SPECIAL LECTURE 1

ACCOUNTING FOR A MERCHANDISING

& MANUFACTURING BUSINESS

Learning Objectives:

At the end of this lecture, you should be able to:

1. Differentiate a merchandising and manufacturing concern business.

2. Record business transactions of merchandising type of business.
3. Prepare properly classified financial statements of a merchandising business.
4. Prepare a statement of cost of sales.
5. Record financial transactions of a manufacturing type of business.
6. Prepare properly classified financial statements of a manufacturing business.
7. Prepare a statement of cost of goods sold.

Introduction

There are generally two ways on how to conduct a business; either you provide service or sell
something. Grab, A1 Driving, Globe Telecom, and Bench Fix Salon are some examples of service
provider businesses. On the other hand, Wilcon Depot (retailer of home building supplies) and
Puregold (supermarket) examples of merchandising business. As you have learned, one of the main
differences between a service and merchandising business is the presence of inventories for a
merchandising business. A third type of business activity is manufacturing, wherein the goods sold
are directly created i.e. manufactured by the seller itself like Toyota (automotive manufacturer) and
Epson. This chapter will focus in accounting for merchandising and manufacturing business.

Merchandising vs. Manufacturing Business

Buys Goods
from A merchandiser usually has a list of suppliers
Supplier where it buys its goods in wholesale to avail
(Wholesale)
of trade and cash discounts. Without
modifying the goods, it sells it in its original
form at a certain markup to recover the
expenses incurred and earn profit in order
Collect Cash
Sells the keep the business running and satisfy the
Goods owner.
or
(Wholesale
Receivable
or Retail)

Figure 1. Merchandising Business Cycle

 Buys Raw
Materials
from Supplier
(Wholesale) A manufacturer creates its own goods. It
buys raw materials from its suppliers, and
then converts the various raw materials into
Comvert Raw finished goods. In the process of conversion,
Materials to
Collect Cash
Finsihed manpower and other overhead costs are
or Receivable
Goods (Labor incurred. These costs form part of the cost
& Overhead)
of the goods (inventory). Finished goods are
sold to customers for cash or on account and
Sells the
the cycle will start again.
Goods
(Wholesale or
Retail)

Figure 2. Manufacturing Business Cycle

Recording Business Transaction for a Merchandising Business

Illustrative Problem 1

On March 1, 2018, Mr. Xander Cage decided to put up a business of selling plain white t-shirts. The
following transactions occurred during its first month of operations.

Mar. 1 Invested P150,000 to start his business.

2 Paid P10,000 in registering its business and the miscellaneous taxes.
3 Bought office supplies amounting to P3,000 and a laptop for the business, P15,000.
The laptop is expected to be used for 3 years.
4 Paid the rent for the month, P5,000.
5 Bought 500 pcs of white shirts for P50 each from its supplier in Divisoria. The
transportation cost in delivering the goods was P500 which is shouldered by Mr.
Cage.
7 Sold 200 pcs for P150 each to a random customer.
10 Bough additional 100 shirts for P60 each from its supplier. The transportation cost
in delivering the goods was P500 which is shouldered by Mr. Cage.
15 Sold 300 pcs (from the first lot) of shirts for P150 to his friend in a national high
school, on account.
15 Paid the salary of his assistant, P5,000.
16 Returned goods due to defect from March 15 sale, 100 pcs.
18 Called the supplier of shirts and ordered 400 pcs at P65 each. The supplier allowed
Mr. Cage a term of 2/10, net 30, plus it has agreed to deliver the goods with the
term FOB shipping point. Cost of freight was P1,000.
19 The goods have arrived, all in good condition, Mr. Cage paid for the freight to the
carrier.
 21 Sold 300 shirts with the following details; 100 shirts (from second lot) were sold for
P180 each, and 200 shirts (from the third lot) were sold for P195 each to a local
university for cash.
25 Paid the supplier (Mar. 19 transaction) in full.
27 Sold to his friend, 100 shirts on account for P195 each. Term is 2/10, net 30.
30 Paid the salary of his assistant, P5,000.
31 The inspection of supplies revealed P1,000 worth of remaining supplies.
A physical count of inventories revealed remaining inventories, P6,500.

Required:

A. Journalize the transactions, including the necessary adjustments at month end.

B. Prepare the income statement with supporting statement of cost of sales.
C. Prepare the balance sheet as of March 31, 2018.

