MERCHANDISING AND

INVENTORY

Inventories
▪ Inventories are assets held for sale
in the ordinary course of business,
in the process of production for
such sale or in the form of materials
or supplies to be consumed in the
production or in the rendering of
services.
Classes of Inventories

• Inventories of a trading concern

*Merchandise Inventory
2. Inventories of a manufacturing
concern
Legal Test
▪ Is the entity the owner of the goods
to be inventoried?

▪ 1. Goods on Hand

Goods in Transit

Free on Board
• FOB destination- ownership of
goods purchased is
transferred only upon receipt
of the goods by the
buyer at the point of
destination.

• FOB shipping point- ownership

is transferred upon the
shipment of the goods.
Freight Terms
Freight Collect
▪ This means that the freight
charge on the goods shipped is
not yet paid. The common
 carrier shall collect the same
from the buyer.
Freight Prepaid
▪ The freight charge on the
goods shipped is already paid
by the seller.
Consigned Goods
Accounting For Inventories
Periodic System

- Calls for the physical counting of goods on

hand at the end of the accounting period to
determine quantities which would give
actual or physical inventories.
Perpetual System

- Requires the maintenance of records

called stock cards that usually offer a
running summary of the inventory inflow
and outflow.
Periodic Vs. Perpetual System
• Purchases xxx Accounts
Payable xxx

• Freight In xxx Cash/Ap

xxx

• Accounts Payable xxx

Purchase Return xxx

• Accounts Receivable xxx

Sales xxx

▪ Merchandise Inventory xxx Accounts Payable

xxx
▪ Merchandise Inventory xxx Cash/Ap xxx

▪ Accounts Payable xxx Merchandise Inventory

xxx

▪ Accounts Receivable xxx Sales

xxx

• Sales Return xxx

Accounts Receivable xxx

• Merchandise Inventory xxx

Income Summary xxx
Cost of Goods Sold xxx
Merchandise Inventory
xxx

▪ Sales Return xxx

Accounts Receivable xxx
Merchandise Inventory xxx
Cost of Goods Sold xxx

▪ No adjustment . The balance of

the Merch. Inv. Account is the
ending inventory.

Methods of Recording
Purchases
Gross Method

-Purchases and accounts payable are recorded at

gross.
Net Method

- Purchases and accounts

payable are recorded at net.
Gross Method Vs. Net Method
• Purchases 200,000 Ap
200,000

• Ap 200,000
Cash 196,000
Purch. Disc 4, 000

• Ap 200,000
Cash 200,000
▪ Purchases 196,000 Ap
196, 000
▪ Ap 196,000
 Cash 196,000

▪ Ap 196,000
Purch. Disc. Lost 4,000
Cash 2000,000
▪ Purch. Disc. Lost 4,000
Ap 4,000
Exercise:
1. While examining the year-
end financial statements of
Team Sarah Company, you
discovered the following:

▪ a. Excluded from the year-end

inventory count are goods held on
consignment by Team Sarah at a
sales price including sales
 commission of 20% of the sales
price.

▪ b. Also excluded from the count are

goods in transit sold to Coach Leah
under terms FOB Destination,
invoiced for 28,650 which includes
2,000 freight recorded on December
29.

C. Consignment of goods to Kamp

Kawayan was inventoried as of year-
end at selling price at 37,700.

d. Mark-up on cost for all sales is

30%.
Compute for adjustment to ending
inventory.

 
Answer: 11, 800

a. Inventory 50, 000

Income Summary 50, 000

b. Accounts Payable 75, 000

Purchases 75, 000

c. Purchases 30, 000

Accounts Payable 30, 000
 Inventory 30, 000
Income Summary 30, 000

d. Income Summary 90, 000

Inventory 90, 000

e. Purchases 140, 000

Accounts Payable 140, 000

Quiz.