Introduction to Merchandising Business

Concepts, Key terms and journal entries

MERCHANDISING COMPANY
A merchandising company is an enterprise that buys and sells goods to earn a profit. 1. Wholesalers sell to retailers. 2. Retailers sell to consumers. A merchandisers primary source of revenue is sale of merchandise, A service companys primary source of revenue is service.

OPERATING CYCLES FOR A SERVICE COMPANY AND A MERCHANDISING COMPANY

Service Company
Receive Cash Perform Services

Cash

Accounts Receivable Merchandising Company

Receive Cash

Cash
Sell Inventory

Buy Inventory

Accounts Receivable

Merchandise Inventory

INCOME MEASUREMENT PROCESS FOR A MERCHANDISING COMPANY

Sales Revenue P100,000

Less

Equals

Cost of Goods Sold P50,000

Gross Profit P50,000

Less

Equals

Operating Expenses P40,000

Net Income P10,000

Buying Activities
Purchasing activities = buying, procurement or acquisition of finished products intended for sale. A purchase is perfected upon delivery of the merchandise by the seller

Parties = buyer and seller

Buyer Eastern Trading

Seller Northern Enterprise,

Buying Activities
Purchases Account titles used: Periodic inventory system = debit purchases For owners initial investment of goods(new business) = debit merchandise inventory Perpetual inventory system, = debit merchandise inventory

hardware items cash or Accounts Payable

Buyer

Seller

Buying Activities
Illustration July 1- Eastern Trading purchased merchandise from Northern Company amounting to P100,000 on account, payable within 20 days after delivery. Northern Enterprise (seller) grants a two percent (2%) discount if payment is made within 10 days from the date of delivery. The company uses periodic inventory method. (terms, 2/10, n/20) Analysis Journal entries for Eastern Trading (buyer)

Buying Activities
Illustration
July 1- Eastern Trading (buyer) purchased merchandise from Northern Enterprises(seller) amounting to P100,000 on account payable within 20 days after delivery. Northern Enterprises grants a two percent (2%) discount if the account is collected within 10 days from the date of delivery. The company uses periodic inventory method.

Date July 1

General Journal Accounts Purchases Accounts PayableNorthern Enterprises Purchases on account, 2/10, n/20

Debit Credit 100,000 100,000

Assets

=Liabilities +100,000

+Equity -100,000

Buying Activities
Transportation cost Freight in: the account title used for transportation cost/expenses incurred by the buyer in the procurement of merchandise. The freight in account is part of the cost of goods purchased. Illustration July 1 - Eastern Trading incurred P10,000 transportation cost in buying the products from Northern Enterprises. Journal Entries for Eastern Trading

Buying Activities
Freight In. Illustration
July 1 - Eastern Trading incurred P10,000 transportation cost in buying the products.

General Journal
Date July 1 Account Freight-in Cash Payment of freight ASSETS -10,000 = LIABILITIES +EQUITY -10,000 F Debit 10,000 10,000 Credit

Buying Activities
Purchase returns and allowances Purchase returns and allowances account : Return of merchandise purchased Due to defects or damages noncompliance with the desired specifications Goods are inferior quality It has a normal credit balance. It is deducted from the purchases account to arrive at the net purchases.

Buying Activities
Purchases Returns and allowances
Illustration

July 2 - Eastern Trading returned P10,000 worth of merchandise because these are not in accordance with the purchase order. A debit memo was issued to Northern Enterprises to support the return. Journal Entries for Eastern Trading

Buying Activities
Purchases Returns and allowances Illustration
July 2 - Eastern Trading returned P10,000 worth of merchandise because these are not in accordance with specifications. A Debit memo was issued to Northern Enterprises to support the return.

General Journal
Date July 2 Account Accounts Payable-Northern * Purchase Returns and Allowances Return of merchandise per Debit Memo ASSETS = LIABILITIES -10,000 +EQUITY +10,000 F Debit 10,000 10,000 Credit

* If cash purchases, and goods were returned, cash is debited

Buying Activities
Partial Payment If the buyer opted to pay in part before its final due date, no discount is yet to be computed.
Illustration

July 5 - Eastern Trading made a partial payment of P50,000 to Northern Enterprise. Journal Entries?

