BASIC RECORDING

AND
IMPLEMENTATION:
TRADING BUSINESS
Group 3
 Presentation title 2

PLAN AND IMPLEMENT A

TRADING BUSINESS DEVELOPING
A TRADING BUSINESS
Trading Business is one of the oldest and most successful business models in
history. Both Magellan and Columbus were traders so they traveled far
distances in search of spices that they wanted to sell in their nstive Europe. In
this model you buy where the price of a product is cheap and you sell where s
product is expensive. This is why products that are abundant in the Philippines
like mangoes, milkfish (bangus) and pearls are far cheaper in our country than
in the Philipines like dory, apples and blueberries are very expensive in our
country when they are far cheaper in the countries where they are abundant.
Unlike a service business, the primary cash outflow in a trading business is the
purchasing of items to sell (also known as inventory) which is not an expense
but an asset. In this regard the Income statement will be significantly different
from the cash flow Statement as this business model requires significant
investment in inventory.
BUSINESS MODELS OF A TRADING
BUSINESS
There are three main business models for a trading business in the
country, and they are:

Buy and Sell

• Buy low then sell high
Sell then buy
• Buy when you have a buyer
Borrow then sell
• Consignment or sales agent deal
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BUY AND SELL

Buy and Sell is the most common form of trading business in the country
done by all sari-sari stores, public market stalls and most street vendors. In
this model, they buy their products in bulk(e.g., quantities of 6 or more
pieces) to attain lower wholesale prices then they sell their products in
individual pieces at higher retail prices.

For example, they may buy a pad paper which has 100 individual sheets at
40 pesos per pad. They will then sell the individual sheets at one peso per
sheet. If they sell all 100 sheets they will get sales of 100 pesos for an
investment of only 40 pesos for a 60-pesos profit. This means that they
must sell at least 40 sheets to get back their original investment of 40
pesos, after which each sheet they sell will be pure profit.
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The basic strategy in buy and sell is to “Buy low and Sell High” with emphasis
on the buying stage. To be able to buy low, the business person must search far
and wide for the lowest possible price and negotiate hard with the suppliers,
Often this means looking for the source of the products. Many traders buy
directly from farmers and fisherfolk at very low prices and transport the goods
to the public market, which then sell them at higher prices. For fast-moving
consumer goods (FMCG) like instant noodles, soap, softdrinks, etc., many
traders buy directly from manufacturers to get the best deals and then sell these
goods in their local communities, which cannot access the manufacturers.
Another common strategy is to buy in large quantities and ask for volume
discounts from the supplier (usually a wholesaler) so that the products may be
profitable enough to sell to consumers.

BORROW THEN SELL

You may do this by arranging the following terms with your suppliers:
1. Consignment
2. Credit Payment Terms
3. Secured by post Dated checks or PDCs
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Supplier Obtain
Agreement Product Sell Product

Collect Deliver
Buy the Product Product
Payment

SELL THEN BUY

You may do this by arranging the following terms with
your customers:
1. Advance Payment or Pre-order
2. Downpayment or Advance Payment
3. Deposit or Reservation
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Obtain Pictures/
Sell Product Collect Payment
Samples

Collect Balance Deliver Product Buy Product

.
 BALANCE SHEET OR STATEMENT OF ASSETS,
LIABILITIES AND NET WORTH (SALN)
SALN AND BALANCE SHEET

The statement of Assets, Liabilities, and Net Worth (SALN) is a financial statement that shows the financial worth
of a person. This is a snapshot of an individuals financial value at a particular moment in time. This document has
been popularized by the media as a way to show the wealth of certain politicians and celebrities. It is also the basis
for the lists of the world’s richest people. The SALN shows the value of an individual’s total Assets (e.g. cash,
properties, etc) less the value of their total Liabilities (e.g. debt) to compute the value of their total Net Worth
which can also be expressed in the following formula:

Assets- Liabilities= Net Worth

To put simply, everything you own (Assets) less everything you owe(Liabilities) equals your total financial value
(Net Worth)

For a business the financial statement that shows the worth of the business is not the SALN but the Balance Sheet.
This is because the total value of the business must come from either the investments of the owners also known as
equities or the borrowing from debtors also know as Liabilities.
 BALANCE SHEET OR STATEMENT OF ASSETS,
LIABILITIES AND NET WORTH (SALN)
In this case the total value of a business is reflected by the total value of its assets
and expressed in the following formula:

Assets= Liabilities + Equities

In this case, instead of Net Worth we use the term Equity as the investment
may be made by multiple owners. In the same vein all Assets of the
company must be used to pay back the Liabilities first, with the remaining
amount used to pay the owners. In this manner we reflect both the source of
funds(e.g. either the liability or equity) and the use of funds.

