The document discusses the operations of merchandising businesses, focusing on sales revenue, cost of goods sold (COGS), and various inventory accounting methods. It explains the operating cycle, journalizing transactions, and the need for special journals due to high transaction volumes. Additionally, it outlines freight costs, sales returns and allowances, and the periodic inventory system for determining COGS at the end of an accounting period.

1. h
Business Transactions
and their Analysis
as Applied to
Merchandising Business

2. Merchandising Business
 is an enterprise that buys and
sells goods to earn a profit.

3. Example
Puregold
 ACE Hardware
 grocery stores
 Merchandise Store
Mercury Drug

4. (or merchandise inventory) refers to goods that are held for
sale to customers in the normal course of business. This includes
goods held for resale.
For example: • Candies, canned goods, noodles sold at a
grocery stores • Juice, biscuits sold in a grocery store •
Medicines sold in a pharmacy
Merchandise

5. A merchandiser’s primary source of
revenue is sales revenue or sales.

6. 1.Cost of goods sold (COGS) – the total cost of merchandise
sold during the period; and
2.Operating Expenses (OE) - expenses incurred in the process of
earning sales revenue that are deducted from gross profit in
the income statement. Examples are sales salaries and
insurance expenses.
Expenses for a merchandising company are divided into
two categories:

7. Merchandising Company operating cycle (cash to
cash) involves:
1. buy merchandise inventory
2. sell inventory
3. obtain Accounts Receivable
4. receive cash
The Operating Cycles for a merchandiser:

8. Accounting Cycle

9. In step 1, transactions are identified and measured. At this stage,
the documents used by the business are analyzed to see whether
these transactions have financial impact or effect. Recall the rule that
only financial transactions are recorded and that the amount can be
measured. These two conditions must exist in order for a particular
transaction to be recognized or recorded. As defined, financial
transactions are those activities that change the value of an asset,
liability or equity.
JOURNALIZING THE TRANSACTIONS IN A
MERCHANDISING BUSINESS

10. Step 2 is the Preparation of Journal Entries
(Journalizing)
A merchandising company may use special and
general journals to record its transactions.
JOURNALIZING THE TRANSACTIONS IN A
MERCHANDISING BUSINESS

11. Some businesses encounter voluminous quantities of similar and recurring transactions,
which may create congestion if these transactions are recorded repeatedly in a single day
or monthly in the general journal. The use of special journals will eliminate this problem.
The following are the commonly used special journals:
1. Cash Receipts Journal – used to record all cash that had been received
2. Cash Disbursements Journal – used to record all transactions involving cash payments
3. Sales Journal (Sales on Account Journal) – used to record all sales on credit (on
account)
4. Purchase Journal (Purchase on Account Journal) – used to record all purchases of
inventory on credit (or on account)
SPECIAL JOURNALS

12. Maintaining inventory items is a unique set-up in a
merchandising business. There are two methods of
accounting for inventory, namely:
a)Perpetual Inventory System
b)Periodic Inventory System.
INVENTORY SYSTEMS

13. Detailed records of the cost of each item are maintained, and the
cost of each item sold is determined from records when the sale
occurs. For example, a car dealership has separate inventory records
for each vehicle.
❖ Record purchase of Inventory.
❖ Record revenue and record cost of goods sold when the item is sold.
❖ At the end of the period, no entry is needed except to adjust
inventory for losses, etc.
Perpetual System

14. • Perpetual systems have traditionally been used by companies that sell
merchandise with high unit values such as automobiles, furniture, and major home
appliances. With the use of computers and scanners, many companies now use the
perpetual inventory system.
• The perpetual inventory system is named because the accounting records
continuously — perpetually —show the quantity and cost of the inventory that
should be on hand at any time. The periodic system only periodically updates the
cost of inventory on hand.
• A perpetual inventory system provides better control over inventories than a
periodic inventory, since the records always show the quantity that should be on
hand. Then, any shortages from the actual quantity and what the records show
can be investigated immediately.
Additional Considerations:

15. Cost of goods sold is determined only at the end of an
accounting period. This system involves:
❖ Record purchase of Inventory.
❖ Record revenue only when the item is sold.
❖ At the end of the period, you must compute cost of goods sold.
(COGS).
Periodic System

16. 1. Determine the cost of goods on hand at the beginning of the
accounting period (Beginning Inventory = BI),
2. Add it to the cost of goods purchased (COGP),
3. Subtract the cost of goods on hand at the end of the
accounting period 4. (Ending Inventory = EI) illustrated as
follows:
BI + COGP = Cost of goods available for sale - EI = COGS
How to compute cost of goods sold?

