Accounting For Merchandising Activities

CHAPTER 1
INTRODUCTION TO MERCHANDISING: EXPLORING THE WORLD OF RETAIL
Learning Objectives:
Upon the successful completion of this module, students will be able to:
1. Understand the concept of merchandising and its role in the retail industry.
2. Gain knowledge about the distinction between service, manufacturing, and merchandising
businesses.
3. Understand the role of inventory in merchandising business
4. Learn the different types of retail businesses and their characteristics.
5. Familiarize the operating cycle of merchandising business and its stages.
CHAPTER OVERVIEW
In this chapter, we will have a comprehensive understanding of the concept of
merchandising, its significance in the retail industry, the different types of retail businesses, various
stages of the merchandising cycle, and the different source documents used in merchandising
business which serve as evidence and support for financial transactions. Merchandising is a
fundamental aspect of many businesses, including retailers, wholesalers, and distributors. By
studying merchandising, you gain a comprehensive understanding of the different source
documents used in business, its importance of providing a reliable and verifiable record of the
transaction, ensuring accuracy in financial reporting. By understanding different source documents,
accountants can ensure that the information recorded in the accounting system is reliable and
trustworthy. Moreover, you will gain more knowledge on how goods are bought and sold to earn
profit, which is crucial for a well-rounded knowledge of business operations. Overall, gaining
knowledge in merchandising as a business student equips you with a versatile skill set that is
applicable across industries. It allows you to understand the dynamics of product-based
businesses, make informed decisions, and pursue various career opportunities within the business
field.
Nature of a Merchandising Business
A merchandising business refers to a type of business that buys and sells goods for profit. It acts
as an intermediary between manufacturers or suppliers and end consumers, bringing products to
market and making them available for purchase. In a merchandising business, the primary focus is
on the sale of tangible products rather than providing services.
The role of merchandising in the retail industry is multi-faceted and essential for the success of
retail businesses. It encompasses a range of activities and strategies aimed at effectively
managing and presenting products to attract customers, drive sales, and maximize profitability.
Effective merchandising strategies and execution are vital for attracting customers, increasing
sales, and achieving long-term success in the competitive retail market.
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The primary distinction between a service business and a retail business lies in the nature of their
core offerings and revenue generation methods. A merchandising business primarily deals with
buying and selling tangible products. It involves acquiring goods from suppliers or manufacturers
and selling them to customers at a markup to generate revenue. A service business, on the other
hand, offers intangible services rather than tangible products. It involves providing expertise, skills,
or assistance to customers in exchange for a fee. While both merchandising and service
businesses aim to generate revenue, the key distinction lies in the offering itself. Merchandising
businesses focus on buying and selling tangible products, managing inventory, and setting prices,
while service businesses offer intangible services based on specialized expertise or skills.
Merchandising differs from manufacturing in that it does not generate its own product for sale. It
buys things from a manufacturer or a supplier at either the retail or wholesale level. In other words,
merchandising is the buying, selling, and marketing of created goods, whereas manufacturing is
the process of changing raw materials or components into finished products via various industrial
processes.
Supplies vs. Inventory

Inventory refers to the collection of goods, products, or items a business keeps on hand for sale,
production, or use in its operations. It represents the stock of items that a business owns and
intends to sell to customers as part of its regular business activities.
Understanding the role of inventory helps a merchandising business make informed decisions
regarding purchasing, sales, pricing, and profitability. Effective inventory control guarantees that
the proper products are available when they are needed, contributes to customer satisfaction, and
supports the financial health and success of the business.
Supplies are assets that a company consumes or uses in its day-to-day operations but are not
intended for sale. These are used for supporting business operations but are not directly involved
in the production or sale of goods or services. They include items like office supplies, cleaning
materials, or maintenance tools.
Ex. Office supplies, cleaning materials, etc.
Types of Retail Businesses and Their Key Characteristics:

1. Department Stores. These are large retailers with numerous departments and a broad
selection of merchandise, including apparel, accessories, cosmetics, home goods, and
gadgets. They frequently offer a one-stop shopping experience and have a wide customer
base.
Examples: Robinson's or SM Department Store
2. Specialty Stores. These are retailers that specialize in a specific product category or niche,
offering a focused selection of merchandise. They cater to specific customer interests and
provide a specialized shopping experience.
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Examples: Sephora (beauty products), PetSmart (pet supplies), Foot Locker (athletic
footwear).
3. Discount Stores. These are retailers that offer products at discounted prices compared to
traditional retailers. They focus on value-driven offerings, competitive pricing, and cost-
saving strategies.
Examples: Landers Superstores, Puregold Price Club
4. Convenience Stores. are small-scale retail businesses with a limited assortment of

necessities that are frequently located in convenient areas and have extended business
hours. They cater to the immediate needs of customers looking for quick purchases.
Examples: 7-Eleven, Ministop, Family Mart
5. Supermarket. Are large-scale supermarkets that provide a variety of food and household
goods. They concentrate on offering a range of products, fresh vegetables, and daily
necessities.
Examples: Robinson’s Supermarket or SM Supermarket
6. E-commerce Retailers. Retail businesses that operate primarily online, allowing customers
to shop through websites or mobile apps. They offer convenience, a wide product selection,
and often personalized shopping experiences.
Examples: Amazon, Alibaba, eBay.
7. Specialty Food Stores. Retailers that specialize in selling high-quality and unique food
products, often with a focus on specific categories like gourmet, organic, or international
foods. They provide specialty items and a niche shopping experience.
Examples: Whole Foods Market, Trader Joe's, Dean & DeLuca.
8. Franchise Retailers. Retail businesses that operate under a franchise agreement, utilizing
an established brand, business model, and support system provided by a franchisor.
Franchisees benefit from brand recognition and proven operational methods.
Examples: McDonald's, Subway, Anytime Fitness.
9. Pop-up Stores. Temporary retail outlets that only exist for a brief period of time, frequently
in unusual locales or during particular occasions or seasons. They give customers a sense
of urgency, exclusivity, and novelty.
Examples: Holiday pop-up shops, seasonal market stalls, temporary fashion boutiques.
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10. Online Marketplaces.: Platforms that connect buyers and sellers in a virtual marketplace.
They facilitate transactions between multiple sellers and offer a wide range of products
from different brands or individual sellers.
Examples: Lazada, Shopee, Zalora

