FINANCIAL ACCOUNTING
&
REPORTING
(Fundamentals)
ZEUS VERNON B. MILLAN
Chapter 10: Accounting Cycle of a Merchan
dising Business (FAR by: Millan)
Chapter 10
Accounting Cycle of a Merchandising
Business
Learning Objectives
1. Prepare the Statement of Cost of Goods Sold
and Gross Profit.
2. Complete the accounting cycle of a
merchandising business
Chapter 10: Accounting Cycle of a Merchan
dising Business (FAR by: Millan)
Merchandising Business
• A merchandising business is one that buys
and sells goods in their original form and
without any further processing. Those goods
are referred to as merchandise inventory (or
simply, inventory).
Inventory Systems
a. Perpetual inventory system – under this system,
the “Inventory” account is updated each time a
purchase or sale is made. Thus, the “Inventory”
account shows a continuing or running balance
of the goods on hand.
b. Periodic inventory system – under this system,
the “Inventory” account is updated only when a
physical count is performed. Thus, the amounts
of inventory and cost of goods sold are
determined only periodically.
Accounts used under Periodic System
• Purchases – the account used to record purchases
of inventory under the periodic system.
• Freight-in (Transportation-in) – the account used
to record the shipping costs incurred on purchases
of inventory under the periodic system.
• Purchase returns – the account used to record
returns of purchased goods to the supplier.
• Purchase discounts – the account used to record
cash discounts availed of on the purchased goods.
Cost of Goods Sold:
• Under the perpetual inventory system, the balances of inventory and
cost of goods sold are readily determinable from the ledger
• Under the periodic inventory system, the balances of inventory on
hand and cost of goods sold are not readily determinable without
Performing first a physical count of the quantity of goods on hand
Example:
Assume that a physical count shows inventory on hand of 105 units
costing P40/unit. Cost of goods sold is computed as follows:
Beginning inventory 2,000
Purchases 10,000
Freight-in 1,000
Purchase returns (2,000)
Purchase discount (1,000)
Net purchases 8,000
Total goods available for sale 10,000
Ending inventory (105 units @P40) 4,200
Cost of goods sold 5,800
Note: Figures for freight-in, purchases, purchase returns and purchase discount are given
Illustration: Perpetual vs. Periodic (Journal Entries)
Perpetual System Periodic System
1. You purchased goods worth P10,000 on account.
Inventory 10,000 Purchases 10,000
Accounts payable 10,000 Accounts payable 10,000
2. You paid shipping costs of P1,000 on the purchase above
Inventory 1,000 Freight-in 1,000
Cash 1,000 Cash 1,000
3. You returned damaged goods worh P2,000 to the supplier
Accounts payable 2,000 Accounts payable 2,000
Inventory 2,000 Purchase return 2,000
4. You sold goods costing P5,000 for P20,000 on account
Accounts receivable 20,000 Accounts receivable 20,000
Sales 20,000 Sales 20,000
Cost of goods sold 5,000 No entry
Inventory 5,000
5. A customer returned goods with sale price of P800 and cost of P200
Sales returns 800 Sales returns 800
Accounts receivable 800 Accounts receivable 800
Inventory 200 No entry
Cost of goods sold 200
Gross Profit
• Sales – include both cash sales and credit
sales.
• Sales returns – the account used to goods
sold but were returned by customers.
• Sales discounts – the account used to record
cash discounts given to and taken by
customers.
Statement of Cost of Goods Sold and Gross Profit
APPLICATION OF CONCEPTS
PROBLEM 2: FOR CLASSROOM DISCUSSION
Chapter 10: Accounting Cycle of a Merchandising Business (FAR by: Millan)
OPEN FORUM
QUESTIONS????
REACTIONS!!!!!
END
