COURSE MODULE TAGOLOAN Community College

MODULE WEEK NO.10-11

Baluarte, Tagoloan, Misamis Oriental

Tel.No. (08822)740-835/(088)5671-215

College of Business Administration

PMC 101: Advance Accounting
1stSemester of A.Y. 2020-2021

Introduction

This module deals with accounting for merchandising business. It explains the nature and activities of a
merchandising business as well as the different account titles used in recording merchandising transactions. Further,
it outlines the difference between periodic and perpetual inventory system and the appropriate use of these methods.
It also demonstrates the accounting cycle for merchandising business and how it differs from servicing business.

Rationale

 Determine the different activities involved in merchandising business.

 Guides in determining the ownership of merchandise sold.
 Demonstrate journalizing of transportation costs.
 Provides a comparison between periodic and perpetual inventory system.

Intended Learning Outcomes

A. Differentiate a merchandising company from a service company and a manufacturing company.

B. Explain the operating cycle of a merchandising company and its major activities.
C. Define and explain the various terminologies related to purchase and sale of merchandise.
D. Differentiate periodic inventory system from perpetual inventory system.
E. Demonstrate the accounting cycle for merchandising business.
Activity
Outline the importance of cash discount in business.

Discussion
ACCOUNTING FOR MERCHANDISING BUSINESS

A servicing business is an entity that generates revenue by rendering services. Its revenue may be in the form of
commissions, service fee, or management fee.

A merchandising business is an entity engaged in in the activities of buying and selling of products.
It generates revenue from selling merchandise or goods that it purchases from other companies. The revenue of a
merchandising company is termed as sales. The goods that are acquired for sale by an entity are reported as merchandise
inventory and classified as current assets. However, upon sales of these merchandise, their cost is transferred to an
expense account cost of goods sold.

A manufacturing company purchases materials and transforms them into finished product.

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COURSE MODULE Operating Cycle of a Merchandising or Trading Business
MODULE WEEK NO.10-11

The operating cycle of a merchandising company consists of the following transactions:

1. Purchases of merchandise either in cash or on credit basis.
2. Sales of merchandise, also either on cash or on account basis.
3. Collection of accounts receivable from customers.

The Operating Cycle of a Business

Servicing business Merchandising Business

Chart of
Accounts of Merchandising Business
A typical sole proprietorship engaged in trading business using periodic inventory system may contain the following
chart of accounts:

CHART OF ACCOUNTS
Acc.No. Acc.No.
Assets: Liabilities:
110 Cash in Bank 310 Accounts Payable
111 Cash on Hand 320 Notes Payable – short-term
112 Petty Cash 321 Interest Payable
120 Accounts Receivable 330 Accrued Salary Payable
130 Allowance for Uncollectible Accounts 340 Accrued Rent Payable
140 Notes Receivable – short-term 350 Bank Loans Payable
150 Interest Receivable 360 Income Tax Payable
160 Merchandise Inventory 370 Withholding Tax Payable
165 Supplies 380 SSS Contribution Payable
170 Prepaid Rent 390 Philhealth Contribution Payable
180 Prepaid Insurance 400 Pag-ibig Contribution Payable
190 Trading Securities 410 Insurance Payable
200 Notes Receivable- Long-term 420 Unearned Service Income
210 Land 430 Notes Payable – Long-term
220 Building 440 Bank Loans Payable – Long-term
221 Accumulated Dep.- Building
240 Furniture and Fixtures Owner’s Equity:
241 Accumulated Dep.-Furniture and Fix. 510 Juan Cruz, Capital
250 Office Equipment 520 Juan Cruz, Drawing
251 Accumulated Dep.-Office Equipment

Cost and expenses: Revenues:

810 Purchases 610 Sales

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COURSE MODULE 811 Purchase returns 611
MODULE WEEK NO.10-11
Sales returns and Allowances
812 Purchase allowances 612 Sales Discounts
813 Purchase Discounts 620 Interest Income
814 Freight-in 630 Rent Income
815 Cost of Goods Sold 640 Dividend Income
820 Salary Expense 650 Gain on Sale of Land (Building, Fur.& Fix. Or
office Equipment)
830 Rent Expense 660 Unrealized Holding Loss-Trading Sec.
840 Utilities Expense 670 Gain on Sale of Trading Securities
850 Uncollectible Accounts Expense 680 Miscellaneous Income
860 Advertising Expense
870 Insurance Expense
880 Taxes and Licenses
890 Supplies Expense
900 Interest Expense
905 Freight-out
910 Depreciation Expense
920 Employees Benefits Expense
930 Loss on sale of Land (Building, Fur.& Fix.
Or office Equipment)
940 Unrealized Holding Loss-Trading Sec.
950 Loss on Sale of Trading Securities
960 Miscellaneous Expense

Major Activities of a Merchandising Firm

1. Purchasing activities
2. Selling activities

Purchasing Activities
Purchasing activities refer to the buying, procurement or acquisition of finished products intended for sale. A purchase is
perfected upon the delivery of the merchandise bought by the buyer, except when there is an agreement to the contrary.

Account titles under purchasing activities:

1. Purchases - the account title used to describe the products that have been purchased and intended for sale. In
perpetual inventory system, the account title used to describe the product for sale is “merchandise
inventory”.
2. Freight-in – also known as “transportation in” refers to the account title for transportation cost incurred by
the buyer in transferring the merchandise from the seller. it is an adjunct account of purchases, hence it is
added to the purchases account to obtain the total purchases. This this account has a normal debit balance.
3. Purchase returns - is used when some of the merchandise purchased are subsequently returned to the
supplier because of defects or noncompliance with the desired specification of some items. It has a normal
credit balance.
4. Purchase allowances – is a contra purchase account which is used to describe reduction on the acquisition
price due to reasons similar to purchase returns.
5. Purchase discounts – the account title used to describe the discount when the buyer takes a cash discount. It
is also treated as a contra-purchase account to arrive at the net purchases. A cash discount is a method
usually used by the sellers in order to encourage buyers to pay earlier purchases made on account.

Selling Activities
Selling pertains to the act of transferring the title of ownership over the merchandise from the seller to the buyer for a
consideration either in money or any other thing of value. A sale is perfected upon delivery of the thing sold.

Account titles under selling activities:

1. Sales – an account title used to describe the sale of merchandise. This account constitutes a recovery of

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COURSE MODULE the cost of merchandise sold as well as the profit.
MODULE WEEK NO.10-11

2. Freight-out – refers to the account title for transportation cost incurred by the seller in transporting the
merchandise to the buyer. It is also known as “transportation out”, transportation expense or delivery
expense. This account has a normal debit balance.
3. Sales returns – an account title used to describe when some items of merchandise sold are returned by
the customer because the items delivered are defective or do not comply with the order’s specifications.
It is a contra-revenue account, so it is deducted from the sales account to arrive at the net sales. It has a
normal credit balance.
4. Sales allowances - an account used to describe reduction on sales due to reasons similar to sales
returns. It is a contra revenue account.
5. Sales discounts – the cash discount on sales of merchandise which is generally effected in the books of
accounts when the buyer pays within the discount period.

Trade Discount vs. Cash Discount

Trade discount is the amount deducted from the supplier’s price list or price catalogue (suggested retail prices or
manufacturer’s suggested list prices) to arrive at the invoice price (the cost to the buyer). Trade discount are never
journalized. Manufacturers and wholesalers often offer a trade discount to the retailers to attract them to buy in big
quantity. It is sometimes called “quantity discounts”.
The following are examples of catalogue prices with trade discounts:

Product options list price terms items to purchase

1 100,000 30,n/30 5 to 10 items
2 100,000 30, 10, n/30 more than 10 to 20 items
3 100,000 30, 10, 2/15, n/30 more than 20 items

The meaning of the price symbols are as follows:

P100,000 – the list price. It is the suggested retail price.

