Lesson 7 MERCHANDISING OPERATIONS
name, account numbers, and space for details of
Net Sales - arise from the sale of goods
Cost of Sales or Cost of Goods Sold - represents
the cost of inventory the entity has sold to
customers
Gross Profit - difference between net sales and
COGS
Net Profit for Operations / Operating Profit– Gross
profit + operating income and – operating expenses
Net Profit Before Income Tax - net profit for
operations + investment revenues and – financial
charges (or financial cost)
Net Profit – net profit before income tax – income
tax
------------------------------------------------------------------
Net Sales
(COGS)
Gross Profit
(Operating Expenses)
Net Profit for Operations
(Financial charges)
Net Profit
-------------------------------------------------------------------
SOURCE DOCUMENTS
*Sales Invoice – prepared by the seller of goods
and sent to the buyer
*Bill of Lading – document issued by the carrier – a
trucking shipping, or airline – that specifies
contractual conditions and terms of delivery
*Statement of Account - formal notice to the
debtor detailing the accounts already due
*Official Receipt – evidences the receipt of cash by
the seller or the authorized representative. It
notes the invoices paid and other details of
payment.
*Deposit Slips – printed forms with depositor’s
the deposit (validated)
*Check – written order to a bank by a depositor to
pay the amount specified in the check from his
checking account to the person named in the check
-payor – entity issuing the check
-payee – receiver
* Purchase requisition - written request to the
purchaser of an entity from an employee or user
department of the same entity that goods be
purchased
* Purchase order – an authorization made by the
buyer to the seller to deliver the merchandise as
detailed in the form
* Receiving report – a document containing
information about goods received from a vendor
* Credit memorandum - form used by the seller to
notify the buyer that his account is being decreased
due to errors or other factors requiring
adjustments
STEPS IN PURCHASE TRANSACTION
*purchase requisition  purchase order 
sales/purchase invoice  receiving report
TERMS OF TRANSACTIONS
Credit period – when goods are sold on account, a
period of time called credit period is allowed for
payment
-usually described as net credit period or
net terms
n/30 – a credit period of 30 days
n/10 eom – if invoice is due ten days after the end
of the month
Cash Discounts (purchase discounts or sales
discounts) – discounts for prompt payment
Discount period – period covered by the discount
Trade Discounts – encourage buyers to purchase
products because of markdowns from the list price
Transportation Costs
F.O.B. / free on board
Transportation In – included in the cost of asset
Transportation Out – also called delivery expense
FOB Destination, Freight Prepaid – Seller , Seller
FOB Shipping Point, Freight Collect – Buyer , Buyer
FOB Destination, Freight Collect – Seller, Buyer
FOB Shipping Point, Freight Prepaid - Buyer ,
Seller
INVENTORY SYSTEMS
*Merchandise inventory is the key factor in
determining cost of sales.
Perpetual Inventory System – the inventory
account is continuously updated
Periodic Inventory System – no entries are made
to the inventory account as the merchandise is
bought or sold
-only ate the end of the period, when the
inventory is counted, will entries be made to the
inventory account to establish its proper balance
NET SALES
Net Sales = Gross Sales – Sales Returns and
Allowances – Sales Discounts
Gross Sales – consists of total sales for cash and on
credit during an accounting period
*Only sales of merchandise held for resale are
recorded in the sales account.
Sales Discounts – contra-income account;
deducted from gross sales in the income statement
Sales Returns and Allowances – return of goods to
the seller due to damaged or defective goods
- contra-income account; deducted from
gross sales in the income statement
Credit Memorandum – issued by the seller to the
customer; formal acknowledgement that the seller
has reduced the amount owed by the customer
Transportation Out (pp 321-322)
COST OF SALES
Cost of Sales / COGS – largest single expense of the
merchandising business; cost of inventory that the
entity has sold
Goods Available for Sale – merchandise inventory
at the beginning of the year and net cost of
purchases during the period
Merchandise Inventory – consists of goods
purchased for resale
Beginning Inventory – inventory at the beginning
of the accounting period
Ending Inventory – inventory at the end of the
accounting period
*The ending inventory shown in the income
statement will be the merchandise inventory to be
reported in the balance sheet.
Net Cost of Purchases – consists of gross purchases
minus purchases discounts and purchases returns
and allowances equals net purchases; plus
transportation costs
Purchases - a temporary account used only for
merchandise purchased for resale
Gross price method – recording merchandise
purchases at invoice price
Purchases Returns and Allowances – contra
account and is accordingly deducted from
purchases in the income statement
Purchases Discounts - contra account and is
accordingly deducted from purchases in the
income statement
Transportation In – (pp 325 -327)
VALUE-ADDED TAX ENTRIES
 *Input tax increased the amount to be paid but
has no effect on the cost of the purchases. Output
tax also increased the amount collected but not
necessarily, the sales figure.
