THE ACCOUNTING CYCLE
OF A MERCHANDISING
BUSINESS
describes the nature of
transactions in a
merchandising business
THE NATURE AND EXAMPLES
OF MERCHANDISING
•Amerchandising company is an enterprise
that buys and sells goods to earn a profit.
•Merchandise (or merchandise inventory)
refers to goods that are held for sale to
customers in the normal course of business.
This includes goods held for resale.
•Forexample: Candies, canned goods,
noodles, Juice, and biscuits sold at a grocery
stores
THE NATURE AND EXAMPLES
OF MERCHANDISING
•A merchandiser’s primary source of revenue
is sales revenue or sales.
•Expenses for a merchandising company are
divided into two categories:
1. Cost of goods sold (COGS) – the total
cost of merchandise sold during the period;
and
THE NATURE AND EXAMPLES
OF MERCHANDISING
•2.Operating expenses (OP) - expenses
incurred in the process of earning sales
revenue that are deducted from gross profit in
the income statement.
•Examples are sales salaries and insurance
expenses.
•Gross profit (GP) is equal to Sales Revenue
less the Cost of Goods Sold.
Income measurement process
for a merchandiser follows as:
Sales ₱ xxx
Less: COGS
xx
Gross Profit ₱ xxx
Less: Operating Expenses
xx
Net Income/(Loss) ₱ xxx
The Operating Cycles for a
merchandiser:
•Merchandising Company operating
cycle (cash to cash) involves:
•1. buy merchandise inventory
•2. sell inventory
•3. obtain Accounts Receivable
•4. receive cash
JOURNALIZING THE TRANSACTIONS
IN A MERCHANDISING BUSINESS
•Instep 1, transactions are identified and
measured. At this stage, the documents used by
the business are analyzed to see whether these
transactions have financial impact or effect.
Recall the rule that only financial transactions are
recorded and that the amount can be measured.
These two conditions must exist in order for a
particular transaction to be recognized or
recorded. As defined, financial transactions are
those activities that change the value of an
JOURNALIZING THE TRANSACTIONS
IN A MERCHANDISING BUSINESS
•Step 2 is the Preparation of Journal
Entries (Journalization). A
merchandising company may use
special and general journals to
record its transactions.
SPECIAL JOURNALS
•1.
Cash Receipts Journal –used to record all
cash that had been received
•2.Cash Disbursements Journal –used to
record all transactions involving cash payments
•3.
Sales Journal (Sales on Account Journal) –
used to record all sales on credit (on account)
•4.Purchase Journal (Purchase on Account
Journal) –used to record all purchases of
inventory on credit (or on account)
INVENTORY SYSTEMS
•Maintaining inventory items is a unique
set-up in a merchandising business.
There are two methods of accounting for
inventory, namely:
Perpetual Inventory System and
Periodic Inventory System..
INVENTORY SYSTEMS
•1.
Perpetual System — Detailed records of the
cost of each item are maintained, and the cost of
each item sold is determined from records when
the sale occurs. For example, a car dealership has
separate inventory records for each vehicle.
Record purchase of Inventory.
Record revenue and record cost of goods sold when the
item is sold.
At the end of the period, no entry is needed except to
adjust inventory for losses, etc.
INVENTORY SYSTEMS
•2.
Periodic System — Cost of goods sold is
determined only at the end of an accounting
period. This system involves:
Record purchase of Inventory.
Record revenue only when the item is sold.
Atthe end of the period, you must compute cost
of goods sold (COGS):
INVENTORY SYSTEMS
•1.Determine the cost of goods on hand at the
beginning of the accounting period (Beginning
Inventory = BI),
•2. Add it to the cost of goods purchased (COGP),
•3.Subtract the cost of goods on hand at the end
of the accounting period
•4. (Ending Inventory = EI) illustrated as follows:
•Beginning Inventory + COGP = Cost of goods
available for sale – Ending Inventory = COGS
ADDITIONAL
CONSIDERATIONS:
•Perpetualsystems have traditionally
been used by companies that sell
merchandise with high unit values such
as automobiles, furniture, and major
home appliances. With the use of
computers and scanners, many
companies now use the perpetual
inventory system..