The Balance Sheet is a snapshot of business financial value at a particular

moment in time. This is different from the Income statement which more
like a video that shows all the transactions that happen for a period of time.
 ELEMENTS OF A BALANCE SHEET
Assets Liabilities
Accounts Amounts
Accounts Amounts Accounts Payable Php 450.00
Salaries Payable Php 130.00
Cash Php 50.00
Inventory Php 800.00
Equities
Accounts Amounts
Paid Up Capital Php 100.00
Retained Earnings Php 170.00

Total Assets Php 850.00 TOTAL LIABILITIES + EQUITIES Php 850.00

 ASSETS
An Asset is a resource that the business owns that can provide value in the future.
The monetary value of each Asset is recorded in the Balance Sheet, the total of
which is balanced with the sum of all Liabilities and Equities

For a trading business, the most common Assets accounts are:

• Cash- The ready-money that the business can easily use and access. Cash can also
be subcategorized into Cash-on-hand (Cash the business owners have) and Cash-
in-Bank (Cash currently deposited in banks)
• Inventory- these are the assets that the business expects to sell on profit. This can
be further subcategorized into Raw Materials Inventory (the ingredients that will
be processed to make the goods that will be sold), Work-in-Process Inventory
(Goods currently in various stages of production) and Finished Goods Inventory
( Goods that are ready for sale)
 ASSETS
• Long-Term Assets- these are the assets that the business will not be converted into
cash nor consumed within a year. These may be subcategorized into Land,
Renovation, Equipment, etc.
ASSETS LIABILITIES
Accounts Amounts Accounts Amounts
Cash Php 50.00 Accounts Payable Php 450.00
Inventory Php 800.00 Salaries Payable Php 130.00

EQUITIES
Accounts Amounts
Paid-Up Capital Php 100.00
Retained Earnings Php 170.00

TOTAL ASSETS Php 850.00 TOTAL LIABILITIES + EQUITIES Php 850.00

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ASSETS
ASSETS LIABILITIES
Accounts Amounts Accounts Amounts
Cash Php 50.00 Accounts Payable Php 450.00
Inventory Php 800.00 Salaries Payable Php 130.00

EQUITIES
Accounts Amounts
Paid-Up Control Php 100.00
Retained Earnings Php 170.00

TOTAL ASSETS Php 850.00 TOTAL LIABILITIES + Php 850.00

EQUITIES
 LIABILITIES
A Liability is a business financial debt or obligation to another entity
usually a lender or a supplier..

For a trading business, common Liabilities accounts are:

• Accounts Payable-these are liabilities for goods and services that have
been delivered by suppliers but have not been paid by the company.
• Salaries Payable-these are liabilities that are payable within one year of
the balance sheet date.
For many liabilities, the lender will charge the business a monthly amount
or interest for the use of its money. In this manner the business will incur
additional Interest Expense for each month that they are unable to pay the
Liability. For purposes of starting your first enterprise, Liabilities which are
charged interest are discouraged as the additional expenses caused by the
interest may make profitability more difficult.
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LIABILITIES
ASSETS LIABILITIES
Accounts Amounts Accounts Amounts
Cash Php 50.00 Accounts Payable Php 450.00
Inventory Php 800.00 Salaries Payable Php 130.00

EQUITIES
Accounts Amounts
Paid-Up Capital Php 100.00
Retained Earnings Php 170.00

TOTAL ASSETS Php 850.00 TOTAL LIABILITIES + Php 850.00

EQUITIES
 EQUITIES
The equity refers to the value of the company that is owned by the investors
of the company. For a single proprietorship( owned by a single individual),
this is synonymous to Owner’s Equity.