It's important to note that retail businesses can often overlap or combine elements from different
types. Additionally, the retail landscape is constantly evolving, with new formats and business
models emerging to adapt to changing consumer preferences and technology advancements.
The Operating Cycle of a Merchandising Business
The operating cycle of a merchandising business refers to the period it takes for a company to
convert its investment in inventory into cash through the sale of merchandise. It involves the
various stages and timeframes involved in the merchandising process.
The key stages of the operating cycle for a merchandising business are as follows:
1. Inventory Purchase. The cycle begins with the purchase of inventory from suppliers or
wholesalers. The company invests its funds to acquire merchandise that will be sold to
customers. After the inventory is purchased, the company holds the merchandise in its
warehouses or stores until it is sold. The duration of inventory holding varies based on
factors such as product demand, shelf life, and inventory management practices.
2. Sales and Receivables. During this stage, the company sells the merchandise to
customers. Sales can be made through various channels, including physical stores, e-
commerce platforms, or wholesale transactions. Customers may make immediate
payments or be granted credit terms, resulting in accounts receivable.
3. Collection of Receivables. If the company has extended credit to customers, it enters the
collection phase. It receives payments from customers, either in the form of cash, checks,
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or electronic transfers. The collection period depends on the credit terms offered to
customers and their payment behavior.
4. Cash Conversion. Finally, the company converts the proceeds from sales and collection of
receivables into cash. This cash can be used to cover operating expenses, purchase new
inventory, repay loans, invest in business growth, or distribute profits to the owners.
Source Documents
Source records are authentic records or proof that detail a commercial transaction. They serve as
the foundation for accounting and financial reporting. Here are some common types of source
documents:
1. Sales Invoice. A vendor will send a sales invoice to a customer in order to request payment for
goods or services that have been sold. It typically contains information like the date, the sale's
description, and number of things, the price, the total amount, and the terms of payment.
2. 2. A bill of lading (B/L) is a legal document that a shipper or shipping agent issues to confirm
that the goods they are shipping have been received. This document serves as a contract of
carriage and serves as proof of the understanding between the shipper (the seller) and the
carrier (the transportation firm). Important details regarding the products being shipped and the
terms of the shipment are included in the bill of lading.
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3. Official Receipts are issued by a business to acknowledge the receipt of cash or other forms of
payment from a customer. They typically include details such as the date, amount received,
payment method, and purpose of payment.
4. Purchase Order is prepared by a buyer and sent to a supplier to formally request the purchase
of goods or services. It outlines the details of the order, including the items, quantities, prices,
delivery terms, and payment terms.
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5. A Statement of Account informs the debtor in writing of the accounts that are already
past due.
5. A delivery note is issued by a seller to confirm the delivery of goods to a customer. It includes
details such as the date, description of the items delivered, quantity, and any discrepancies or
damages noted.
6. Bank statements are documents provided by a bank that show the transactions and balances
in a bank account. They include information about deposits, withdrawals, interest earned, fees
charged, and the ending balance for a specific period.
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7. Payroll Records: Payroll records contain information about employee compensation, including
wages, salaries, deductions, and taxes withheld. They may include timesheets, payroll
registers, pay stubs, and other relevant documents.
8. A deposit slip is a document used to deposit funds into a bank account. It serves as a record of
the transaction and provides details about the deposit, including the account number, the
account holder's name, and the amount being deposited. The deposit slip is typically provided
by the bank and can be obtained either from the bank branch or through online banking
services.
9. A check is a written, negotiable instrument that directs a bank to pay a specific amount of
money from a designated bank account to a designated recipient. It serves as a payment
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method, allowing individuals or businesses to make payments to others without the need for
physical cash.
10. A purchase requisition, also known as a purchase request, is a formal document used within
an organization to initiate the process of purchasing goods or services. It serves as a request
from one department or individual to another, typically from a user or department requiring the
goods or services to the procurement or purchasing department responsible for acquiring them.
11. A credit memorandum, also known as a credit memo or credit note, is a document issued by a
seller to a buyer, indicating that the buyer's account should be credited for a specific amount
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These source documents provide the necessary information for recording transactions accurately
and are used as evidence in case of audits, disputes, or financial analysis. They form the basis for
maintaining proper financial records and ensuring compliance with accounting standards and
regulations.
"The best way to predict the future is to create it." - Peter Drucker
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CHAPTER 2
RECORDING MERCHANDISING TRANSACTIONS
Students who successfully complete this module will be eligible to:
1. Explain the two major activities of a merchandising business
2. Learn the different account titles used for each activity
3. Compare the Chart of Accounts used for Service and Merchandising Business
4. Prepare the journal entries for each business transaction
CHAPTER OVERVIEW
The basic principles and processes involved in accurately recording financial transactions
related to merchandise purchases, sales, and returns are summarized in this chapter. Properly
recording all transactions in a merchandising business is of paramount importance it ensures that
the financial reportss present a true and fair view of the business's financial position and
performance. Financial statements, such as the income statement, balance sheet, and statement
of cash flows, rely on accurate transaction recording to provide reliable information to stakeholders,
including investors, lenders, and regulators. Properly recording transactions also helps ensure
compliance with applicable accounting standards and regulations. By adhering to accounting
principles, the business can demonstrate transparency, consistency, and reliability in its financial
reporting. Overall, proper recording of transactions in a merchandising business is essential for
maintaining accurate financial records, complying with accounting and tax requirements,
supporting decision-making, and ensuring transparency and accountability. It forms the foundation
for reliable financial reporting and effective management of the business's operations, finances,
and resources.
Major Business Activities
1. Buying of merchandise
2. Selling of merchandise
A. Buying of merchandise
The procedures and actions involved in acquiring inventory or products for sale are referred to as
purchasing activities in a merchandising business. According to the historical cost principle, all
additional acquisition-related incidental costs are added to the purchase price to determine the cost
of the goods. Generally, the purchase is typically considered perfected in a merchandising
business when a legally binding agreement is reached between the buyer and the seller. This
agreement usually occurs at the moment when both parties agree on the essential terms of the
purchase, such as the quantity, price, and description of the goods.
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The standard account names utilized in the buying activities are:
In the purchasing activities of a merchandising business, there are several common account titles
are used to track and record financial transactions. These account titles are typically part of the
company's chart of accounts and help organize and categorize the various aspects of purchasing.
1. Purchases: Under the periodic inventory system, the cost of inventory or products
purchased for resale is recorded in the purchases account. The cost of the goods
themselves as well as any other costs spent, including shipping or import tariffs, are all
included in this account's direct cost of buying goods. The account term used to identify
the item for sale is Merchandise Inventory, however, if the perpetual inventory system is
in use.
2. Freight-In or Transportation-In: This account is used to track the transportation costs

associated with bringing purchased goods to the business premises. It includes expenses
such as freight charges, shipping fees, and any other costs related to the transportation of
the goods. A typical debit balance is the normal balance in this account. Because it is an
adjunct purchase account, it is added to the purchases account to determine the overall
amount of purchases.
Example:
On June 10, Lady Company purchases goods from Lord Company for P1,000 with terms
of FOB Shipping Point and pays P150 for transportation.
Date Description PR Debit Credit

June 10 Purchases 1,000
Accounts Payable 1,000
Purchase merchandise, terms FOB Shipping Point
Freight-in 150
Cash 150
Paid shipping costs
The total purchases are computed as follows:

Purchases P1,000
Freight-in 150
Total P1,150
3. Purchase Returns and Allowances: This account is used to record the value of returned
goods or allowances granted by suppliers. If there are any discrepancies or issues with the
purchased goods, such as damaged items or incorrect shipments, a purchase return or
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allowance entry is made to reflect the reduction in the cost of inventory. Given that it is a
counter account of purchases, the net purchases are calculated by subtracting it from the
purchases.
Purchase Returns and Purchase Allowances are both accounting terms used to reflect
adjustments in the cost of inventory due to issues with purchased goods. However, there is
a difference between the two:
Purchase Returns occur when a buyer returns goods to the seller due to various reasons,
such as damaged goods, incorrect shipments, or unsatisfactory quality. The buyer returns
the goods to the seller and receives a refund or credit for the returned items. Purchase
returns result in a reduction of the cost of inventory and a decrease in the liability owed to
the supplier.
Illustration:
ABC Clothing Store purchased 100 shirts from XYZ Apparel for P1,000. However, upon
inspection, they discovered that 10 shirts were damaged. As a result, ABC Clothing Store
decided to return those 10 shirts to XYZ Apparel for a refund. XYZ Apparel agreed to accept
the return and issued a credit note for the returned shirts.
To record this purchase return in the accounting records of ABC Clothing Store, the following
journal entry would be made:
Date Description Folio Debit Credit

Accounts Payable 100
Purchase Returns 100
To record purchase allowance
Explanation:
The "Accounts Payable" account is credited because the liability owed to XYZ Apparel for the
returned shirts is reduced by P100 (10 shirts x P10 per shirt).
The "Purchase Returns and Allowances" account is debited to reflect the decrease in the cost
of inventory by P100.
Purchase Allowances, on the other hand, occur when a buyer keeps the goods despite
certain defects or issues but receives an allowance or discount from the seller as
compensation. The buyer accepts the goods at a reduced cost rather than returning them.
Purchase allowances also result in a reduction of the cost of inventory but may not directly
impact the accounts payable.
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Illustration:
ABC Electronics purchases 50 laptops from XYZ Supplier for a total of P50,000. Upon
inspection, ABC Electronics discovers that five of the laptops have minor cosmetic defects but
are still functional. After negotiating with XYZ Supplier, a purchase allowance of P1,000 is
granted to ABC Electronics for the affected laptops.
To record this purchase allowance in the accounting records of ABC Electronics, the following

Purchase Allowances 1,000
To record purchase allowance
Explanation:
The "Accounts Payable" account is debited to reduce the liability owed to XYZ Supplier by
P1,000, reflecting the agreed-upon purchase allowance.
The "Purchase Allowances" account is credited to reduce the cost of inventory by P1,000,
reflecting the decrease in the value of the laptops.
By recording this entry, ABC Electronics properly adjusts the cost of inventory to reflect the
purchase allowance granted by XYZ Supplier. It recognizes the reduced value of the laptops
while keeping them in inventory for sale or use.
Note:
The Net Purchases are computed as follows:
Purchases P50,000
Less: Purchase Returns and Allowances 1,000
Net Purchases P49,000
1. Purchase Discount: This account is used to record any discounts granted by suppliers for
prompt payment or volume purchases. It reflects the reduction in the cost of goods
purchased due to discounts negotiated with the suppliers. The account term "purchase
discount" is used to refer to the discount when the buyer accepts a monetary discount. It
lowers the cost of acquiring the acquired goods. To calculate the net purchases, it is
likewise handled as a contra-purchase account. It usually has a credit balance.
Illustration:
On February 5, 2022, ABC Furniture Store purchases P10,000 worth of furniture from XYZ
Manufacturer. XYZ Manufacturer offers a purchase discount of 5% if payment is made within 10
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days. ABC Furniture Store pays the invoice within the discount period and takes advantage of the
discount.
To record this purchase discount in the accounting records of ABC Furniture Store, the following

