Merchandising Business

Operating Cycle of Merchandising Business

The merchandising entity purchases inventory, sells the inventory and

uses to purchase more inventory and the cycle continues.

For cash sales, the cycle is from cash to inventory and back to cash.

For sales on account, the cycle is from cash to inventory to accounts

receivable and back to cash.
Source Documents

1. Sales Invoice – is prepared by the seller of goods and sent to the buyer. It specifies the
amount of sales, and the transportation and payment terms.
2. Bill of lading – document issued by the carrier – a trucking, shipping or airline – that
specifies contractual conditions and terms of delivery such as freight terms, time, place and
the person named to receive the goods.
3. Statement of Account – formal notice to the debtor detailing the accounts already due.
4. Official Receipt – evidences the receipt of cash by the seller.
5. Deposit Slips – a validated deposit slips indicates that cash and checks where actually
deposited to the account holder.
Source Documents

6. Check – written order to a bank by a depositor to pay the amount specified in the check
from his checking account to the person named in the check.
7. Purchase Requisition – is a written request to the purchaser of an entity from an employee
of the same entity the goods be purchased.
8. Purchase Order – is an authorization made by the buyer to the seller to deliver the
merchandise as detailed in the form.
9. Receiving Report – is a document containing information about the goods received from a
vendor.
10. Credit Memorandum – a form used by the seller to notify the buyer that his account is
being decreased due to errors on other factors requiring adjustments.
Steps in a Purchase Transaction
Whenever a purchase or sale or merchandise occurs, the buyer and the seller should agree on
the price of the merchandise, the payment terms, and the party to shoulder the transportation
costs.
The procedures are as follows:
1. When certain items are needed, the user department fills in a purchase requisition form and
sends it to purchasing department.
2. The purchasing department the prepares a purchase order after checking with the price
lists, quotations or catalogs of approved vendors.
3. After receiving the purchase order, the seller forwards a sales invoice to the purchaser
upon shipment of the merchandise.
4. Upon receiving the shipment of merchandise, the purchaser’s receiving department sees to
it that the terms in the purchase order are complied with, and prepares a receiving report.
5. Before approving the invoice for payment, the accounts payable department compares
copies of purchase requisition, purchase order, receiving report and sales invoice to ensure
that quantities, descriptions, and prices agree.
Journalizing Sales and Purchase Related
Transactions
 Sales Transactions

Cash Sales Sales Returns

Cash xx Sales Returns & Allowances xx
Sales xx Cash xx

Sales on Account
A/R xx
Sales xx
 Collections

Within Discount Period

Cash xx
Sales Discounts xx
A/R xx

Beyond Discount Period

Cash xx
A/R xx
 Purchase Transactions

Cash Purchase Purchase Returns

Purchases xx Cash xx
Cash xx Purchase Returns & Allowances xx

Purchases on Account
Purchases xx
A/P xx
 Payments

Within Discount Period

A/P xx
Purchase Discounts xx
Cash xx

Beyond Discount Period

A/P xx
Cash xx
Agnes Ramos Company and Eva Cammayo Supply Company engaged in the following transactions during
the month of May 2019.
May 4. Ramos sold merchandise on account to Cammayo, P162,000. Terms: FOB Destination; 2/10, n/30.
Freight charges amounted to P2,000.
May 5. Ramos sold merchandise on account to Cammayo, P710,000. Terms: FOB Shipping Point; 2/10, n/30.
Freight charges amounted to P8,000.
May 6. Cammayo paid freight charges on the purchase of May 5.
May 7. Ramos received returned merchandise from Cammayo in the amount of P12,000 from May 4 sale.
May 9. Ramos received payment from Cammayo for the May 4 transaction less returns and discounts.
May 10. Ramos paid the transportation cost on the May 4 shipment.
May 12. Ramos received payment from Cammayo for the May 5 transaction.
May 18. Ramos sold merchandise on account to Cammayo, P250,000. Terms: 40% trade discount; FOB
Shipping point; 2/n, n/30.
May 21. Camayo paid freight charges on the May 18 transaction, P3,000.
May 23. Ramos received payment from Cammayo for the amount due from the transaction of May 18.
TRANSPORTATION COSTS
 OWNER OF GOODS IN TRANSIT/WHO WILL
SHOULDER THE SHIPPING COST?

FOB DESTINATION – SELLER

FOB SHIPPING POINT – BUYER

 WHO PAID THE FREIGHT COST?

FREIGHT PREPAID – SELLER

FREIGHT COLLECT – BUYER
Periodic and Perpetual
Inventory Systems
Accounting for Inventories

Two systems are offered in accounting for

inventories, namely:
 A. PERIODIC SYSTEM
 B. PERPETUAL SYSTEM
Periodic System

The periodic system calls for the physical counting

of goods on hand at the end of the accounting
period to determine quantities.
The periodic inventory procedure is generally used
when the individual inventory items turnover
rapidly and have small peso investment.
Perpetual System

The perpetual inventory system requires the

maintenance of records call stock cards that usually
offer a running summary of inflow and outflow.
In an ideal perpetual system, the stock cards are
kept to reflect and control both units and costs. The
entity would be able to know the inventory on hand
at a particular moment in time.
 Perpetual System
 May 2, 2021 – Purchased 500 units of army bomb at P1,000.00/unit.
 May 6, 2021 – Purchased another 500 units of army bomb at
P1,000.00/unit.
 May 10, 2021 – Sold 400 units of army bomb at P2,000/unit.
 May 23, 2021 – Sold 200 units of army bomb at P2,000/unit.
 May 31, 2021 – Physical count revealed 300 army bombs on hand.
Perpetual System

 May 2, 2021 – Purchased 500 units of army bomb at P1,000.00/unit.

 Inventory P500,000
 Cash P500,000

 May 6, 2021 – Purchased another 500 units of army bomb at P1,000.00/unit.

 Inventory P500,000
 Cash P500,000

 May 10, 2021 – Sold 400 units of army bomb at P2,000/unit.

 Cash P800,000
 Sales P800,000

 COGS P400,000
 Inventory P400,000
Perpetual System

 May 23, 2021 – Sold 200 units of army bomb at P2,000/unit.

 Cash P400,000
 Sales P400,000

 COGS P200,000
 Inventory P200,000
 May 31, 2021 – Physical count revealed 300 army bombs on hand.
 Inventory Shortage P100,000
 Inventory P100,00
 Effects on Inventory

Effect in Quantity Effect on Cost

Purchases + +
Purchase Returns and - -
Allowances
Purchase Discounts Na -
Freight in na +

Sales - -
Sales Returns and Allowances + +
 Activity

Intern Company is a wholesaler of car seat covers. On January 1, 2019, the entity’s inventory
consisted of 90 car seat covers priced at P1,000 each. During the current year, the following events
occurred:
1. Purchased 800 car seat covers on account at P1,000 each.
2. Returned 50 defective car seat covers to supplier and received credit.
3. Paid 600 of the car seat covers purchased.
4. Sold 790 seat covers at P2,000 each.
5. Received 20 car seat covers returned by a customer and a client gave credit. The goods where in
excellent condition.
6. Physical count at year-end revealed 60 units on hand.

Required:
 Journal Entries (Periodic & Perpetual)
 COGS (Periodic & Perpetual)