ACTBAS2:

Introductory AccountingPart 2 Introduction to Merchandising Transactions Documents common in a merchandising business 1. Purchase Order Contains the details of good to be bought, number of units, brand or model, unit price, and other relevant information Prepared by the buyer and forwarded to the seller A document which contains the detail of goods sold on account. Prepared by the seller based on the purchase order received from the buyer Similar to the charge sales invoice which contains details of goods sold on cash basis Issued at point of sale Issued by the seller when he(she) collects from a credit customer, or when cash is received from sale of noninventory items. Issued on collection on accounts Involved in other transactions except merchandising transactions A document prepared by the buyer informing the seller of the return of defective goods and the corresponding reduction of liability. 6. Credit Memorandum A document prepared by the seller informing the buyer that he has reduced his collectible from the buyer Note: If purchase is made on cash basis, then a refund is appropriate. The debit and credit memorandums do not apply to any other form of considerations such as cash or promissory notes. Methods of Recording Merchandise 1. Periodic Inventory Does not maintain ledger accounts for Cost of Sales Does not update the Merchandise Inventory All purchases and sales of merchandise do not affect Merchandise Inventory. Instead, all purchases and sales are recorded in alternative accounts. The cost of merchandise sold and the cost of merchandise on hand at the end of the period is determined through physical count of the goods. Needs an adjusting entry to set up the ending balance of the Merchandise Inventory account There is a need to compute for cost of sales Used by firms whose transactions are recorded manually and whose inventories are voluminous but with cheaper unit prices The buyer uses the following unique and exclusive account titles in recording merchandising transactions:
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2. Charge Sales Invoice

3. Cash Sales Invoice

4. Official Receipt

5. Debit Memorandum

ACTBAS2: Introductory AccountingPart 2 Introduction to Merchandising Transactions i. Purchases ii. Purchase Returns and Allowances iii. Purchase Discount iv. FreightIn (also known as TransportationIn) The seller uses the following account titles in recording merchandising transactions: i. Sales ii. Sales Returns and Allowances iii. Sales Discount iv. FreightOut (also known as TransportationOut or Delivery Expense) 2. Perpetual Inventory Separate ledger accounts are maintained for Merchandise Inventory and Cost of Sales. Cost of goods already sold and cost of goods not yet sold are always (perpetually) available from records. Computerized system can afford to employ this method of recording merchandising transactions. Physical count of goods on hand at the end of the year is also made to confirm the balance of Merchandise Inventory per ledger. Any different between the physical count and the ledger balance of the Merchandise Inventory account is either debited or credited to Inventory Shortage or Inventory Overage account. If the physical count is less than the ledger balance, there is inventory shortage, otherwise, inventory overage. Inventory Shortage or Inventory Overage is closed to the Cost of Sales account. Under a manual environment, this inventory method is used by firms with few inventories but a more costly unit price. The buyer uses the Merchandise Inventory account only for all merchandising transactions. The seller uses the following accounts: i. Sales ii. Cost of Sales iii. Sales Returns and Allowances iv. Sales Discount v. FreightOut vi. Merchandise Inventory Merchandising Transactions (Periodic Inventory Method) A. Buying Phase 1. Purchases The account debited for the cost of merchandise bought whether on cash basis or on credit Purchases
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Cash/Accounts Payable

ACTBAS2: Introductory AccountingPart 2 Introduction to Merchandising Transactions 2. Purchase Returns and Allowances The account credited for the cost of merchandise returned due to defect or wrong specifications. This is supported by a debit memorandum in the case of a purchase made on account whether fully or partially. Accounts Payable Purchase Returns and Allowances xxx xxx

However, if the purchase was made on cash basis, the entry would be for a refund received. Cash Purchase Returns and Allowances xxx xxx

3. Purchase Discount The account credited by the buyer when he fully pays the liability within the discount period. Accounts Payable Cash Purchase Discount xxx xxx xxx

4. FreightIn (TransportationIn) The account debited when the buyer shoulders the cost of transporting the goods. FreightIn Cash xxx xxx

B. Selling Phase 1. Sales The account credited for the selling price of merchandise sold whether on cash basis or on credit. Cash/Accounts Receivable Sales xxx xxx

2. Sales Returns and Allowances The account debited for the selling price of merchandise returned. This is supported by a credit memorandum in the case of a sale made on account whether fully or partially. Sales Returns and Allowances Accounts Receivable xxx xxx

However, if the sale was made on cash basis, the entry would be made for a refund granted. Sales Returns and Allowances
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ACTBAS2: Introductory AccountingPart 2 Introduction to Merchandising Transactions Cash xxx

3. Sales Discount The account debited by the seller when a receivable is fully collected within the discount period. Cash Sales Discount Accounts Receivable xxx xxx xxx

4. FreightOut The account debited when the seller shoulders the cost of transporting the goods. FreightOut Cash xxx xxx

Merchandising Transactions (Perpetual Inventory Method) A. Buying Phase 1. The buyer debits the Merchandise Inventory account for the cost of merchandise bought for cash or on credit. Merchandise Inventory Cash/Accounts Payable xxx xxx

