ANALYZING AND RECORDING BUSINESS TRANSACTIONS

OF A MERCHANDISING BUSINESS

Learning Outcomes

At the end of the chapter, learners shall be able to:

 Identify the peculiar account titles of a merchandising business;

 Compute trade discount and cash discount;
 Differentiate the different freight terms; and
 Demonstrate how business transactions of a merchandising business are
recorded in the general journal.

A merchandising business generates revenues from the selling of

merchandise or goods that it purchases from other companies. Its major
activities consist of buying and selling of merchandise. The merchandise
purchased from a manufacturer or a wholesaler is sold in the same form at a
profit.

Journalizing Transactions Using the General Journal

The chart of accounts of a merchandising business differs from that of a

service business as it contains additional accounts as follows:

Purchases – is the account used to record purchases of merchandise.

Purchase Returns and Allowances – is used when the merchandise

received from the supplier are defective or do not conform to the specifications of
the buyer. The buyer may opt to return the goods to the seller (purchase return)
or may decide to keep them and the seller will grant an allowance (purchase
allowance). However, the two terms have been combined, thus, Purchase
Returns and Allowances. In this case, the buyer issues a debit memorandum
informing the seller or supplier that it has debited or reduced the supplier’s
account and the reason for the return of the merchandise or for the purchase
allowance.

Purchase Discount – refers to the reduction in the amount to be paid

due to prompt or early payment of an account.

Sales – is the revenue derived from selling goods or merchandise.

Sales Returns and Allowances – refers to the deductions from the

invoice prices due to damages, defects or errors in the kind or quality of
merchandise delivered to customers. Sales returns account is used when there
is a physical return of goods, while Sales Allowances account is used when
damages/defects on goods delivered are settled by a reduction in the invoice
price. However, these two accounts are combined, thus, Sales Returns and
Allowances. In this case, the seller issues a credit memorandum.

Sales Discount – represents the deductions allowed to customers

because of prompt or early collection from them.

Freight in - refers to the transportation cost of the merchandise when

purchased.

Freight out or Delivery expense – represents the cost of the gasoline

and oil used and other related expenses incurred in transporting the goods to the
customers.

Merchandise Inventory – refers to the goods unsold as of a given date.

There are two terms used such as Merchandise Inventory, beginning which
refers to the merchandise at the start of the accounting period and Merchandise
Inventory, ending which refers to the value of the goods unsold at the end of
the accounting period.

Cost of sales – otherwise termed as Cost of Goods Sold, is an expense

account where the cost of the merchandise sold is transferred.

Purchase of Merchandise

Merchandise refers to goods or commodities bought by the business for

resale at a certain amount of profit. There are two methods of accounting for
merchandise: the Perpetual Inventory Method and the Periodic Inventory
Method. Under the Perpetual Inventory Method, the Merchandise Inventory
account is used when there are purchases and is reduced if there is a sale of
merchandise. The Cost of Goods Sold and value of inventory at the end can be
determined even without a physical counting. When the Periodic Inventory
method is used, the value of the ending inventory is determined by physically
counting the unsold items and valuing it at cost. The Purchases account is
used when merchandise is purchased. The Periodic inventory method will be
used in the succeeding discussions. Merchandise can be purchased on cash
basis or on account.

A. Cash Purchases

Illustration: Bought merchandise costing P3,000 Terms: Cash

Date Account Tiles/Explanation Debit Credit

Purchases 3,000
Cash 3,000

Since the periodic inventory system is used, the Purchases account is

debited.

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Purchases on Account. Payment will be made in the future although
merchandise will be received on the date of purchase.

Illustration: Assume that goods were purchased on account, P5,000.

Date Account Tiles/Explanation Debit Credit

Purchases 5,000
Accounts Payable 5,000

It may also happen that the buyer is asked to make a down payment and
the balance on account.

Illustration: Assume that merchandise costing P8,000 were purchased. Terms:

20% down, balance on account.

Date Account Tiles/Explanation Debit Credit

Purchases 8,000
Cash 1,600
Accounts Payable 6,400

If a promissory note is issued, Notes Payable should be credited instead

of Accounts Payable.

B. Trade Discount

Trade discounts are reductions from the catalog price or list price, granted
to customers for quantities purchased. These are granted as a way of
encouraging customers to buy in large quantities. Trade discounts are not
recorded in the books of the buyer nor seller.

Illustration: The list price of a certain product is P120 per unit and the buyer
purchased 200 units on cash basis. A 10% trade discount was
granted.

List Price (P120 x 200) P24,000

Less: Trade Discount (10% x 24,000) 2,400
Invoice Price P21,600

The amount of purchases to be recorded is P21,600.