For a trading business, common Equity accounts are:

• Paid-Up Capital- This refers to the amount of money the investors paid
to as capital for the business. Ideally, this is only done once at the start of
the business and forms the basis of the ownership shares into the
business. In cases where the investors need to invest additional money in
the course of business operations this may be added to paid-up Capital to
recorded as Additional Paid-Up Capital.
• Retained Earnings- This refers to the total income(or loss) the company
has incurred since its inception less any amount of dividends returned to
investors.
 EQUITIES
Assets Liabilities
Accounts Amounts
Accounts Amounts Accounts Payable Php 450.00
Salaries Payable Php 130.00
Cash Php 50.00
Inventory Php 800.00
Equities
Accounts Amounts
Paid Up Capital Php 100.00
Retained Earnings Php 170.00

Total Assets Php 850.00 TOTAL LIABILITIES + EQUITIES Php 850.00

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RETAINED EARNINGS AND THE INCOME

STATEMENT

In the first year of operations, the Retained Earnings account of the Balance Sheet
is synonymous to the Net Income after Dividends account of the Income
Statement. In this manner, the Entire Income Statement is reflected into the
Balance Sheet.

This means that any increase in Net Income brings an equivalent increase in
Retained Earnings and any decrease in Net Income brings an equivalent decrease
in Retained Earnings.
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Assets Liabilities
Accounts Amounts Accounts Amounts
Cash Php 50.00 Accounts Payable Php 450.00
Inventory Php 500.00 Salaries Payable Php 130.00

Equities
Accounts Amounts
Paid Up Capital Php 100.00
Retained Earnings Php 170.00
Sales Php 500.00
less COGS Php 200.00
Less OPEX Php 130.00
Net Income Php 170.00
TOTAL ASSETS Php 850.00 TOTAL LIABILITIES + EQUITIES Php 850.00
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RECORDING TRADING OPERATIONS

WITH DOUBLE-ENTRY ACCOUNTING
BALANCING A BALANCE SHEET

With the Balance Sheet in place we must ALWAYS balance the Assets side with the “Liabilities +
Equities” side.

Assets = Liabilities + Equities

We can no longer use single-entry accounting which we used in the previous chapters, we need to do
double-entry accounting as each transaction will have a source and use of funds which can affect
either Assets and/or the “Liabilities + Equities” portion of the balance sheet. In this manner each
transaction will now be recorded in two entries in our chart of accounts. For Example, every cash sale
will be recorded as increase of “ Sale”(the source of funds) and an increase of “Cash” (the use of funds)
while every purchase of products for sale will be recorded both as decrease in “Cash (the source of
 Presentation title 21

RECORDING TRADING OPERATIONS

WITH DOUBLE-ENTRY ACCOUNTING
This means that each transaction must be:
1. Increase in the value of an Asset with equivalent increase in the value of a Liability or Equity.
2. Increase in the value of an Asset with equivalent decrease in the value of another Asset.
3. Increase in the value of a Liability or Equity with equivalent in the value of another Liability or
Equity.

INTERPRETING A BALANCE SHEET

A Balance Sheet should tell you in one-page the total worth of your business. The Assets section tell
you what your business has and in what form (e.g. cash, inventory, etc). It is important to validate the
amount of your assets as what you have on paper may be different from what you actually possess for a
variety of reasons such as spoilage, pilferage, etc.
The Balance Sheet also shows you what you OWE (liabilities) and what you OWN (equities), what you
own what the business owns are different if you have liabilities and debts. The Balance Sheet reminds
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RECORDING TRADING OPERATIONS

WITH DOUBLE-ENTRY ACCOUNTING
Liabilities above equities as we should pay them first before we recognize our ownership.

Unlike the Income Statement which reports a period, the balance sheet shows all records from the
start of the business until the present day.
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RECORDING TRADING ACCOUNTS

RECORDING PAID UP CAPITAL
When we start the business we begin with an initial investment of cash. In the example below, we
invest 50 pesos, which is translated into an increase in Cash (Equity) and an increase in Paid-Up
Capital (Liabilities + Equity); hence, the Balance Sheet is balanced with the company being worth 50
pesos.
ASSETS LIABILITIES
Accounts Amounts Accounts Amounts
Cash Php 50.00

EQUITIES
Accounts Amounts
Paid-Up Capital Php 50.00

TOTAL ASSETS Php 50.00 TOTAL LIABILITIES + EQUITUES Php 50.00

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RECORDING INVENTORY PURCHASES

