ACCOUNTING

FOR
MERCHANDISING BUSINESS
MERCHANDISING BUSINESS
The business is involved in purchasing goods that are ready for sale and then sell these
products to customers. They sell products without changing its form and sell these products at
higher prices to make profit.
Known as “Buy and Sell” business.
Examples: Department Stores
COMPARISON OF INCOME STATEMENT
SERVICE BUSINESS MERCHANDISING BUSINESS
Income Statement Income Statement

Revenue from Services Net Sales

minus
Cost of Sales
minus equals
Gross Profit
add or minus
Expense Income or Expenses
equals equals
Profit Profit
SAMPLE INCOME STATEMENT
Christopher Biore Traders
Income Statement
For the Year Ended December 31, 2021

Net Sales P 2,393,250

Less: Cost of Sales 1,313,600
Gross Profit 1,079,650
Less: Operating expenses 586,040
Operating Profit 493,610
Less: Finance Cost 38,400
Profit P 455,210
TERMS OF TRANSACTION
1. Cash or COD (Cash on Delivery) – this means that payment is required at the
time the merchandise is delivered.

2. Credit Term – this means that the sales is on account.

Credit Period – the time allowed for payment.
Ex: n/30, n/eom, n/10/eom
CASH DISCOUNT
Cash discount is offered to buyers to encourage early payment. It is a certain
percentage of the invoice amount.
The period covered by the discount is called discount period.
Cash discount are called purchase discount from the buyer’s point of view and sales
discount from the seller’s point of view.
 CREDIT TERM
2% discount if payment is made within10 days from invoice date, amount due in 30 days

Discount Period

Discount
Rate 2/10, n/30 Credit Term

Credit Period
CREDIT TERM
2% discount if payment is made on or before the end of the month, amount due in 60 days

2/EOM, n/60
CREDIT TERM
2% discount if payment is made on or before the 10th of the following month, amount due in 60
days

