LESSON 8 ACCOUNTING CYCLE for MERCHANDISING BUSINESS

MERCHANDISING BUSINESS Business organization that is engaged in buying and selling of merchandise MERCHANDISE Goods or articles acquired by the business that are intended for sale Merchandise inventories Include only goods that are held for sale in the normal course of business operations Examples: office supplies for sale are inventories for National Book Store but office supplies for UST MERCHANDISE INVENTORY BEGINNING Goods available at the start of the accounting period MERCHANDISE INVENTORY END Goods available or remain unsold at the end of the accounting period ACCOUNTING FOR MERCHANDISING BUSINESS The accounting cycle for a service business is also applied to merchandising business. Measuring income for a merchandising company is the same as for a service business, however, their operating cycle differs.. The operating cycle begins by purchasing merchandise and ends by collecting cash from selling the goods. The length of the operating cycle depends on what type of merchandise the business is into. For example, fast food establishments may have an operating cycle of only a day but companies selling merchandise on installment basis may have operating cycle that can least for years The merchandising business uses special accounts to record the buying and selling of merchandise or goods for sale.

ACCOUNTING FOR SALES

Sales Sales Return & Allowance

ACCOUNTING FOR PURCHASES

Purchases Purchase Return & Allowance Purchase Discount

Sales Discount

Freight Out

Freight In

ACCOUNTING FOR SALES ACCOUNTS TO RECORD THE SELLING OF MERCHANDISE 1. SALES

Income account used to record sale of merchandise Credit to record increase; debit to record decrease

2.

SALES RETURN AND ALLOWANCES Used to record the amount of goods returned by the buyer Reduces the amount of sales Debit to record increase; credit to record decrease It is evidenced by the issuance of a credit memorandum SALES DISCOUNT Discount granted by the seller to encourage early payment of the buyers Decreases the amount of sales Debit to record increase; credit to record decrease

3.

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4. FREIGHT OUT Freight charges or cost of delivering the product to the buyers place paid by the seller Debit to record increase; credit to record decrease

Note: These special merchandise accounts are used to record sale of merchandise only. For sale of nonmerchandise items, the ordinary account titles are used. CREDIT MEMORANDUM Document that informs a customer that a credit has been made to the customers account receivable arising from discounts, returns and allowances TERMS OF SALES / PURCHASE 30 Days o The amount of the invoice is payable after30 days. o One of the most common modes of purchase o No discount is given by the seller 2/10, n/30 o A discount of 2% is deducted from the invoice price if paid within 10 days from purchase. o The gross invoice price is to be paid if payment is after the discount period. o Account should be paid in 30 days COD o Cash on Delivery o The invoice price is to be paid upon delivery of the product EOM o o

End of month Account should be paid on or before the end of the month of sale

2/10, EOM, n/60 o 2% discount is given if the customer pays by the tenth of the month following the month of sale o Beyond this period, the full amount must be paid within 60 days from the date of sale

SHIPPING CHARGES ON MERCHANDISE SOLD OR PURCHASED The buyer and the seller must agree on who is responsible for paying any freight charges and who bears the risk of loss while the merchandise is on transit FREIGHT TERMS FOB Shipping Point o Free on Board at point of origin. o The buyer pays for the freight or transportation o The buyer debits Freight In for this. o The buyer assumes the risk of loss while goods are in transit FOB Destination o Free on Board up to destination. o The seller pays for freight or transportation o The seller assumes the risk of loss while the goods are in transit o The seller debits Freight Out or Delivery Expense account for this CHART OF ACCOUNTS List of account titles used in recording business transactions. Arranged in the ALPICE order

Example of Chart of Accounts for Merchandising Business

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EXAMPLES OF TRANSACTIONS INVOLVING SALE OF MERCHANDISE The following transactions of Triple J Trading occurred during the month of January 2009 January 3 Triple J sold merchandise worth P20,000 to Mr. Vargas. Terms: COD 3 - Sold merchandise worth P 30,000 to ABC Co. Terms: P10,000 downpayment, balance: 2/10; n/30 4 - Mr. Vargas returned defective merchandise amounting to P300. A cash refund was given to him. 5 ABC Co. returned defective merchandise amounting to P500. 6 - Sold merchandise to various customers P13,000. Paid freight charges amounting to P400. 12 Received full payment from ABC Co. 13- Sold an old office table for P1,000. COD 15 Sold merchandise worth P29,000, less 3%, 2% The above transactions will be journalized as follows: General Journal DATE ACCOUNT TITLES & EXPLANATIONS 2009 January 3 Cash Sales Sold goods to Mr. Vargas, COD 3 Cash Accounts Receivable Sales Sold goods to ABC Co. Terms: P10,000 down, balance 2/10, n/30 Sales Return & Allowances Cash Cash refund for merchandise Returned Sales Return & Allowance Accounts Receivable Defective merchandise returned by ABC Co. page 1 DR 20,000 20,000

