Merchandising

Merchandising purchases inventory, sells

inventory, and uses cash to purchase more
inventory.
Is someone that sells tangible products in the
same from that it purchased them.
Merchandising is using a Function of Cost
format.
Service is using a nature of expense format.
 Retail Clothing
 Grocery stores
 Bookstores
Service Business sells knowledge or expertise
while a merchandising business sells a
particular group of products.
For Cash Sales, the cycle is from cash to
inventory and back to cash.
For Sales on account, from cash to inventory to
account receivable and back to cash.
 Purchases 10,000
Cash 10,000
To record purchases of merchandise on cash.
 Account Receivable 15,000
Sales 15,000
To record sale on merchandise on credit.
 Cash 15,000
Account Receivable 15,000
To record collection of account.
Service Merchandising
Income Statement Income Statement
Revenues from Services Net Sales
Minus minus
Expenses Cost of Sales
Equals equals
Profit Gross Profit
Add or minus
Income Expenses
Equals
 PROFIT

Merchandising Terms
Inventory- The goods to be sell
Supplies- use within the company.
Net sales- arises from the sale of goods
Cost of Sales/Cost of Good sold- cost of
inventory the entity has sold to the
customers.
Gross Profit- Net sales minus Cost of
sales.
Net Purchases- Gross amount of
Purchases
Net Cost of Purchases- Total amount of
cost purchases. Net Purchases added by
the transportation in.
Goods Available for Sale- Beginning
added by the Net purchases. Goods that
are Available for sale.
Net Sales- Cost of Good sold added by
Gross Profit.
Merchandise Inventory, Beginning-
Inventory from the other period that
became an opening account for
inventory.
 Merchandise Inventory, ending-
Inventory from the physical count at the
end of the period.
Finance Cost- cost just like Interest
expense that belongs to the operating
expenses.

SOURCE DOCUMENTS
 Sales Invoice- prepared by the seller of goods and sent to the
buyer. It contains records of sales or details of credit.
 Sales Invoice is for cash sales.
 Credit sales is used for sales on account.
 Bill of Lading- Document issued by the carrier containing the
terms of delivery. It specifies the contractual conditions and terms
of delivery.
 Official Receipt- evidences the receipt of cash by the seller. It
notes the invoices paid and other details of the payment.
 Check- a written order to the bank by a depositor to pay the
amount specified in the check from his checking account to the
person name in the check.
 Receiving Report- is a document containing information about
goods received from a vendor.
 Delivery Receipt- signed by the receiver of a shipment to indicate
that they have in fact received the items being shipped.
 Credit Memorandum- notification of decreased due to sales
returns or other errors requiring adjustments.
 Debit Memorandum- a debit was made in the seller’s account on
the buyer’s book.
 Account Payable voucher- used to records liabilities.
 Statement of Account- formal notice to the debtor detailing the
accounts already due.
 Deposits Slips- Printed bank form; Deposits Receipt.
 Purchase Requisition- Written request to the purchaser of an
entity from an employee that goods need to be purchased.
 Purchase Order- authorization made by the buyer to the seller to
deliver the merchandise as detailed in the form.

STEPS IN PURCHASE TRANSACTION

1. Fill in a Purchase Requisition Form and send it to the
purchasing department.
2. Purchase department prepares a Purchasing Order.
3. After receiving the purchase order, the seller forward an
invoice to the purchaser upon shipment of the merchandise.
4. The purchaser’s receiving department sees to it that the terms
in the purchase order are complied with and prepares a
receiving report.
5. Before approving the invoice for payment, all accounts will be
check if everything agrees with each other.

Terms of Transactions
Merchandise may be purchased and sold either on credit
terms or for cash on delivery. When goods are sold on
account, a period called of CREDIT PERIOD is allowed for

