ACCOUNTING CYCLE OF

A MERCHANDISING
BUSINESS
NATURE OF MERCHANDISING BUSINESS

 its is one of the three forms of business

organizations according to activities
 The primary purpose of M.B is to engage in the
buying and selling of goods or merchandise.
 Its normal operation consist of buying merchandise,
selling merchandise, billing customers, and
collecting customer accounts.
 The cash collected from customers would be used to
buy a new set of merchandise so the process
repeats.
What is a merchandise?
 Refersto an item bought by a business for the
purpose of reselling it. It is referred to as goods.
 Merchandising, its merchandise would be the
supplies that it would be selling.
 The merchandise that would include notebooks,
pens, rulers, folders, and other school-related and
office-related supplies.
Example : Note that Maria Merchandising would used this
supplies
( notebooks, pens, folders, etc.) ,in its business
operations, these would be considered as supplies of the
business and not merchandise.
Merchandise that remain unsold at the end of the
accounting period is known as merchandise inventory end,
end which is more commonly referred to as stocks.
Ending merchandise is classified as a current asset in the
statement of financial position because it is expected to
provide future benefits by being sold within a period of
one year. Once sold, the business expects to receive cash
from the customer.
Merchandise inventory, beginning
 refers to merchandise that remains
unsold from previous accounting period
and is expected to be sold this period.
 If sold within the previous accounting
period, beginning merchandise inventory
forms part of cost of goods sold in the
income statement.
Cost of Goods sold or cost of sales
 Isthe amount of merchandise sold by the
business for a given period of time.
 Itis computed by adding the net sale cost
of purchases to beginning inventory to
get the cost of goods available for sale
from which the ending inventory is
deducted from.
Net cost of purchases – is the total
amount of merchandise bought include
shipping costs, but net of returns and
discounts.
Cost of goods available for sale – refers to
total amount of merchandise that the
business can sell to its customers for a
given period of time.
Formula : Cost of Goods Sold

Merchandise Inventory, P xxx

Beginning
Add: Net Cost of Purchases xxx

Cost of goods available for P xxx

sale
Less: Merchandise xxx
Inventory, End
Cost of goods sold P xxx
INCOME STATEMENT FORMAT :

SERVICE Merchandising
BUSINESS Business

Net Sales P xxx

Revenues P xxx revenue

Less: Cost of xxx

goods sold
Less: xxx
Operating Gross Profit P xxx
Expenses Less: Operating xxx
Expenses

Net Income P xxx

(loss) Net Income ( loss) P xxx
Sales Revenue or sales
 is the amount of merchandise sold by a business
for a specific period of time.
 It is computed by multiplying the quantity of
merchandise sold by the selling price.
 Since merchandising business is into buying and
selling of merchandise, sales revenue is the
primary source of revenue in this kind of business.
Gross Profit – is the difference between net sales revenue
and cost of goods sold.
It refers to the income of the business after deducting cost
of goods sold but before deducting any other expenses.
Note: Service business do not need information on the gross
profit in its income statement because they do not need to
buy a raw material or merchandise before they can render
service. They rely instead on employees’ skills and talents
in order to provide service, which means that service
businesses also incur operating expenses.
Operating Expenses
 Refer to expenses incurred by businesses in their
day-to-day operations.
 Common examples relate to salaries, utilities,
rent, supplies, insurance, transportation,
depreciation, delivery and advertising.
 These are deducted from gross profit in order to
determine the net income or loss for a given
period.
 Two Classifications of Operating Expenses
A. DISRIBUTION COST OR
SELLING EXPENSES
 Are expenses incurred by
the seller in order to place
the merchandise in the
hands of the buyer.
 Examples are sales salaries,
commissions, advertising,
depreciation on store
equipments, store supplies
used, rent on store space,
store utilities
B. Administrative Expenses or
general expenses
 Are expenses incurred by the
seller from day-to-day
operations of the business but
are not directly related to
selling activities.
 Office salaries, insurance on
building, depreciation on office
equipment, office supplies
used, rent on office space,
office utilities
 TRANSACTIONS IN A MERCHANDISING
BUSINESS

