1. Net 30 or n/30 — Net or simply n means the credit period of the purchase. A net 30 or
n/30 means that the entire invoice is due within 30 days from the invoice without
discount. An n/60 would also mean that the invoice is due within 60 days without
discount, and so on.
2. 1/15, n/30 — This means that the invoice is due within 30 days but the buyer is entitled
to 1% discount if the invoice is paid within 15 days from invoice date, there will be no
discount on the 16th to 30th day.
Illustration
Royce Store purchased goods with a list price of ₱100,000 and a 30% trade discount from a
supplier. The supplier billed the balance 2/10, n/30.

The net amount due the supplier shall be computed as follows:

List Price ₱ 100,000

Less: Trade discount (30% x ₱100,000) 30,000
Invoice price (Cash due if payment is beyond discount period) ₱ 70,000
Less: Cash discount (2% x ₱70,000) 1,400
Cash due (if within the discount period) ₱ 68,600
3. 2/10, 1/15, n/60 — This means that invoice is due for payment in 60 days but the buyer
will be given a 2% discount if he makes payment within 10 days or 1% if he makes payment
beyond 10 days but within 15 days. If payment is made beyond the discount period, no
discount shall be granted.

Illustration
On January 3, 2016, Royce Store purchased goods with a list price of ₱300,000 with terms
of 10% , 3/10, 1/15, n/60 from Supplier B. On January 4, 2016, merchandise with an invoice
price of ₱15,000 was returned by Royce. On January 18, 2016, Royce Store paid its
account.
The net amount due the supplier shall be computed as follows:

List Price ₱ 300,000

Less: Trade discount (10% x ₱300,000) 30,000
Invoice price of merchandise ₱ 270,000
Less: Invoice price of merchandise returned 15,000
Net invoice price ₱ 255,000
Less: Cash discount (*1% x ₱255,000) 2,550
Cash due on January 18, 2016 ₱ 252,450

Note: January 18 is the 15th day from date of purchase hence the discount is 1%.
3. 2/EOM, n/60 — This means that the invoice is due for payment in 60 days but the buyer
shall be entitled to 2% cash discount if payment is made on or before the end of the month
of purchase. If payment is not made within the discount period, the entire invoice price is
due 60 days from the invoice date.
4. 2/10 EOM, n/60 — This means that the invoice is due for payment in 60 days but the
buyer is entitled to 2% discount if he pays on or before the 10th day of the month following
the month of purchase. If payment is not made within the discount period, the entire invoice
price is due 60 days from the invoice date.
Illustration
On January 25, 2016, Royce Store purchased goods with a list price of ₱250,000 with terms of 2/10,
EOM, n/60 from Supplier B. On February 1, 2016, merchandise with an invoice price of ₱5,000 was
returned by Royce. On February 10, 2016, Royce Store paid its account.

The net amount due the supplier shall be computed as follows:

List Price ₱ 250,000

Less: Trade discount -
Invoice price of merchandise ₱ 250,000
Less: Invoice price of merchandise returned 5,000
Net invoice price ₱ 245,000
Less: Cash discount (*2% x ₱245,000) 4,990
Cash due on January 18, 2016 ₱ 240,100

Note: Since the term is end of the month (EOM), the discount period will start from February 1 up
to February 10, 2016. Since Royce paid its account on February 10, 2016, it is qualified to the 2%
discount.
RECORDING OF MERCHANDISING TRANSACTIONS
To simplify our discussion, let us group merchandising transactions into:
a. Purchasing and disbursement activities
b. Sales and collections activities

PURCHASING AND DISBURSEMENT ACTIVITIES

Purchasing and disbursements involves related transactions in the
acquisition of goods from suppliers and their settlement.
Related merchandising accounts:
 
1. Purchases – An account used to record the cost of goods or merchandise bought for resale
during the current reporting period. This is normally a debit balance.

2. Freight –in – An account used to record the transport cost of the goods purchased. This is an
adjunct account (addition) to the purchases account; and hence, it has normal debit balance.

3. Purchase discount – An account used for the agreed reduction in the price of goods. This is
normally given by the supplier on account of early payment. Purchase discount is a contra-
account to the purchase account; hence, it has a normal credit balance.

4. Purchase returns and allowances –An account used to record the cost of merchandise
returned to the supplier and including price reductions to the purchase which is granted by a
supplier on account of unsatisfactory goods delivered. Just like the purchase discount account,
this is normally a credit balance.

5. Advances to supplier- An account used to record advance payments made to a supplier for
goods to be purchased in the future. This is an asset account and has a normal debit balance.
PRO-FORMA ILLUSTRATIVE ENTRIES: Purchasing and Disbursement

1. Purchase of goods for cash

Date Account Debit Credit

XXX Purchases ₱ XXXX
Cash ₱ XXXX
To record the cash purchase of goods

2. Purchase of goods for cash

Date Account Debit Credit

XXX Purchases ₱ XXXX
Account payable ₱ XXXX
To record the purchase of goods on credit
3. Payment of freight on purchases

Date Account Debit Credit

XXX Freight-in ₱ XXXX
Cash ₱ XXXX
To record the payment of freight on goods purchased

4. Availment of cash discount

Date Account Debit Credit

XXX Accounts payable ₱ XXXX
Purchase discounts ₱ XXXX
Cash XXXX
To record the payment of account purchases within the discount period

Note: This is a compound entry. The recording of the discount and the cash payments
can be separated in simple entries. Both recording methods are acceptable.
5. Return of goods to supplier

Date Account Debit Credit

XXX Accounts payable* ₱ XXXX
Purchase returns and allowances ₱ XXXX
To record returns of goods purchased

*This may be debited to the following accounts under the following conditions:
a. Cash – if a cash refund was made by the supplier.
b. Receivable from suppliers – if the purchased goods have been paid in cash
and the supplier agreed to return cash in the future for the goods returned.
c. Advances to supplier – if the supplier agreed to offset the price of goods
returned against future purchases of the business from the supplier
6. Payment of advances to suppliers

Date Account Debit Credit

XXX Advances to suppliers ₱ XXXX
Cash ₱ XXXX
To record the cash advance to suppliers for future goods to be bought

7. Recoupment of advances to suppliers

Date Account Debit Credit

XXX Purchases ₱ XXXX
Advance to suppliers ₱ XXXX
To record offset of advances made against current purchases
ILLUSTRATION: Purchasing and Disbursements
Royce Store had the following purchase transactions during January:
January 1: Purchased goods for cash, ₱10,000. Royce paid ₱500 for the transport of goods to its store.

