Introduction to Merchandising Transactions

 ACTBAS2: Introductory Introductory Accounting  Accounting‐‐Part  Part 2 2 Introduction to Merchandising Transactions Documents common in a merchandising business 1. PurchaseOrder 

Containsthedetailsofgoodtobebought,numberofunits,brandormodel,unitprice,andother relevantinformation

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Preparedbythebuyerandforwardedtotheseller

2. ChargeSalesInvoice 

Adocumentwhichcontainsthedetailofgoodssoldonaccount.

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Preparedbythesellerbasedonthepurchaseorderreceivedfromthebuyer

3. CashSalesInvoice 

Similartothecharge Similartothecharge sales invoicewhichcontainsdetailsofgoodssoldoncashbasis invoicewhichcontainsdetailsofgoodssoldoncashbasis

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Issuedatpointofsale

4. OfficialReceipt  

Issuedbythesellerwhenhe(she)collectsfromacreditcustomer,orwhencashisreceivedfrom saleofnon‐inventoryitems.

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Issuedoncollectiononaccounts

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Involvedinothertransactionsexceptmerchandisingtransactions

5. DebitMemorandum 

Adocumentpreparedbythebuyerinformingthesellerofthereturnofdefectivegoodsandthe correspondingreductionofliability.

6. CreditMemorandum 

Adocumentpreparedbythesellerinformingthebuyerthathehasreducedhiscollectiblefromthe buyer

Note: Ifpurchaseis Ifpurchaseismadeo madeoncash ncashbasis, basis,thena thenarefund refundisappro isappropriate. priate.Thede Thedebitand bitandcreditm creditmemorandum emorandumsdo sdo notapplytoanyotherformofconsiderationssuchascashorpromissorynotes. Methods of Recording of  Recording Merchandise 1. PeriodicInventory 

DoesnotmaintainledgeraccountsforCost  Doesnotmaintainledgeraccountsfor Cost of  of Sales Sales

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DoesnotupdatetheMerchandise DoesnotupdatetheMerchandise Inventory 

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AllpurchasesandsalesofmerchandisedonotaffectMerchandise Allpurchasesandsalesofmerchandisedonotaffect Merchandise Inventory .Instead,allpurchases .Instead,allpurchases andsalesarerecordedinalternativeaccounts.

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Thecostofmerchandisesoldandthecostofmerchandiseonhandattheendoftheperiodis determinedthroughphysicalcountofthegoods.

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NeedsanadjustingentrytosetuptheendingbalanceoftheMerchandise Needsanadjustingentrytosetuptheendingbalanceofthe account  Merchandise Inventory account 

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Thereisaneedtocomputeforcostofsales

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Usedbyfirmswhosetransactionsarerecordedmanuallyandwhoseinventoriesarevoluminous butwithcheaperunitprices

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Thebuyerusesthefollowinguniqueandexclusiveaccounttitlesinrecordingmerchandising transactions:

 ACTBAS2: Introductory Introductory Accounting  Accounting‐‐Part  Part 2 2 Introduction to Merchandising Transactions i. Purchases ii. PurchaseReturnsandAllowances iii. PurchaseDiscount  iv. Freight‐In(alsoknownasTransportation‐In) 

Thesellerusesthefollowingaccounttitlesinrecordingmerchandisingtransactions: i. Sales ii. SalesReturnsandAllowances iii. SalesDiscount  iv. Freight‐Out(alsoknownasTransportation‐OutorDeliveryExpense)

2. PerpetualInventory 

SeparateledgeraccountsaremaintainedforMerchandise Separateledgeraccountsaremaintainedfor Merchandise Inventory andCost  andCost of  of Sales. Sales.

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Costofgoodsalreadysoldandcostofgoodsnotyetsoldarealways(perpetually)availablefrom records.

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Computerizedsystemcanaffordtoemploythismethodofrecordingmerchandisingtransactions.

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Physicalcountofgoodsonhandattheendoftheyearisalsomadetoconfirmthebalanceof perledger. Merchandise Inventory perledger.

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AnydifferentbetweenthephysicalcountandtheledgerbalanceoftheMerchandise Anydifferentbetweenthephysicalcountandtheledgerbalanceofthe Merchandise Inventory  accountiseitherdebitedorcreditedtoInventory  accountiseitherdebitedorcreditedto Inventory Shortage Shortage orInventory  orInventory Overage Overageaccount. account.

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Ifthephysicalcountislessthantheledgerbalance,thereisinventoryshortage,otherwise, inventoryoverage.

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Inventory Shortage Inventory Shortage orInventory  orInventory Overage Overage isclosedtotheCost  isclosedtotheCost of  of Sales Sales account.

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Underamanualenvironment,thisinventorymethodisusedbyfirmswithfewinventoriesbuta morecostlyunitprice.

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ThebuyerusestheMerchandise ThebuyerusestheMerchandise Inventory accountonlyforallmerchandisingtransactions. accountonlyforallmerchandisingtransactions.