ADDITIONAL
CONSIDERATIONS:
•The perpetual inventory system is
named because the accounting records
continuously — perpetually —show the
quantity and cost of the inventory that
should be on hand at any time. The
periodic system only periodically
updates the cost of inventory on hand.
ADDITIONAL
CONSIDERATIONS:
•Aperpetual inventory system provides
better control over inventories than a
periodic inventory, since the records
always show the quantity that should be
on hand. Then, any shortages from the
actual quantity and what the records
show can be investigated immediately.
PERIODIC INVENTORY SYSTEM
PURCHASES OF MERCHANDISE: PERIODIC
•
SYSTEM
•1.
When merchandise is purchased for resale to
customers, the account, Purchases, is debited for
the cost of goods purchased.
•2.
Like sales, purchases may be made for cash or
on account (credit).
•3.
The purchase is normally recorded by the
purchaser when the goods are received from the
PERIODIC INVENTORY SYSTEM
PURCHASES OF MERCHANDISE: PERIODIC
•
SYSTEM
•Apurchase invoice received by the buyer is
actually a sales invoice or a charge invoice
prepared by the supplier or vendor.
•Notethat only purchases of merchandise are
debited to the ‘Purchase’ account. Acquisition
(purchases) of other assets: supplies, equipment,
and similar items are debited to their respective
accounts
Periodic inventory system
PURCHASE RETURNS AND ALLOWANCES
Apurchaser may find the merchandise received to
be unsatisfactory because the goods are:
damaged or defective
of inferior quality
not in accord with the purchaser’s specifications
Periodic inventory system
PURCHASE RETURNS AND ALLOWANCES
The purchaser initiates the request for a
reduction of the balance due through the
issuance of a debit memorandum. The debit
memorandum is a document issued by a
buyer to inform a seller that the seller’s
account has been debited because of
unsatisfactory goods.
Periodic inventory system
PURCHASE RETURNS AND ALLOWANCES
A return of the merchandise (a deduction
from the purchase price when unsatisfactory
goods are kept) is shown by the entry where
Accounts Payable is debited and Purchase
Returns and Allowances is credited to show
that the purchases was reduced with a return
or an allowance.
Periodic inventory system
PURCHASE RETURNS AND ALLOWANCES
ThePurchase Returns and Allowances
account is a “contra purchases” account
when merchandise is returned to a supplier.
Periodic inventory system
ACCOUNTING FOR FREIGHT COSTS
The sales agreement should indicate
whether the seller or the buyer is to pay the
cost of transporting the goods to the buyer’s
place of business.
The two most common arrangements for
freight costs are FOB SHIPPING POINT AND
FOB DESTINATION.
Periodic inventory system
ACCOUNTING FOR FREIGHT COSTS (FOB
Shipping Point )
Goods placed free on board (FOB) the carrier by seller.
Buyer pays freight costs.
Freight-In is debited if buyer pays freight.
Cash is credited if the goods come on cash on
delivery (COD), for example, and was paid
immediately. Accounts Payable would be credited if on
account.
Ownership over the goods is transferred to the buyer
Periodic inventory system
ACCOUNTING FOR FREIGHT COSTS (FOB
Destination )
Goods placed free on board (FOB) at buyer’s
business.
Seller pays freight costs.
Delivery Expense is debited if seller pays freight
on outgoing merchandise to a buyer. This is an
operating expense to the seller.
Ownership over the goods is transferred to the
Periodic inventory system
PURCHASE DISCOUNT
Credit terms (specify the amount of cash discount and
time period during which a discount is offered) may permit
the buyer to claim a cash discount for the prompt
payment of a balance due. If the credit terms show 2/10,
n/30 means a 2% discount is given if paid within 10 days
(called the discount period); otherwise, the invoice is due
in 30 days.
The buyer calls this discount a purchase discount.
A purchase discount is normally based on the invoice cost
Periodic inventory system
SALES TRANSACTIONS: REVENUE ENTRIES FOR A
MERCHANDISER
Revenues are reported when earned in accordance
with the revenue recognition principle, and in a
merchandising company, revenues are earned when
the goods are transferred from seller to buyer.