Date Account Debit Credit

Jan. 1, 2016 Purchases ₱ 10,000
Freight-in 500
Cash ₱ 10,500

January 4: Purchased goods from ABC Company on credit, ₱30,000 at 2/15, n/60. ABC Company
agreed to shoulder the freight costs of ₱1,000.
Date Account Debit Credit
Jan. 4, 2016 Purchases ₱ 30,000
Accounts payable ₱ 30,000
 Note: The ₱1,000 freight cost will not be recorded since Royce Store is not paying for it. It is a non-
accountable transaction for Royce Store because it does not affect an asset, liability or equity
account of Royce. ABC Company on its part shall record this as freight-in.

January 6: Returned ₱3,000 worth of goods to ABC Company because these goods were different
from those ordered
Date Account Debit Credit
Jan. 6, 2016 Accounts payable ₱ 3,000
Purchase returns and allowances ₱ 3,000

January 8: Discovered minor defects on goods purchased from ABC Company. ABC agreed to
provide for ₱1,000 price reduction adjustment
Date Account Debit Credit
Jan. 8, 2016 Accounts payable ₱ 1,000
Purchase returns and allowances ₱ 1,000
January 19: Paid the balance due to ABC Company

Date Account Debit Credit

Jan. 19, 2016 Accounts payable ₱ 26,000
Freight-in ₱ 520
Cash 25,480

Note:
1. Payment is made within the discount period (January 5 to January 19) or 15 days from
January 4.
2. The net accounts payable after returns and allowances was ₱30,000 – ₱3,000 –
₱1,000 = ₱26,000.
3. The discount shall be ₱26,000 x 2% or ₱520. ₱26,000 shall be paid if payment is made
after January 19.
January 20: Paid ₱5,000 as reservation for goods ordered from Supplier XYZ at a total price of
₱20,000.
Date Account Debit Credit
Jan. 20, 2016 Advances to supplier ₱ 5,000
Cash ₱ 5,000

Note: The ₱20,000 order is not yet an accountable event because it is a future transaction with
no effect on assets, liability or equity. Only the ₱5,000 is an accountable event at the moment.

January 22: Supplier XYZ delivered the ₱20,000 goods ordered and presented a bill for the balance
due January 30.
Date Account Debit Credit
Jan. 22, 2016 Purchases ₱ 20,000
Advances to supplier ₱ 5,000
Accounts payable* 15,000
*This is cash if payment of the bill is made upon delivery.
 SALES AND COLLECTION ACTIVITIES
The sale and collection function involves selling of goods and
collecting customers’ accounts.
Related merchandising accounts:
1. Sales – An account used to record the selling price of goods to a customer. The sales account
has a normal credit balance.

2. Freight –out – An account used to record the transport cost of the goods sold to customers. If
goods are purchased from the business’ warehouse, customers normally shoulder the freight of
their goods. At times, the seller may accommodate the freight as goodwill to customers. Freight
out is a separate expense account and is not a contra-account to the sales account. It may be
alternatively called delivery expense.

3. Sales discount – An account used to record the agreed reduction in the price of goods sold to
customers. This is the equivalent of purchase discount in the buyer’s perspective. Sales discount
is a contra-account to the sales account; hence, it has a normal debit balance.

4. Sales returns and allowances – An account used under periodic inventory system to record the
amount of sales returned by customers including reductions in selling prices granted to customers
because merchandise was not satisfactory to a buyer. This is also a contra-account to the sales
account and has a normal debit balance.

5. Advances from customer - An account representing advance payment made by a customer for
goods to be delivered in the future. This is a liability account and has a normal credit balance.
PRO-FORMA ILLUSTRATIVE ENTRIES: Sales and Collections

1. Sale of goods for cash

Date Account Debit Credit

XXX Cash ₱ XXXX
Sales ₱ XXXX
To record the sales of goods for cash

2. Payment of freight on sales deliveries

Date Account Debit Credit

XXX Freight-out ₱ XXXX
Cash ₱ XXXX
To record the freight on goods sold shouldered by the seller
3. Sale of goods on account

Date Account Debit Credit

XXX Accounts receivable ₱ XXXX
Sales ₱ XXXX
To record the sales of goods on credit

4. Grant of cash discount

Date Account Debit Credit

XXX Cash ₱ XXXX
Sales discounts XXXX
Accounts receivables ₱ XXXX
To record the grant of cash discounts to customers
5. Return of goods sold to customers

Date Account Debit Credit

XXX Sales returns and allowances ₱ XXXX
Accounts payable* ₱ XXXX
To record returns of goods previously sold

*This may be credited to the following accounts under the following conditions:
a. Cash – if cash was paid to the customer.
b. Due to customers – if the return of sold goods will be repaid in cash
c. Advances from customers – if the customer agreed to offset the amount of
goods returned for his future credit purchases
6. Receipt of advances from customers

Date Account Debit Credit

XXX Cash ₱ XXXX
Advances to suppliers ₱ XXXX
To record advance of cash from customers

7. Application of customer advances

Date Account Debit Credit

XXX Advances from customers ₱ XXXX
Sales ₱ XXXX
To record the application of customer advances to goods sold
ILLUSTRATION: Sales and Collection
Royce Store had the following sales transactions during January:
January 3: Sold goods for cash, ₱18,000

Date Account Debit Credit

Jan. 3, 2016 Cash ₱ 18,000
Sales ₱ 18,000
January 7: Sold goods to DEF Company on credit, ₱50,000 with terms 1/15, n/30. Royce Store
agreed to shoulder and paid the ₱1,000 freight on the goods.
Date Account Debit Credit
Jan. 7, 2016 Accounts receivable ₱ 50,000
Sales ₱ 50,000

Date Account Debit Credit

Jan. 7, 2016 Freight-out ₱ 1,000
Cash ₱ 1,000

Note: If the buyer shoulders the freight, Royce shall not record freight out. If Royce paid the
freight as an accommodation for the buyer, Royce shall debit it to accounts receivable, not to
freight out, because the buyer will repay Royce Store.
January 9: DEF Company returned goods billed for ₱4,000 due to defects

Date Account Debit Credit

Jan. 10, 2016 Sales returns and allowance ₱ 4,000
Accounts receivables ₱ 4,000

January 10: DEF Company complained of minor defects on the goods it purchased. Royce
Store agreed to provide for ₱2,000 price reduction for the minor defects.