CR

10,000 20,000 30,000

300 300

500 500

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DATE 2009 January ACCOUNT TITLES & EXPLANATIONS 6 Cash Sales Sale of merchandise Freight Out Cash Payment of freight charges C ash Sales Discount Accounts Receivable Collected the amount due from ABC Co. less return and discount Cash Furniture and Fixtures Sold an old office table Cash Sales Sold goods less 3%, 2% F DR 13,000 13,000 CR

400 400

12

19,110 390 19,500

13

1,000 1,000

15

27,567.40 27,567.40

ACCOUNTING FOR PURCHASES 1. PURCHASES Means goods bought for the purpose of resale without any change in the physical form Debited when goods are acquired on cash basis or on account PURCHASE RETURNS AND ALLOWANCES Used to record the goods returned by the buyer to the seller This usually happens because the goods are faulty or damaged Decreases the cost of goods bought Credit for increases, debit for decreases PURCHASE DISCOUNTS Used to record the amount of discounts granted by the seller Decreases the cost of goods bought Credit for increases, debit for decreases FREIGHT IN Account debited by the buyer for the transportation expense of goods purchased Debit for increases, credit for decreases

2.

3.

4.

Note: These special merchandise accounts are used to record purchase of merchandise only. For purchase of nonmerchandise items, the ordinary account tiles will be used. EXAMPLES OF TRANSACTIONS INVOLVING PURCHASE OF MERCHANDISE The following transactions took place during the month of January 2009: Jan. 16 AB Enterprises bought shoes, slippers and handbags from their Marikina supplier amounting to P95,000 under the purchase term of 2/10, n/30. It was agreed buyer and supplier that the freight in or transportation from Marikina to Makati, P500, is to be paid by the buyer, AB Enterprises. 17

between amounting to

AB Enterprises received deliveries of handbags from Celine amounting to P20,000. Terms: COD 18 AB Enterprises ordered and received delivery from Manel, shoes costing P35,000. Terms: n/30. 19 AB Enterprises paid to the Marikina supplier the P95,000 less 2% discount.(see Jan. 16) 20 The buyer AB Enterprises found some defective goods and made complaint to Celine. Supplier Celine agreed to refund P1,200 and promptly paid this amount to AB Enterprises. 23 - AB Enterprises complained to Manel on some unpolished shoes for which Manel gave the buyer rebate of P1,000. A credit memorandum was received from Manels 29 Purchased supplies for office use, P1,000 on cash basis. 30 - Purchased goods amounting to P30,000 less 20%

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Credit memorandum a note issued by the seller to acknowledge the return of merchandise and to inform the buyer that his account has been reduced accordingly. General Journal DATE ACCOUNT TITLES & EXPLANATIONS 2009 January 16 Purchases Accounts Payable Purchase of goods. 2/10, n/30 16 Freight In Cash Payment of freight charges Purchases Cash Purchase from Celine. COD Purchases Accounts Payable Purchase from Manel. n/30 Accounts Payable Purchase Discount Cash Full payment of amount due to Marikina supplier Cash Purchase Return & Allowances Cash refund from Celine for Merchandise returned Accounts Payable Purchase Return & Allowances Allowance granted by Manel for defective merchandise Office Supplies Cash Purchase supplies for office use Purchases Cash Purchase of goods less 20% page 2 DR 95,000 95,000

CR

500 500

17

20,000 20,000

18

35,000 35,000

19

95,000 1,900 93,100

20

1,200 1,200

23

1,000 1,000

29

1,000 1,000

30

24,000 24,000

DISCOUNTS Reduction in the original price of goods TYPES OF DISCOUNT A. CASH DISCOUNT Reduction in price to encourage a customer to pay immediately Recorded in the books as Sales discount (by seller) Purchase discount (by buyer) B. TRADE DISCOUNT Reductions from the published list price granted to dealers or wholesalers for buying large quantities or for regularly patronizing the business Granted to customers who buy items to resell or who will use the items to produce other salable goods Often listed in catalogs that contain the list price as well as the amount of trade discount available. It has no relationship to whether a customer is paying a bill early. Trade discounts and list price are not shown in the accounts of either the buyer or the seller.

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ACCOUNTING FOR TRADE DISCOUNT Trade discounts and list price are not shown in the accounts of either the buyer or the seller. From the point of view of the buyer, only the net price paid is recorded in the books From the point of view of the seller, the price received from the buyer is recorded in the books

Examples: 1. Purchase goods with a list price of P800. Terms: 30% trade discount Trade discount = List price x rate of discount = 800 x .30 = 240 Net price = List Price Trade discount = 800 240 = 560 Journal entry: Purchases. 560 Cash. To record purchase of goods less 30% 2.

560

Sold merchandise with a list price of P80,000 and trade discounts of 10%, 5%. The sales price will be computed as follows: List price ..80,000 Less: first discount (80,000x 10%). 8,000 Balance after discount. 72,000 Less second discount (72,000 x 5%) 3,600 Net sales price 68,400 Journal entry Cash (or Accounts Receivable) Sales.. Sold merchandise less 10%,5% 68,400 68,400