30 - 30%. It is the first trade discount deductible from the list price of 100,000.
10 - 10%. It is the second trade discount deductible from the balance net of the first discount.
2/15 – 2% cash discount is given based on the invoice price if paid within fifteen days.
2/15, EOM - 2% cash discount is given based on the price invoice if paid within 15 days from the end of the month.
n/30 if not paid within 15 days, net amount within the 2% discount must be paid within 30 days.

Illustration
Assuming that Bush Enterprise sold merchandise to Bin Company at a list price of P100,000; trade discount – 25, 10;
2/10, n/30. The computation of the invoice price would be:

List price 100,000

Less: First trade discount (100,000 x 25%) 25,000
Balance net of the first trade discount 75,000
Less: Second trade discount (75,000 x 10%) 7,500
Invoice price 67,500

Cash Discounts
Cash discounts are deductions from the accounts payable of the buyer which are offered by manufacturers and
wholesalers to encourage prompt payments. Cash discounts are journalized.
The account title used to describe cash discount of the seller is termed as “sales discount” and the cash discount of the
buyer is “purchase discount”.

Illustration
Assume that Bin Company paid within 10 days. The computation of actual cash payment to the Bush Enterprise would
be:

Invoice price 67,500

Less: Cash discount (67,500 x 2%) 1,350
Actual cash payment 66,150

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COURSE MODULE Transportation Costs: F.O.B, Shipping Point vs. F.O.B., Point of Destination
MODULE WEEK NO.10-11

1. F.O.B., Shipping Point refers to the “Freight on Board, Shipping Point” which means that ownership of
product is transferred to the buyer upon shipment, hence, the buyer should pay for the cost of transportation.
Illustration. Growing Enterprises purchased P200,000 worth of merchandise form Oldie Company with terms of 2/10,
n/30, F.O.B. Shipping Point, Freight Collect. JRS transported the products and collected P10,000 as transportation fee.
The related journal entries would be:
 Books of Oldie Company (seller)
GENERAL LEDGER
Date Descriptions PR Debit Credit
200x
a) Accounts receivable 200,000
Sales 200,000
Sales on account. Terms 2/10,n/30
 Books of Growing Enterprises (buyer)
GENERAL LEDGER
Date Descriptions PR Debit Credit
200x
a) Purchases 200,000
Accounts Payable 200,000
Purchases on account. Terms: 2/10,n/30

Freight-in 10,000
Cash 10,000
Transportation cost paid to JRS

2. F.O.B., Point of Destination refers to the “Freight on Board, Point of Destination” which means that ownership
of the product is transferred to the buyer only upon reaching the specified place of destination, hence the seller
still owns the products transported which makes him responsible for the cost of transportation while the
products are still in transit.

Illustration. New City Enterprises purchased P100,000 worth of merchandise form Old Town Company with terms of
2/10, n/30, F.O.B. Point of Destination, Freight Prepaid. JRS transported the products and collected P5,000 as
transportation fee. The related journal entries would be:
 Books of Old Town Company (seller)
GENERAL LEDGER
Date Descriptions PR Debit Credit
200x
a) Accounts receivable 100,000
Sales 100,000
Sales on account. Terms 2/10, n/30

b) Freight-out 5,000
Cash 5,000
Transportation cost paid to JRS.
 Books of New City Enterprises (buyer)
GENERAL LEDGER
Date Descriptions PR Debit Credit
200x
a) Purchases 100,000
Accounts Payable 100,000
Purchases on account. Terms: 2/10, n/30

Freight Prepaid vs. Freight Collect

1. Freight prepaid means that the actual payment of transportation cost shall be made by the seller to the
common carrier.

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COURSE MODULE MODULE WEEK NO.10-11
Illustration. Mabenta Dry Goods Store sold P50,00 worth of merchandise to Zamboanga Bazaar. The terms of sales
contract are 2/10, n/30; F.O.B., shipping point, freight prepaid, P2,500. The related journal entries would be:
 Books of Mabenta Dry Goods Store (seller)
Date Descriptions PR Debit Credit
200x
a) Accounts Receivable 50,000
Sales 50,000

Sales on account. Terms: 2/10, n/30

Accounts receivable 2,500

Cash 2,500
To record transportation cost
 Books of Zamboanga Bazaar Store (buyer)
Date Descriptions PR Debit Credit
200x
a) Purchases 50,000
Accounts Payable 50,000

Sales on account. Terms: 2/10, n/30.