{Input tax & Output tax = x .12}
{Sales, Purchases & Sales Discounts = / 1.12}
OPERATING EXPENSES
Distribution costs or selling expenses - expenses
related directly to the entity’s efforts to generate
ales
Administrative expenses – expenses related to the
general administration of the business
Other operating expenses – expenses that are not
related to the central operations of the business
Lesson 8 COMPLETING THE CYCLE FOR A
MERCHANDISING BUSINESS
Need for a Physical Count
*With no perpetual record of the cost of sales
during the period, the only way to obtain the cost
of the ending inventory is to make physical count.
* An error in valuing ending inventory will translate
into one inaccurate balance sheet and two
incorrect income statements
Merchandise Inventory at the End of the Period
*Beginning merchandise inventory and purchases
are debits to income summary; while ending
merchandise inventory is a credit to income
summary.
Income Statement
Nature of Expense Method – Expenses are
aggregated or combined in the income statement
according to their nature and are not reallocated
among various functions within the entity.
Function of Expense Method – also called “cost of
sales” method; classifies expenses according to
their function as part of cost of sales,
distribution/selling, administrative and other
operating activities
Lesson 9 SPECIAL AND COMBINATION JOURNALS,
AND VOUCHER SYSTEM
CONTROL ACCOUNTS AND SUBSIDIARY LEDGERS
Accounts Receivable Control Account – general
ledger is kept into a manageable size
-it is a controlling account in the sense that
its balance should equal the total of the individual
account balances in the subsidiary ledger.
Accounts Receivable Subsidiary Ledger – contains
the detailed record of transactions with individual
customers
-controlled by the accounts receivable
account in the general ledger
*Subsidiary ledgers are often used for accounts
payable, inventory, and property and equipment.
SPECIAL JOURNALS
Sales journal (S) – sales of merchandise on account
Cash receipts journal (CR) – receipts of cash
Purchases journal (P) – credit purchases of
merchandise and other items
Cash disbursements journal (CD) – payments of
cash
General journal (GJ) – entries that do not fit in the
other journals
Advantages of Using Special Journals
*Their use permits division of labor.
*It often reduces recording time.
Sales Journal - sales of merchandise on account
*Credit sales of assets other than merchandise
inventory (property and equipment) are entered in
the general journal.
*For each transaction, the accountant enters the
date, sales invoice no., and customer account to be
debited along with the amount.
*The posting of any journal to the ledger must
result in equal debits and credits.
*For any posting to a control account in the general
ledger, the same total amount must be posted to
one or more related subsidiary ledger accounts.
*Amounts recorded in the sales journal are posted
daily to the subsidiary ledger to keep a current
record of the A/R from each customer.
*At the end of the month, when all sales have been
recorded and the sales journal has been totaled
and ruled, the total sales figure is posted to the
general ledger.
*When amounts are posted to the ledgers, the
journal page number is entered in the account to
identify the source of the data.
Cash Receipts Journal – all transactions involving
cash receipts
*This journal has debit columns for cash and sales
discount; and credit columns for accounts
receivable and sales.
*The totals of the cash, sales discounts, accounts
receivable, and sales columns are posted to the
general ledger.
*Individual items in the A/R column are posted on
a daily basis to the customers’ subsidiary ledger to
keep it in balance with the A/R control account.
*A schedule of account balances in the subsidiary
ledger is usually prepared at the end of each
accounting period to verify that the subsidiary
ledger agrees with the related control account.
Purchases Journal – designed to account for
purchases of merchandise, supplies, and other
assets on account.
*The primary source document used as the basis
for the entries in the journal is the receiving report.
Cash Disbursements Journal - payments of cash
General Journal - entries that do not fit in the
other journals
*examples include merchandise returns, write-offs
of uncollectible accounts and certain non-cash
transactions involving notes receivable and notes
payable
Flexibility of Special-Purpose Journals
*Its function is to reduce and simplify the work in
accounting and allow division of labor.
*Special journals should be designed to suit
transactions commonly encountered by an entity.
VOUCHER SYSTEM
*Most entities control purchases and cash
disbursements by formalizing the process of
verification and approval of payments using a
method known as the voucher system.
Voucher – serially numbered form that identifies
the name and address of the payee, the due date,
terms, description and invoice amount.
*Copies of the purchase requisition, purchase
order, invoice, and receiving report should be
attached to the voucher (voucher package).
*The voucher is recorded in the book of original
entry called the voucher register.
Voucher Register – takes the place of the
purchases journal, and provides a record of all
authorized check payments
*In voucher system, all expenditures are recorded
first in the voucher register.
*Approved vouchers are entered in the voucher
register in numerical sequence.
Unpaid Voucher File– the absence of entries in the
payment date and check number columns of the
voucher register indicate that voucher is unpaid
Check Register – record of all check payments
*Checks are issued only in payment of approved
and recorded vouchers
Paid Voucher File
Special Problems in a Voucher System
Gross or Net Amounts – under the voucher
system, discounts may cause the amount of the
check to differ from the gross amount of this
voucher
Recording Purchases Returns and Allowances –
companies usually handle purchases returns and
allowances by cancelling the original voucher and
issuing a new one for the lower amount
Recording Partial Payments – when installment or
partial payments are made on invoices, a separate
voucher is prepared for each check issued