Nature of Merchandising Business

A merchandising business is a company that buys

goods and resells these goods, without making any
modifications, at a price higher than its purchase price
for the purpose of making profit. Inventory (or
merchandise inventory) is the most important asset of a
merchandising business as this is where the company
derives its regular revenue streams. Basically, there are
two (2) major activities that are involved in a
merchandising business, these are buying and selling
activities.

Inventory Systems
There are two (2) systems used in keeping of
merchandise inventory records. These are Periodic and
Perpetual inventory systems.
 Periodic Inventory System. Under this inventory
system, the company provides data on inventory
levels at some points in time. A physical count is
made usually at the year-end to provide figures as
to how many exist at that point in time.
 Perpetual Inventory System. Under this
inventory system, the company keep track of all
changes in the inventory account. There is a
continuous updating of the ins and outs in the
stock card every time there are purchases and sale
of merchandise.

Journalizing Transactions in a Merchandising

Business
Journalizing transactions in a merchandising
company is basically the same with that of a business
concern only that there are additional account titles used
in a merchandising company. The following account titles
are used in journalizing merchandising business under
periodic inventory system:

o Merchandise Inventory, End

This refers to the unsold merchandise at the
end of the accounting period as determined by the
physical counting or inventory taking.

o Merchandise Inventory, Beginning

This refers to merchandise inventory at the
beginning of the period and is usually dated January
1.

o Purchases
This account is debited when merchandise is
purchased either in cash or on credit.
Journal Entry:

Purchases xx
Cash or Accounts Payable xx

o Purchase Discounts
This account is credited when there is discount
availed from a supplier for early payment of
merchandise purchased on credit.
Journal Entry:

Accounts Payable xx
Purchase Discounts xx
Cash xx

o Purchase Returns and Allowances

 This account is credited for merchandise
purchased either in cash or on credit that were
returned to the supplier for reason of bad order or
does not fit to the description of the merchandise
ordered and were not replaced due to non-
availability of stocks of merchandise by the
supplier.
Journal Entry:

Cash/Accounts Payable xx
Purchase Return and Allowances xx

o Freight-in
This account is debited for the freight and
handling charges of merchandise purchased by
the buyer or customer and shipped via land, sea
and air transportation.
Journal Entry:

Freight-in xx
Cash xx

o Sales
This account is credited for merchandise that
are sold either in cash or on credit.
Journal Entry:

Cash/Accounts Receivable xx
Sales xx

o Sales Discount
This account is debited for sales discount given
to a customer for early collection from his/her
account.
 Journal Entry:

Cash xx
Sales Discount xx
Accounts Receivable xx

o Sales Return and Allowances

This account is debited for merchandise sold
either in cash or on credit but were returned by
the customer for reason of bad order or does not fit
the description of the merchandise ordered and
were not replaced due to non-availability of stock.
Journal Entry:

Sales Return and Allowances xx

Cash/ Accounts Receivable xx

o Freight-out
This account is debited for freight and handling
charges of merchandise sold to customers and
shipped via land, sea and air transportation.
Journal Entry:

Freight-out xx
Cash xx

Discount Terms

The term Cash Discounts has two connotations. It

can either be a purchase discounts from the buyer’s
viewpoint or sales discounts from the seller’s
viewpoint. Cash discounts are inducements to both
buyer and seller for prompt payment or prompt
collection of account purchase and account sales.
The following are the common discount terms both
for purchases and sales:

o 2/10, n/30 - This means that if the

account is paid/collected within
10 days from the date of the invoice,
a 2% discount can be availed or given
and no discount if the account is
paid/collected after the 10th day or
from the 11th to 30th days.
o 2/10, 1/20, N/30 - This means that a 2%
discount can be availed or
given if the account is paid/collected
within 10 days from the invoice date,
1% if paid/collected from the 11 th to
20th days and no discount if
paid/collected from the 21st to the
30th day.
o 2/10, EOM - This means that a 2%
discount can be availed or given if
the account is paid/collected 10 days
after the End of the Month.
Example:
The amount of merchandise bought was P35,000
and 2% discount is given/availed if paid within 10
days. The deadline for payment was met.
Computation:
Amount of merchandise
P35,000
 Less: 2% cash discount (35,000 x
2%) 700
Invoice Price
P34, 300