Date Account Debit Credit

Jan. 10, 2016 Sales returns and allowance ₱ 2,000
Accounts receivables ₱ 2,000
January 21: DEF Company paid the balance of his account

Date Account Debit Credit

Jan. 10, 2016 Cash ₱ 43,560
Sales discount** 440
Accounts receivables* ₱ 44,000

Note:
1. ₱50,000 – ₱4,000 – ₱2,000 = ₱44,000*
2. ₱44,000 x 1% = ₱440**
3. There is no discount if the payment is made beyond 15 days (i.e. after
January 22).
January 22: TUV Company ordered goods with selling price of ₱10,000 and made a ₱3,000
advanced deposit.

Date Account Debit Credit

Jan. 22, 2016 Cash ₱ 3,000
Advances from customer ₱ 3,000

Note: The ₱10,000 sales order is not yet an accountable event because it is a future
transaction with no effect on assets, liability or equity. Only the ₱3,000 cash receipt is an
accountable event at the moment.

January 27: Delivered to TUV Company the ₱10,000 goods it ordered. TUV paid the balance in
cash.

Date Account Debit Credit

Jan. 10, 2016 Cash* ₱ 7,000
Advances from customer 3,000
Sales ₱ 10,000
*This is accounts receivable if the bill is not paid upon delivery. The rules on discounts may
apply if Royce provides discount.
 SPECIAL CASES IN MERCHANDISING
1. Shipping Terms
2. Freight Terms
3. Merchandise withdrawn by the owner for
personal use and merchandise used by the
business
4. Optional Net Method of Recording
 SHIPPING AND FREIGHT TERMS IN MERCHANDISING

SHIPPING TERMS
 
a. FOB shipping point – Ownership to the goods transfer to the buyer from the moment
the goods leave the warehouse of the seller which is normally the shipping date or
invoice date.

Under this term, sales shall be recorded from the moment the goods are delivered.
The buyer already owns the goods in transit; hence, the buyer shall be responsible
for freight.

b. FOB Destination – ownership to the goods transfer to the buyer from the moment the
goods arrive at the warehouse of the buyer which is normally the delivery receipt date.

Under this term, sales shall be recorded the moment the client acknowledges
delivery. The seller still owns the goods in transit; hence, the seller shall be
responsible for freight.
These rules do not require that recording must be made exactly upon transfer of
ownership. Recording maybe made at a later date but the journal entries for sales or
purchases must be dated at the date of transfer of ownership.

FREIGHT TERMS
a. Freight prepaid – the freight shall be paid by the seller to the freight or cargo
forwarder upon release of the goods in his premises
b. Freight collect – the freight shall be paid by the buyer to the freight or cargo
forwarder upon arrival of the delivery in his premises
 Recognition of purchases and Sales
Date of recognition of Date of recognition of
If the term is:
purchases sales
FOB destination When the buyer receives When the buyer receives
the goods the goods
FOB shipping point At the point of shipment At the point of shipment
ILLUSTRATION – Seller’s Perspective
Royce Store sold goods on account with selling price of ₱20,000 to a customer. The goods will incur
₱1,000 freight up to the buyer’s warehouse.

Royce Store shall record the foregoing sales under the following terms:
FOB Shipping Point
 FOB Shipping Point – Freight Prepaid
Date of arrival of the goods to the
Date of shipment of goods by the seller
buyer
Accounts receivable ₱ 20,000
Sales No entry.
Sales ₱ 20,000
Accounts receivable ₱ 1,000
Freight No entry.
Cash ₱ 1,000

Note:
a. FOB shipping point = buyer owns goods in transit and shall be responsible for freight.
b. FOB freight prepaid = seller advances the freight of the goods to the freight forwarder
c. The freight advanced by the seller is a receivable from the buyer because the buyer is liable
for freight.
 FOB Shipping Point – Freight Collect
Date of arrival of the goods to the
Date of shipment of goods by the seller
buyer
Accounts receivable ₱ 20,000
Sales No entry.
Sales ₱ 20,000

Freight No entry. No entry.

Note:
a. FOB shipping point = buyer owns the goods in transit and shall be responsible for the freight.
b. FOB freight collect = the buyer pays the freight upon arrival of the goods.
c. The payment of the freight by the buyer is a non-accountable event to the seller.
FOB Destination

FOB Destination – Freight Prepaid

Date of arrival of the goods to the
Date of shipment of goods by the seller
buyer
Accounts receivable ₱ 20,000
Sales No entry. Sales ₱ 20,000
Accounts receivable ₱ 1,000
Freight No entry.
Cash ₱ 1,000

Note:
a. FOB Destination = seller owns goods in transit and shall be responsible for the freight.
b. FOB freight prepaid = the seller pays the freight upon shipment of the goods.
c. The payment of the freight by the seller is a delivery expense – freight out.
 FOB Destination – Freight Prepaid
Date of arrival of the goods to the
Date of shipment of goods by the seller
buyer
Accounts receivable ₱ 20,000
Sales No entry.
Sales ₱ 20,000

Freight No entry. Freight-out ₱ 1,000

Accounts receivable ₱ 1,000

Note:
a. FOB Destination = seller owns goods in transit and shall be the one responsible for the
freight.
b. FOB freight collect = the buyer shall pay the freight upon arrival of the goods.
c. The freight payment by the buyer is a deduction from the receivable of the seller because the
seller is liable for freight.
ILLUSTRATION 2: Buyer’s Perspective
Royce Store purchased goods with selling price of ₱20,000 from a supplier. The goods will be
delivered at ₱1,000 freight.