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Thesellerusesthefollowingaccounts: i. Sales ii. CostofSales iii. SalesReturnsandAllowances iv. SalesDiscount  v. Freight‐Out  vi. MerchandiseInventory

Merchandising Transactions (Periodic Inventory Method) A. BuyingPhase 1. Purchases–Theaccountdebitedforthecostofmerchandiseboughtwhetheroncashbasisoron credit Purchases Cash/Accounts Payable

xxx xxx

 ACTBAS2: Introductory Introductory Accounting  Accounting‐‐Part  Part 2 2 Introduction to Merchandising Transactions 2. PurchaseReturnsandAllowances–Theaccountcreditedforthecostofmerchandisereturneddue todefectorwrongspecifications.Thisissupportedbyadebitmemoranduminthecaseofa purchasemadeonaccountwhetherfullyorpartially. Accounts Payable

xxx

Purchase Returns and Allowances

xxx

However,ifthepurchasewasmadeoncashbasis,theentrywouldbeforarefundreceived. Cash

xxx

Purchase Returns and Allowances

xxx

3. PurchaseDiscount–Theaccountcreditedbythebuyerwhenhefullypaystheliabilitywithinthe discountperiod. Accounts Payable

xxx

Cash

xxx

Purchase Discount

xxx

4. Freight‐In(Transportation‐In)–Theaccountdebitedwhenthebuyershouldersthecostof transportingthegoods. Freight‐In

xxx

Cash

xxx

B. SellingPhase 1. Sales–Theaccountcreditedforthesellingpriceofmerchandisesoldwhetheroncashbasisoron credit. Cash/Accounts Receivable

xxx

Sales

xxx

2. SalesReturnsandAllowances–Theaccountdebitedforthesellingpriceofmerchandisereturned. Thisissupportedbyacreditmemoranduminthecaseofasalemadeonaccountwhetherfullyor partially. Sales Returns and Allowances

xxx

Accounts Receivable

xxx

However,ifthesalewasmadeoncashbasis,theentrywouldbemadeforarefundgranted. Sales Returns and Allowances

xxx

 ACTBAS2: Introductory Introductory Accounting  Accounting‐‐Part  Part 2 2 Introduction to Merchandising Transactions Cash

xxx

3. SalesDiscount–Theaccountdebitedbythesellerwhenareceivableisfullycollectedwithinthe discountperiod. Cash

xxx

Sales Discount

xxx

Accounts Receivable

xxx

4. Freight‐Out–Theaccountdebitedwhenthesellershouldersthecostoftransportingthegoods. Freight‐Out

x xx

Cash

xxx

Merchandising Transactions (Perpetual Inventory Method) A. BuyingPhase 1. ThebuyerdebitstheMerchandise ThebuyerdebitstheMerchandise Inventory accountforthecostofmerchandiseboughtforcashor Inventory accountforthecostofmerchandiseboughtforcashor oncredit. Merchandise Inventory

xxx

Cash/Accounts Payable

xxx

2. ThebuyerdebitstheMerchandise ThebuyerdebitstheMerchandise Inventory accountforthecostoftransportingthegoods. Inventory accountforthecostoftransportingthegoods. Merchandise Inventory

xxx

Cash

xxx

3. Thebuyercreditsthe ThebuyercreditstheMerchandise Merchandise Inventory accountforthecostofmerchandisereturned.Thisis Inventory accountforthecostofmerchandisereturned.Thisis supportedbythedebitmemoranduminthecaseofapurchasemadeonaccountwhetherfullyor partially. Accounts Payable

xxx

Merchandise Inventory

xxx

However,ifthepurchasewasmadeoncashbasis,theentrywouldbeforarefundreceived Cash

xxx

Merchandise Inventory 4. Thebuyercreditsthe ThebuyercreditstheMerchandise Merchandise Inventory fortheamountofdiscountgrantedbytheseller. Inventory fortheamountofdiscountgrantedbytheseller.

xxx

 ACTBAS2: Introductory Introductory Accounting  Accounting‐‐Part  Part 2 2 Introduction to Merchandising Transactions Accounts Payable

xxx

Cash

xxx

Merchandise Inventory

xxx

B. SellingPhase 1. Everytimethereisasale,thesellerrecordstwoentriesasfollows: Cash/Accounts Receivable

xxx

Sales (for the selling price of goods)

Cost of Sales (for the cost of goods)

xxx

xxx

Merchandise Inventory

xxx

2. Everytimethereisareturnofgoods,thesellerrecordstwoentriesasfollows: Sales Returns and Allowances (for the selling price)

x xx

Accounts Receivable/Cash

Merchandise Inventory

x xx

xxx

Cost of Sales (for the cost)

xxx

3. SalesDiscount–Theaccountdebitedbythesellerwhenhefullycollectsthereceivablewithinthe discountperiod. Cash Sales Discount

xxx xx

Accounts Receivable

xxx

4. Freight‐Out–Theaccountdebitedwhenthesellershouldersthecostoftransportingthegoods. Freight‐Out Cash Selected Merchandising Transactions 1. Owner’soriginal Owner’soriginal investment ofmerchandise investment  ofmerchandise

x xx xxx

 ACTBAS2: Introductory Introductory Accounting  Accounting‐‐Part  Part 2 2 Introduction to Merchandising Transactions Merchandise Inventory

xxx

Capital

xxx

2. Owner’sadditional Owner’sadditional investmentofmerchandise Purchases

xxx

Capital

xxx

3. Owner’swithdrawalofmerchandise Drawing

xxx

Purchases

xxx

4. Owner’swithdrawalofasecond‐handcomputer(movablefixedasset) Drawing

xxx

Accumulated Depreciation – Office Equipment

xxx

Office Equipment

xxx

5. Owner’spermanent  Owner’spermanent cashwithdrawal cashwithdrawal Capital

xx x

Cash

xxx

Trade Discount  

Purposeistoencouragethebuyertomakelargevolumewholesalepurchases

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Treatedasadeductionfromthelistorcatalogprice

