FAR EASTERN UNIVERSITY

INSTITUTE OF ACCOUNTS BUSINESS AND FINANCE

Handout Retail Operations

1. Retailer or merchandiser
is an entity that buys and sells (finished) goods to earn a profit.
Entities that purchase and sell directly to consumers are retailers, and those that sell to retailers are known as wholesalers.

2. The primary source of revenue for a retailer is sales or sales revenue.

3. Expenses are divided into:

a. cost of sales or cost of goods sold and
b. other expenses.
general and administrative
selling
finance cost
4. Computation of Cost of Sales or Cost of Goods Sold:
Beginning inventory P XX
Add: Net purchases
Purchases P XX
Freight in XX
Purchase discounts (XX)
Purchase returns and allowances (XX) XX
Goods available for sale XX
Less: Ending inventory (XX)
Cost of Goods Sold P XX

5. Computation of Gross profit or gross margin

Net Sales
Gross Sales revenue P XX
Sales discounts (XX)
Sales returns and allowances (XX) P XX
Less: Cost of Goods Sold (See No. 4) (XX)
Gross Profit or Gross Margin P XX

6. Operating cycle for a retail merchandiser

Receive Cash Cash Buy Inventory

Accounts Receivable Sell Inventory Merchandise Inventory

7. Source documents
Purchase requisition Accounts payable voucher (APV)
Purchase order/Sales order Check/EFTs
Packing slip Official Receipt
Delivery receipt/Bill of lading/Airway bill Credit memorandum
Receiving report Debit memorandum
Supplier invoice

8. Purchase/Sale transaction Illustrative example

List Price Trade Delivery
Invoice Returns and
Case or Catalog Discount/Volume cost/Freight Freight terms
Price Allowances
Price Discount/Rebate cost
1 P100,000 10% P1,000 FOB shipping point, 1/10, n30, freight collect P5,000
FOB destination point, 1/10 EOM, n60 freight
2 P100,000 10%, 20% P1,000 P5,000
prepaid
FOB shipping point, 1/10, n30 EOM, freight
3 P100,000 10%, 20%, 30% P1,000 P5,000
prepaid
10%, 10%, FOB destination point, 1/10, 2/15, n30, freight
4 P100,000 P1,000 P5,000
20%, 30% collect

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 Requirement: Journalize the following transactions on the books of the buyer and seller for each of the cases above:
a. Jan 1: Purchase/sale of goods
b. Jan 3: Payment of freight charges
c. Jan 5: Returns and allowances
d. Jan 11: Payment within the discount period (For case no. 4, journalize also if paid on Jan 13)
e. Payment beyond the discount period (assume a date beyond discount period)

9. Perpetual inventory system

In a perpetual inventory system, detailed records of the cost of each inventory item are maintained and the cost of each item sold is
determined from the records when the sale occurs.
a. Record revenue and cost of sales every sales transactions
b. Cost of sales and ending inventory are updated every transaction made
c. Physical count of ending inventory is done at period end to verify correctness of perpetual records

10. Periodic Inventory System

In a periodic inventory system, detailed inventory records are not maintained and the cost of sales is determined only at the end of an
accounting period.
a. Record revenue only every sales transaction
b. Physical count of ending inventory must be done at the period end to obtain value of ending inventory
c. Cost of sales is indirectly calculated by deducting value of ending inventory from cost of goods available for sale

11. Periodic Inventory System and Perpetual Inventory System Illustrative Example
a. Jan. 1, Retail Co. purchased P100,000 merchandise from Supplier Co., 2/10, n30. FOB shipping point, freight collect.
b. Jan. 5, Retail Co. paid P1,500 freight cost.
c. Jan. 8, Retail Co. returned P5,000 worth of defective merchandise to Supplier Co.
d. Jan 11, Retail Co. paid the balance due on Jan. 1 purchase.
e. Jan 15, Retail Co. sold P21,000 worth of merchandise to Customer Co. for P30,000, 1/15, n30. FOB destination, freight
prepaid.
f. Jan 20, Retail Co. paid for the delivery cost, P1,000.
g. Jan 24, Customer Co. returned goods costing P2,100 sold for P7,000 due to defects.
h. Jan 28, Customer Co. was granted by allowance by Retail Co. for damaged goods. The goods cost P600 and were originally
sold for P2,000.
i. Jan 31, Customer Co. paid the balance due to Retail Co. related to Jan. 15 purchase.

Requirements: Journalize above transactions of Retail Co. under (a) periodic inventory system and (b) perpetual inventory system.

12. Gross Method and Net method of accounting for purchase discounts.
a. Jan. 1, Retail Co. purchased P10,000 worth of inventory, terms 2/10, n30, FOB destination, freight collect.
b. Jan 5, Retail Co. paid freight cost, P500.
c. Jan 8, Retail Co. returned P2,000 worth of inventory due to wrong specifications.
d. Jan 11, Retail Co. paid the amount due to supplier related to Jan. 1 purchase.
e. Jan 12, assume Retail Co. paid the amount due to supplier on this date instead.

