TRANSPORTATION COSTS

TRANSPORTATION COSTS
These transportation costs are necessary
to compute for the Cost of Goods Sold and
failure to do so may affect the Net Income.
The buyer and seller must agree on who to
pay these costs. These costs will be added
to the cost of merchandise purchased.
 TRANSPORTATION COSTS
1. FOB Shipping Point
Buyer is the one who will pay the Freight/ Transportation Cost. The buyer receives
the title of goods at shipping point.

2. FOB Destination
Seller is the one who will pay the Freight Cost and the buyer receives the title of
goods at point of destination.

3. Freight Prepaid
Seller temporarily pays the freight usually at time of shipment.

4. Freight Collect
Buyer temporarily pays the freight usually upon receipt of goods.

Note: Maintaining inventory is necessary to Merchandising Business and generally,

one can only account inventory if he/she has the title or ownership of goods.
TRANSPORTATION COSTS

1. FOB Shipping Point, Freight Prepaid

In this term, the Seller paid the freight cost but it will be paid back/reimbursed by
Buyer to the Seller.

2. FOB Shipping Point, Freight Collect

Buyer paid the freight cost. No entry is needed for the Seller.

3. FOB Destination, Freight Prepaid

Seller paid the freight cost. No entry is needed for the Buyer.

4. FOB Destination, Freight Collect

In this term, the Buyer paid the freight cost but it will be paid back/reimbursed by
Seller to the Buyer.
Assume the following examples:

On January 10, B Company located in Cebu purchased

merchandise worth P 100,000 from S Company located
in Manila. Freight or transportation costs amounted to
P 10,000. Terms: 2/10, n/30. Assume the following
shipping terms.

a. FOB Shipping Point, Freight collect

b. FOB Shipping Point, Freight prepaid
c. FOB Destination, Freight prepaid
d. FOB Destination, Freight collect
The following are the entries on both on the books of B and S company. Assume in all cases, B
Company paid in full on January 20.

A. Terms of shipment: FOB Shipping point, freight collect

ENTRIES : B COMPANY ENTRIES : S COMPANY
Jan 10 Purchases 100,000 Accounts Receivables 100,000
Accounts Payable 100,000 Sales 100,000

14 Freight In 10,000 No entry

Cash 10,000

20 Accounts Payable 100,000 Cash 98,000

Purchases Discount 2,000 Sales Discount 2,000

Cash 98,000 Accounts Receivables 98,000

Computation: Computation:
Accounts Payable – S Co. P 100,000 Accounts Receivable – S Co. P 100,000
Less: Cash Discount (2% x 100,000) 2,000 Less: Cash Discount (2% x 100,000) 2,000
Net amount due to S. Co. P 98,000 Net amount due from B. Co. P 98,000
 B. Terms of shipment: FOB Shipping point, freight prepaid
ENTRIES : B COMPANY Note: The ENTRIES : S COMPANY
Jan 10 Purchases 100,000 Shipping term Accounts Receivable 100,000
Accounts Payable 100,000 FOB Shipping Sales 100,000
Point,
transportation Accounts Receivable 10,000
14 Freight In 10,000
cost is to be Cash 10,000
Accounts Payable 10,000
shouldered by To record freight.
To record freight. the buyer. So
the seller
Cash 108,000
20 Accounts Payable 110,000 prepaid the
Sales Discount 2,000
Purchases Discount 2,000 freight but it
is charged to Accounts Receivable 110,000
Cash 108,000
the buyer.
Computation:
Accounts Payable (for mdse. Purchased P 100,000
Accounts Payable (for freight cost of mdse.) 10,000
Total P 110,000 The 2% cash discount is based on the
Less: Cash Discount (2% x 100,000) 2,000 invoice price of P 100,000.
Cash to be paid to S company P 108,000
 C. Terms of shipment: FOB Destination, freight prepaid
ENTRIES : B COMPANY ENTRIES : S COMPANY
Jan 10 Purchases 100,000 Accounts Receivable 100,000
Accounts Payable 100,000 Sales 100,000

14 No entry Freight Out 10,000

Cash 10,000

Cash 98,000
20 Accounts Payable 100,000
Sales Discount 2,000
Purchases Discount 2,000
Accounts Receivable 100,000
Cash 98,000