Buying Activities
Partial payment Illustration
July 5 - Eastern Trading made a partial payment of P50,000 to Northern Enterprise.

General Journal
Date July 5 Account Accounts Payable-Northern Cash Partial payment ASSETS = LIABILITIES +EQUITY F Debit 50,000 50,000 Credit

-50,000 -50,000

Buying Activities
Purchase Discount cash discount = is a method usually used by sellers in order to encourage buyers to pay earlier on purchases made on account. It is also called prompt payment discount When the buyer takes a cash discount, the account title purchase discount is used to describe the discount. Purchase discount is a contra-purchases account to arrive at the net purchases.

Buying Activities
Purchase Discount Illustration

July 7 - Eastern Trading paid its outstanding account with Northern Enterprise.
Computation: Purchases-July 1 Less: Returns Amount subject to discount Discount 2% Amount payable Partial Payment Net Payable P100,000 10,000 P90,000 1,800 P88,200 50,000 P38,200

Buying Activities
Purchase Discount Illustration

July 7 - Eastern Enterprise paid its outstanding account with Northern Company.
Computation (2) Purchases-July 1 Less: Returns Amount subject to discount Less: partial payment Net Payable Less: discount (P90,000 x 2%) Net Payable P100,000 10,000 P 90,000 50,000 P 40,000 1,800 P 38,200

Buying Activities
Purchases Discount Illustration
July 7 Eastern Trading paid its outstanding account with Northern Enterprise.

General Journal
Date July 7 Account Accounts Payable-Northern Purchase Discount Cash ASSETS = LIABILITIES +EQUITY +1,800 F Debit 40,000 1,800 38,200 Credit

-38,200 - 40,000

Buying Activities
Total Purchases/Net Purchases
Gross Purchases Less: Purchases Returns & Allowances Purchase discount Net Purchases Add: Freight in Total Purchases P10,000 1,800 11,800 P88,200 10,000 P98,200 P100,000

Buying Activities
Documents used: Purchase order a document which requests purchase of supplies, merchandise or property assets.
date supplier quantity of items ordered name of the buyer estimated cost of the order

Delivery Receipt a document which gives evidence to the delivery of supplies, merchandise or property assets.
date supplier quantity and description of items delivered person who received the items (buyer)

Buying Activities
Documents used:

Voucher a document which gives evidence to a transaction involving approval of payment either by cash or check
date name of payee amount explanation journal entries

who prepared/checked the voucher and authorized signatories

Check-a document which gives evidence to payment of expenses/withdrawal of cash in a checking account.
date name of payee amount if figures/words authorized signatories

Buying Activities
Debit memo a written notice issued by the buyer to confirm return of goods purchased or adjustment of his account or liability with the seller because of defective, damaged goods.
EASTERN ENTERPRISE
DEBIT MEMO

July 2, 2011 To Northern Enterprise Return of merchandise, not in accordance with specifications (TEN THOUSAND ONLY) P10,000 Approved Eastern Enterprise

Key terms (Write your answers in a worksheet/notebook)

Income Measurement

Sales Cost of goods sold Gross Profit Expenses Net Income (Loss)

Computation of amount subject to discount Wholesaler Retailer Debit memo Delivery receipt Purchase order Operating cycle Voucher Check Prompt payment discount

Purchases Merchandise Inventory Purchase returns and allowances Purchase discount Freight in

Selling Activities
Sales Selling of goods or merchandise. Debit - Cash (for cash sales) or Accounts Receivable (for credit sales) Credit - Sales It is a recovery of the cost of merchandise plus mark up. The difference between sales and cost is called gross profit or gross margin Gross Profit (Gross Margin) covers the business operating expenses Accounts used:

Selling Activities
Sales Selling is the act of transferring the title of ownership over the merchandise from the seller to the buyer for a consideration either in money or any other thing of value.

hardware items
Seller Eastern Enterprise Buyer Bin Laden

cash or credit

Selling Activities
Illustration

On August 1, 2011, Eastern Trading sold to Bin Ladin hardware items amounting to P125,000, including a markup of P50,000 on account, collectible within 30 days. As Easterns policy, a cash discount of 3% is granted to customer (Bin Ladin) if payment is made within 5 days. The company uses periodic inventory method. Analysis Journal entries for Eastern Trading.