Requirements: Journalize above transactions of Retail Co. under (a) Gross method and (b) Net method of accounting for purchases
discounts. Use periodic inventory system.

13. Gross Method, Net method and Allowance method of accounting for sales discount.
a. Jan. 1, Retail Co. sold inventory for P20,000, terms 1/10, n30, FOB delivery point, freight prepaid.
b. Jan 5, Retail Co. paid P2,000 freight costs.
c. Jan 8, customer returned goods sold for P3,000 due to defects.
d. Jan 11, customer settled account with us related to Jan. 1 sale.
e. Jan 12, assume customer paid the amount due to us on this date instead.

Requirements: Journalize above transactions of Retail Co. under (a) Gross method, (b) Net method and (c) Allowance method of
accounting for sales discounts.

14. Complete accounting cycle for merchandising. (Illustrative Problem)

Quijonez operates a dry goods stall located in the public market of Mariveles, Bataan. Shown below is a summary of her transactions for
the year 2014:

1. On Jan. 1, invested P120,000 cash for her business under the trade name Quijonez Fashionables.
2. On Feb. 2, borrowed from BPI a 36-months loan amounting to P50,000 carrying a 9% interest payable annually.
3. On Feb. 3, bought office computer equipment for P36,000 in cash.
4. On Feb. 4, rented a building paying annual rent of P28,800; recorded the same to a permanent account.
5. On Feb. 25, purchased P2,000 worth of supplies for cash and recorded the same in the Supplies account.

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6. On Mar. 1, bought various consumer products for resale. List price of supplier was P50,000 and she was granted 20% and 25% trade
discount, respectively. Terms were 2/10, n60, fob shipping point.
7. On Mar. 8, paid freight charges related to Mar. 1 purchase, P1,000.
8. On Mar. 9, returned goods to supplier related to Mar. 1 purchase, P500.
9. On Mar. 11, paid the Mar. 1 purchase less returns made on Mar. 9 and any applicable discount.
10. On Apr. 30, received additional investment from owner, P3,000.
11. On May 25, sold merchandise for P8,000, terms to customer are 1/15, n30, free on board, destination.
12. Paid delivery cost on May 26 related to May 25 sale, P200.
13. On May. 31, purchased a 1-year business insurance for the store and charged the P3,600 premium paid to an expense account.
14. On Jun. 7, customers returned P300 worth of merchandise related to May. 25 sales.
15. On Jun. 8, collected the amount due on May 25 sale less applicable discounts and returns made last Jun. 7.
16. On Jun. 30, subleased a small portion of the store space receiving a P1,200 rent payment for 8 months which was recorded as income
upon receipt.
17. On Jul. 9, received advance payment from a major customer for goods to be delivered, P2,500 amount of cash received and recorded it
as a liability.
18. On Aug. 20, sold merchandise for P35,000 and received a 25% cash payment, the balance recorded in an open account.
19. On Oct. 14, Quijonez withdrew P1,500 cash.
20. On Oct. 29, sold P90,000 merchandise for cash.
21. On Nov. 30 Quijonez paid utilities amounting to P5,000.
22. On Dec. 15, Quijonez hired bookkeeper assistant for monthly salary of P12,000.
23. On Dec. 31, Quijonez paid miscellaneous operating expenses worth 350.

Additional information
the adjustments are computed on the nearest month basis. Round off any amounts to the nearest peso.
a. Interest on loan contracted on Feb. 2 should be accrued.
b. Computer equipment has useful life of 3 years with P6,000 disposal value.
c. Rent paid last Feb 4 should be adjusted by end of the year.
d. Supplies counted at the end of the year amounted to P550.
e. Insurance contracted last May 31 should be adjusted by Dec. 31.
f. Income received from subleasing portion last Jun. 30 of store space should be adjusted by Dec. 31.
g. Out of the advance payment received last Jul. 9, 40% have already been delivered by Quijonez by Dec. 31.
h. Salaries for the half-month of December should be accrued.
i. On Dec. 31, received bills for utilities, P200.
j. Doubtful accounts expense is recognized as 1.5% of net credit sales.
k. Physical inventory counted at period end amounted to P12,000.

Requirements:
1. Journalize transactions for the year. (refer to Chart of Accounts Below)
2. Post the journal entries to T-accounts.
3. Prepare unadjusted trial balance on a work sheet.
4. Prepare adjusting entries as of December 31.
5. Post adjusting entries to T-accounts.
a. Cost of goods sold method
b. Direct extension method
6. Prepare adjusted trial balance on the work sheet.
7. Prepare financial statements.
8. Prepare closing entries using
a. Cost of goods sold method
b. Direct extension method
9. Post closing entries to T-accounts
10. Prepare post-closing trial balance.
11. Identify which adjusting entries are qualified for reversing entries.
12. Prepare and post reversing entries.

End of HO 05

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