For a trading business we need to purchase inventory so that we may have products for sale. There
are two basic ways to obtain Inventory.
1. We can buy inventory using our cash. For example, we can use the 50- peso Cash above to
purchase 50 pesos worth of Inventory. This is recorded by decreasing the Cash (Asset) by 50
pesos and increasing the Inventory(another Asset) by the same 50 pesos, herby refraining thr
value of our business at 50 pesos.
ASSETS LIABILITIE
Accounts Amounts Accounts Amounts
Cash Php 50.00
EQUITIES
Accounts Amounts
Paid Up Capital Php 50.00

Inventory Php 50.00 TOTAL LIABILITIES + EQUITIES Php 50.00

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2. We can also buy the inventory using credit. For example, we can ask a supplier to lend us 1,000
pesos worth of goods which we will pay in 30 days. In this example we do not touch the 50
pesos in Cash, but instead increase our Accounts Payable by 1,000 pesos (Liabilities) and
increase our inventory by 1,000 pesos(Assets). We essentially sourced 1,000 pesos and used it for
1,000 pesos worth of inventory. This increases the value of ,our company to 1,050 pesos but the
owners only own 50 pesos of this.
ASSETS LIABILITIES
Accounts Amounts Accounts Amounts

Cash Php 50.00 Accounts Payable Php 1,000.00

Inventory Php 1,000.00 EQUITIES

Accounts
Paid Up Capital Php 50.00

TOTAL LIABILITIES + EQUITIES Php 1,050.00

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RECORDING PRODUCT DELIVERY AND COST OF

SALES
Once you sell the product, you will deliver the product to your customer and lose
it from your inventory. This means that we will reduce our Inventory (Asset) and
incur an expense in Income statement called Cost of Goods Sold(COGS) That
refers to the total amount of inventory we delivered to the customer. This reduces
the total value of our company.

In the example below, we delivered 200 pesos worth of goods that results in:

• Reduction of Inventory(Asset) by 200 pesos

• Increase in COGS expense by 200 pesos
The COGS reduced our Net Income is reflected in the Balance Sheet as “-P200” In
the Retained Earnings (Liabilities + Equities)
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ASSETS LIABILITIES
Accounts Amounts Accounts Amounts
Cash Php 50.00
Inventory Php 800.00 Accounts Payable Php 1,000.00
Salaries Payable

EQUITIES
Accounts
Paid Up Capital Php 50.00
Retained Earnings -Php 200.00
Sales
less COGS Php 200.00
less OPEX
Net Income -Php 200.00
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ASSETS LIABILITIES
Accounts Amounts Accounts Amounts

Cash Php 50.00 Accounts Payable Php 1,000.00

Inventory Php 1,000.00 EQUITIES

Accounts
Paid-Up Capital Php 50.00
TOTAL ASSETS Php 1,050.00

TOTAL LIABILITIES + EQUITIES Php 1,050.00

 RECORDING CASH SALES
After the delivery of goods, we should be able to collect payment. In this case we will
collect payment as cash. For starting business. We discourage selling products on terms as
this puts undue pressure to collect from our customers.
In the examples below, we sold the 200 pesos worth of inventory for 500 pesos in Sales
(recorded in the Income Statement) which we collected in Cash. This results in:
• Increase in Cash (Asset) by 500 pesos
• Increase in Sales by 500 pesos
The Sales increased in Net Income is reflected in the Balance sheet as 500 pesos increase in
the Retained Earnings (Liabilities + Equities)
• Total Value of the business is increased by 500 pesos to 1,350 pesos.
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ASSETS LIABILITIES
Accounts Amounts Accounts Amounts
Cash Php 550.00 Accounts Payable Php 1,000.00
Inventory Php 800.00 Salaries Payable

EQUITIES
Accounts Amounts
Paid Up Capital Php 50.00
Retained Earnings Php 300.00
Sales Php 500.00
less COGS Php 200.00
less OPEX
Net Income Php 300.00

TOTAL ASSETS Php 1,350.00 TOTAL LIABILITIES + EQUITIES Php 1,350.00

RECORDING OPERATING EXPENSES
In the process of conducting business operations, the business incurs operating expenses
that must either be paid in cash or borrowed from suppliers.
In the example below, the business incurs 130 pesos worth of work (OPEX)
From their employees, however, as tbhe company will pay all salaries by the end of the
month, it could instead record it as Salaries Payable (Liability). This is recorded as:

• Increase of Salaries Payable (Liability) by 130 pesos

• Increase in OPEX expenses by 130 pesos
• The OPEX reduced our Net Income by 130 pesos resulting in a 130-peso reduction in
Net Income.