If multiple (series) trade discounts are given, the 2 nd trade discount is

computed based on the net amount of the first trade discount, and the
succeeding discounts to be based on the net amount of the immediately
preceding discounts.

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Illustration: Assume that HNA Trading bought merchandise with a list price of
P40,000 and trade discounts of 10%, and 5%. The invoice price is
computed as:

List Price P40,000

Less: 1st Trade discount (10%x 40,000) 4,000
Net of the 1st trade discount P36,000
Less: 2nd Trade discount (5% x 36,000) 1,800
Invoice Price P34,200

An alternative method to determine the invoice price is to multiply

the list price by 90% then 95%.

Date Account Tiles/Explanation Debit Credit

Purchases 34,200
Cash/ Accounts Payable 34,200

C. Freight on Merchandise

Freight in is the account used to record the transportation charges on

merchandise purchased.

Freight out is the freight on merchandise sold. The terms of shipment

indicate whether the buyer or seller should shoulder the freight expenses.

The following are the freight terms:

F.O.B. Shipping Point means that the seller is responsible for the
transportation expenses up to the point of shipment only. F.O.B means
free on board. Upon shipment, ownership of the goods is transferred to
the buyer, thus transportation expenses from the shipping point to the
buyer’s place will be shouldered by the buyer.

F.O.B. Destination means that the goods are free on board to the point
of destination. Ownership of the goods remains to the seller until the point
of destination, and as such, transportation expense is shouldered by the
seller.

The party responsible for the freight expenses may not be the one who
actually paid for the transportation expenses. The following terms indicate who
actually paid for the expenses:

Freight Collect means that the freight expenses were paid by the buyer.

Freight Prepaid means that the freight expenses were paid by the seller.

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Illustration: Assume that Victor Angel’s Food Products (VAFP) located in
Paoay, Ilocos Norte sells chichacorn to Sun Valley Commercial
located in Metro Manila.

The goods are to be shipped through Florida Bus from Batac City
(Shipping Point) to Metro Manila (Point of Destination) at a rate of
P100 per carton. On February 25, 201A, 10 cartons of chichacorn
were shipped.

F.O.B. Shipping Point, Freight Collect. This means that the freight
expenses should be shouldered by the buyer and was actually paid by the buyer.

On the part of the buyer:

Date Account Tiles/Explanation Debit Credit

Freight in 1,000
Cash 1,000

The seller will not be affected by this transaction.

F.O.B. Shipping Point, Freight Prepaid. This means that the freight
expenses should be shouldered by the buyer (Sun Valley Commercial) but was
actually paid by the seller (Victor Angel’s Food Products). Since the expense of
the buyer was paid by the seller, the buyer will have a liability to the seller and
the seller will have a receivable from the buyer.

On the part of the buyer:

Date Account Tiles/Explanation Debit Credit

Freight in 1,000
Accounts Payable 1,000

On the part of the seller:

Date Account Tiles/Explanation Debit Credit

Accounts Receivable 1,000
Cash 1,000

F.O.B. Destination, Freight Collect. This means that the expense

should be shouldered by the seller, but the expense was actually paid by the
buyer. Therefore, the buyer will now have a receivable from the seller and the
seller will have a liability to the buyer.

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On the part of the buyer:

Date Account Tiles/Explanation Debit Credit

Accounts Receivable 1,000
Cash 1,000

On the part of the seller:

Date Account Tiles/Explanation Debit Credit

Freight out 1,000
Accounts Payable 1,000

F.O.B. Destination, Freight Prepaid. This means that the freight

expense should be shouldered by the seller and was actually paid by the seller.

On the part of the seller:

Date Account Tiles/Explanation Debit Credit

Freight out 1,000
Cash 1,000

The buyer will not be affected by this transaction.

D. Purchase Returns and Allowances

When goods purchased are defective, of inferior quality or of wrong

specification, the buyer can return the merchandise back to the seller. When
such would happen, the account Purchase Return will be used. Should the
buyer decide to keep the merchandise, a reduction in the amount due to the
seller is to be done. If there is no physical flow of merchandise from the buyer
back to the seller, the appropriate account to be used is Purchase Allowances.
In most cases, however, the Purchase Returns and Allowances account is
used.

If the goods were originally purchased on cash basis, the buyer is entitled
to a cash refund.

Illustration: AX Trading, returned defective goods worth P2,000 originally

purchased on cash basis.

Date Account Tiles/Explanation Debit Credit

Cash 2,000
Purchase Returns and Allowances 2,000

If the goods were originally purchased on account, the buyer is entitled to

a reduction in the liability

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Illustration: AX Trading returned defective goods originally purchased on
account.

