GREY MERCHANDISING ENTRIES

NOTE: To solve problems like this, treat every transaction (every payment, every move is one
transaction)

1. INVESTMENT OF RESOURCES

Discussion: This is an entry to recognize an investment to the business. Investments are resources
contributed to the business to allow it to survive. The account title usually used is “Capital”. The
resources are recorded as assets accordingly. Capital accounts have a credit normal balance. (This
means that an increase in the Capital means there is an increase in the Credits)

Example. A contributed ₱1,000,000 cash and ₱500,000 worth of inventories. We record them as debit to
Cash for ₱1,000,000.00 and debit to Inventory ₱500,000.

Cash ₱1,000,000.00
Inventories 500,000.00
Capital ₱1,500,000.00

2. Various cash payments

Discussion: This is merely cash payments of expenses and purchase of assets. However, individually
assess the payments.

a. “she paid 60,000 for six months’ rent” – She paid rent in advance. This means she has not yet stayed
in the premises for six months pero nagbayad na siya ng rent. This shouldn’t be treated as an expense
muna since kung tutuusin may utang pa si landlord sa kanya na rent services (sorry, nagtagalog na ako…
nagnosebleed ako sa English ko sa taas…hahaa).

Another example of prepaid expenses (advanced payment to services) includes prepaid insurance or
prepaid subscription expense (of newspapers, etc.)

So if not treated as an expense, what is it? It is an asset, particularly a Prepaid Asset. However, in this
case, since this is rent, the account title to be used is Prepaid Rent Expense. To recognize prepaid rent:

Prepaid Rent xx
Cash xx

b. paid 15,000 for business licenses

Business licenses are expenses paid to the government to be able to make the business legal and
operational. Kasama dito ang Mayor’s permit, Permit to Operate, Sanitary permit…etc. These are regular
fees paid by the business to the government and are thus Operating Expenses. To recognize:

Business Licenses xx
Cash xx
c. paid 85,000 for various store furniture
This is a cash purchase for store furniture. If we follow through the normal business setting, once na may
investment, next na gagawin ni business owner is to acquire assets para sa business. This will include
furniture, machineries and inventories. Simply record these assets in their proper account title and
credit cash (since it is a cash purchase). Entry to record:

Furniture and Fixtures (or Machinery/Merchandise Inventory) xx

Cash xx

3. Meredith also bought 85,000 worth of office supplies with the intention of selling them at a
higher price. Gross profit will be 50% based on cost. The company paid 500 for delivery
charges. FOB Terms: FOB Shipping point, freight collect.

Ayan na…this is it. The madugo part. Himay-himayin muna natin. As previously stated, business owners
purchase assets for their business. Kasama dito sa assets ang inventory. In this case, the assets are Office
Supplies to be sold at a 50% mark-up. Wag muna malito, let’s break down:

The transaction here is the (a) purchase of the office supplies; and (b) the payment of delivery charges.

The other facts such as the gross profit and the FOB terms are merely facts to be used to account for the
sales and the delivery charges. So since the problem did not state any sales made, the gross profit is
unnecessary.

Now to the entries:

a) purchase of the office supplies for 85,000.00. Alamin muna if this is cash purchase or credit purchase.
If cash purchase, we credit “Cash”, if credit or utang, credit “Accounts Payable”. So is the purchase cash
or credit? Check the final note: “supplies were bought from Seattle Supplies store on terms n/60”. Kapag
may nakita kang “terms” and “n/(number)”, it is a credit purchase. So the entry should be:

Merchandise Inventory 85,000.00

Accounts Payable 85,000.00

b) payment of delivery charges na 500.00

Let’s discuss FOB muna. FOB means “free on board” or “freight on board”, it is a shipment term used to
determine who shoulders the cost of damage during shipping. So what is this “Shipping point “ and
“collect”?

Shipping Point is the point of origin. Kung saan nanggaling yung items na ishiship. Usually the shipping
point is the seller. The other term to watch out for is FOB Destination Point. Destination Point means the
point or place where the items shipped will arrive, usually the buyer. The importance of these points is
to pinpoint who will shoulder the loss or cost of damage during the shipping. Kung sinabi na Shipping
Point, the buyer is the owner from the point of origin or simply put, once na na-order na ni buyer yung
items and may agreement na sa price, the owner of the items is the buyer so siya ang magrerecognize
ng loss or damage ng items. Kung sinabi naman na Destination Point, the buyer is the owner of the items
until delivery. In short, since kanya pa yung items while the items are being shipped, any loss or damage
will be shouldered by the buyer. (This is a bit confusing. It’s normal to be confused at this FOB thingy…
kasi I only understood it after weeks of discussion sa amin..hayst).

Here is a graphical view of the Shipping Terms: (FULL DISCUSSION link: https://www.double-entry-
bookkeeping.com/operating-expenses/fob-accounting/)
So, next naman…what is this “collect” after the shipping point? This is the other term of “COD” or cash
on delivery. The buyer will not pay for the delivery muna upon ordering and will only pay the delivery
charges upon delivery. What if gusto na bayaran ni buyer yung delivery charges upon order? The term to
be used is “prepaid”. So instead na “FOB Shipping Point, collect”, it will be “FOB Shipping Point,
prepaid”.

Again, the notes about the FOB above are merely discussions. Don’t worry, it doesn’t affect your journal
entry for this problem. It is merely for informatory purposes so you will not be so surprised if met with a
similar problem na andaming sinasabi na shipping. (I swear, marami kayong exercises on this, minsan
magkukuwento pa ang problem about typhoons or vehicular accidents…mga ganern).

Now back to the entries. So as stated in the problem, the “company paid 500 for delivery charges”. The
proper account title to be used is “Freight In”. Note na this will be an addition to your Purchases when
preparing your Income Statement.

Freight In 500.00
Cash 500.00

Pwede mo pagsamahin yung two entries:

Merchandise Inventory 85,000.00

Freight In 500.00
Accounts Payable 85,000.00
Cash 500.00

4. But on the next day, the business received a 3,000.00 credit memo for allowance granted on
the purchased merchandise.

A credit memo for purchases is a memo (or a certain document) which is issued by the seller to the
buyer, which reduces the amount of the credit owed by the buyer on a certain purchase. Simply,
nakasaad dito yung binabawasan ni seller sa babayaran ni buyer sa kanya on the purchases on account
of probable damages on the items purchased during shipment.

In the accounting world, the reduction will be made on the credit (Accounts Payable). So since
mababawasan ang utang ni buyer, there will be a debit on the Accounts Payable. And what is the
credit? No, it is not Merchandise Inventory but a contra-asset account called “Purchase Returns and
Allowances”.

Hope this helps. Just ask me for further questions. 😊