The 130-peso reduction in Net Income is reflected in the Balance Sheet as 130-peso
reduction in the Retained Earnings (Liabilities + Equities)
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TOTAL VALUE OF THE BUSINESS IS REDUCED BY 130 PESOS

ASSETS LIABILITIES
Accounts Amounts Accounts Amounts
Cash Php 550.00 Accounts Payable Php 1,000.00
Inventory Php 800.00 Salaries Payable Php 130.00

EQUITIES
Accounts Amounts
Paid Up Capital Php 50.00
Retained Earnings Php 170.00
Sales Php 500.00
less COGS Php 200.00
less OPEX Php 130.00
Net Income Php 170.00

TOTAL ASSETS Php 1,350.00 TOTAL LIABILITIES + EQUITIES Php 1,350.00

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In the process of business operations, the company may incur

expenses which thy may pay for with Cash. In the example
below, the business incurs 30 pesos worth of transportation
expenses (OPEX) Which they pay for with their cash (Assets).
This is recorded as:
• Decrease of Cash (Asset) by 30 pesos
• Increase in OPEX expense by 30 pesos
The OPEX reduced our Net Income by 30 pesos resulting in a
30- peso reduction in Net Income.
The 30-peso reduction in Net Income is reflected in the Balance
Sheet as 30-peso reduction in the Retained Earnings (Liabilities
+ Equities)
• Total Value of the business is reduced by 30 pesos
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TOTAL VALUE OF THE BUSINESS IS REDUCED BY 130 PESOS

ASSETS LIABILITIES
Accounts Amounts Accounts Amounts
Cash Php 520.00 Accounts Payable Php 1,000.00
Inventory Php 800.00 Salaries Payable Php 130.00

EQUITIES
Accounts Amounts
Paid Up Capital Php 50.00

Retained Earnings Php 140.00

Sales Php 500.00
less COGS Php 200.00
less OPEX Php 160.00
Net Income Php 140.00

TOTAL ASSETS Php 1,320.00 TOTAL LIABILITIES + EQUITIES Php 1,320.00

 RECORDING ACCOUNTS PAYABLE
PAYMENTS

Now that we have earned income, we may make payments to our suppliers for the
liabilities we have incurred.

In the example below, we will pay 200 pesos from our Cash (Assets) to our supplier to
lessen our Accounts Payable (Liabilities + Equities). Take note our Accounts Payable
does not incur interest expenses. This is recorded as:
• Decrease of Cash (Asset) by 200 pesos
• Decrease in Accounts Payable by 200 pesos
• Total Value of the business is reduced by 200 pesos
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ASSETS LIABILITIES
Accounts Amounts Accounts Amounts
Cash Php 320.00 Accounts Payable Php 800.00
Inventory Php 800.00 Salaries Payable Php 130.00

EQUITIES
Accounts Amounts
Paid Up Capital Php 50.00

Retained Earnings Php 140.00

Sales Php 500.00
less COGS Php 200.00
less OPEX Php 160.00
Net Income Php 140.00

TOTAL ASSETS Php 1,120.00 TOTAL LIABILITIES + EQUITIES Php 1,120.00

PROFIT AND LOSS ANALYSIS IN A
TRADING BUSINESS
Trading Businesses tend to have very high Cost of Sales or Cost of Goods Sold (COGS)
COGS is usually the biggest cost component in a Trading Business. Hence there are two
Basic Strategic for a trading business to be profitable.

First, the Trading Business can BUY LOW and SELL HIGH. The difference between the
selling price and the cost of goods must be large enough to earn more than the
operating expenses of the business. To be able to do this, the Trading Business must find
good quality products that have high perceived value but very low costs.
PROFIT AND LOSS ANALYSIS IN A
TRADING BUSINESS

Second, the Trading Businesses can SELL LOW and SELL MANY. This is the strategy of
Chinese traders. They price their products low, but sell at a large quantities that they can
earn more than their operating costs. This is usually done by doing wholesale selling or
selling to business who will resell to consumers.

Trading businesses should be wary of high Operating Expenses such as Rent, as this can
lead to losses if they are unable to get enough sales. Fortunately, there are many business
models that do not require high rent such as Online Selling (Clicks part of Bricks and
Clicks). Direct Selling and Reselling.
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