All sales should be supported by a document such as a
cash register tape (to provide evidence of cash sales)
or cash receipt, or office receipt for cash sales, and
charge invoice for credit sales, or sales on account.
Periodic inventory system
SALES TRANSACTIONS: REVENUE ENTRIES FOR A
MERCHANDISER
One entry is made with each sale:
Debit — Accounts Receivable (if a credit sale) or Cash
(if a cash sale) which increases assets for the sales
amount
Credit — Sales which increases revenues
The sales account is credited only for sales of goods
held for resale. Sales of assets not held for resale (such
as equipment, buildings, land, etc.)are directly credited
Periodic inventory system
SALES TRANSACTIONS: FREIGHT TERMS: FOB
DESTINATION — SELLER PAYS FREIGHT
An entry is made when seller pays the freight
to deliver goods to a customer or buyer. If the
buyer will pay for the freight, no entry is
made.
Debit — Delivery Expense and credit — Cash
or Accounts Payable.
Periodic inventory system
SALES TRANSACTIONS: SALES RETURNS
AND ALLOWANCES:
Sales Returns result when customers are
dissatisfied with merchandise and are allowed
to return the goods to the seller for credit or a
refund.
Sales Allowances result when customers are
dissatisfied, and the seller allows a deduction
Periodic inventory system
SALES TRANSACTIONS: SALES RETURNS AND
ALLOWANCES:
To grant thereturn or allowance, the
seller prepares a credit memorandum to
inform the customer that a credit has
been made to the customer’s account
receivable.
Periodic inventory system
SALES TRANSACTIONS: SALES RETURNS AND
ALLOWANCES:
Sales Returns and Allowances is a contra
revenue account to the Sales account. A
contra account is a reduction to a
particular account.
A contra account is used, instead of
debiting sales, to disclose the amount of
sales returns and allowances in the
Periodic inventory system
SALES TRANSACTIONS: SALES RETURNS AND
ALLOWANCES:
This information is important to
management as excessive returns and
allowances suggest inferior merchandise,
inefficiencies in filling orders, errors in
billing customers, and mistakes in
delivery or shipment of goods.
Periodic inventory system
SALES TRANSACTIONS: SALES RETURNS AND
ALLOWANCES:
The normal balance of Sales Returns and
Allowances is a debit.
One entry is made with each sales return and
allowance:
The entry to record the sales return or
allowance:
Debit — Sales Return and Allowances which
decreases revenues for the amount of the sale;
Credit — Accounts Receivable (if a credit sale) or
Periodic inventory system
SALES TRANSACTIONS: SALES DISCOUNTS.:
1. A sales discount is the offer of a cash
discount to encourage customers to pay the
balance at an earlier date.
2. An example of a discount term is
commonly expressed as: 2/10, n/30, which
means that the customer is given 2%
discount if payment is made within 10 days.
After 10 days there is no discount, and the
balance is due in 30 days.
Periodic inventory system
SALES TRANSACTIONS: SALES DISCOUNTS.
:
3.Sales Discounts is a contra
revenue account with a normal debit
balance.
Determining Cost of Goods Sold
under Periodic Inventory System
1. The Cost of Goods Sold under the
periodic inventory system is determined
at the end of the period (monthly or
yearly) by a short computation, as
follows:
Determining Cost of Goods Sold
under Periodic Inventory System
COST OF GOOD SOLD:
Merchandise Inventory, Beginning 100,000
Purchases 250,000
Less: Purchases returns & 5,000
allowances
Purchases discounts 2,000 (7,000)
Net Purchases 243,000
Add: Freight-in 6,000
Cost of goods purchased 249,000
Cost of goods available for sale 349,000
Merchandise Inventory, Ending (118,750)
Cost of Good Sold 230.25
Determining Cost of Goods Sold
under Periodic Inventory System
•In a periodic inventory system, separate ledger
accounts are maintained for various items composing
the cost of goods sold (Purchases, Purchase Returns
& Allowances, Freight-In, Purchase Discounts).
•At the end of the accounting period, a physical count
of inventory is necessary to establish the ending
balance of the inventory.