2. The buyer debits the Merchandise Inventory account for the cost of transporting the goods. Merchandise Inventory Cash xxx xxx

3. The buyer credits the Merchandise Inventory account for the cost of merchandise returned. This is supported by the debit memorandum in the case of a purchase made on account whether fully or partially. Accounts Payable Merchandise Inventory xxx xxx

However, if the purchase was made on cash basis, the entry would be for a refund received Cash Merchandise Inventory xxx xxx

4. The buyer credits the Merchandise Inventory for the amount of discount granted by the seller.
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ACTBAS2: Introductory AccountingPart 2 Introduction to Merchandising Transactions Accounts Payable Cash Merchandise Inventory xxx xxx xxx

B. Selling Phase 1. Every time there is a sale, the seller records two entries as follows: Cash/Accounts Receivable Cost of Sales (for the cost of goods) Merchandise Inventory xxx xxx Sales (for the selling price of goods) xxx xxx

2. Every time there is a return of goods, the seller records two entries as follows: Sales Returns and Allowances (for the selling price) Merchandise Inventory Cost of Sales (for the cost) xxx xxx Accounts Receivable/Cash xxx xxx

3. Sales Discount The account debited by the seller when he fully collects the receivable within the discount period. Cash Sales Discount Accounts Receivable xxx xx xxx

4. FreightOut The account debited when the seller shoulders the cost of transporting the goods. FreightOut Cash xxx xxx

Selected Merchandising Transactions 1. Owners original investment of merchandise

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ACTBAS2: Introductory AccountingPart 2 Introduction to Merchandising Transactions Merchandise Inventory Capital xxx xxx

2. Owners additional investment of merchandise Purchases Capital xxx xxx

3. Owners withdrawal of merchandise Drawing Purchases xxx xxx

4. Owners withdrawal of a secondhand computer (movable fixed asset) Drawing Accumulated Depreciation Office Equipment Office Equipment xxx xxx xxx

5. Owners permanent cash withdrawal Capital Trade Discount Purpose is to encourage the buyer to make large volume wholesale purchases Treated as a deduction from the list or catalog price Non account title to recognize trade discount List Price Trade Discount = Invoice Price (net amount placed in charge/cash sales invoice) The trade discount is expressed as a series of deduction in whole numbers. Example: Bought merchandise for 10,000 less 10105 10105 is the trade discount. The invoice price is computed as follows: 10,000 1 0.10 1 0.10 1 0.05 = 7,695 Cash xxx xxx

Cash Discount Encourages full cash payment at the earliest time possible Purchase Discount. The account recording the discount the buyer receives when he fully pays within the discount period.

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ACTBAS2: Introductory AccountingPart 2 Introduction to Merchandising Transactions Sales Discount. The account recording the discount the seller grants to the buyer when he fully collects within the discount period. The amount to be recorded in the Purchase Discount and Sales Discount accounts are equivalent as long as both accounts are involved in the same transaction. Unlike trade discount, cash discount is recorded in the books. Purchase Discount is credited by the buyer while Sales Discount is debited by the seller. Cash discount is presented in a transaction as a series of fractions. Example: Bought merchandise for 20,000; terms are 2/10 n/30. 2: 10: 30: n: Cash discount rate Discount period Credit period No discount given

2/10 n/30 means that 2% of the invoice price is allowed to the buyer if account is fully paid within 10 days after date of purchase. No discount is given if full payment is made after the 10th day. 3/15 2/eom n/45 eom: 3/15: 2/eom: End of the month 3% of the invoice price is allowed if full payment is made within 15 days after purchase date 2% is allowed if account is fully paid on or before the end of the month. No discount is given after the end of the month.

3/10 2/5eom n/45 3/10: 3% is allowed if the account is fully paid within 10 days after purchase date.

2/5eom: 2% is allowed if the account is fully paid within 5 days after the end of the month. No discount is given after the fifth day of the next month.

Guide in Recording Full Payment/Collection 1. Is the current year a leap year or an ordinary year? (If year number is divisible by 4, it is a leap year.) 2. Memorize number of days in each month. 3. Determine the outstanding balance of a particular Accounts Payable or Accounts Receivable as of the date of full payment. 4. Determine the basis of purchase or sales discount as of full payment date using the following formula: For the Buyer: Initial Accounts Payable xxx

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ACTBAS2: Introductory AccountingPart 2 Introduction to Merchandising Transactions Less: Purchase Returns and Allowances Basis of Purchase Discount For the Seller: Initial Accounts Receivable Less: Sales Returns and Allowances Basis of Sales Discount 5. Multiply the Basis of Discount by the applicable discount rate For the Buyer: Basis of Purchase Discount Multiplied by: Applicable Discount Rate Amount of Purchase Discount For the Seller: Basis of Sales Discount Multiplied by: Applicable Discount Rate Amount of Sales Discount xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx

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