Royce Store shall record the foregoing purchase under the following terms:
FOB Shipping Point
 FOB Shipping Point – Freight Prepaid
Date of arrival of the goods to the
Date of shipment of goods by the seller
buyer
Purchase ₱ 20,000
Sales No entry.
Accounts payable ₱ 20,000
Freight-in ₱ 1,000
Freight No entry.
Accounts payable ₱ 1,000

Note:
a. FOB Shipping point = buyer owns goods in transit and shall be the one responsible for the
freight.
b. FOB freight prepaid = the seller shall pay the freight upon delivery of the goods.
c. The freight advanced by the seller is an additional payable to the seller because the buyer is
liable for freight.
 FOB Shipping Point – Freight Prepaid
Date of arrival of the goods to the
Date of shipment of goods by the seller
buyer
Purchase ₱ 20,000
Sales No entry.
Accounts payable ₱ 20,000
Freight-in ₱ 1,000
Freight No entry.
Cash ₱ 1,000

Note:
a. FOB Shipping point = buyer owns goods in transit and shall be the one responsible for the
freight.
b. FOB freight collect = the buyer pays the freight upon delivery of the goods.
c. The freight paid by the buyer is freight-in. Note that actual freight cost is determinable only
upon arrival of the goods.
FOB Destination

FOB Destination – Freight Prepaid

Date of arrival of the goods to the
Date of shipment of goods by the seller
buyer
Purchases ₱ 20,000
Sales No entry.
Accounts payable ₱ 20,000
Freight No entry. No entry.

Note:
a. FOB Destination = seller owns goods in transit and shall be the one responsible for the
freight.
b. FOB freight prepaid = the seller pays the freight upon delivery of the goods.
c. The freight paid by the buyer is a non-accountable event to the buyer.
 FOB Destination – Freight Prepaid
Date of arrival of the goods to the
Date of shipment of goods by the seller
buyer
Purchases ₱ 20,000
Sales No entry.
Accounts payable ₱ 20,000

Freight No entry. Accounts payable ₱ 20,000

Cash ₱ 20,000

Note:
a. FOB Destination = seller owns goods in transit and shall be the one responsible for the
freight.
b. FOB freight collect = the buyer pays the freight upon delivery of the goods.
c. The freight paid by the buyer is a reduction to the amount due to the seller because the seller
is liable for freight.
COMPUTATION OF NET CASH COLLECTION OR PAYMENT
When there is freight, the net cash collection or payment may be computed as follows:
Invoice price of merchandise sold or purchased XXX
Less: Invoice price of merchandise returned (XXX)
Net invoice price XXX
Less: Sales or Purchase discount (% x net invoice price above)
(If collection or payment is within the discount period) XXX
Total collection or payment before freight XXX
Less: Freight paid by the buyer - (If the term is FOB Destination, freight collect) (XXX)
Add: Freight paid by seller - (If the term is FOB shipping point, freight prepaid) XXX
Total Cash Collection or Payment after freight XXX

This would be the total collection This would be the total collection if
if the terms are FOB the terms are FOB Destination,
Destination, freight prepaid freight collect and FOB shipping
and FOB shipping point, point, freight prepaid
freight collect
ILLUSTRATION
On January 5, 2017, Josiah sold merchandise with a list price of ₱200,000, terms of 10%, 20%,
3/10, 2/15, n/30. On January 8, merchandise with an invoice price of ₱10,000 was received from a
customer. Freight of ₱2,000 was incurred. On January 20, 2017, the customer paid its account.

If the freight term is FOB destination point, freight prepaid, the net cash collection is computed
as follows:

Invoice price of merchandise sold (₱200,000 x 90% x 80%) ₱ 144,000

Less: Invoice price of merchandise returned 10,000
Net invoice price ₱ 134,000
Less: Sales discount (2% x ₱134,000) 2,680
Total cash collection ₱ 131,320
If the term is FOB destination, freight collect, the net cash collection is computed as follows:

Invoice price of merchandise sold (₱200,000 x 90% x 80%) ₱ 144,000

Less: Invoice price of merchandise returned 10,000
Net invoice price ₱ 134,000
Less: Sales discount (2% x ₱134,000) 2,680
Total Collection before freight ₱ 131,320
Less: Freight paid by buyer- (FOB Destination, freight collect) 2,000
Total cash collection after freight ₱ 129,320
If the term is FOB shipping point, freight collect, the net cash collection is computed as follows:

Invoice price of merchandise sold (₱200,000 x 90% x 80%) ₱ 144,000

Less: Invoice price of merchandise returned 10,000
Net invoice price ₱ 134,000
Less: Sales discount (2% x ₱134,000) 2,680
Total cash collection ₱ 131,320
If the term is FOB shipping point, freight prepaid, the net cash payment or collection is computed
as follows:

Invoice price of merchandise sold (₱200,000 x 90% x 80%) ₱ 144,000

Less: Invoice price of merchandise returned 10,000
Net invoice price ₱ 134,000
Less: Sales discount (2% x ₱134,000) 2,680
Total Collection before freight ₱ 131,320
Less: Freight paid by buyer- (FOB Destination, freight collect) 2,000
Total cash collection after freight ₱ 133,320
Withdrawal of merchandise by the owner for personal use
When an owner withdrew merchandise for personal use, the company will charge the cost and not
the selling price or fair value of the merchandise to the drawings account. The journal entry is:

Date Account Debit Credit

XXX Owner’s drawings ₱ XXXX
Purchases* ₱ XXXX

*Note: This may also be credited to Merchandise inventory, beginning account.

Merchandise inventories used by the business in the day to day operations (say for
cleaning or other purpose) and not sold
When merchandise inventories were used by the business in the day to day operations, for example
for cleaning, the company will charge the cost and not the selling price of the merchandise to an
appropriate expense account. The appropriate journal entry is:

Date Account Debit Credit

XXX Owner’s drawings ₱ XXXX
Purchases* ₱ XXXX

*Note: This may also be credited to Merchandise inventory, beginning account.

ILLUSTRATION
Assume the following transactions, among others, occurred during the month of January for TUV
Company:
January 23: The owner withdrew merchandise costing ₱12,000 with a selling price of ₱24,000 for
personal use.

Date Account Debit Credit

Jan. 23, 2016 Owner’s drawings ₱ 12,000
Purchases* ₱ 12,000

*Or Merchandise inventory, beginning account.

January 24: The Company used merchandise costing ₱5,000 with a selling price of ₱10,000 in
cleaning the office premises.