payment.
 Purchase Price
 -simply the cost of merchandise upon purchase.
 Discount(Trade vs. Cash)- Discount in general, is a
reduction in the price of an item.
 TRADE DISCOUNT- is a reduction in price to
convert the list of catalog price to an amount to
be charged the customer (purchase price or
invoice price).
 It encourages the buyers to purchase
products because or mark down from the list
price.
 CASH DISCOUNTS- is a reduction in price if
payment is made within the discount period.
Notation as “2/10” which means the buyer may
avail a two percent discount if the invoice is paid
within ten days from the invoice date.
o Purchase Discount- from the buyer’s
point of view.
o Sales Discounts- from the seller’s point
of view.
 Credit Period- also known as net credit period or net terms.
It is a days from the time of purchase upon which an
obligation has to be settled.
 n/30 credit period of 30
 n/10 eom – credit period of ten days after the end
of the month.
 Discount Period- a certain number of days/periods, if paid
within shall entitle the buyer a certain discount to be deducted
to the total amount due.
  Example: 2/10, n/30
Where 2 is the cash discount, 10 is discount
period and 30 where credit period.
SALES RETURNS AND ALLOWANCES
- Buyers may return good to the seller for credit if the sale was made
for account or for cash refund if the sale was for cash. Each return
or allowances is recorded as a debit to an account called sales
returns and allowances.
- Users CREDIT MEMORANDUM, which is a formal
acknowledgement that the seller has reduced the amount owed by
the customer
- A Contra-Income Accoount
PURCHASE DISCOUNTS
- Merchandise purchases are usually made on credit and commonly
involve purchase discounts for early payment.
PURCHASES RETURNS AND ALLOWANCES
- Sales returns and Allowances in the seller’s books are recorded as
Purchase Returns and Allowances in the books of the buyer.

TRANSPORTATION COST
FOB- Free on Board
- The term of shipment determines who should shoulder the cost of
transportation.
FOP Shipping Point- buyers shoulders the shipping cost.
- Ownership over the goods passes from seller to the buyer when the
inventory leaves the seller’s place business- the shipping point.
- Buyer already owns the good while in transit and therefore,
shoulders the transportation cost.
- FREIGHT IN
FOB Destination- seller bears the shipping cost.
 - Title or ownership passes only when the goods are received by the
buyer at the point of destination.
- While in transit the seller is still the owner of the goods so the seller
shoulders the transportation costs.
- FREIGHT OUT
FREIGHT PREPAID- The seller pays the transportation costs before
shipping the goods sold.
FREIGTH COLLECT- the freight entity collects from the buye.

FREIGHT TERMS
 FOB Destination, Freight Prepaid
 FOB Shipping Point, Freight Collect
 FOB Destination, Freight Collect
 FOB Shipping Point, Freight Prepaid
- The shipping cost borne by the buyer using the periodic
inventory system are debited to transportation in account.
- The shipping costs borne by the seller are debited to
transportation out account.

INVENTORY SYSTEM
Periodic Inventory
- Useful for smaller businesses.

- Relies on physical counting of inventories to determine ending

inventories.

- Lessees inventory control as updates to inventory are done

occasionally.
 - Can allow use of manual record keeping.

- Maintains additional accounts:

 Purchase Account

 Purchase Returns and Allowances

 Purchase Discounts

 Transportation In

 Sales Returns and Allowances

 Sales Discounts.

- No entry is recorded to capture the cost of goods solds.

- Cost of goods solds is computed at the end.

- No entries are made in to the inventory account as the

merchandise is bought or sold.

- At the end of the period you credit beginning balance.

- PHYSICAL COUNT- is use to get the ending inventory.

Perpetual Inventory

- Inventory account is continuously updated with the

movement in inventory.
- Inventory accounts requires that at the time of purchase, the
merchandise inventory is debited.
- In sale- the cost of sale is determined and recorded by a
 Cost of sales xxx
Inventory xxxx
- Both the inventory and cost of sales accounts receive entries
throughout the accounting period.
- The ending inventory should reconcile with the actual
physical count at the end.
- The account is adjusted for any inaccuracies discovered.
- Count provides an independent check on the amount of
inventory that should be reported at the end of the period.
EMPHASIS
Movement affecting inventory is recorded in the inventory
account.
At the time of sale, 2 entries are recorded;
 To record Sales
 Account Receivable
Sales
 To record Cost of Good sold.
 Cost of Sale
Inventory
Cost of Good Sold is readily available.