17. PERIODIC INVENTORY SYSTEM
Recording purchases and related
transactions under the periodic
inventory system.

18. 1. When merchandise is purchased for resale to customers, the account, Purchases, is
debited for the cost of goods purchased.
2. Like sales, purchases may be made for cash or on account (credit).
3. The purchase is normally recorded by the purchaser when the goods are received from
the seller.
• Each credit purchase should be supported by a purchase invoice.
• A purchase invoice received by the buyer is actually a sales invoice or a charge invoice
prepared by the supplier or vendor.
• Note that only purchases of merchandise are debited to the ‘Purchase’ account. Acquisition
(purchases) of other assets: supplies, equipment, and similar items are debited to their respective
accounts.
PURCHASES OF MERCHANDISE:

19. Magaling Computer Store started its operations on January
2, 2016. The store is located in Sikat Mall in Bicol. The owner
invested PHP500,000 to start the business. On January 3,
2016, Magaling purchased 20 units of computers on
account for PHP10,000 each. Upon delivery of the units, the
supplier, Delta, Inc., issued Charge Invoice No. 145 to
Magaling.
TO ILLUSTRATE:

20. Journal Entry:

21. • A purchaser may find the merchandise received to be unsatisfactory
because the goods are:
• damaged or defective
• of inferior quality
• not in accord with the purchaser’s specifications
• The purchaser initiates the request for a reduction of the balance due
through the issuance of a debit memorandum. The debit memorandum
is a document issued by a buyer to inform a seller that the seller’s
account has been debited because of unsatisfactory goods.
PURCHASE RETURNS AND ALLOWANCES

22. • A return of the merchandise (a deduction from the purchase price
when unsatisfactory goods are kept) is shown by the entry where
Accounts Payable is debited and Purchase Returns and Allowances is
credited to show that the purchases was reduced with a return or an
allowance.
• The Purchase Returns and Allowances account is a “contra
purchases” account when merchandise is returned to a supplier.
PURCHASE RETURNS AND ALLOWANCES (cont.)

23. Out of the 20 computer units purchased last January
3, 2016, it was found after inspection on the same
day that one unit was damaged during shipment.
Magaling issued a debit memorandum (DM 01) and
informed the supplier that it will return the one
damaged item.
TO ILLUSTRATE:

24. Journal Entry:

25. The sales agreement should indicate whether the seller or the
buyer is to pay the cost of transporting the goods to the
buyer’s place of business.
The two most common arrangements for freight costs are:
1. FOB SHIPPING POINT
2. FOB DESTINATION.
ACCOUNTING FOR FREIGHT COSTS

26. • Goods placed free on board (FOB) the carrier by seller.
 Buyer pays freight costs.
 Freight-In is debited if buyer pays freight.
 Cash is credited if the goods come on cash on delivery (COD), for example,
and was paid immediately. Accounts Payable would be credited if on
account.
 Ownership over the goods is transferred to the buyer once it is out of the
premises of the seller.
FOB Shipping Point

27. • Goods placed free on board (FOB) at buyer’s business.
• Seller pays freight costs.
• Delivery Expense is debited if seller pays freight on outgoing
merchandise to a buyer. This is an operating expense to the
seller.
• Ownership over the goods is transferred to the buyer once
the goods are delivered and received by the buyer.
FOB Destination

28. Assume the supplier of Magaling is based in Manila. In
order to bring the 20 computer units to Bicol, it will cost
PHP3,000 to deliver the goods.
If the terms is FOB Shipping Point, the entry to record,
assuming Magaling paid the common carrier in cash
on January 4, 2016 is :
TO ILLUSTRATE:

29. Journal Entry:

30. No entry is recorded in the books of
Magaling. The Php 3,000 will be paid by
the seller, in this case Delta, Inc.
If the terms is FOB Destination:

31. • Credit terms (specify the amount of cash discount and time period
during which a discount is offered) may permit the buyer to claim a cash
discount for the prompt payment of a balance due. If the credit terms
show 2/10, n/30 means a 2% discount is given if paid within 10 days
(called the discount period); otherwise, the invoice is due in 30 days.
• The buyer calls this discount a purchase discount.
• A purchase discount is normally based on the invoice cost less returns
and allowances, if any.
PURCHASE DISCOUNTS:

32. The credit terms for the purchase of 20 computer units (total
cost PHP200,000) is 2/10, n/30. This means that if Magaling
pays on or before January 13, 2016, it is entitled to a 2%
discount, otherwise Magaling will have to pay the full
amount on or before February 4, 2016 (30 days after
purchase). On January 10, 2016, Magaling paid the
account in full with Delta.
TO ILLUSTRATE:

33. 2%
ournal Entry:

34. Assuming that instead of paying on January 10, 2016, Magaling
paid on February 4, 2016, thus forfeiting the 2% discount, the
entry to record is:
Cash

35. Recording of sales and related transactions
under the Periodic Inventory System
SALES TRANSACTIONS: REVENUE ENTRIES FOR A MERCHANDISER
• Revenues are reported when earned in accordance with the revenue
recognition principle, and in a merchandising company, revenues are
earned when the goods are transferred from seller to buyer.
• All sales should be supported by a document such as a cash register
tape (to provide evidence of cash sales) or cash receipt, or office receipt
for cash sales, and charge invoice for credit sales, or sales on account.

