CHAPTER 5 MERCHANDISING

TOPIC: JOURNAL ENTRIES - MERCHANDISING

RULES IN JOURNAL ENTRIES:

1. ALWAYS
1.1 All Income accounts are ALWAYS CREDIT. Examples of income accounts:
Sales, rent income, interest income, commission income, dividend income.

SALES account is credited when the entity sell Merchandise inventory. When
the entity sell an office equipment, the account credited is always OFFICE
EQUIPMENT.

1.2 All contra-income accounts are ALWAYS DEBIT. Examples: Sales discount,
sales returns and allowances

SALES DISCOUNT is the account debited when the entity gave a

discount on sale to a customer.
SALES RETURNS AND ALLOWANCES is the account debited when the
customer returned the merchandise sold to them.

When the entity sell an asset that is not a merchandise, like furniture and
fixture, the account title to be credited should be FURNITURE AND
FIXTURES. But when the buyer of the furniture and fixture returned it to
the entity, the account title that should be debited is FURNITURE AND
FIXTURES.

1.3 All expense accounts are ALWAYS DEBIT. Examples: purchases, freight
in, cost of sales, salaries and wages, taxes and licenses, advertising
expense, utilities expense, etc.

PURCHASES account should ALWAYS be debited when the entity buy

merchandise. But when the entity buy a delivery equipment, the debit should
be DELIVERY EQUIPMENT.

1.4 FREIGHT IN (always debit)

Freight in is an account title used only for the purchase of
MERCHANDISE INVENTORY. When you buy machineries and
you incurred freight expense, the account title to use should
be MACHINERIES AND EQUIPMENT ( not Freight in).

1.5 FREIGHT OUT (always debit)

 Freight out is an account title used only for the delivery expense of
MERCHANDISE INVENTORY sold.

1.6 All contra-expense accounts are ALWAYS CREDIT. Examples: Purchase

discount, purchase returns and allowances.

When the merchandise bought is returned to the supplier, the account

PURCHASE RETURNS AND ALLOWANCES should always be credited.

When the entity received a discount from the merchandise purchase, the
account that should be credited is PURCHASE DISCOUNT.

When an asset is bought (not a merchandise inventory), like factory

machineries and equipment, the account title is FACTORY
MACHINERIES AND EQUIPMENT
But when this factory machineries and equipment is returned to the
supplier, the credit is FACTORY MACHINERIES AND EQUIPMENT (not
purchase returns and allowances).
When the supplier gave a discount, the account title to be credited is
FACTORY MACHINERIES AND EQUIPMENT (not purchase discount)

1.7 All capital accounts are ALWAYS CREDIT. Example: X, Capital, Tisoy,
Capital, Maganda, Capital, etc.

1.8 All withdrawal accounts are ALWAYS DEBIT. Example: Petra, withdrawal,
Petsay, withdrawal, Bisugo, withdrawal.

NOT ALWAYS
1.9 ASSET ACCOUNTS
1.9.1 Asset accounts are debited when bought / received except when
merchandise is bought and received by the business; the account
title to be used should be PURCHASES (not merchandise
inventory). When the merchandise bought is returned to the
supplier due to defect, the account title should be PURCHASE
RETURNS AND ALLOWANCES ( not merchandise inventory).
When a cash discount is given to the buyer on the merchandise
bought, the account title should be PURCHASE DISCOUNT.
Please take note that these account titles are used ONLY for buying
MERCHANDISE.
When you buy office equipment, the account title should be OFFICE
EQUIPMENT. When you return the office equipment to supplier
because of defect, the credit should be OFFICE EQUIPMENT.
1.10 LIABILITIES
1.10.1 All liability accounts are CREDITED when the entity borrowed from
the bank or when the entity buy an asset on account or on credit.
1.10.2 All liability accounts are DEBITED when the amount borrowed from
the bank is paid or when the accounts payable or notes payable to
the supplier is paid.