Date Account Debit Credit

Jan. 24, 2016 Cleaning expense ₱ 5,000
Purchases* ₱ 5,000

*Or Merchandise inventory, beginning account.

METHODS OF RECORDING PURCHASES AND SALES
There are two methods of recording purchases and sales:
a. Gross method – the amount of purchases or sales to be recorded includes the possible cash
discount
b. Net method – the amount of purchases or sales to be recorded excludes the possible cash
discount
 
The gross method is the one previously illustrated in this chapter. You will use this method if the
problems does not state what method is to be used. Optionally, merchandising businesses may use
the net method in recording purchases and sales.
 Comparison of Gross Method and Net Method
 
Illustration 1: Buyer’s Perspective
Assume that the buyer purchased on credit ₱70,000 worth of goods with a discount of ₱1,400 if paid
within the discount period. ₱68,600 shall be due within the discount period.

GROSS METHOD
If payment is made within the If payment is made beyond
Upon purchase
discount period the discount period
Purchase ₱ 70,000 Accounts payable ₱ 70,000 Accounts payable ₱ 70,000
Accounts payable ₱ 70,000 Purchase discount ₱ 1,400 Cash ₱ 70,000
Cash 68,600
NET METHOD
If payment is made within the If payment is made beyond
Upon purchase
discount period the discount period
Purchase ₱ 68,600 Accounts payable ₱ 68,600 Accounts payable ₱ 70,000
Accounts payable ₱ 68,600 Cash ₱ 68,600 Purchase discount lost* 1,400
Cash ₱ 70,000

Note: This is an expense account. Under current GAAP, this may be recorded as an interest expense.*
 
Illustration 2: Seller’s Perspective
Assume also that the seller sold goods on credit worth ₱70,000 with a discount of ₱1,400 if paid within
the discount period. ₱68,600 shall be due within the discount period.

GROSS METHOD
If payment is made within the If payment is made beyond
Upon sale
discount period the discount period
Accounts receivable ₱ 70,000 Cash ₱ 68,600 Cash ₱ 70,000
Sales ₱ 70,000 Sale discount ₱ 1,400 Accounts receivable ₱ 70,000
Accounts receivable ₱ 70,000
NET METHOD
If payment is made within the If payment is made beyond
Upon purchase
discount period the discount period
Accounts receivable ₱ 68,600 Cash ₱ 68,600 Cash ₱ 70,000
Sales ₱ 68,600 Accounts receivable ₱ 68,600 Accounts receivable ₱ 68,600
Cash 1,400

Note: This is an income account. Under current GAAP, this may be recorded as interest income.*

Although the net method is the most theoretically sound, both these methods are equally acceptable in
practice.
TRIAL BALANCE
After the recording of all merchandising transactions, an unadjusted trial balance of the ledger
accounts is drawn similar to the process employed with servicing concern.

ADJUSTING THE RECORD OF A MERCHANDISING CONCERN

The same adjusting procedures as employed with servicing concern in Chapter 10 also apply with
merchandising concern. Hence, adjustments will also be prepared for the effects of the following
items:
1. Accruals 5. Supplies
2. Prepayments 6. Bad debt expense
3. Deferrals 7. Accounting errors
4. Depreciation
BAD DEBTS
Recall the different methods of computing for bad debts as follows:

Methods of Estimating Bad Debts

1. % of account sales method Bad debt expense is equal to % of account sales or revenues made
on credit
2. % of receivables method The required balance of allowance for bad debts is computed as a
percentage of the ending receivable balance. Bad debt expense is
determined in the change in the balance of the allowance account.

We have thoroughly discussed the bad debts computation basing on the percentage of receivables
method in Chapter 10. Let us illustrate the bad debts computation based on sales method.
ILLUSTRATION – Percent of Sales Method
Roxas Company’s unadjusted trial balance at December 31, 2016 included the following accounts:

Debit Credit
Accounts receivable ₱ 1,500,000
Allowance for doubtful accounts ₱ 40,000
Sales 10,000,000
Sales returns and allowances 700,000
If the company estimates its bad debt expense to be 2% of net sales, the adjusting entry on
December 31, 2016 is:

Adjusting Entry in 2016:

Date Account Debit Credit
Dec. 31, 2016 Bad debt expense ₱ 186,000
Allowance for bad debts ₱ 186,000
To record estimated bad debt expense (₱9,300,000 x 2%)
Computation:
Net Sales (₱10,000,000 - ₱700,000) ₱ 9,300,000
Multiply by: Percentage of uncollectible 2%
Bad debts expense ₱ 186,000

The allowance for bad debts end is computed as follows:

Allowance for bad debts, beg. ₱ 40,000
Add: Bad debts expense (see computation above) 186,000
Allowance for bad debts, end ₱ 226,000

Note on the percent of sales method that the amount computed is already the bad
debt expense for the period. There would be no required T-account analysis 1or
work-back computations unlike the percent of receivable method.
ADJUSTED TRIAL BALANCE
After adjusting the records, an adjusted trial balance shall be prepared. Shown below is an example of
an adjusted trial balance:

ROYCE STORE
Adjusted Trial Balance
For the period ended December 31, 2016
Debit Credit
Cash ₱ 10,000
Accounts receivable 30,000
Allowance for bad debts ₱ 4,000
Notes receivable 90,000
Advances to suppliers 12,000
Inventory 42,000
Office supplies 15,000
Equipment 40,000
Accumulated depreciation 13,000
Accounts payables 25,000
Advances from customers 10,000
Owner’s capital 90,000
Owner’s drawings 5,000
Sales 310,000
Sales discount 2,000
Sales returns & allowances 1,000
Purchases 106,000
Freight-in 7,000
Purchase discounts 5,000
Purchase returns & allowances 3,000
Salaries expense 50,000
Taxes and licenses expense 10,000
Interest expense 6,000
Freight-out 8,000
Rent expense 32,500
Accrued interest income 1,500
Interest income 1,500
Accrued salaries expense 10,000
Accrued interest expense 1,000
Depreciation expense 3,000
Accrued rent expense 2,500
Bad debt expense 4,000 ________
TOTAL ₱ 475,000 ₱ 475,000

Note: The accounts peculiar to merchandising businesses are in italics.