Computation:
Accounts Payable – S Co. P 100,000
Less: Cash Discount (2% x 100,000) 2,000
Net amount due to S. Co. P 98,000
 D. Terms of shipment: FOB Destination, freight collect
ENTRIES : B COMPANY ENTRIES : S COMPANY
Jan 10 Purchases 100,000 Accounts Receivable 100,000
Accounts Payable 100,000 Sales 100,000

Freight Out 10,000

14 Accounts Payable 10,000
Accounts Receivable 10,000
Cash 10,000

Cash 88,000
20 Accounts Payable 90,000
Sales Discount 2,000
Purchases Discount 2,000
Accounts Receivable 90,000
Cash 88,000

Computation:
Accounts Payable – S Co. P 100,000
Less: Freight prepaid 10,000
Cash Discount (2% x 100,000) 2,000
Total amount to be deducted 12,000
Net amount due to S. Co. P 88,000
COST OF GOODS SOLD
It refers to the cost of merchandise sold to customers
during the period.
COST OF GOODS SOLD FORMAT
Cost of Goods Sold = [(Merchandise Inventory,
beginning + Net Purchases) – Merchandise
Inventory, ending]
Net Purchases = [(Purchases + Transportation In)
– (Purchase Discounts + Purchase Returns and
Allowances)]
ACCOUNTING FOR INVENTORIES
An accurate merchandise inventory figure is needed to
determine the cost of merchandise in the inventory and
the cost of merchandise sold.

ACCOUNTING SYSTEMS
Perpetual Inventory System

Periodic Inventory System

 Perpetual Inventory System
It provides detailed records of the quantity and cost of
each item of inventory and continuously shows the cost of
goods on hand.
The cost of each item is debited to the Merchandise
Inventory account as it is purchased.

Once the merchandise is sold, Merchandise Inventory is

credited and Cost of Goods Sold is debited.
 ENTRIES
1. Purchase of Inventory 2. Sale of Inventory
Merchandise Inventory xxx Cash xxx
Cash xxx Sales xxx
Purchased merchandise for cash. Sold merchandise for cash.

Cost of Goods Sold xxx

Merchandise xxx
Inventory
Purchased merchandise for cash.
 Periodic Inventory System
The count of the physical inventory takes place periodically usually
at end of period. No detailed record of merchandise is maintained.
The Purchases account is used to record the cost of merchandise
bought by the business.
Merchandise inventory
1. Make a physical count of merchandise on hand at the end of the
accounting period.
2. Multiply the quantity of each type of merchandise by its unit cost
3. Add the resulting cost of each type of merchandise to obtain a total.
This amount is the ending merchandising inventory.
 Summary of journal entries prepared for merchandising transaction.

I. Pro-forms entries for transaction relating to purchase of merchandise.

A. TO RECORD PURCHASE OF MERCHANDISE FOR CASH C. TO RECORD TRANSPORTATION COSTS PAID ON

MERCHANDISING PERIOD
Purchases xx
Freight-In or
Cash xx Transportation-In

B. TO RECORD PURCHASE OF MERCHANDISE ON ACCOUNT

xx
D. MERCHANDISE RETURNED THAT WAS PURCHASED
Purchases xx FOR CASH RECEIVING A REFUND
Cash xx
Accounts Payable xx Cash xx
Purchase Returns xx
and allowances
 Summary of journal entries prepared for merchandising transaction.

I. Pro-forms entries for transaction relating to purchase of merchandise.

E. . MERCHANDISE RETURNED THAT WAS PURCHASED

ON ACCOUNT ( THE ACCOUNT HAS NOT BEEN PAID)

Accounts Payable xx
Purchase Returns xx G. PAYMENT OF ACCOUNT AFTER THE DISCOUNT
PERIOD
and Allowances
Accounts Payable xx
F. PAYMENT WITHIN THE DISCOUNT PERIOD
Cash xx
Accounts Payable xx
Purchase Discount xx
Cash xx
 II. For transactions relating to sales

C. RETURN BY CUSTOMER OF MERCHANDISE THAT WAS

A. SALES FOR CASH SOLD FOR CASH PAYING A REFUND

Cash xx Sales Returns and xx

Sales xx Allowances
Cash xx

B. SALES ON ACCOUNT D. ISSUANCE OF CREDIT MEMO TO A CUSTOMER FOR

MERCHANDISE RETURNED PREVIOUSLY SOLD ON ACCOUNT
Accounts Receivable xx
Sales Returns and Allowances xx
Sales xx
Cash xx
 II. For transactions relating to sales

