ACCOUNTING CYCLE for MERCHANDISING BUSINESS
Dr. Josefina R. Torres
MERCHANDISING BUSINESS • Business organization that is engaged in buying and selling of merchandise
MERCHANDISE • Goods or articles acquired by the business that are intended for sale • Merchandise inventories Include only goods that are held for sale in the normal course of business operations • Examples: office supplies for sale are inventories for National Book Store but “office supplies” for UST
Merchandise Inventory Merchandise Inventory – Beginning • Goods available at the start of the accounting period
Merchandise Inventory - End • Goods available or remain unsold at the end of the accounting period
ACCOUNTING FOR MERCHANDISING BUSINESS • The accounting cycle for a service business is also applied to merchandising business. • Measuring income for a merchandising company is the same as for a service business, however, their operating cycle differs.
ACCOUNTING FOR MERCHANDISING BUSINESS • The operating cycle begins by purchasing merchandise and ends by collecting cash from selling the goods. • The length of the operating cycle depends on what type of merchandise the business is into.
ACCOUNTING FOR MERCHANDISING BUSINESS • For example, fast food establishments may have an operating cycle of only a day but companies selling merchandise on installment basis may have operating cycle that can least for years
ACCOUNTING FOR MERCHANDISING BUSINESS • The merchandising business uses special accounts to record the buying and selling of merchandise or goods for sale.
SPECIAL MERCHANDISE ACCOUNTS
SALES • Income account used to record sale of merchandise • Credit to record increase; debit to record decrease //
SALES RETURN & ALLOWANCES • Used to record the amount of goods returned by the buyer • Reduces the amount of sales • Debit to record increase; credit to record decrease • It is evidenced by the issuance of a credit memorandum //
CREDIT MEMORANDUM • Document that informs a customer that a credit has been made to the customer’s account receivable arising from discounts, returns and allowances//
SALES DISCOUNT • Discount granted by the seller to encourage early payment of the buyers • Decreases the amount of sales • Debit to record increase; credit to record decrease //
FREIGHT OUT • Freight charges or cost of delivering the product to the buyer’s place paid by the seller • Debit to record increase; credit to record decrease //
Note: • These special merchandise accounts are used to record sale of merchandise only. • For sale of non-merchandise items, the ordinary account titles are used.
TERMS OF SALES • n/30 – The amount of the invoice is payable within 30 days from the date of sale. – One of the most common modes of purchase – No discount is given by the seller
TERMS OF SALES • 2/10, n/30 – A discount of 2% is deducted from the invoice price if paid within 10 days from date of sale – The gross invoice price is to be paid if payment is made after the discount period. – Account should be paid in 30 days from the date of sale
TERMS OF SALES • COD – Cash on Delivery – The invoice price is to be paid upon delivery of the product
TERMS OF SALES • EOM – End of month – Account should be paid on or before the end of the month of sale
TERMS OF SALES • 2/10, EOM, n/60 – 2% discount is given if the customer pays by the tenth of the month following the month of sale – Beyond this period, the full amount must be paid within 60 days from the date of sale
SHIPPING CHARGES ON MERCHANDISE SOLD OR PURCHASED • The buyer and the seller must agree on – who is responsible for paying any freight charges, and – who bears the risk of loss while the merchandise is on transit
FREIGHT TERMS • FOB Shipping Point – – – –
Free on Board at point of origin. The buyer pays for the freight or transportation The buyer debits “Freight In” for this. The buyer assumes the risk of loss while goods are in transit
FREIGHT TERMS • FOB Destination – Free on Board up to destination. – The seller pays for freight or transportation – The seller assumes the risk of loss while the goods are in transit – The seller debits “Freight Out” or “Delivery Expense” account for this
CHART OF ACCOUNTS • List of account titles used in recording business transactions. • Arranged in the ALPICE order
Chart of Account of a Merchandising Business
Examples of Transactions Involving Sale of Merchandise The following transactions of Triple J Trading occurred during the month of January 2009 January 3 - Triple J sold merchandise worth P20,000 to Mr. Vargas. Terms: COD 3 - Sold merchandise worth P 30,000 to ABC Co. Terms: P10,000 downpayment, balance: 2/10; n/30 4 - Mr. Vargas returned defective merchandise amounting to P300. A cash refund was given to him.
Jan 5 ABC Co. returned defective merchandise amounting to P500. 6 - Sold merchandise to various customers – P13,000. Paid freight charges amounting to P400. 12 - Received full payment from ABC Co. 13 - Sold an old office table for P1,000. COD //
ACCOUNTING FOR PURCHASES • PURCHASES – Means goods bought for the purpose of resale without any change in the physical form – Debited when goods are acquired on cash basis or on account //
PURCHASE RETURNS AND ALLOWANCES – Used to record the goods returned by the buyer to the seller – This usually happens because the goods are faulty or damaged – Decreases the cost of goods bought – Credit for increases, debit for decreases //
PURCHASE DISCOUNTS – Used to record the amount of discounts granted by the seller – Decreases the cost of goods bought – Credit for increases, debit for decreases //
FREIGHT IN – Account debited by the buyer for the transportation expense of goods purchased – Debit for increases, credit for decreases //
• Note: – These special merchandise accounts are used to record purchase of merchandise only. – For purchase of non-merchandise items, the ordinary account tiles will be used.
Examples of Transactions Involving Purchase of Merchadise The following transactions took place during the month of January 2009: Jan. 16 - AB Enterprises bought shoes, slippers and handbags from their Marikina supplier amounting to P95,000 under the purchase term of 2/10, n/30. It was agreed between buyer and supplier that the freight in or transportation from Marikina to Makati, amounting to P500, is to be paid by the buyer, AB Enterprises.
Jan 17 AB Enterprises received deliveries of handbags from Celine amounting to P20,000. Terms: COD 18 -
AB Enterprises ordered and received delivery from Manel, shoes costing P35,000. Terms: n/30.
19 -
AB Enterprises paid to the Marikina supplier the P95,000 less 2% discount. (see Jan. 16)
20 -
The buyer AB Enterprises found some defective goods and made complaint to Celine. Supplier Celine agreed to refund P1,200 and promptly paid this amount to AB Enterprises.
23 -
29 -
30 -
AB Enterprises complained to Manel on some unpolished shoes for which Manel gave the buyer rebate of P1,000. A credit memorandum was received from Manels Purchased supplies for office use, P1,000 on cash basis. Purchased goods amounting to P30,000 less 20%
Credit memorandum – a note issued by the seller to acknowledge the return of merchandise and to inform the buyer that his account has been reduced accordingly.
DISCOUNTS • Reduction in the original price of goods • Types of Discounts a. Cash discount b. Trade discount
A. CASH DISCOUNT – Reduction in price to encourage a customer to pay immediately – Recorded in the books as • Sales discount (by seller) • Purchase discount (by buyer) //
B. TRADE DISCOUNT – Reductions from the published list price granted to dealers or wholesalers for buying large quantities or for regularly patronizing the business – Granted to customers who buy items to resell or who will use the items to produce other salable goods – Often listed in catalogs that contain the list price as well as the amount of trade discount available.
B. TRADE DISCOUNT (cont’n) – It has no relationship to whether a customer is paying a bill early. – Trade discounts and list price are not shown in the accounts of either the buyer or the seller. – Computed as: List price x rate of discount //
ACCOUNTING FOR TRADE DISCOUNT • Trade discounts and list price are not shown in the accounts of either the buyer or the seller. • From the point of view of the buyer, only the net price paid is recorded in the books • From the point of view of the seller, the price received from the buyer is recorded in the books
Example 1:
Example 2:
