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Accounting For Merchandising Operations

Basic Accounting

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43 views

Accounting For Merchandising Operations

Basic Accounting

Uploaded by

amora elyse
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Accounting for Merchandising Operations

Nature of Merchandising Business

A business engaged in the BUYING of merchandise or goods which will be SOLD at a price
higher than purchase cost.

Terms in Accounting for PURCHASES of Merchandise

1. Cash or COD (Cash on Delivery) - purchase of merchandise is payable in cash

2. On Credit or On Account – purchase is payable at some future time.

3. Credit Term or Credit Period – the time within which the payment should be made.

             Example: n/30 - payable within 30 days from date of invoice

                               n/EOM - payable at the end of the month when the purchase is made.

                               N/10 EOM – payable up to 10 days after the end of the month of purchase.

4. Trade Discount – a special discount given to the buyer for buying in large quantity. Outright
deduction from list price to arrive at invoice price.

5. Purchase Discount – discount given to buyers for paying within a specified period of time
which is usually earlier than the credit period. To encourage prompt payment.

6. Discount period – the period of time within which to pay to be entitled to a discount.

           Example: 

2/10, n/30 - 2% discount if paid within 10 days from date of invoice; or it must be paid not later
than 30 days from date of invoice.

2/10, 1/15, n/30 - 2% discount if paid within 10 days from date of invoice; or only 1% if paid after
the 10th but on or before the 15th day from date of invoice; or it must be paid not later than 30
days from date of invoice.

3/EOM, n/60 - 3% discount if paid on or before the end of the month of purchase; or it must be
paid not later than 60 days from date of invoice.

7. Purchase Returns and Allowances – the buyer may return merchandise bought for certain
valid reasons like:

        a. goods have some defects or not in satisfactory conditions

        b. goods may have been damaged while in transit.


        c. goods received were not the ones ordered.

Terms Used for Cost of Delivering or Transporting Goods

1. Freight In – the costs incurred by the buyer for transporting the goods from the seller's place
to the buyer's place.

2. FOB Shipping point – this means Free on Board up to the shipping point. Freight charges
and other incidental costs will be shouldered by the BUYER once loaded in the common carrier.

3. FOB Destination – this means Free on Board up to the point of destination. The seller will
pay all the freight charges and incidental costs up to the buyer's place.

4. Freight Collect – the buyer will pay for the freight charges upon receipt of goods. If the term
is FOB Destination, the buyer can deduct the freight charges when paying for the invoice price.

5. Freight Prepaid - the seller has paid for the freight charges at the time of shipment. If the
term is FOB shipping point, the seller can add the charges to the invoice price.

Merchandise Inventory System

1. Periodic Inventory System

• Every time a purchase is made, an expense account (PURCHASES) is


debited. 

• When a sale is made, a revenue account (SALES) is credited. 

• At the end of the accounting period, a physical count of the goods unsold will be
made.

• The ending MERCHANDISE INVENTORY will be carried forward to the next


accounting period.

• Most common method used in merchandising.

2. Perpetual Inventory Sysytem

• Every time a purchase is made, an asset account (MERCHANDISE


INVENTORY) is debited. 

• When a sale is made, 2 entries are required. First, a revenue account (SALES)
is credited and second, a debit to Cost of Goods Sold and credit to
Merchandise to record the expense.

• The Merchandise Inventory will have a running balance.


• It is also useful in manufacturing business.

RECORDING PURCHASE TRANSACTIONS


ACCOUNTING FOR SALES OF MERCHANDISE

Terms used in sales of merchandise:

1. Sales Invoice – a document that the seller gives to the buyer listing the items ordered or sold
together with the quantity, price, description, VAT, terms of sale, and total price.

2. Delivery receipt – is a document issued by the seller and signed by the customer to
evidence receipt of the goods ordered or sold as per the sales invoice.

3. Credit Memo – a business paper used by the seller to notify the buyer that his account is
credited (balance reduced) for returns made or allowance granted for defective merchandise.

4. Sales Returns & Allowances – deductions from sales as a result of merchandise returned
or allowance granted for damaged or defective merchandise.

5. Sales Discount – is the discount given to customers for paying earlier than the credit term.

6. Trade discount – a special discount given to customers for buying in large quantities.

7. Freight Out – the expense incurred by the seller to transport the goods to the buyer's place
when freight should be shouldered by the seller.

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