2,500
Freight-in
Accounts Payable 2,500
To record transportation cost

2. Freight Collect means that the buyer shall make the actual payment of transportation cost to the common
carrier.

Illustration. Bombay Bazaar sold P150,00 worth of merchandise to Mindanao Enterprises. The terms of sales contract are
2/10, n/30; F.O.B., Destination, freight collect, P10,500. The related journal entries would be:
 Books of Bombay Bazaar (seller)
Date Descriptions PR Debit Credit
200x
a) Accounts Receivable 150,000
Sales
Sales on account Terms:2/10,n/30 150,000

Freight-in 10,500
Accounts payable 10,500
To record transportation cost

.
 Books of Bombay Bazaar (buyer)
Date Descriptions PR Debit Credit
200x
a) Purchases 150,000
Accounts Payable 150,000

Purchases on account. Terms: 2/10, n/30.

Accounts receivable 10,500

Cash 10,500
To record transportation cost

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COURSE MODULE Inventory Accounting System
MODULE WEEK NO.10-11

1. Periodic Inventory System. Under the periodic inventory system, a company does not maintain a continuous
record of the physical quantities (or costs) of inventory on hand. The periodic inventory system is used by
businesses that’s sell relative inexpensive goods.
2. Perpetual Inventory System. A company using the perpetual inventory system maintains a continuous record
of the changes of the physical quantities in its inventory.
Comparative entries for Periodic and Perpetual Inventory System
Transactions Periodic Inventory System Perpetual Inventory System

Purchase of merchandise for cash Purchases xx Merchandise inventory xx

Cash xx Cash xx

Purchases of merchandise on account Purchases xx Merchandise inventory xx

Accounts payable xx Accounts payable xx

Return of merchandise bought on cash to seller due to defect Cash xx Cash xx

or damage
Purchase returns and allowances Merchandise inventory xx

Return of merchandise bought on account to seller due to Accounts payable xx Accounts payable xx
defect or damage
Purchase returns and allowances xx Merchandise inventory xx

Payment of account within discount period Accounts payable xx Accounts payable xx

Purchase discount xx Merchandise inventory xx

Cash xx Cash xx

Payment of account beyond discount period Accounts payable xx Accounts payable xx

Cash xx Cash xx

Payment of freight by the buyer Freight in xx Merchandise inventory xx

Cash xx Cash xx

Sale of merchandise for cash Cash xx Cash xx

Sales xx Sales xx

Cost of goods sold xx

Merchandise inventory xx

Sale of merchandise on account Accounts receivable xx Accounts receivable xx

Sales xx Sales xx

Cost of goods sold xx

Merchandise inventory xx

Payment of freight by the seller Freight-out/ delivery expense xx Freight-out/ delivery expense xx

Cash xx Cash xx

Return of defective merchandise by the buyer Sales returns and allowances xx Sales returns and allowances xx

Cash xx Cash xx

Merchandise inventory xx

Cost of goods sold xx

Collection from customer within discount period Cash xx Cash xx

Sales discount xx Sales discount xx

Accounts receivable xx Accounts receivable xx

Collection from customer beyond discount period Cash xx Cash xx

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COURSE MODULE Accounts receivable xx
MODULE WEEK NO.10-11

Accounts receivable xx

Reflection

What makes merchandising business more complicated than a servicing business?

Resources and Additional Resources

 Valencia and Roxas (2009), “Basic Accounting”, 3rd edition. Valencia Educational Supply ISBN 978-971-93934-3-6
 Cabrera, Ledesma and Lupisan (2010), “Fundamentals of Accounting”, Volume 1 -2010 Edition ISBN 971-0489-40-4