FORMULA
VAT- Value Added Tax VAT EXCLUSIVE
VAT = OUTPUT TAX – INPUT TAX ________
X12% = __________
VAT INCLUSIVE
________ / 1.12 =
_______________ X.12 =
COST OF GOOD SOLDS
  BEG [ (P-R AND A-D) + TI] – ENDING = COGS
 GAS- Ending
 Net Sales- Profit
 Beginning Inventory
Add: Net Puchases
Goods Available for Sale
Less Ending Inventory
COST OF GOOD SOLD
Net Purchases= P-R&D-D
NET COST PURCHASES= NP+TI OR GAS-BEGINNING
GAS= BEG+NCP OR ENDING+COGS
GROSS PROFIT= NET SALES- COGS
BEGINNING= GAS-NCP
ENDING= GAS-COGS
PROFIT= GROSS PROFIT- TOTAL OPERATING
EXPENSES
NET INCOME
Net sales
Less: Cost of Good Sold
Gross Profit
Add: Other Income
Total Revenue
Less: Operating Expenses
Net Income
COST OF SALES OR COST OF GOOD SOLD
- Is the largest single expense of the merchandising business.
- It is the cost of inventory that the entity has sold to customers.

MERCHANDISE INVENTORY
- Beginning Inventory- is the merchandise inventory at the
beginning of the accounting period.
 - Ending Inventory- is the merchandise inventory at the end of
the accounting period.
(the ending inventory of the current period will be the beginning
inventory next period. )

NET COST OF PURCHASES

- Net cost of purchases consist of gross purchases minus
purchases discounts and purchases returns and allowances
equals net purchases plus transportation cost.
PURCHASES
- A temporary account, used only for merchandise purchased for
resale.
- Its sole purpose is to accumulate the total cost of merchandise
purchased during an accounting period.
- Recording merchandise purchases at invoice price is known as
the GROSS PRICE METHOD of recording purchases.
Purchases Returns and Allowances
- Is a contra account and is accordingly deducted from purchases
in the income statement.
Purchase Discount
- Is a contra account that is deducted from purchases on the
income statement.
OPERATING EXPENSES
-These are expenses other than cost of sales, which are incurred to
generate profit from the entity’s major line of business-merchandising.
- Categories of Operating Expenses.
 Distribution Cost or Selling Cost- are those expenses
related directly to the entity’s efforts to generate sales.
 Sales Salaries and commissions and realetd
employer payroll expenses.
  Advertising and store displays
 Travelling expenses
 Store supplies used
 Depreciation of store property and
equipment
 Transportation out.
 Administrative Expenses- are those expenses related to
the general administration of the business.
 Officers and Office Salaries and other
related employer payroll expenses.
 Office Supplies used.
 Depreciation of Office Property and
Equipment
 Business Taxes
 Professional Services
 Uncollectible Accounts Expense
 Other general office Expenses.
 Other Operating Expenses- are those expenses that are
not related to the central operations of the business.
 Expenses and losses from peripheral or
incidental transactions of enterprise.
 Loss on sale of investments or loss on
sale of property and Equipment.

COMPLETING THE CYCLE FOR A MERCHANDISING

BUSINESS
Need for a physical count to obtain the cost of the ending
inventory.
Ending Inventory is deducted from goods available for sale to
obtain cost of sale.
The resulting total cost of inventory is the ending inventory.
 MERCHANDISE INVENTORY AT THE END OF THE PERIOD
The following is needed:
1. To remove the beginning balance from the merchandise
inventory account and to transfer it to income summary.
2. To enter ending balance in the merchandise inventory account
and to established it in the income summary.

Two Method to adjust the Beginning and Ending

Merchandise Inventory:
1. Adjusting Entry Method
a. To remove beginning balance of merchandise
inventory and transfer it to income summary.
b. To establish ending balance of merchandise
inventory and deduct it from goods available
for sale in income summary.
2. Closing Entry Method
a. To close temporary accounts with debit
balances to remove beginning inventory.
b. To close temporary accounts with credit
balances and to establish ending inventory.

Under the closing entry method, no adjustment entry

is made for merchandise inventory.
The effect of adding beginning inventory to net cot of
purchases; observe that the purchases account is also
in the debit column of the income statement.
 Ending balance is entered in the credit column of the
income statement.
Ending Inventory is also entered in the debit column
of the balance sheet.

NATURE OF EXPENSE METHOD

- Expenses are aggregated or combined in the income
statement according to their nature and are not
reallocated among various functions within the entity.
- Also refers as COST OF SALES method, classifies
expenses according to their function as part of cost of
sales, distribution/selling, administrative and other
operating activities.
CLOSING ENTRY
1. Close the temporary accounts that has debit balances
to the income summary including the ending
inventory.
2. Close the temporary accounts that has credit balances
to the income summary including the beginning
inventory.
3. Close the income summary account to the capital.
4. Close the withdrawal.