The transactions for a service business are similar to

those in a merchandising business. Both types of
business generate revenues, incur expenses, collect
bills, pay-off obligations, and enter into transactions
with individuals or other businesses.
However, because of the differing nature of principal
activity in these businesses, the recording of
transactions that relate to the primary source of
revenue and related costs are also different.
 Transactions in a Merchandising
Business
1.Purchase of merchandise
2.Purchase of return and allowances
3.Payment of freight
4.Partial Payment of account with supplier
5.Full payment of account with supplier
6.Sale of merchandise
7.Sales returns and allowances
8.Partial collection of customer account
9.Full collection of customer account
10.Purchase of supplies
11.Purchase of property, plant, and equipment
12.Incurrence of expenses
13.Payment of expenses
14.Owner’s investment of merchandise
15.Owner’s withdrawal of merchandise
Two Systems of maintaining inventory:
A. Periodic Inventory System
 is traditionally used by businesses selling inexpensive
goods.
 Examples of these businesses would be supermarkets,
convenience stores, hardware stores, and sari-sari
stores
 Under this system, updating of inventory is done
periodically which is usually once or twice a year
through physical counting.
B.PERPETUAL INVENTORY SYSTEM
 The updating of inventory is done every
time there are changes in the quantity of
the goods.
 This system is traditionally used by
businesses selling few expensive goods.
 Examples of these business would be
jewelry stores, car dealers and furniture
shops.
How would the business pay for the
purchased merchandise?

The effect of the purchased would

be analyzed using the terms of
purchase which are on cash basis, on
account, or with downpayment and
the balance on account
Transaction Analyses of the merchandising
transaction’s in the buyer’s books:
TRANSACTION A L OE
1a Purchase of merchandise on cash basis - 0 -
1b Purchase of merchandise on account 0 + -
1c Purchase of merchandise with downpayment - + -
2a Purchase returns and allowances (cash basis) + 0 +
2b Purchase returns and allowances ( on account) 0 - +
2c Purchase return and allowances (w/ downpayment) 0 - +
3 Partial payment of account with supplier - - 0
4a Full payment of account beyond discount period - - 0
4b Full payment of account within the discount period - - +
Purchase of Returns and Allowances

 Thetransaction on P.R.A can only happen if there

was a purchase of merchandise to begin with
 Reasons why merchandise is returned : these
include merchandise being defective and having
incorrect specification in terms of brand name,
model type or other details.
 Inany of these cases, the business (the buyer)
would wants its supplier to replace the defective or
incorrectly-specified merchandise with a better or
correct one.
In cases where there are no available replacements,
the business has two options:
1. Return the merchandise and expect to receive a
cash refund or a reduction in liability, whichever is
appropriate;
2. Not return the merchandise but expect to be
granted some cash or reduction in liability for
defective or inferior merchandise bought.
 Option 1 refers to purchase returns while option 2
refers to purchase allowances
 After buying the merchandise, the business
now has merchandise that it can sell to its
customers.
 For the sale transactions, the business is
considered as the seller and the analyses
that follow show the effects on the seller’s
books.
Summary Table on the effect of merchandising
transactions in the seller’s accounting equation:
TRANSACTION A L OE
5a Sale of merchandise on cash basis + 0 +
5b Sale of merchandise on account + 0 +
5c Sale of merchandise with downpayment, balance + 0 +
on account
6a Sales returns and allowances ( cash basis) + 0 +
6b Sales returns and allowances ( on account ) - 0 -
6c Sales return and allowances ( with downpayment) - 0 -
7 Partial collection of account with supplier +/- 0 0
8a Full collection of account beyond discount period +/- 0 0
8b Full collection of account within discount period +/- 0 -