Computation:
Income in merchandising is determined as follows:

Net Sales ₱ XXX,XXX

Less: Cost of sales XXX,XXX
Gross profit ₱ XXX,XXX
Less: Expenses XXX,XXX
Net income ₱ XXX,XXX
Net Sales
Net sales or revenue in merchandising is computed as follows:

Sales (gross) ₱ XXX,XXX

Less: Sales discounts ₱ XX,XXX
Sales returns & allowances XX,XXX
Net sales ₱ XXX,XXX

Note: Freight-out is not a contra-account to sales but is a separate expense account

COST OF SALES
As merchandising businesses sells, the sale is reported as revenue, the cost of the goods
sold must also be expensed in line with the Matching Principle of accounting.

The expensed cost of goods sold is computed using the inventory method, similar to
those employed with supplies expense as follows:
Inventory, beginning ₱ XXX,XXX
Add: Net purchases XXX,XXX
Total goods available for sale ₱ XXX,XXX
Less: Inventory, end XXX,XXX
Cost of sales or cost of goods sold ₱ XXX,XXX

The beginning and ending inventory figures are established by physical count of goods
on hand at the end last year and this year, respectively.
The inventory appearing on the adjusted trial balance is
not the final ending inventory for the period but is
actually the beginning inventory. The ending inventory
as counted at the end of the current period shall be set-
up to the records during the closing of the books.
Net Purchases
Net purchases in merchandising shall be computed as follows:

Purchases (gross) ₱ XXX,XXX

Add: Freight-in XX,XXX
Less: Purchase discounts ₱ XX,XXX
Purchase returns & allowances XX,XXX XXX,XXX
Net sales ₱ XXX,XXX

Note: Freight-in is an adjunct account to the purchases account and is added to it.
WORKSHEET PREPARATION FOR A MERCHANDISING CONCERN
The worksheet of a merchandising concern will be slightly modified by the addition
of a new column “Cost of sales” or “Cost of goods sold” between the adjusted trial
balance and the income statement columns.
Illustration: Cost of Sale and Income Statement Columns
Let us use the adjusted trial balance of Royce in the preceding example as our basis. Let us further
assume that the ending inventory was counted as ₱34,000.

ADJUSTED TB COST OF SALES INCOME STATEMENT

DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
Cash ₱10,000
Accounts receivable 30,000
Allowance for bad debts ₱ 4,000
Notes receivable 90,000
Advances to suppliers 12,000
Inventory (BEGINNING) 42,000 ₱ 40,000
Office supplies 15,000
Equipment 40,000
Accumulated depreciation 13,000
Accounts payable 25,000
Advances from customers 10,000
Owner’s capital 90,000
Owner’s drawings 5,000
Sales 310,000 ₱ 310,000
Sales discount 2,000 ₱ 2,000
Sales returns & allowances 1,000 1,000
Purchases 106,000 106,000
Freight-in 7,000 7,000
Purchase discounts 5,000 5,000
Purchase returns & allowances 3,000 3,000
Salaries expense 50,000 50,000
Taxes and licenses expense 10,000 10,000
Interest expense 6,000 6,000
Freight-out 8,000 8,000
Rent expense 32,500 32,500
Accrued interest income 1,500
Interest income 1,500 1,500
Accrued salaries expense 10,000
Accrued interest expense 1,000
Depreciation expense 3,000 3,000
Accrued rent expense 2,500
Bad debt expense 4,000 4,000
TOTAL ₱ 475,000 ₱ 475,000
*34,000
TOTAL ₱ 155,000 ₱ 42,000
Cost of sales -Transfer to income statement _______ **113,000 113,000 ________
₱155,000 ₱155,000 ₱229,500 ₱ 311,500
NET PROFIT ***₱82,000
₱311,500 ₱311,500
* This credit adjustment will be matched by a debit adjustment in the balance sheet
columns.
** The cost of sales is an expense (debit) item in the Income Statement.
***Note that the total credits is greater than the total debits by ₱82,000 in the income
statement. This is a net profit. This amount must be debited to balance the debits and
credits. This will be matched by a credit adjustment in the Statement of Change in
Equity.
STATEMENT OF COST OF SALES
After completing the cost of sales column, a statement of cost of goods sold shall be presented as follows:

ROYCE STORE
Statement of Cost of Goods Sold
For the period ended December 31, 2016
Cash ₱ 42,000
Add: Net purchases
Gross purchases ₱ 106,000
Less:
Purchase discount ₱ 5,000
Purchase returns and allowances 3,000 8,000 98,000
Add: Freight-in 7,000
Total cost of goods available for sale ₱ 147,000
Less: Ending Inventory 34,000
Cost of Goods Sold ₱ 113,000
INCOME STATEMENT
After completing the income statement column, an Income Statement shall be presented as follows:

ROYCE STORE
Statement of Cost of Goods Sold
For the period ended December 31, 2016
Gross Sales ₱ 310,000
Less:
Sales discount ₱ 2,000
Sales returns and allowances 1,000 3,000
Net Sales ₱ 307,000
Less: Cost of sales* 113,000
Gross profit ₱ 194,000
Add: Other income
Interest income 1,500
Cost of Goods Sold ₱ 194,500
LESS: EXPENSES
Salaries expense ₱ 50,000
Taxes and licenses expense 10,000
Interest expense 6,000
Freight-out 8,000
Rent expense 32,500
Depreciation expense 3,000
Bad debt expense 4,000 113,500
NET INCOME ₱ 82,000

Note: The cost of sales statement may be appended as part of the income statement.*
Transfer of Profits to Change in Equity Column

ADJUSTED TB COST OF SALES INCOME STATEMENT

DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
Owner’s capital ₱ 90,000 ₱ 90,000
Owner’s drawings ₱ 5,000 ₱ 5,000

TOTAL ₱ 229,500 ₱ 311,500

(debit) (credit)
NET PROFIT
₱ 82,000 ₱ 82,000
₱ 311,500 ₱ 311,500 _______ ________
TOTAL ₱ 5,000 ₱ 172,000
Ending capital ₱ 167,000
STATEMENT OF CHANGES IN EQUITY
After the completion of the Change in Equity Column, the statement of changes in equity shall be
presented as follows:

ROYCE STORE
Statement of Changes in Equity
For the period ended December 31, 2016
Beginning Capital ₱ 90,000
Add: Net Profits 82,000
Less: Drawings 5,000
Ending Capital ₱ 167,000
Transfer of Ending Capital to the Balance Sheet Column

INCOME STATEMENT CHANGES IN EQUITY BALANCE SHEET

DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
Owner’s capital ₱ 90,000
Owner’s drawings _______ ________ ₱ 5,000
NET PROFIT ₱229,500 ₱311,500
₱ 82,000 ₱ 82,000
TOTAL ₱ 311,500 ₱ 311,500 ₱ 5,000 ₱172,000

(debit) (credit)
Ending capital
167,000 167,000
₱ 172,000 ₱ 172,000
Transferring of Inventory Figures

ADJUSTED TB COST OF SALES INCOME STATEMENT BALANCE SHEET

DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
Inventory, beginning ₱42,000 ₱42,000
Inventory, ending ₱34,000 ₱34,000
THE BALANCE SHEET COLUMN
All real accounts in the adjusted trial balance, the ending inventory in the cost of sale column and the
ending capital in the change in equity columns shall be transferred in the Balance sheet columns, as
follows:
ADJUSTED TB BALANCE SHEET
DEBIT CREDIT DEBIT CREDIT
Cash ₱10,000 ₱ 10,000
Accounts receivable 30,000 30,000
Allowance for bad debts ₱ 4,000 ₱ 4,000
Notes receivable 90,000 90,000
Advances to suppliers 12,000 12,000
Inventory (BEGINNING) 42,000 40,000
Office supplies 15,000 15,000
Equipment 40,000 40,000
Accumulated depreciation 13,000 13,000
Accounts payable 25,000 15,000
Advances from customers 10,000 10,000
Owner’s capital 90,000
Owner’s drawings 5,000
Sales 310,000
Sales discount 2,000
Sales returns & allowances 1,000
Purchases 106,000
Freight-in 7,000
Purchase discounts 5,000
Purchase returns & allowances 3,000
Salaries expense 50,000
Taxes and licenses expense 10,000
Interest expense 6,000
Freight-out 8,000
Rent expense 32,500
Accrued interest income 1,500 1,500
Interest income 1,500
Accrued salaries expense 10,000 10,000
Accrued interest expense 1,000 1,000
Depreciation expense 3,000
Accrued rent expense 2,500 2,500
Bad debt expense 4,000 ________
TOTAL ₱ 475,000 ₱ 475,000
Inventory (ENDING) ……… 34,000
Capital (ENDING) ……… 167,000
₱132,500 ₱232,500

For final check, these must balance. An imbalance indicates a

transferring error.
CLOSING OF MERCHANDISING ACCOUNTS: PERIODIC INVENTORY SYSTEM
The following are the standard closing procedures for merchandising accounts under periodic
system:

1. Closing of sales revenue

Date Account Debit Credit

XXX Sales ₱ XXXX
Sales discount ₱ XXXX
Sales returns and allowances XXXX
Profit or loss summary XXXX
To close sales and related accounts
2. Closing of inventory related accounts
a. Closing of beginning inventories

Date Account Debit Credit

XXX Profit or loss summary ₱ XXXX
Beginning inventory ₱ XXXX
To close beginning inventory
b. Closing of purchase related accounts

Date Account Debit Credit

XXX Profit or loss summary ₱ XXXX
Purchase discounts XXXX
Purchase returns and allowances XXXX
Purchases ₱ XXXX
Freight-in XXXX
To close purchases and related accounts
 c. To set-up ending inventory

Date Account Debit Credit

XXX Inventory, end ₱ XXXX
Profit or loss summary ₱ XXXX
To set-up ending inventory in the account

Note:
1. The balance of the net balance of the profit or loss summary account in closing entries 1
and 2 is the gross profit.
2. The balance of the profit or loss summary after closing entries 2(a) to 2(c) is cost of
goods sold or cost of sales.
Alternative method: The purchases and inventory accounts may be summarized under
a “cost of goods sold” account as follows:

Inventory, end ₱ XXXX

Purchase discounts XXXX
Purchase returns and allowances XXXX
Cost of goods sold XXXX
Purchases ₱ XXXX
Freight-in XXXX
Inventory, beginning XXXX

The cost of goods sold account in this case is a temporary account which will be
eventually closed to profit or loss summary account. Although the use of the cost of
goods sold or cost of sales account is not standard with periodic system, some
accountants prefer to use it so the amount of goods sold becomes easily visible in the
journal entries.
3. Closing of Expenses

Date Account Debit Credit

XXX Profit or loss summary ₱ XXXX
Freight-out ₱ XXXX
Expenses XXXX
To close beginning inventory

Note:
1. The balance of the profit or loss summary considering all closing entries is the net profit
or net loss which will be eventually closed to equity.
2. A debit balance of the profit or loss summary is a net loss while a credit balance of the
profit or loss summary is a net profit.
LIMITATION OF THE PERIODIC METHOD
The periodic method is anchored on practicality when timeliness of accounting
reports is not an issue. It may work best when the goods are homogenous in
nature and are relatively inexpensive. The problem with periodic method is that it
might not be effective when frequent reporting is required or when high value
goods are at stake where detailed monitoring may be essential for internal
control. Also because the missing goods at year-end are presumed all sold, there
is a possibility that losses due to pilferage or theft may be hidden as part of the
cost of goods sold.

The Perpetual Inventory System addresses most of the negative issues of the
Periodic Method.
THE PERPETUAL INVENTORY METHOD
Under the perpetual inventory system, a record of each item of inventory is maintained with the use
of stock cards or bar codes. This system ensures continuous monitoring of stocks. Every new item
acquired is assigned a stock card or inventory number with a corresponding record of its cost. When
goods are sold, the stock cards of the items are retrieved to know the cost. In automated systems,
the inventory item number together with cost data is encoded in a computer database from which a
computer program extract the cost data once the item is sold.
 
The beauty of perpetual inventory system is that the business knows exactly the cost of the goods
sold at the point of sale by referring to the stock card of the item sold or to the computer codes
which identifies the item sold.
 
