Merchandising Operations

Marilou S. Quibuyen, CPA, MBA

 LEARNING OBJECTIVES:

• Show the difference in computing the net income for a

service business and for a merchandising business
• Describe the inventory system under the periodic and
perpetual method
• Account for sales and compute for net sales revenue
• Account for purchases and compute for net cost of
purchases
• Determine the cost of sales, gross profit and operating
income
• Recognize 12% VAT for transactions involving purchase
and sale of goods
• Prepare the merchandiser’s financial statements in
accordance with International Accounting Standards and
Philippine Financial Reporting Standards
Operating Cycle of a Merchandising
Business

Purchase and Cash Sale Purchase and Sale on Account

Cash Cash

Accounts
Receivable Inventory
Inventory
Manufacturer Wholesaler

Retailer Customer

Channel of Distribution

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CRUZ DELIVERY SERVICE SUPER BOOKSTORE
Service Revenue P30,000 Sales Revenue P54,000
Other Operating Income 3,000 Less Cost of Sales 30,000
Operating Expenses (12,000) Gross Income 24,000
Other Operating Expenses ( 2,000) Other Operating Income 5,000
Operating Expenses (16,000)
_______ Other Operating Expenses ( 2,000)
NET INCOME P19,000 NET INCOME P11,000

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 Objective 1

Account for the sale of inventory

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 Sale of Inventory
• Sales Revenue
– Amount earned from selling inventory
– Revenue account (Credit)
• Cost of Sales
– Cost of inventory that has been sold to
customers
– Expense account

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 Sale of Inventory
• Sales Returns & Allowances
– When customer returns goods or the seller
grants a reduction in price to customer
– Contra-revenue account (debit balance)
• Sales Discounts
– If customer pays within the discount period
allowed by the seller
– Contra-revenue account (debit balance)
• Delivery Expense (Freight Out)

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 Sales Transactions
S5-5
GENERAL JOURNAL
DATE DESCRIPTION REF DEBIT CREDIT

Accounts Receivable 60,000

Sales Revenue 60,000
To record sales on account
(60-pcs of USB X 1,000@)

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 Sales Transactions
S5-5
GENERAL JOURNAL
DATE DESCRIPTION REF DEBIT CREDIT

Cash 60,000
Accounts Receivable 60,000
Collected on account

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 Sales Discounts

• Two common discounts:

• (1) Trade discounts- is a percentage reduction
from a published list price granted to retailers
or wholesalers for buying large quantities or for
regularly patronizing the business.
• (2) Cash discounts- discount granted to a
customer for paying his account promptly. The
aim is to encourage a customer to pay
immediately, speed up the seller’s cash inflow
and allow him for another profitable operating
cycle.

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 Sales Transactions
S5-5
GENERAL JOURNAL
DATE DESCRIPTION REF DEBIT CREDIT

Cash 58,800
Sales Discount 1,200
Accounts Receivable 60,000
Collected on account

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 Sales Transactions
S5-5
Sales $60,000
Sales Discount(1,200)
Net Sales $58,800

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 S5-6
GENERAL JOURNAL
DATE DESCRIPTION REF DEBIT CREDIT

Accounts Receivable 10,000

Sales Revenue 10,000
To record sales on account

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 S5-6
GENERAL JOURNAL
DATE DESCRIPTION REF DEBIT CREDIT

Sales Returns & Allowances 1,000

Accounts Receivable 1,000
To record 100 books returned

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 S5-6
Accounts Receivable Sales
10,000 1,000 10,000

Bal 9,000

Sales Returns & Allowances Sales Discounts

1,000

Bal 1,000

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 S5-6
GENERAL JOURNAL
DATE DESCRIPTION REF DEBIT CREDIT

Cash 8,820
Sales Discount 180
Accounts Receivable 9,000
Collected on account

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 S5-6
Accounts Receivable Sales
10,000 1,000 10,000
9,000
Bal 0

Sales Returns & Allowances Sales Discounts

1,000 180
Bal 1,000 Bal 180

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 S5-7
Sales $10,000
Sales Returns & Allowances (1,000)
Sales Discounts (180)
Net Sales $8,820

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 SALES RETURN AND
SALES ALLOWANCES

Credited for revenue Debited for returns

for goods sold to of goods sold for
customers reduction in the
sales price

SALES DISCOUNT FREIGHT OUT

Debited for decrease Debited for cost of

in sales or revenue delivering goods and
due to decrease in treated as selling
amount collected expense, under the
from customers term FOB Destination

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 Objective 2

Account for the purchase of

inventory

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 Operating Cycle of a
Merchandising Business

Accounts
Cash
Receivable

Inventory

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 Inventory Systems

• Periodic- the merchandise when bought is

recorded as purchases representing
goods available for sale. Adapted by
businesses selling low price-high volume
goods.

• Perpetual- complete movement of the

merchandise is recorded. Adapted by
businesses selling high price-low volume
goods.

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 Purchase of Inventory
S5-1
GENERAL JOURNAL

DATE DESCRIPTION REF DEBIT CREDIT

Purchases 10,000
Accounts Payable 10,000
Purchased inventory/stocks

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 Purchase Discounts
• A deduction from the invoice price granted
to encourage early payment of the amount
due
– 2/10, n/30
– n/30
– eom

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 Purchase of Inventory
S5-2
GENERAL JOURNAL
DATE DESCRIPTION REF DEBIT CREDIT

Accounts Payable 10,000

Cash 9,800
Purchase Discounts 200
Paid within discount period

Purchase Discounts
200
Bal 200
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 Purchase Returns and
Allowances
• Purchase Return - Merchandise returned
by the purchaser to the supplier
• Purchase Allowance - A reduction in the
cost of defective merchandise received by
a purchaser from a supplier

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 Purchase Returns and
Allowances – S5-2
GENERAL JOURNAL

DATE DESCRIPTION REF DEBIT CREDIT

Purchases 100,000
Accounts Payable 100,000
Purchased inventory/stocks

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 Purchase Returns and
Allowances – S5-2
GENERAL JOURNAL
DATE DESCRIPTION REF DEBIT CREDIT

Accounts Payable 10,000

Purchase Return & Allowances 10,000

Returned damaged goods

Purchase Return & Allow Accounts Payable

10,000 10,000 100,000

Bal 10,000 Bal 90,000

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 Purchase Returns and
Allowances – S5-2
GENERAL JOURNAL
DATE DESCRIPTION REF DEBIT CREDIT

Accounts Payable 90,000

Cash 90,000
Paid after the discount period

Purchases Accounts Payable

100,000 10,000 10,000 100,000
90,000
Bal 90,000 Bal 0
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 Purchase Returns and
Allowances – S5-2
GENERAL JOURNAL
DATE DESCRIPTION REF DEBIT CREDIT

Accounts Payable 90,000

Cash 87,300
Purchase Discounts 2,700

Paid within discount period

Purchase Discounts Accounts Payable
2,700 10,000 100,000
90,000
Bal 2,700 Bal 0
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 Transportation Costs

Seller Buyer
Goods

FOB Shipping Point FOB Destination

(Buyer Pays) (Seller Pays)

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 Transportation Costs
• Freight in (Buyer pays for the freight)
– Transportation cost on purchased goods
– Debit Freight In/ Transportation In
• Freight-out (Seller pays for the freight)
– Transportation cost on goods sold
– Debit an expense (delivery expense/freight-
out)

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 E5-15

GENERAL JOURNAL

DATE DESCRIPTION REF DEBIT CREDIT

Apr 30 Purchases 6,000

Accounts Payable 6,000
Purchased inventory/stocks

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 E5-15
GENERAL JOURNAL

DATE DESCRIPTION REF DEBIT CREDIT

Apr 30 Freight In 300

Cash 300
Paid freight charges

Freight In Accounts Payable

300 6,000

Bal 300
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 E5-15
GENERAL JOURNAL
DATE DESCRIPTION REF DEBIT CREDIT

Apr 30 Accounts Payable 1,000

Purchase Return & Allowances 1,000
Returned unsuitable goods

Purchase Return & Allow Accounts Payable

1,000 1,000 6,000
Bal 5,000
Bal 1,000
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 E5-15
GENERAL JOURNAL
DATE DESCRIPTION REF DEBIT CREDIT