E. RECEIPT OF PAYMENT FROM CUSTOMER WITHIN

THE DISCOUNT PERIOD
Cash xx
Sales Discount xx G. TRANSPORTATION COSTS OF MERCHANDISE SOLD

Accounts Receivable xx Freight-out or Delivery xx

Expense
F. RECEIPT OF PAYMENT FROM CUSTOMER AFTER THE
DISCOUNT PERIOD
Cash xx
Cash xx
Accounts Receivable xx
 Accounts Classification Normal Balance

a. Merchandise Inventory Asset Debit

b. Purchases Expense Debit

c. Freight-in Adjunct account Debit

d. Purchase discount Contra Account Credit

e. Purchase Returns and Contra Account Credit

Allowances
f. Sales Revenue Credit

g. Sales Returns and Contra Account Debit

Allowances
h. Sales Discount Contra Account Debit
 ACCOUNTING FOR
VALUE ADDED TAX (VAT)
Business enterprises subject to business taxes are
required to pay taxes due to the Bureau of Internal
Revenue (BIR) according to the National Internal
Revenue Code.
 One kind of tax is the VAT. It is a form of sales tax.
It is a tax on consumption levied on the sale of
goods and services and on the import of goods in
the Philippines.
A 12% output tax is levied on customer and
SALES added to the selling price.

A 12% input tax is being paid to supplier

PURCHASES in addition to the purchase price.
Selling Price + Output Tax INVOICE
=
Purchase Price + Input Tax PRICE

OUTPUT TAX Seller’s POV, account with credit balance.

INPUT TAX Buyer’s POV, account with debit balance.

The excess of output tax over input tax is known as the VAT Payable. It is a
current liability of the enterprise and should be remitted to the BIR within
25 days of the next month.
FORMULAE:
Selling Price (100%)
+ VAT (12%)
Invoice Price (112%)
To get the Invoice Price:
or

Selling Price or VATable Sale x 112%

Selling Price XXX

To get the VAT amount: X 12%
VAT amount XXX
FORMULAE:

Invoice Price XXX

To get the Selling price: / 1.12
Selling Price XXX
The following examples illustrate accounting for value added tax.
Jan S Company sold merchandise to B company on cash basis. Invoice
1 Price P 11,200 (inclusive of 12% VAT).

ENTRY BY:
B Company
S Company
Purchases 10,000
Cash 11,200 (11,200/112%)
Sales (11,200/112%) 10,000 Input Tax 1,200
(10,000x12%)
Output Tax (10,000x12%) 1,200 Cash 11,200
The following examples illustrate accounting for value added tax.
Jan S Company sold merchandise to B. Invoice Price P 56,000 (inclusive of
2 12% VAT) terms 2/10, n/30.

ENTRY BY:

S Company B Company
Account Receivables 56,000 Purchases 50,000

Sales 50,000 Input Tax 6,000

Output Tax 6,000 Accounts Payable 56,000

The following examples illustrate accounting for value added tax.
Jan S Company issued credit memorandum to B Company for defective
4 merchandise returned sold on January 2. The invoice price is P 5,600.

ENTRY BY:

S Company B Company
Sales Returns and 5,000 Accounts Payable 5,600
Allowances
Purchase return 5,000
Output Tax 600 and allowances

Accounts Receivables 5,600 Input Tax 600

The following examples illustrate accounting for value added tax.
Jan 12 S Company received full payment from B Company.

ENTRY BY:

S Company B Company
Cash 49,392 Accounts Payable 50,400

Sales Discount 900 Purchase Discount 900

Output Tax 108 Input Tax 108

Accounts Receivables 50,400 Cash 43,392

Computation:

Accounts Receivable P 50,400

Less: Cash Discount P 900
VAT on discount (12% x 900) 108 1,008
Amount collectible by S Company P 49,392

Computation of the P 900 Cash Discount:

Amount of sales on account P 50,000

Less: Merchandise returned 5,000
Net Sales P 45,000
Multiply by Cash Discount Rate 2%
Amount of Cash Discount P 900