Chapter 10: Accounting Cycle of a

Merchandising Business (FAR by: Millan)

 Chapter 10
Accounting Cycle of a Merchandising
Business
Learning Objectives
1. Prepare the Statement of Cost of Goods Sold
and Gross Profit.
2. Complete the accounting cycle of a
merchandising business

Chapter 10: Accounting Cycle of a

Merchandising Business (FAR by: Millan)
 Merchandising Business
• A merchandising business is one that buys
and sells goods, in their original form and
without any further processing. Those goods
are referred to as merchandise inventory (or
simply, inventory).

Chapter 10: Accounting Cycle of a Merchandising Business (FAR by: Millan)

 Inventory Systems
a. Perpetual inventory system – under this system,
the “Inventory” account is updated each time a
purchase or sale is made. Thus, the “Inventory”
account shows a continuing or running balance of
the goods on hand.
b. Periodic inventory system – under this system, the
“Inventory” account is updated only when a
physical count is performed. Thus, the amounts of
inventory and cost of goods sold are determined
only periodically.

Chapter 10: Accounting Cycle of a Merchandising Business (FAR by: Millan)

Chapter 10: Accounting Cycle of a Merchandising Business (FAR by: Millan)
 Accounts used under Periodic System
• Purchases – the account used to record purchases
of inventory under the periodic system.
• Freight-in (Transportation-in) – the account used
to record the shipping costs incurred on
purchases of inventory under the periodic system.
• Purchase returns – the account used to record
returns of purchased goods to the supplier.
• Purchase discounts – the account used to record
cash discounts availed of on the purchased goods.
Chapter 10: Accounting Cycle of a Merchandising Business (FAR by: Millan)
Chapter 10: Accounting Cycle of a Merchandising Business (FAR by: Millan)
Chapter 10: Accounting Cycle of a Merchandising Business (FAR by: Millan)
 Gross Profit

Chapter 10: Accounting Cycle of a Merchandising Business (FAR by: Millan)

Chapter 10: Accounting Cycle of a Merchandising Business (FAR by: Millan)
Chapter 10: Accounting Cycle of a Merchandising Business (FAR by: Millan)
• Sales – include both cash sales and credit
sales.
• Sales returns – the account used to goods
sold but were returned by customers.
• Sales discounts – the account used to record
cash discounts given to and taken by
customers.

Chapter 10: Accounting Cycle of a Merchandising Business (FAR by: Millan)

Statement of Cost of Goods Sold and Gross Profit

Chapter 10: Accounting Cycle of a Merchandising Business (FAR by: Millan)

 TERMS OF TRANSACTIONS
• Cash Discounts-discount for prompt payment
“2/10” ,n/30
– Sales Discount
– Purchase Discount
• Trade Discount
– Computed first before reflecting the cash discount
computation

Chapter 10: Accounting Cycle of a

Merchandising Business (FAR by: Millan)
OPEN FORUM
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Chapter 10: Accounting Cycle of a

Merchandising Business (FAR by: Millan)
END

Chapter 10: Accounting Cycle of a

Merchandising Business (FAR by: Millan)