Selling Activities
Illustration:
On August 1, 2011, Eastern Trading sold to Bin Ladin a merchandise amounting to P125,000, including a markup of P50,000 on account, collectible within 30 days. As Easterns policy, a cash discount of 3% is granted to customers if payment is made within 5 days. The company uses periodic inventory method.

General Journal

Date
August 1

Accounts
Accounts Receivable-Bin Laden Sales Sales on account, 3/5, n/30

Debit Credit
125,000 125,000

Assets

=Liabilities

+Equity +125,000

125,000 = *if cash sales, cash is debited

Selling Activities
Freight-Out Freight-out , the account title for transportation cost incurred by the seller in transporting/transferring the merchandise to the buyer. Freight out is treated as distribution expense under the operating expense caption of the income statement using functional form income statement

Selling activities
Illustration August 1, Eastern Trading incurred/paid P2,000 transportation cost in delivering the products to Bin Laden. Journal Entries for Eastern Trading

Selling activities
Illustration
August 1, Eastern Trading incurred/paid P2,000 transportation cost in delivering the products to Bin Laden.

General Journal
Date Accounts F Debit Credit

August 1

Freight out Cash Transportation cost

2,000 2,000

Assets -2,000

=Liabilities =

+Equity -2,000

Selling Activities
Sales Returns and allowances The sales returns and allowances = merchandise sold are returned by the customer(buyer) because it is:

defective or does not comply with specifications. Customer dissatisfied

To document the acceptance of return, the seller would issue a credit memo. The sales returns account is a contra-revenue account, so, it is deducted from the sales account to arrive at the net sales. It has a normal debit balance.

Selling Activities
Sales returns and allowances Illustration August 4, Bin Laden returned some merchandise amounting to P15,000 because they do not conform to product specifications as ordered. Eastern Trading issued a credit memo to document the return of merchandise. Journal Entries for Eastern Trading

Selling Activities
Illustration
August 4, Bin Laden returned some merchandise amounting to P15,000 because they do not conform to product specifications as ordered. Eastern Trading issued a credit memo to document the return of merchandise.

General Journal
Date August 4 Account Sales Return & Allowances Accounts Receivable-Bin Laden Return of merchandise per CM Assets -15,000 =Liabilities + Equity -15,000 F Debit 15,000 15,000 Credit

*if cash sales, the account to be credited is cash

Selling Activities
Partial Collection of accounts receivable For partial collection, no computation of discount yet because full collection from customer is still uncertain. Illustration August 6, The customer, Bin Laden made a partial payment of P20,000. Journal Entries?

Selling Activities
Illustration
August 4, The customer, Bin Laden made a partial payment of P20,000.

General Journal
Date Account F Debit Credit

August 4

Cash Accounts Receivable-Bin Laden Partial payment

20,000
20,000

Assets
+20,000 -20,000

=Liabilities

+ Equity

Selling Activities
Sales Discounts The cash discount on sales of merchandise is described by the account title sales discounts = customers pay within the discount period. It reduces the sales price of merchandise delivered to the customer. It is treated as contra-revenue account against sales. The normal balance of account is debit

Selling Activities
Sales Discounts
August 6, Bin Laden (customer) paid his account which entitles him for a 3% discount.

Supporting computations:

Total Sales Less: Sales Returns & Allowances Amount subject to discount Discount (110,000 x .03) Total Partial payment Total amount collected

P125,000 15,000 P110,000 3,300 P106,700 20,000 P 86,700

Selling Activities
Sales Discounts
August 6, Bin Laden (customer) paid his account which entitles him for a 3% discount.

Supporting computations:

Total Sales Less: Sales Returns & Allowances partial payment Less: discount (P110,000 x 3%) Total amount collected 15,000 20,000

P125,000

35,000 90,000 3,300 P 86,700

Selling Activities
Sales Discounts Illustration
August 6, Bin Laden (customer) paid his account which entitles him for a 3% discount.