Date Account Tiles/Explanation Debit Credit

Accounts Payable 2,000
Purchase Returns and Allowances 2,000

E. Cash Discounts

Cash discounts are discounts offered as an incentive to the buyer to pay

his account at an early date. The amount of cash discount a buyer can avail of
would depend on the credit terms of the purchase.

F. Payment of Accounts

When purchases are made on account, the terms of purchase should be

considered in determining whether the buyer is entitled to a discount or not.

Payment within the Discount Period

If the buyer pays his account within the discount period, he is granted a
cash discount. The cash discount reduces the amount of cash to be given in
payment of a liability and it decreases the cost of purchases.

Illustration: Assume that on March 30, 201A payment was made on the
P10,000 purchase on account made on March 21 under the terms
2/10,1/20, n/30.

The buyer is entitled to a 2% discount since payment was made within 10

days from date of invoice (Mar. 21 to Mar. 30, 201A) the amount of discount is
P200.

Date Account Tiles/Explanation Debit Credit

Accounts Payable 10,000
Purchase Discount 200
Cash 9,800

Payment beyond the Discount Period.

If the buyer pays after the discount period, the amount of invoice will be
paid and that no cash discount will be given.

Illustration: Assume that on Mar. 30, 201A, payment was made on the March
18, 201A P10,000 purchase under the terms 2/10, n/30

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 The buyer will not be given any discount because payment was made 12
days after the invoice date (Mar. 18 to Mar. 30).

Date Account Tiles/Explanation Debit Credit

Accounts Payable 10,000
Cash 10,000

Cash Discount on Partial Payment

Cash discounts are granted on partial payment provided that total

payments will be made within the discount period.

Illustration: Assume that Superior Trading has an account of P50,000 under an

Invoice dated February 1, 201A with terms 2/10, n/30. Payments
were made on February 5, 201A, P10,000; on February 7, 201A,
P15,000 and full payment was made on February 10, 201A.

Computation of discount and final payment

Total Account P50,000

Less: Feb. 5 payment 10,000
Balance after first payment 40,000
Less: Feb. 7 payment 15,000
Balance after second payment 25,000
Less: Discount (P50,000 x 2%) 1,000
Amount to be paid on the last payment P24,000

Cash Discounts and Returns

Cash discounts shall not be computed on purchase returns and

allowances made. The amount of purchase returns and allowances should be
deducted from the gross purchases. The resulting amount is the basis of the
discount.

Illustration: Assume the following transactions:

201A
Mar 1 Purchased goods on account, P15,000. Terms: 2/10, n/30
2 Returned merchandise worth P200.
8 Paid in full the account.

Computation of Cash Discount on Mar. 8, 201A

Invoice Price P15,000

Less: Returns 200
Balance after returns 14,800
Less: Discount (2% x P14,800) 296
Amount to be Paid P14,504

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Notes Payable

When goods are purchased, the buyer may issue a promissory note, thus
the buyer has a liability to the seller. The following entry would be made to
record the issuance of a promissory note in exchange of goods purchased.

Illustration: Maxi Trading purchased merchandise worth P20,000 issuing a 60-

day non-interest bearing note.

Date Account Tiles/Explanation Debit Credit

Purchases 20,000
Notes Payable 20,000

Payment of Notes Payable

A promissory note is either interest bearing or non-interest bearing. When

an interest bearing note is paid, the cash to be paid by the maker is the principal
amount of the note plus interest due thereon. When a non-interest bearing note
is paid, the amount to be paid is equal to the principal amount of the note.

Payment of Interest- Bearing Note

At the date of maturity, the maker has to pay the maturity value of the
note. The maturity value is the total of the principal amount plus interest. The
interest is computed using the formula:

Interest = Principal x Rate x Time

Illustration: Assume that on January 1, 201A, a P25,000, 60-day, 6% note was

issued for the merchandise purchased.

The analysis of the payment on maturity date (March 2, 201A) is:

Principal P25,000
Add: Interest (25,000 x 6% x 60/360) 250
Maturity Value/ Amount to be paid on maturity date P25,250

Date Account Tiles/Explanation Debit Credit

Notes Payable 25,000
Interest Expense 250
Cash 25,200

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Payment of Non-Interest Bearing Note

When non-interest bearing note is paid on the date of maturity, the

principal amount will be paid.

Illustration: Assume that on March 1, 201A, a P10,000, 30-day note was

issued.

The entry to record the payment on maturity date (March 31, 201A) is:

Date Account Tiles/Explanation Debit Credit

Notes Payable 10,000
Cash 10,000

Sales

A trading business derives income mainly from the sale of goods. The
account title Sales is used to record the sale of goods. This account records
sale of merchandise at selling prices. All terms of purchases of merchandise are
also applicable to sale of goods.

