is bought (from supplier), debit = original

side
NATURE AND CONCEPT OF
MERCHANDISING BUSINESS 5. Purchases Returns and Allowances
- contra account to “Purchases”
● also called as trading business/buy
- similar to sales returns and
and sell business
allowances but from the view point
● service business has no
of business/buyer
merchandise inventory account
- credit = original side
● wherein a merchandising business
6. Purchase Discounts
sells its merchandise inventory
- also a contra account to
Merchandise Inventories = goods that
“Purchases”
are sold by the business
- similar to sales discount in nature
OPERATING CYCLE OF but from the viewpoint of
MERCHANDISING INVENTORY business/buyer
1. Purchasing merchandise inventory 7. Freight-In Account
2. Selling - known as transportation in
3. Accounts receivable if on account - transportation cost shouldered by
4. Collecting cash from receivables buyer or the freight term agreed
5. Purchasing more merchandise upon by both buyer and seller is
inventories FOB Shipping point
MERCHANDISING BUSINESS - found only in the book of buyer and
ACCOUNTS added in computation of total net
purchase
1. Sales Account - revenue account in
- debit = original side
merchandising business
- meanwhile, Freight-Out Account is
2. Sales Returns and Allowances
immediately expensed
- contra account to “Sales”
8. Trade Discounts
- when there is a return of
- encourages buyers to purchase
merchandise because of defect or if
because of markdowns from list
incorrect, buyer has all the right to
price
return
- enables suppliers to vary prices
- when the return is recognized by
periodically without the
seller, the seller should issue a
inconvenience of revising price lists
credit memorandum that will
- not an account title, should not be
decrease liability of buyer
recorded/recognized in the
- debit = original side
business transactions because the
3. Sales Discounts
recording of transaction starts with
- also a contra account to “Sales”
invoice price and not from list price
- companies sometimes sell on credit
- trade discounts are outright
term
deducted to list price
- to ensure early payment, seller
would give sales discount
- debit = original side
4. Purchases Account - account title
used when when merchandise inventory
9. List Price
- price of business transactions with
trade discounts
- trade discount is deducted from list
price to generate invoice price
SPECIAL JOURNALS AND THE
GENERAL JOURNAL
● merchandising business encourage
sales in big numbers, thus lots of
customers can be recorded in
general journal, specially if
company would allow credit sales,
bulk of business transactions need
to be monitored for follow up,
collection and sales
● because of this, special journals are
used to facilitate easy monitoring of
customers and suppliers’ account
1. Sales Journal - all sales on account
are recorded here (sales ng business na
naka utang/accounts receivable)
2. Purchase Journal - all accounts with a
credit to Accounts Payable are recorded
here (binili ng business na naka
utang/accounts payable)
3. Cash Receipt Journal - all accounts
with a debit to Cash account is recorded
here (sales ng business na binayaran ng
cash ng customers)
4. Cash Disbursement Journal - also
known as Cash Payment Journal, where
all Cash account on the credit side is
recorded (lahat ng gastos na binayaran
ng business na naka cash)
5. General Journal - accounts that may
not be recorded in the four special
journals are recorded here (E.G.
Purchase Return and Allowances & Sales
Return and Allowances)
PREPARATION OF TRIAL BALANCE
● same with service businesses,
arrange according to liquidity
However, new accounts may appear in
the chart of accounts as follows:
1. Merchandise Inventory, Beginning
2. Sales
3. Sales Discounts
4. Sales Returns and Allowances
5. Purchases
6. Purchases Returns and Allowances
7. Freight-In
8. Merchandise Inventory, Ending
PREPARATION OF ADJUSTING
ENTRIES
● generally similar with service
businesses but there is an
adjustment in merchandise
inventory, ending
COMPLETING THE ACCOUNTING
CYLE OF A MERCHANDISING
BUSINESS
● similar with service businesses, a
worksheet is very important in
completing the accounting cycle
● the worksheet helps facilitate the
recording of adjustments, final
valuation of assets and liabilities,
and final computation of the new
capital
- Business cycle is completed with the
preparation of financial statements and
closing of nominal accounts
- Financial statements are the same as
service businesses except statement of
financial position and statement of
financial performance
● Statement of Financial Position =
difference in presentation of
merchandise inventory in the asset
section
● Statement of Financial
Performance = difference in
presentation of cost of goods sold
which will determine gross profit
after deducting the said cost