General Journal
Date Account F Debit Credit

August 6

Cash Sales discount Accounts Receivable-Bin Laden Collection of account

86,700 3,300 90,000

Assets +86,700 -90,000

=Liabilities

+ Equity -3,300

Selling Activities
Net Sales:

Computation: Gross Sales Less: Sales Returns & Allowances Sales discounts Net sales P15,000 3,300 18,300 P106,700 P125,000

Selling Activities
Documents used: Cash register tapes - provide evidence of cash sales. Sales invoice provide support for a credit sale. The original invoice goes to the customer and the seller keeps a copy for use in recording the sale. Statement of account A document requesting payment of an account for services rendered or for goods sold.

Selling Activities
Delivery Receipt a document which gives evidence to the delivery of supplies, merchandise or property assets Credit memo a document issued by the seller to inform an adjustment or reduction of clients account because of defective or returned goods
EASTERN ENTERPRISE CREDIT MEMO Aug 5, 2011 To Bin Laden For Return of merchandise, not in accordance with specifications (FIFTEEN THOUSAND ONLY) P15,000 Approved Eastern Enterprise

Key Terms (Write answers in a worksheet)

Credit memo Statement of account Sales discounts Contra-revenue accounts Distribution expenses Net sales Accounts receivable subject to discount Account titles used in selling merchandise in cash/credit Sales invoice Sales returns and allowances Accounts receivable Freight out

Trade vs cash discount

Trade discounts Manufacturers and wholesalers often offer a trade discount to the retailers to attract them to buy in big quantity. Trade discounts are not journalized It is sometimes called quantity discounts or volume discounts It is the amount deducted from the list price or price catalogue to arrive at the invoice price.

Trade vs cash discount

Product Trade discount/credit terms 5, 2/10, n/30 5-2, 3/10, n/30 5-2-1, 3/eom, n/60 List Price Trade Discount Invoice Price Collection w/in the discount Period 93,100 135,460.50 178,807.68

1. Paints 2. Paints 3. Paints

100,000.00 150,000.00 200,000.00

P5,000 P10,350 P15,662

95,000.00 139,650.00 184,338.00

Other terms: 3, 3/05, n/5eom 3-2-1, 2/10, n/10eom

Trade vs cash discount

Illustration: Sellers Books
Product Trade discount/credit terms List Price Invoice Price Collection w/in the discount Period 178,807.68

3.

Paints

5-2-1, 3/eom, n/60

200,000.00

184,338.00

Ex: (3) List price Less 5% 200,000 10,000 190,000 list price Less: 2% 190,000 List price 3,800 Less 1% 186,200 Invoice Price Less 3% Net amount discount collected 186,200 1,862 184,338 5,530.14 178,807.68

Trade vs cash discount

Illustration: Sellers Books (Bush Co.)
On June 1, Bush Co. sold to Bill Clinton P200,000 worth of merchandise less 5-2-1, 3/eom, n/60. Bill Clinton paid the account within the discount period

General Journal
Date Account F Debit Credit

June 1

Accounts Receivable-Bill Clinton Sales To record the sales

184,338 184,338

Assets +184,338

=Liabilities

+ Equity +184,338

Trade vs cash discount

Illustration: Sellers Books (Bush Co.)
On June 1, Bush Co. sold to Bill Clinton P200,000 worth of merchandise less 5-2-1, 2/eom, n/60. Bill Clinton paid the account within the discount period

General Journal
Date June 30 Account Cash Sales discount Accounts Receivable-Bill Clinton To record the collection of account Assets +178,807.68 -184,338.00 =Liabilities + Equity -5,530.32 F Debit 178,807.68 5,530.32 184,338 Credit

Trade vs cash discount

Illustration: Buyers Books (Bill Clinton)
Product Trade discount/credit terms List Price Invoice Price Payment w/in the discount Period 178,807.68

paints

5-2-1, 3/eom, n/60

200,000.00

184,338.00

List price Less 5%

200,000 10,000 190,000

list price Less: 2%

190,000 List price 3,800 Less 1% 186,200 Invoice Price Less 3% Net amount discount collected

186,200 1,862 184,338 5,530.14 178,807.68

Trade vs cash discount

Illustration: Buyers Books (Bill Clinton)
On June 1, Bill Clinton bought from Bush Co. P200,000 worth of merchandise less 52-1, 3/eom, n/60. Bill Clinton paid the account within the discount period.