Illustration: Assume that ALL GOOD Trading sold P60,000 worth of goods on
cash basis.

Date Account Tiles/Explanation Debit Credit

Cash 60,000
Sales 60,000

When goods are sold on credit or on account, Accounts Receivable

should be debited instead of cash. However, if a promissory note was received,
the account to be debited should be Notes Receivable.

Sales Returns and Allowances

When the buyer returns or complains about goods that are defective or of
wrong specification, the seller grants a reduction on the invoice price of the
merchandise sold. Goods which are actually returned by the customer and
received by the seller are considered as Sales Returns by the seller. In cases
where there is no actual receipt of merchandise, but only a reduction in the
invoice price is to be effected, this is called Sales Allowances.

The Sales Returns and Allowances account is used to reduce the

previously recorded sales.

Illustration: ALL GOOD Trading received merchandise worth P2,000 returned

by the buyer, ALL THE TIME Trading.

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 Date Account Tiles/Explanation Debit Credit
Sales Returns and Allowances 2,000
Cash/Accounts Receivable 2,000

If the returned merchandise were originally sold on cash basis, the

customer will be entitled to a cash refund. Therefore, the credit should be to
cash if the seller has already paid the refund. However, if the returned
merchandise were originally sold on account, the entry would require a credit to
Accounts Receivable as the collectible of the creditor from the debtor will be
reduced. The seller (creditor) must issue a credit memo to support the
reduction in the receivable account.

Collection of Accounts

Receivables may be collected within the discount period or beyond the

discount period.

Collection within the discount period

If a customer pays within the discount period, the corresponding cash

discount should be computed, as it will reduce the amount to be paid. The cash
discount granted by the seller to the buyer is called Sales Discount. It is a
reduction from the total sales made during a certain period.

Illustration: Assume the following transactions:

Mar. 1 Lucky Trading sold P12,000 worth of merchandise to Geline

Trading Terms: 2/10, 1/15, n/30.

12 Collected in full the amount due from Geline Trading.

Analysis of Mar. 12 transaction:

Invoice Price P12,000

Less: Sales Discount (1% x P12,000) 120
Net Amount to be Collected P11,880

Date Account Tiles/Explanation Debit Credit

Cash 11,880
Sales Discount 120
Accounts Receivable 12,000

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Collection of Accounts Beyond the Discount Period

The term of sale may not involve discount or the collection was made
after the discount period has ended. In such cases, the cash received by the
seller will be equal to the decrease in Accounts Receivable.

Illustration: Assume the following transactions:

Mar 1 Lucky Trading sold P12,000 worth of merchandise to Geline

Trading Terms: 2/10, n/30

12 Collected in full the amount due from Geline Trading.

No discount will be granted since collection was made after the discount
period.

Date Account Tiles/Explanation Debit Credit

Cash 12,000
Accounts Receivable 12,000

Notes Receivable

When goods are sold, a promissory note may be received which could be
an interest bearing or a non-interest bearing note.

Illustration: Assume that on Mar. 1, 201A, ALL GOOD Trading sold P60,000
worth of goods and received a 30-day, promissory note.

Date Account Tiles/Explanation Debit Credit

Notes Receivable 60,000
Sales 60,000

Collection of a Non-Interest Bearing Note

For non-interest bearing note, the amount to be collected is equal to the

principal or the face value of the note. In the previous illustration, the entry to
record the collection, if it is a non-interest bearing note, would be:

Date Account Tiles/Explanation Debit Credit

Cash 60,000
Notes Receivable 60,000

Collection of Interest- Bearing Note

When interest bearing notes are collected, interest earned from the time
the notes were received up to the time that they are collected should be
recognized.

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Illustration: Assume that on Mar. 1, 201A, ALL GOOD Trading sold P60,000
worth of goods and received a 30-day, 12% promissory note.

The amount to be collected can be computed as follows:

Principal P60,000
Add: Interest Earned (P60,000 x 12% x 30/360) 600
Total Amount to be Collected on Mar. 31, 201A P60,600

Note: The interest earned is for 30 days as the note was outstanding for
30 days only.