A. The journal entries will appear as follows:

GENERAL JOURNAL PAGE J1

Date Account Title & Explanation Ref. Debit Credit

Mar. 1 Cash 150,000
Cage, Capital 150,000

2 Taxes & Licenses 10,000

Cash 10,000

3 Supplies 3,000
Cash 3,000

Computer 15,000
Cash 15,000

4 Rent Expense 5,000

Cash 5,000

5 Purchases 25,000
Freight In 500
Cash 25,500

7 Cash 30,000
Sales 30,000

10 Purchases 6,000
 Freight In 500
Cash 6,500

15 Accounts Receivable 45,000

Sales 45,000

Salaries Expense 5,000

Cash 5,000

16 Sales Return 15,000

Accounts Receivable 15,000

19 Purchases 26,000
Freight In 1,000
Accounts Payable 26,000
Cash 1,000

21 Cash 57,000
Sales 57,000

25 Accounts Payable 26,000

Cash 25,480
Purchase Discount 520

27 Accounts Receivable 19,500

Sales 19,500

30 Salaries Expense 5,000

Cash 5,000

31 Supplies Expense 2,000

Supplies 2,000

Depreciation Expense 416.67

Accumulated Depreciation-Computer 416.67
B. Income Statement with supporting Statement of Cost of Goods Sold

Xander Cage
Income Statement
For the month ending March 31, 2018 Gross Sales 151,500
Sales Return ( 15,000)
Net Sales 136,500 Net Sales 136,500

Less: Cost of Sales* 51,980

Gross Income 99,520
Less: Operating Expenses
Salaries Expense 10,000
Taxes & Licenses 10,000
Rent Expense 5,000
Supplies Expense 2,000
Depreciation Expense 416.67 27,416.67
Net Income (before tax) 57,103.33

*Supporting Statement of Cost of Sales

The Net Purchases was computed as
Merchandise Inventory Beg. 0 follows:
Add: Net Purchases 58,480
Total Cost of Good Available for Sales 58,480 Purchases 57,000
Freight In 2,000
Less: Merchandise Inventory End 6,500 Purchase Discount ( 520)
Cost of Sales 51,980 Net Purchases 58,480

Important Notes:

1. The business used the periodic system because of the nature of its product (white shirts). It
is the most applicable inventory system (refer to your AP 1 book for discussion related to
inventory systems).
2. The cost of inventory as you have noticed was increasing which is what is actually happening
in the real market. In such cases, the selling of inventory generally should be on a first in,
first out basis just like in our illustration. In higher accounting subjects, you will be
discussing in detail the different cost flow assumptions specifically FIFO (first in, first out),
LIFO (last in, first out) and average method. In the Philippines, only the FIFO and average
method are allowed to be used.
 FIFO vs. AVERAGE METHOD

Let us have a brief comparison of the two cost flow assumptions. In this illustration, we will assume
that no freight costs were incurred in any of the purchases to make the discussion easier. Meaning,
disregard any freight cost given in the previous illustration. Under the FIFO method, all goods that
were purchased first should be sold first. I will use the given in our illustration:

Inventory
Date Trans Units Price Cost
Mar. 5 Purchase 500 50 25,000.00
7 Sale -200 50 (10,000.00) Inventory Beg. 0
Balance 300 50 15,000.00 Net Purchases:
15 Purchase -300 50 (15,000.00) Purchases 57,000
Balance 0 50 - Purchase Disc ( 520) 56,480
Goods Available for sale 56,480
10 Purchase 100 60 6,000.00 Inventory end ( 6,500)
21 Sale -100 60 (6,000.00) Cost of sales 49,980
Balance 0 60 -
19 Purchase 400 65 26,000.00
21 Sale -300 65 (19,500.00)
Balance 100 65 6,500.00
Note: Excluding the cost of freight

Take note that based on physical

Important Notice count, 100 pcs of shirts remained
with P6,500 cost (based on the
illustration). But that is actually the
FIFO cost of the ending inventory
(100 pcs).

Now, take a look if the average method was used.

Inventory
Date Trans Units Price Cost
Mar. 5 Purchase 500 50 25,000.00 Inventory Beg. 0
10 Purchase 100 60 6,000.00 Net Purchases:
19 Purchase 400 65 26,000.00 Purchases 57,000
Purchase Disc ( 520) 56,480
Balance 1000 57 57,000.00 Goods Available for sale 56,480
Note: Excluding the cost of freight Inventory end ( 5,700)
Cost of sales 52,780

This is the average cost of all

Important Notice
inventories purchases
(P57,000/1,000 pcs)
100 pcs x P57