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Nonaccounttitletorecognizetradediscount 

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ListPrice–TradeDiscount=InvoicePrice(netamountplacedincharge/cashsalesinvoice)

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Thetradediscountisexpressedasaseriesofdeductioninwholenumbers. Example: Bought merchandise Bought merchandise for   for ₱  10,000 less 10‐10‐5  ₱ 10,000 10‐1 10‐10‐ 0‐5 5is ist the het tra rade ded dis isco coun unt. t. Theinv Theinvoic oicep eprice riceis isco compu mputed tedas asfol follows lows:10 :10,00 ,000 0  1  0.10 0.10  1  0.10 0.10  1  0.05 0.05=7,695

Cash Discount  

Encouragesfullcashpaymentattheearliesttimepossible

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PurchaseDiscount.The PurchaseDiscount.The account recording account recording the discount the discount the buyer receives buyer receives when he fully  he fully  pays  pays within the discount  period.  period.

 ACTBAS2: Introductory Introductory Accounting  Accounting‐‐Part  Part 2 2 Introduction to Merchandising Transactions 

SalesDiscount.The SalesDiscount.The account recording account recording the discount the discount the seller  grants  grants to the buyer when buyer when he fully  he fully collects collects within the discount  period.  period.

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TheamounttoberecordedinthePurchase Theamounttoberecordedinthe accountsareequivalentaslongas Purchase Discount and Discount andSales Sales Discount accountsareequivalentaslongas bothaccountsareinvolvedinthesametransaction.

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Unliketradediscount,cashdiscountisrecordedinthebooks.

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Purchase Discount iscreditedbythebuyerwhile Discount iscreditedbythebuyerwhileSales Sales Discount isdebitedbytheseller. isdebitedbytheseller.

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Cashdiscountispresentedinatransactionasaseriesoffractions. Example: Bought merchandise Bought merchandise for   for ₱  are  2/10n/30. ₱  20,000; terms are 2/10 2:

Cash discount rate

10:

Discount period

30:

Credit period

n:

No discount given

2/10n/30meansthat2%oftheinvoicepriceisallowedtothebuyerifaccountisfullypaidwithin 10daysafterdateofpurchase.Nodiscountisgiveniffullpaymentismadeafterthe10 thday. 3/15  2/eom  2/eomn/45  e om :

End of the month

3/15: 3/15:

3%of 3%ofthe theinv invoice oicepri price ceis isallo allowed wedif ifful fullp lpayme aymenti ntisma smadew dewithi ithin1 n15d 5days aysaft after er purchasedate

2/eom:

2%isallowed 2%isallowedifacc ifaccountis ountisfull fullypaid ypaidonorb onorbeforeth eforetheendo eendofthemo fthemonth. nth. No discount is given after the end of the month.

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3/10 2/5eom  2/5eomn/45 

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

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3/10: 3/10:

3%is 3%isall allowed owedif ifthe theacc accoun ountis tisfu fully llypai paidw dwithi ithin1 n10d 0days aysafte afterpu rpurch rchase asedat date. e.

2/5eom:

2% is allowed if the account is fully paid within 5 days after the end of the month. No discount is given after the fifth day of the next month.

Guide in Recording Full Payment/Collection 1. Isthecurrentyearaleap Isthecurrentyearaleap yearoran yearoranordinary ordinary year?(Ifyearnumberisdivisibleby4,itisaleapyear.) 2. Memorizenumberofdaysineachmonth. 3. Determinetheoutstandingbalanceofaparticular Determinetheoutstandingbalanceofaparticular Accounts  Accounts Payable or Accounts  Accounts Receivable asofthedateof fullpayment. 4. Determinethebasisofpurchaseorsalesdiscountasoffullpaymentdateusingthefollowingformula: FortheBuyer: Initial Accounts Payable

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 ACTBAS2: Introductory Introductory Accounting  Accounting‐‐Part  Part 2 2 Introduction to Merchandising Transactions Less: Purchase Returns and Allowances Basis of Purchase Discount

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xx x

For the Seller: Initial Accounts Receivable Less: Sales Returns and Allowances Basis of Sales Discount

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5. MultiplytheBasisofDiscountbytheapplicablediscountrate FortheBuyer: Basis of Purchase Discount Multiplied by: Applicable Discount Rate Amount of Purchase Discount

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For the Seller: Basis of Sales Discount Multiplied by: Applicable Discount Rate Amount of Sales Discount

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xxx