The entry to record the collection on Mar. 31, 201A is:

Date Account Tiles/Explanation Debit Credit

Cash 60,600
Notes Receivable 60,000
Interest Income 600

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COMPREHENSIVE ILLUSTRATION

TRANSACTIONS
201A
January 2 The proprietor of CR Trading, Mr. Concepcion Ruiz, invested
P150,000 in cash, P10,000 in store furniture, and P18,000 in
merchandise. His liability of P5,000 to Real Trading on the
merchandise was assumed by the business.
3 Paid P580 for business permits.
4 Paid in advance P8,000 rent for two months to Llanes Realty.
5 Bought store equipment from E.Corpuz Enterprises. Terms: 1/10,
n/30, P12,000.
7 Received a 15-day, 8% note from Gay’s Store for goods sold,
P9,000.
7 Discounted a P6,000, 90-day note at 6% with Mandac Financing.
7 Paid the outstanding accounts with Real Trading.
8 Made purchases of goods from:
United Distributors, P20,000. Terms: 10%, 5%, 2/10, n/30.
Champion Wholesalers, P10,800. Terms : n/15
9 Sold goods to Suerte Store, P15,500. Terms: P3,000 down, a 20-
day note for P10,000; balance 2/10, n/30.
10 Deposited P45,000 in a current account with BPI.
10 Champion Wholesalers had granted the request for credit of
P1,000 on account of defective merchandise
11 Issued a check for P20,500 for goods bought from Real Trading.
12 The account with E. Corpuz Enterprises was paid in full by check.
12 Issued a credit memo to Suerte Store to cover a P500 allowance
on the sales made on the 9th.
13 The account with Champion Wholesalers was settled by the
issuance of a 10-day, non-interest bearing note dated today.
13 Received a cash refund of P1,200 from Real Trading for
merchandise returned.
14 Paid P5,000 to United Distributors.
14 Cash sales today, P30,450.
15 Payroll of P20,200 was paid less deduction of P420 for withholding
taxes, P800 for SSS and P250 forPhilhealth.
16 Goods bought by Joan Store were delivered today, P19,000.
Terms: C.O.D.
17 Suerte Store gave a check in full payment of accounts.

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 17 Sales were made to the following:
JP’s Store — P10,000. Terms: 1/10, n/30.
Lorelei Store — P24,000. Terms: n/20.
18 Deposited the check received from Suerte Store and P12,000 in
cash.
18 Refunded P700 to Joan Store for unsatisfactory merchandise.
18 Paid in full the account with United Distributors.
19 Purchased merchandise from Champion Wholesalers, P80,000.
Terms: 20% down; a 60-day, 6% note for P40,000; balance, 2/10,
n/30.
19 Paid freight on goods bought, P620.
22 Received check from JP Store in full payment of accounts.
22 Collected the note from Gay’s Store.
23 Paid the 10-day note to Champion Wholesalers.
25 The proprietor took home some merchandise for personal use,
P800.
27 Issued a check in the amount of P1,500 as advance payment of
wages of employees.
29 Collected the note from Suerte Store.
31 Payroll of P20,200 for the second half of the month was paid, less
deduction of P420 for withholding taxes, P800 for SSS, P250 for
Philhealth and the advances on the 27th.

Record the above transactions using the following Chart of Accounts:

101 Cash on Hand 301 C. Ruiz, Capital

102 Cash in Bank 302 C. Ruiz, Drawing
103 Notes Receivable 401 Sales
104 Accounts Receivable 402 Sales Returns and Allowances
105 Advances to Employees 403 Sales Discount
106 Merchandise Inventory 501 Purchases
107 Prepaid Rent 502 Purchase Returns and Allowances
108 Store Furniture 503 Purchase Discount
109 Store Equipment 504 Freight in
201 Accounts Payable 601 Wages Expense
202 Notes Payable 602 Taxes and Licenses
203 Withholding Taxes Payable 701 Interest Income
204 SSS Contributions Payable 702 Interest Expense
205 Philhealth Contributions Payable

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Journal Entries for the Transaction of CR Trading

General Journal 1
Date Account Titles and Explanation F Dr Cr
201A
Jan 2 Cash on Hand 150,000
Store Furniture 10,000
Merchandise Inventory 18,000
Accounts Payable 5,000
C. Ruiz, Capital 173,000
Initial Investment

3 Taxes and Licenses 580

Cash on Hand 580
Payment of registration fees

4 Prepaid rent 8,000

Cash on Hand 8,000
Advance rentals

5 Store Equipment 12,000

Accounts Payable 12,000
1/10, n/30

7 Notes Receivable 9,000

Sales 9,000
15-day, 8% note

Cash on Hand 5,910

Interest expense 90
Notes Payable 6,000
90-day, 6% note

Accounts Payable 5,000

Cash on Hand 5,000
Settlement with Real Trading

8 Purchases 27,900
Accounts Payable 27,900
United Distributors – 2/10, n/30
Champion Wholesalers – n/15

9 Cash on Hand 3,000

Notes Receivable 10,000
Accounts Receivable 2,500
Sales 15,500

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 20-day note, 2/10,n/30
2
Date Account Titles and Explanation F Dr Cr
201A
Jan 10 Cash in Bank 45,000
Cash on Hand 45,000
Deposit at BPI

Accounts Payable 1,000

Purchase Returns and Allowances 1,000
Allowance granted by CW

11 Purchases 20,500
Cash in Bank 20,500
Purchase of goods from Real T.

12 Accounts Payable 12,000

Store Equipment 120
Cash in Bank 11,880
Payment to E. Corpuz Ent.