General Journal
Date June 1 Account Purchases Accounts Payable-Bush Co. To record purchase of merchandise Assets =Liabilities +184,338.00 + Equity -184,338 F Debit 184,338 184,338 Credit

Trade vs cash discounts

Illustration Buyers Books (Bill Clinton)
Bill Clinton bought from Bush Co. P200,000 worth of merchandise less 5-2-1, 3/eom, n/60. Bill Clinton paid the account within the discount period

General Journal
Date June 30 Account Accounts Payable-Bush Co. Purchase discount Cash Payment of account within the discount period Assets =Liabilities + Equity +5,530.32 F Debit 184,338.00 5,530.32 178,807.68 Credit

-178,807.68 -184,338.00

Key Terms (Write your answers in a worksheet)

Quantity discounts Volume discounts Trade discounts computation of trade discounts List price or price catalog Invoice price Accounts used by the seller/buyer when merchandise sold/purchased are subject to trade discount.

Inventory Systems
Periodic
Maintains no records of physical quantities in its inventory To record purchases of inventory, purchases account is used. (if new business and the owner invested inventory, merchandise inventory account is used)

Perpetual
Maintains a continuous record of the changes of the physical quantities in its inventory. Uses Merchandise inventory, to record purchases of merchandise. Additional entries required for the cost of merchandise sold

Inventory Systems
Periodic
Beginning Inventory Add: Total Purchases Less: Ending Inventory Cost of Goods Sold P xxx xxx xxx P xxx Physical count is not required But may also be counted at least once a year to verity the perpetual inventory balance = to inventory count.

Perpetual
It provides a continuous record of the balances in both the inventory account and the cost of goods sold account

Goods Available for Sale P xxx

Ending inventory is determined by conducting a physical count at the end of the period (hence, the term periodic)

Inventory Systems
Periodic
Used for relatively low value inventory items such as:

Perpetual
It facilitates better inventory planning and control for it provides information of inventory on hand anytime. The system is used primarily for low-volume, high-cost items: such as automobiles, jewelry, and furniture

inventory of grocery stores, hardware, drug stores,

Inventory Systems
Illustration
Dipolog Company provided the following summary of transactions. The business is buying and selling of baby books Beginning inventory: 1,000 pcs of Baby books at P50 per pc. 1. Purchases on account: 2,000 pcs at P50 per unit.

.
2. Freight on purchase, P2,000. 3. Purchase returns, 20 pcs 4. Sold: 2,100pcs at P100 each 5. Sales returns, 10 pcs 6. Number of pcs per count, end of the year, 890

Inventory Systems
Periodic
1. Purchase of merchandise 2,000 at P50 Date 1 Account Purchases Accounts Payable Debit 100,000 100,000 Credit

Perpetual
1. Purchase of merchandise, 2,000 at P50 Date 1 Account Merchandise Inventory Accounts Payable Debit 100,000 100,000 Credit

For new business and the owner invested inventory, the account to be used/debited is Merchandise Inventory

Inventory Systems
Periodic
2. Cost of transportation /freightP2,000 Date 2. Account Freight in Cash Debit 2,000 2,000 Credit

Perpetual
2. Cost of transportation/freightP2,000 Date 2. Account Mdse Inventory Cash Debit 2,000 2,000 Credit

Inventory Systems
Periodic
3. Return of 20 pcs at P50 Date 3. Account Accounts Payable Purchase Returns & Allow Debit 1,000 Credit

Perpetual
3. Return of 20 pcs at P50 Date 3. Account Accounts Payable Merchandise Inventory Debit Credit
1,000 1,000

1,000

Inventory Systems
Periodic
4. Sales on Account, 2,100pcs at P100/ea
Date

Perpetual
4. Sales on account, 2,100pcs at P100/ea
Date 4. Account Debit Credit

Account Accounts Receivable Sales

Debit
210,000

Credit

4.

Accounts Receivable Sales

210,000 210,000

210,000

No entry for cost of merchandise sold

Cost of Sales Merchandise Inventory

105,000 105,000

Inventory Systems
Periodic
6. Sales Returns, 10 pcs Date 5. Account Sales Returns And Allow Accounts Receivable Debit 1,000 Credit

Perpetual
6. Sales Returns, 10 pcs
Date 5. Account Debit Credit

Sales returns And allow Accounts Receivable

1,000 1,000

1,000

No entry for the cost of merchandise returned by customer

Merchandise Inventory Cost of Sales

500 500

Inventory Systems
Periodic
7. Inventory count, end of the accounting period, 890 pcs Date 6. Account Merchandise Inventory Revenue & Expense Summary Debit 44,500 Credit

Perpetual
The company may also count the inventory to make sure that the stocks equals the amount per books.
Date 6. Account Debit Credit

no entry 44,500

Inventory Systems
Periodic
Sales Less: Sales Returns Net Sales Cost of Sales:
Beginning Inventory P50,000 Purchases P100,000 Purchase Ret ( 1,000) Net Purchases P 99,000 Freight in 2,000 101,000

Perpetual
P 210,000 1,000 P209,000 Sales Less: Sales Returns Net Sales
Cost of Sales Gross Profit

P210,000 1,000 P209,000

104,500 P 104,500

The difference of P2,000.00 represents the freight in which was recorded as inventory under the perpetual method.

Goods Available
Inventory end

P151,000 ( 44,500) 106,500 P102,500

Cost of Goods sold Gross Profit

Inventory Systems - Matrix

Periodic
1. Purchase of inventory on credit Purchases Accounts Payable 2. Purchase returns and allowances Accounts Payable Purchase returns & Allowances 3. Freight cost on purchases Freight in Cash xxx xxx xxx xxx xxx xxx

Perpetual
1. Purchase of inventory on credit Merchandise Inventory Accounts Payable xxx xxx

2. Purchase Returns & Allowances Accounts Payable Merchandise Inventory 3. Freight cost on purchases Merchandise Inventory Cash xxx xxx xxx xxx

Inventory Systems - Matrix

Periodic
4. Payment of account with a discount Accounts Payable Cash Purchase discount 6. Sale of Inventory on credit Accounts Receivable Sales No entry for cost of goods sold xxx xxx xxx xxx xxx

Perpetual
4. Payment of account with discount Accounts Payable Cash Merchandise Invty 6. Sale of Inventory on credit Accounts receivable Sales Cost of Goods Sold Merchandise Invty xxx xxx xxx xxx xxx xxx xxx

Inventory Systems - Matrix

Periodic
7. Return of inventory sold Sales return and allow Accounts Receivable No entry xxx xxx

Perpetual
7. Return of inventory sold Sales return and allow Accounts receivable Mdse Inventory Cost of Goods Sold xxx xxx xxx xxx

8. Collection of account with discount Cash Sales discount Accounts Receivable xxx xxx xxx

8. Collection of account with discount Cash Sales discount Accounts Receivable xxx xxx xxx

Key Terms (Write your answers in a 10-col worksheet)

Characteristics of Periodic inventory system Characteristics of Perpetual inventory system Difference between the two system (account titles used) Computation of goods available for sale Computation of Cost of goods sold Inventory used for Low value items Inventory used for High value items Physical count of inventory is applicable to what inventory system

Workbook Exercises Assignment

Read/Answer: Jan 10 (Tues) 2-1; 2-2; 2-3; 2-4; Jan 13 (Fri) 3-1; 3-2; 3-3; 3-4; 3-5 (including study questions) Pages 4-14. Jan 17 (Tues) 3-6 journal entries using periodic and perpetual inventory system Jan 20 (Fri) Quiz 1, Please write the answers in a 10-column worksheet . One (1) worksheet per workbook Exercise number. No Assignment, Minus points