2/10/EOM, n/60
ILLUSTRATION
On November 23, 2021. Jin Merchandising purchase inventories amounting to
P120,000 with terms 3/10, n/30. Answer the following question:
1. If Jin Merchandising paid on November 30, 2021, how much is the cash discount?
2. If the credit term is 3/10, 2/15, n/30 and Jin Merchandising paid on December
5, 2021, how much is the cash discount?
Answer:
1. P120,000 x .03 = P3,600
2. P120,000 x .02 = P2,400
TRADE DISCOUNT
Trade Discount – a special discount (outright deduction) from the list price offered by
a seller to buyers if the order is in large quantity. There is no trade discount account.
ILLUSTRATION
Example: Pinaccle Technologies quoted a list price of P2,500 for each flash drive, less
a trade discount 15% and 10%. Video Fantastics ordered 10 flash drives. How much
will be the invoice price.
Computation:
List Price (2,500 x 10) P25,000
Less: 15% TD 3,750
Balance 21,250
Less: 10% TD 2,125
Invoice Price P19,125
ILLUSTRATION
Example: Pinaccle Technologies quoted a list price of P2,500 for each flash drive, less
a trade discount 15% and 10%. Video Fantastics ordered 10 flash drives. How much
will be the invoice price.
Computation:
Invoice Price = List Price x 85% x 90%
= (2,500 x 10) x .85 x .90
= P19,125
INVENTORY SYSTEMS
1. Perpetual Inventory System
❑ Under the perpetual inventory system, the inventory account is continuously updated.
❑ At the time of purchase, merchandise acquisitions are debited to merchandise
inventory.
❑ At the time of sale, the cost of sales is determined and recorded by a debit to cost
of sales account and a credit to merchandise inventory account.
❑ The ending inventory should reconcile with the physical count at the end of the
period.
PERIODIC INVENTORY SYSTEM
❑ Under the periodic inventory system, no entries are made to the merchandise
inventory account when the merchandise is bought and sold.
❑ When goods are purchased, a separate set of accounts – purchases, purchase
discounts, purchase return and allowances, and transportation-in (freight-in) – is used
to accumulate information on net purchases.
❑ The merchandise inventory balance and the cost of sales are only determined
during physical count at year-end.
SALES
The sales account is the revenue account of merchandising business.
❑ Gross sales consist of the total sales for cash or credit during an accounting period.
❑ Net sales is computed as follows:
Gross sales xxx
Less: Sales Return and Allowances xxx
Sales Discount xxx xxx
Net sales xxx
SALES DISCOUNT
The sales discount account is used when the buyer made an early payment. Sales
discount is a deduction from the gross sales of the business; thus, it is debited.
SALES RETURN AND ALLOWANCES
The sales return and allowances account is used when the buyer return some of the
merchandise. When a return is made, cash is refunded or accounts receivable is
deducted.
TRANSPORTATION OUT
Transportation out or freight-out is the account title used to record the freight of the
merchandise sold.
Transportation out is an expense account presented under operating expense of the
business.
COST OF SALES
Merchandise Inventory, beg xxx
Purchases xxx
Less: Purchase Return and Allowances xxx
Purchase Discount xxx xxx
Net purchases xxx
Freight-In xxx
Net Cost of Purchases xxx
Goods Available for Sale xxx
Less: Merchandise Inventory xxx
Cost of Sales xxx
MERCHANDISE INVENTORY
The merchandise inventory at the beginning of the period is called the beginning
inventory. The merchandise at the end of the period is called the ending inventory.
Under the periodic method, the ending inventories are determined at physical count.
PURCHASES
The purchase account is a temporary account used to record merchandised purchased
for resale. Its sole purpose is to accumulate the total cost of merchandise purchased
during an accounting period.
PURCHASE RETURN AND ALLOWANCES
Purchases returns and allowances is a contra account and deducted from the purchases
in the income statement.
PURCHASES DISCOUNTS
Purchases discount is also a contra account. It is used to record cash discounts taken by
the buyer.
OPERATING EXPENSES
1. Distribution cost
2. Administrative cost
3. Other Operating Expenses
INCOME STATEMENT
Accounts selected from December 31, 2021 trial balance of the Victoriano Navarette
Traders are listed below:
Sales 9,630,000 Sales Return & Allow 280,000
Purchases 4,720,000 Insurance Expense 55,000
MI, 1/1/21 2,170,000 Sales Discounts 210,000
MI, 12/31/21 1,430,000 Transportation Out 170,000
Salaries Exp - Selling 1,140,000 Dep’r Exp – Store Equip 160,000
Salaries Exp – General 920,000 Purchase Ret & Allow 110,000
Office supplies expense 460,000 Selling Supplies Exp 80,000
Dep’r Exp – Office Equip 320,000 Purchase Discounts 70,000
Miscellaneous Expense 30,000 Transportation In 50,000
INCOME STATEMENT
Victoriano Navarette Traders
Income Statement
For the Year Ended Dec 31, 2021

Net Sales
Less: Cost of Goods Sold
Gross Profit
Less: Operating Expenses
Administrative Expenses
Selling Expenses
Net Income
INCOME STATEMENT
Net Sales

Sales P9,630,000
Less: Sales Return and Allowances P280,000
Sales Discount 210,000 490,000
Net Sales P9,140,000
INCOME STATEMENT
Cost of Sales
Merchandise Inventory, beginning P2,170,000
Purchases P4,720,000
Less: Purchases R& A P110,000
Purchase Discount 70,000 180,000
Net Purchases 4,540,000
Transportation In 50,000
Net Cost of Purchases 4,590,000
Total Goods Available for Sale 6,760,000
Less: Merchandise Inventory, ending 1,430,000
Cost of Sales P5,330,000
INCOME STATEMENT
Administrative Expenses

Salaries Expense - General P920,000

Office Supplies Expense 460,000
Depreciation Expense - OE 320,000
Insurance Expense 55,000
Miscellaneous Expense 30,000
Total Administrative Expense P1,785,000
INCOME STATEMENT
Selling Expenses

Salaries Expense – Selling P1,140,000

Selling Supplies Expense 80,000
Depreciation Expense – SE 160,000
Transportation Out 170,000
Total Administrative Expense P1,550,000
INCOME STATEMENT
Victoriano Navarette Traders
Income Statement
For the Year Ended Dec 31, 2021

Net Sales P9,140,000

Less: Cost of Goods Sold 5,330,000
Gross Profit 3,810,000
Less: Operating Expenses
Administrative Expenses P1,785,000
Selling Expenses 1,550,000 3,335,000
Net Income P 475,000