Sales Returns and Allowances 500

Accounts Receivable 500
Credit memo to Suerte Store

13 Accounts Payable 9,800

Notes Payable 9,800
10-day note

Cash on Hand 1,200

Purchase Returns and Allowances 1,200
Cash refund from Real trading

14 Accounts Payable 5,000

Cash on Hand 5,000
Partial Payment to U D

Cash on Hand 30,450

Sales 30,450
Total cash sales

15 Wages 20,200
Withholding tax payable 420
SSS Contributions Payable 800
Philhealth Contributions Payable 250
Cash on Hand 18,730
Payroll for the first half of the

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 month
3
Date Account Titles and Explanation F Dr Cr
201A
Jan 16 Cash on Hand 19,000
Sales 19,000
C.O.D.

17 Cash on Hand 1,960

Sales Discount 40
Accounts Receivable 2,000
In full of Suerte’s account

Accounts Receivable 34,000

Sales 34,000
JP Store – 1/10, n/30
Lorelei Store – n/20

18 Cash in Bank 13,960

Cash on Hand 13,960
Deposit at BPI

Sales Returns and Allowances 700

Cash on Hand 700
Cash refund to Joan Store

Accounts Payable 12,100

Purchase discount 342
Cash on Hand 11,758
Payment to United Distributors

19 Purchases 80,000
Cash on Hand 16,000
Notes Payable 40,000
Accounts Payable 24,000
60-day, 6% note; 2/10, n/30

Freight in 620
Cash on Hand 620
Freight on goods bought

22 Cash on Hand 9,900

Sales Discount 100
Accounts Receivable 10,000
Collection of Accounts

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 4
Date Account Titles and Explanation F Dr Cr
201A
Jan 22 Cash on Hand 9,030
Notes Receivable 9,000
Interest Income 30
Collection of note

23 Notes Payable 9,800

Cash on Hand 9,800
Payment of a 10-day note

25 C. Ruiz, Drawing 800

Merchandise Inventory 800
Withdrawal of merchandise

27 Advances to employees 1,500

Cash in Bank 1,500
Check issued for advances

29 Cash on Hand 10,000

Notes Receivable 10,000
Collection of note

31 Wages 20,200
Withholding taxes payable 420
SSS Contributions Payable 800
Philhealth Contributions Payable 250
Advances to employees 1,500
Cash in Bank 17,230
Payroll for the second half of
the month

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 Review Questions

1. What are the accounts used in a merchandising business but not in a service
concern?

2. What are the two methods of accounting for merchandise?

3. How are purchase transactions recorded in the general journal of the buyer?

4. What are trade discounts? How are these treated in the book of accounts?

5. What is freight? Give the freight terms. How are these recorded in the book
of the purchaser/seller? What is the treatment of freight in relation to the total
cost of purchases?

6. When is the account Purchase Returns and Allowances used? How is it

treated in relation to the net cost of purchases?

7. What are cash discounts? How are these treated in the book of accounts?
Differentiate cash discount from trade discount.

8. How are payments of accounts recorded? If payment is made within the

discount period? If payment is made beyond the discount period?

9. What is the basis of the discount if there are returns or allowances availed
of?

10. When can there be cash discount on partial payment?

11. When a non-interest bearing note is issued, how will the payment be
recorded?

12. How is the payment of an interest bearing note recorded?

13. How are sales transactions recorded in the general journal of the seller?

14. Give the pro forma entries to record the following transactions:

a. Sale on cash basis

b. Sale on account
c. Sale with the receipt of a promissory note
d. Sales returns and allowances
e. Collection of accounts within the discount period
f. Collection of accounts beyond the discount period
g. Collection of a non-interest bearing note
h. Collection of an interest bearing note

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 Exercise 5-1: Compute for the invoice price.