Consequently, there is no need to regularly perform a physical count to establish the cost of goods
sold because the inventories are continuously monitored; hence, the name perpetual inventory
system. Inventory count is conducted only to confirm balances in the stock cards.
 
Yes, the perpetual inventory system is the best inventory system to apply but it is expensive to
implement because the business entity has to develop a stock card system or invest in Point-of-Sale
(POS) machines or computers to facilitate inventory monitoring.
Unique features of Perpetual System:
a. The use of a single account “inventory” to monitor increases or decreases in
inventory. The “inventory” account replaces the Purchase, Purchase returns
and allowances, Purchase discounts and Freight-in accounts.
b. The use of a “cost of goods sold” account.
 PERIODIC SYSTEM VS. PERPETUAL SYSTEM
POINT OF DIFFERENCES PERIODIC SYSTEM PERPETUAL SYSTEM
Purchase of goods Purchase ₱ XXX Inventory ₱ XXX
Cash or A/P ₱ XXX Cash or A/P ₱ XXX
Incurrence of freight-in Freight-in ₱ XXX Inventory ₱ XXX
Cash or A/P ₱ XXX Cash or A/P ₱ XXX
Purchase discounts Accounts payable ₱ XXX A/P ₱ XXX
Purchase discounts ₱ XXX Inventory ₱ XXX
Cash XXX Cash XXX
Purchase returns and Accounts payable ₱ XXX A/P ₱ XXX
allowances Purchase returns ₱ XXX Inventory ₱ XXX
Sale of goods Cash/Accounts payable ₱ XXX Cash/Accounts payable ₱ XXX
Sales ₱ XXX Sales ₱ XXX
Cost of sales ₱ XXX
Inventory ₱ XXX
Closing of inventory Inventory, end ₱ XXX
accounts Purchase ret. & allowances XXX
Purchase discounts XXX
No entry!
Inventory, beginning ₱ XXX
Purchases XXX
Freight-in XXX
Statement of Cost of --- Required --- ---Not Required ---
goods sold
The Perpetual System may also employ gross or net method of recording. The effects of adjustments for
discounts are coursed through the “inventory” account.
As you can see, the difference lies on the recording of purchasing and disbursement transactions and in the
methods of costing inventory balances.
Illustration
At the beginning of January 1, 2016, Tristan Company has 2,000 inventories costing ₱20 per unit.
The following transactions in chronological order transpired during the year:

1. Purchased on account 3,000 units of inventory at ₱20 per unit.

2. Sold on account 2,500 units of inventory for ₱50 per unit.
3. Purchased on account 4,000 units of inventory at ₱20 per unit.
4. Sold on account 3,000 units of inventory for ₱50 per unit.
5. Paid employee salary of ₱10,000, the only expense for the period.
6. On December 31, 2016, physical count revealed that 3,500 units were on hand.

Required: Prepare all the necessary journal entries involving merchandising accounts using:
1. Perpetual inventory system
2. Periodic inventory system, using:
a. Traditional approach – without using cost of sale account
b. Alternative approach – using cost of sale account
SOLUTION:
Journal Entries under Perpetual Inventory System
1. Inventory (3,000 x ₱20) ₱ 60,000
Accounts payable ₱ 60,000

2. Accounts receivable ₱ 125,000

Sales (2,500 x ₱50) ₱ 125,000

Cost of goods sold ₱ 80,000

Accounts payable ₱ 80,000

3. Inventory (4,000 x ₱20) ₱ 80,000

Accounts payable ₱ 80,000
4. Accounts receivable ₱ 150,000
Sales (3,000 x ₱50) ₱ 150,000

Cost of goods sold ₱ 60,000

Inventory (3,000 x ₱20) ₱ 60,000

5. Salaries expense ₱ 10,000

Cash ₱ 10,000
6. No closing entry for ending inventory is required since all inventory related transactions
are directly recorded through the inventory account.
Sales (₱ 125,000 + ₱150,000) ₱ 275,000
Cost of goods sold (₱ 50,000 + ₱ 60,000) ₱ 110,000
Salaries expense 10,000
Profit or loss summary 155,000

Profit or loos summary ₱ 155,000

Owner’s equity ₱ 155,000
 Journal Entries under Perpetual Inventory System
(Traditional method)
1. Purchases (3,000 x ₱20) ₱ 60,000
Accounts payable ₱ 60,000

2. Accounts receivable ₱ 125,000

Sales (2,500 x ₱50) ₱ 125,000

3. Purchases (4,000 x ₱20) ₱ 80,000

Accounts payable ₱ 80,000

4. Accounts receivable ₱ 150,000

Sales (3,000 x ₱50) ₱ 150,000
5. Salaries expense ₱ 10,000
Cash ₱ 10,000

6. Inventory, end (₱ 125,000 + ₱150,000) ₱ 70,000

Profit or loss summary 110,000
Purchases (₱ 60,000 + ₱ 80,000) ₱ 140,000
Inventory, beg (₱ 20,000 x 2,000) 40,000

Sales ₱ 275,000
Profit or loss summary ₱ 275,000

Profit or loss summary ₱ 10,000

Salaries expense ₱ 10,000

Profit or loss summary ₱ 155,000

Owner’s equity ₱ 155,000
 Journal Entries under Perpetual Inventory System
(Alternative method)
1. Purchases (3,000 x ₱20) ₱ 60,000
Accounts payable ₱ 60,000

2. Accounts receivable ₱ 125,000

Sales (2,500 x ₱50) ₱ 125,000

3. Purchases (4,000 x ₱20) ₱ 80,000

Accounts payable ₱ 80,000

4. Accounts receivable ₱ 150,000

Sales (3,000 x ₱50) ₱ 150,000
5. Salaries expense ₱ 10,000
Cash ₱ 10,000

6. Inventory, end (₱ 125,000 + ₱150,000) ₱ 70,000

Cost of goods sold 110,000
Purchases (₱ 60,000 + ₱ 80,000) ₱ 140,000
Inventory, beg (₱ 20,000 x 2,000) 40,000

Sales ₱ 275,000
Cost of goods sold (₱ 60,000 + ₱ 80,000) ₱ 140,000
Salaries expense 10,000
Profit or loss summary 155,000

Profit or loss summary ₱ 155,000

Owner’s equity ₱ 155,000