May 14 Accounts Payable 5,000

Cash 4,850
Purchase Discounts 150
Paid within discount period

Purchase Discounts Accounts Payable

150 1,000 6,000
5,000
Bal 150 Bal 0
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NET COST OF PURCHASES
From Gross Purchases, Freight In is added to arrive at Total Cost of
Delivered Goods. From Total Cost of Delivered Goods, purchase returns and
allowances and purchase discounts are deducted to arrive at Net Cost of
Purchases.

Purchases P19,600
Add Freight In 1,000
Total cost of goods delivered 20,600
Less: Purchase Returns & Allowances P2,000
Purchase Discount 352 2,352
Net Cost of Purchases P18,248

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To illustrate assume that during the year total purchases amounted
to P50,000 representing 200 chairs bought at P250 each. At the end
of the year, a physical count of chairs showed 70 are still on hand.
Cost of goods sold is computed as follows:

Purchases (200 X P250) P50,000

Less Merchandise Inventory, Dec. 31 (70 X P250) 17,500
Cost of Goods sold (130 X P250) P32,500

If the merchandise is sold at 50% above cost or a mark-up of

P125 then sales price will be (P250 +P125) P375. Gross Profit will
be computed as follows:
Sales (130 X P375) P 48,750
Cost of Sales ( 130 X P250) 32,500
Gross Profit on Sales ( 130 X P125) P 16,250

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 Merchandise
Inventory Purchases (100)
January 1 (70) P25,000
P17,500 (new stock)
(old stock)

Total Goods Available for Sale

(170) P42,500
(during the year)

Merchandise Inventory Cost of Goods Sold

December 31 (50) (120) P30,000
P12,500 (sold during the
(on hand at year end) year)

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 Merchandise Inventory, Jan 1 (70 at P250) P 17,500
Add: Purchases (100 X P250) 25,000
Total Goods Available for Sale (170 at P250)
42,500
Less: Merchandise Inventory, Dec 31 (50 X P250) 12,500
Cost of Sales (120 X P250) P 30,000

If the 120 books were sold at a 50% mark up or P125 plus P250, then sales price was
P375 resulting to a total gross profit of P15,000 computed as follows:

Sales (120 X P375) P 45,000

Less: Cost of Sales (120 X P250) 30,000
Gross Profit (120 X P125) P 15,000

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 PURCHASES FREIGHT IN
f
F
Debited for cost Debited for cost of
of goods bought transporting goods
under the term
FOB shipping point

PURCHASE RETURNS AND

ALLOWANCES PURCHASE DISCOUNT

Credited for cost of Credited for

goods returned or discount taken
for reduction in when account is
purchase price paid within the
discount period

IN THE BOOKS OF THE BUYER

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 Objective 3

Compute cost of goods sold in a

periodic inventory system

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 Cost of Goods Sold – Periodic
Inventory System

Beginning Inventory

Goods Available for Sale

+ Purchases

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 Cost of Goods Sold – Periodic
Inventory System

Goods Available for Sale

Cost of Sales

- Ending Inventory

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 Cost of Goods Sold – Periodic
Inventory System
Beginning Inventory
+ Purchases (Net) or Net Cost of Purchases
Goods Available for Sale
- Ending Inventory
Cost of Sales

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a. Sales 170,000
Less: Sales discounts 3,000
Sales ret & allow 15,000 18,000
Net sales 152,000

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b. Inventory, May 31, 20X6 $19,000
Add: Net Purchases Purchases
$82,000
Add: Freight in 4,000
Total Cost of Goods Delivered 86,000
Less:Purchases discounts 2,000
Purchases ret & Allow 8,000 10,000 76,000
Total Goods available for sale $95,000
Less: Inventory, May 31, 20X7 21,000
Cost of Sales $74,000

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c. Net sales $152,000
Cost of sales (74,000)
Gross profit $78,000

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