List Price (P) Trade Discount (%)

a. 60,000 2
b. 50,000 10, 5
c. 80,000 8, 5, 1
d. 30,000 5
e. 25,000 5, 2

Exercise 5-2: In each of the following cases, determine the missing

information:

Date of Invoice Date of Cash Amount

Terms List Price
Invoice Price Payment Discount Paid
20%,10%, 2/10,
a) Jan. 25 P25,000 ? Feb 3 ? ?
n/30
5%, 2/10,1/20,
b) June 18 60,000 ? June 29 ? ?
n/60
c) June 7 2/10,n/30 ? 20,000 June 17 ? ?
d) July 15 2/10, 1/15, n/30 16,000 ? July 31 ? ?
e) July 20 5%, 2% E.O.M. 18,000 ? July 31 ? ?
10%, 2/10, 1/20,
f) July 17 8,500 ? Aug 7 ? ?
n/30

Exercise 5-3: The LC Trading received the following invoices:

Invoice Price Freight Terms Freight Amount Freight Paid by

a) P25,000 F.O.B. Destination P1,500 LC Trading

b) P80,000 F.O.B. Shipping Pt. 2,500 Shipper
c) P95,000 F.O.B. Destination 2,500 Shipper
d) P6,000 F.O.B. Shipping Pt. 900 LC Trading

Prepare the journal entries of LC Trading for each of the above invoices.

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Exercise 5-4: For each of the situation given below, compute the amount of
discount if full payment is made within the discount period.

a) Invoice Price P15,000

Terms 2/10,n/30

b) Invoice Price P9,000

Terms 1/10, n/30
Returns and Allowances P500

c) Invoice Price P16,300 (P300 freight charges included)

Terms 2/10, n/30

d) Invoice Price P9,500

Terms 2/10, n/30
Partial Payment 40% made after 5 days from invoice date

e) Invoice Price P35,000

Down Payment P3,000
Terms 2/10, n/30
Partial Payment P4,000 made 4 days after invoice date

f) Invoice Price P19,200 (P200 freight charges included)

Terms 1/10, n/30
Returns and Allowances P700

g) Invoice Price P16,000

Terms 1/10, n/30
Allowances P200
Partial Payment P1,000

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Problem 5-1:

Record the following transactions in a general journal:

Feb. 201A

2 A. Marquez sold his lot costing P100,000 for P150,000 and

invested proceeds in a dry goods store named AM Trading.
3 Bought goods from DV Trading, P80,000. Terms: P10,000 down,
P50,000, 6% note; balance 1/10,n/30.
3 Deposited P20,000 with BDO.
4 Received a credit memo from DV Trading, P5,000 for merchandise
returned.
6 Cash sales to date, P15,000. Deposited the same with BDO.
7 Sold merchandise to Boyet Galvez, P5,000. Terms P1,000 down,
P2,000, 20-day, 6% note, balance, 2/10,n/30.
8 Issued a credit memo for allowances of P500 granted to B. Galvez
for defective goods.
9 Issued a check to DV Trading in full payment of account.
10 Received a check from B. Galvez as full payment of account and
deposited it at BDO.
11 Cash sales to date, P20,000. Deposited the same with BDO.
12 Purchased store equipment from Duratex Trading, P15,000. Terms
2/10,n/30
13 Cash Sales to date, P22,000.
14 Issued a check to Bruce Bros. for store supplies bought, P2,000
15 Received a 60-day 6% note for P7,500 from Lee Mateo for
merchandise sold.
16 Returned supplies worth P500 to Bruce Bros. and received cash as
refund.
16 Collected the account of B. Galvez in full.
17 The owner took home goods costing P1,000 and priced to sell at
P1,250 for his family’s use.
18 Issued a check to DV Trading to apply on the note given on the 3rd
.Cash sales to date, P20,000.
27 Collected the note of B. Galvez in full.
28 Paid salaries of workers, P5,000.

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 Problem 5-2:

K. Waga opened a furniture store and engaged in the following

transactions during the month of April. Prepare the journal entries in a general
journal.

April 1 Invested P950,000 cash in a furniture store.

Purchased beds and bedrooms fixtures from Dessert Furniture Shop.
P26,300 C.O.D.
Purchased 30 lounge chairs at P1,500 each with terms 1/10, n/45.
2 Paid the trucking firm for the shipment of the chairs, P150.
3 Returned 3 of the chairs purchased because they were defective.
Received a credit memo from the seller.
3 Sold a bed to a family friend, P14,000. Terms: 2/10, n/30.
3 Paid for the shipment of the bed, P500.
3 Purchased 8 office tables at P2,600 each. Terms: 20%
downpayment, balance, 2/10, n/30.
4 Sold 3 of the office tables to Morales Company at P6,000 each.
Terms : C.O.D.
5 Received a credit on open account from the seller of the office tables
due to a slight damage on one of the tables, P500.
5 Issued a credit memo for P650 to Morales Company due to their
claim of slight damage on one of the tables sold.
7 Paid P9,000 in partial payment of the account on the lounge chairs.
8 Purchased 4 sala sets from ENV Wholesalers, Inc., P100,000.
Terms: 2/10, n/30.
9 Purchased from Benito Furnitures, Inc. 25 office chairs at P2,500
each.
Terms: 15-day, 10% promissory note.
10 Sold a sala set to V. Santos, P30,000. Terms: 6% 20-day promissory
note.
11 Paid the total amount due on the lounge chairs.
13 Paid the amount due on the office tables.
13 Collected in full the amount due on the bed.
14 Paid P20,000 of the account with ENV Wholesalers, Inc.
15 Discounted own P50,000 15-day, 9% promissory note with PNB.
15 Paid half month salary of sales personnel, P21,000.
18 Paid in full account with ENV Wholesalers, Inc.
19 Bought office supplies for cash, P1,500.
21 Sold a sala set to D. Guzman, P28,000. Terms: 5-day non-interest
bearing note.
24 Paid the note due to Benito Furnitures, Inc.
26 Collected the note due from D. Guzman.
27 Paid utility bills, P1,850.
28 Paid office rent, P2,000.
29 Paid employees’ salaries, P18,000.
30 Paid the note to PNB which is due today.
30 Collected the note due from V. Santos.