36. Recording of sales and related transactions
under the Periodic Inventory System
• One entry is made with each sale:
Debit — Accounts Receivable (if a credit sale) or Cash (if a cash sale)
which increases assets for the sales amount
Credit — Sales which increases revenues
 The sales account is credited only for sales of goods held for
resale. Sales of assets not held for resale (such as equipment,
buildings, land, etc.) are credited directly to the asset
account.

37. For the month of January, Magaling made the following
sale:
1/10/2016 Official Receipt (OR) No. 001 Sold two units
for cash to Marie Cruz for PHP36,000 (PHP18,000 per unit),
FOB Destination.
1/15/2016 Charge Invoice (ChI) No. 001 Sold five units
on account to Rafael Reyes for PHP97,500 (PHP19,500 per
unit) with terms 3/10, n/ 30, FOB Shipping Point.
TO ILLUSTRATE:

38. Journal Entry:

39. • An entry is made when seller pays the freight to
deliver goods to a customer or buyer. If the buyer
will pay for the freight, no entry is made.
• Debit — Delivery Expense and credit – Cash or
Accounts Payable
FREIGHT TERMS: FOB DESTINATION - SELLER PAYS FREIGHT

40. On January 10, 2016 Magaling
paid MM Express, PHP500 to deliver
the two units to Marie Cruz.
TO ILLUSTRATE:

41. Journal Entry:

42. • Sales Returns result when customers are dissatisfied with merchandise
and are allowed to return the goods to the seller for credit or a refund.
• Sales Allowances result when customers are dissatisfied, and the seller
allows a deduction from the selling price.
• To grant the return or allowance, the seller prepares a credit
memorandum to inform the customer that a credit has been made to
the customer’s account receivable.
• Sales Returns and Allowances is a contra revenue account to the Sales
account. A contra account is a reduction to a particular account.
SALES RETURNS AND ALLOWANCES

43. • A contra account is used, instead of debiting sales, to disclose the amount of sales
returns and allowances in the accounts.
• This information is important to management as excessive returns and allowances
suggest inferior merchandise, inefficiencies in filling orders, errors in billing customers, and
mistakes in delivery or shipment of goods.
• The normal balance of Sales Returns and Allowances is a debit.
• One entry is made with each sales return and allowance: The entry to record the sales
return or allowance:
• Debit — Sales Return and Allowances which decreases revenues for the amount of the sale
• Credit — Accounts Receivable (if a credit sale) or Cash (if a cash sale) which decreases assets
SALES RETURNS AND ALLOWANCES (cont.):

44. On January 16, 2016, Rafael Reyes returned one
unit of the computers purchased last January 15,
2016 under Charge Invoice 001. The unit returned
was in good condition. However, Rafael Reyes
returned the unit because it is one unit more than
what they need. The return was approved and
accepted by Magaling. The price will be
deducted from the account of Rafael Reyes.
TO ILLUSTRATE:

45. Journal Entry:

46. 1. A sales discount is the offer of a cash discount to encourage customers
to pay the balance at an earlier date.
2. An example of a discount term is commonly expressed as: 2/10, n/30,
which means that the customer is given 2% discount if payment is made
within 10 days. After 10 days there is no discount, and the balance is
due in 30 days.
3. Sales Discounts is a contra revenue account with a normal debit
balance.
SALES DISCOUNTS

47. Assume that Magaling purchased on cash, five
units of computers at PHP10,000 per unit from a
supplier on January 17, 2016. These units were
subsequently sold to Jun Cruz on January 18,
2016 under Charge Invoice (ChI) No. 002
amounting to PHP90,000 (PHP18,000 per unit)
with terms 2/10, n/30, FOB Shipping Point. On
January 23, 2016, Cruz paid the said account in
full.
TO ILLUSTRATE:

48. Notice in the entry on January 23, 2016 that the cash received from Jun Cruz was net of the 2%
discount because he made the payment within the discount period. Take note that the
discount period in this case was from January 19, 2016 to January 28, 2016 (10 days).

49. What If Jun Cruz paid the account on January 30, 2016 instead of
January 23, 2016? The entry would be:

50. Determining Cost of Goods Sold under Periodic Inventory System
The Cost of Goods Sold under the periodic inventory system is determined at the
end of the period (monthly or yearly) by a short computation, as follows:

51. In a periodic inventory system, separate ledger accounts are
maintained for various items composing the cost of goods sold
(Purchases, Purchase Returns & Allowances, Freight-In, Purchase
Discounts). At the end of the accounting period, a physical
count of inventory is necessary to establish the ending balance
of the inventory.