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Problem 5-3

Record the following transactions of Dada Farm Products Enterprise in a

general journal.

Jan. 2 Purchased insecticides and fertilizers from Matagumpay Chemical

Corporation for P68,000 cash.
3 Returned P600 worth of damaged insecticides and fertilizers from
Matagumpay Chemical Corporation for which cash refund was
received.
4 Purchased chicken and hog feeds from Noon Agriculturals for
P28,000. Terms: 2/10, n/30.
7 Paid freight on the above purchase, P285.
Paid P12,000 to Noon Agriculturals.
Purchased farm tools from Habagat Tools Enterprises for P19,500.
Terms: 20% downpayment, balance 1/15, n/30.
Paid Noon Agriculturals, P2,000
12 Purchased fertilizers from Alpha Company, P10,000. Terms: less
5%, 2/10, n/30.
Paid freight amounting to P500.
13 Purchased store counters from AB Crafts & Furniture Store for
P8,000. Terms 2/10, n/30.
14 Returned defective merchandise to Alpha Company for which an
allowance of P600 was received.
Paid the account with Noon Agriculturals in full.
17 Purchased Chicken and Hog Feeds from C-Meg Farm Corp.,
P12,000. Issued a non-interest bearing promissory for the whole
amount.
18 Bought for cash additional chicken and hog feeds from Sta. Clara
Farm Supply Distributors, P6,000.
20 Paid in full account with Alpha Company.
21 Bought brown paper bags and sando bags from Divisoria, P500
cash.
23 Settled the account with AB Crafts & Furniture in full.
25 Paid the account with Habagat Tools Enterprises in full.

Problem 5-4

Record the following selected transactions of NAPPCO Florist Store in a

general journal.

Jan. 2 Sold for cash P1,800 worth of flower and plants to Santo Tomas
Cathedral.
3 Gave cash refund of P200 for several plants returned by Santo
Tomas Cathedral.
5 Received a promissory note from Jose’s Floral Co. for fresh flowers
delivered to them, P5,500.
Paid for the delivery cost of the above sales.
10 Delivered P5,500 worth of fresh flowers and plants to Yano’s Garden

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 & Flower Shoppe. Terms: 2/10, n/30.
11 Received defective plants returned by Yano’s Garden & Flower
Shoppe for which a credit of P400 was given.
12 Sold fresh flowers to Coke Flower Shop, P4,000. Terms: less 15%,
2/10, n/30.
19 Collected the account of Yano’s Garden & Flower Shop in full.
20 Sold 10 bundles of Tulips to ARLink Bridal Shop, P8,500. Terms:
1/10, n/30.
23 Collected P1,000 from ARLink Bridal Shop.
25 Received full payment from Coke Flower Shop.
26 Sold various flowering plants to Tabladillo Landscaping Co., P6,000.
Terms: 30% down payment, balance 2/10, n/30.
27 Collected P900 from ARLink Bridal Shop.
30 Received full payment from ARLink Bridal Shop.

Problem 5-5

The following are the selected promissory note transactions of E. Simeon

Merchandising. Record the following in a general journal.

Feb. 2 Sold merchandise to Vench Trading, P160,000. Terms: 20-day,

8% promissory note.
5 Loaned P20,000 to T. Soy. A non-interest bearing note was
received.
15 Discounted own P50,000, 10%-30-day promissory note with RP
Bank.
17 Collected the note due from Vench Trading.
20 Collected the amount due from T. Soy.
25 Granted a loan to ABC Store, P50,000. Received a 30-day,9%
promissory note for P50,000.
26 Purchased merchandise from XYZ Supertore, P15,000. Issued a
20-day, 5% promissory for the whole amount.
March 17 Collected the amount due from ABC Store.
17 Paid the note due to RP Bank.
18 Paid the total amount due to XYZ Superstore.

101