Feb. 5 Accounts Payable 10,000
Cash 9,500
Purchase Discount 500
Payment of purchases within the discount period
Explanation:
The "Accounts Payable" account is debited to reduce the liability owed to XYZ Manufacturer by the
full amount of the invoice, which is P10,000.
The "Cash" account is credited with the amount paid, which is P9,500, reflecting the discounted
payment made within the discount period.
The "Purchase Discounts" account is credited with the discount amount, which is P500, to
recognize the reduction in the cost of inventory due to the discount taken.
By recording this entry, ABC Furniture Store reflects the reduced cost of inventory resulting from
the purchase discount. The Accounts Payable is reduced by the full invoice amount, while the
Cash account reflects the discounted payment made and the Purchase Discounts account
recognizes the cost savings.
Illustrative Problem on Purchasing Activity
Assuming that Lady and Lord Enterprises (L&L Ent.) has a beginning merchandise inventory
(unsold goods at the start of the period) of P9,000. The following transactions occurred during the
month of January 2023:
On January 1, it paid P90,000 to J & F Trading for goods intended for sale on account payable
within 20 days after delivery. P9,000 went toward transportation costs to obtain the goods. If
payment is received by J & F Trading within ten (10) days after the date of delivery, a two percent
(2%) discount will be given.
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Jan. 1 Purchases 90,000
Purchases on account
Freight-in 9,000
Cash 9,000
Transportation cost incurred
On January 5, Lady and Lord Enterprises found out that about 10,000 goods purchased did not
meet the specifications of the products ordered. J&F Trading agreed for the return of the
merchandise and issued a 7,000 credit memo to reduce its claim against L&L Ent.

Jan. 5 Accounts Payable 10,000
Purchase Returns 10,000
Returned merchandise
On January 6, L&L Ent. Determined that 4,000 woth of merchandise was slightly damaged. J&F
Trading issued a credit memo in this regard.

Returned merchandise
At this point, we can compute for the Net Purchases:
Purchases P90,000
Add: Freight-In 9,000
Total P99,000
Less: Purch. Ret. P10,000
Purch. Allow. 4,000 14,000
On January 10, L&L Ent. Paid its obligation to J&F Trading within the discount period allowing a
2% discount.

Cash 74,480
Purchase Discount 1,520
Payment within the discount period
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1) Supporting Computation:
Purchase Price P90,000
Less: Purchase Returns P10,000
Purchase Allowances 4,000 14,000
Balance before purchase discounts P76,000
Less: Purchase Discount (76,000 x 2%) 1,520
Cash Payment P74,480
Freight costs are generally not considered when computing cash rebates. Cash reductions are
typically applied to the net amount of the purchases before including any additional costs such as
freight.
2) The amount of Net Purchases is computed as follows:

Purchases P90,000
Add: Freight-In 9,000
Total P99,000
Less: Purchase Returns P10,000
Purchase Discount 1,520 15,520
B. Selling Activities
Selling activities in a merchandising business refer to the various tasks and processes involved in
promoting and selling merchandise or goods to customers. These activities are geared towards
maximizing sales, attracting customers, and generating revenue.
In the selling activities of a merchandising business, various account titles are used to track and
record the financial transactions related to sales and revenue generation. Here are some common
account titles used in the selling activities of a merchandising business:
1. Sales Revenue or Sales: This account title is used to record the total amount of revenue
generated from the sales of merchandise. It represents the income earned by the business
from selling goods to customers.
2. Accounts Receivable: This account title is used to record the amounts owed to the business
by customers for credit sales. It represents the accounts receivable balance resulting from
sales made on credit.
3. Cash or Cash Sales: This account title is used to record the cash received from customers for
sales made in cash. It represents the cash inflow resulting from immediate payment by
customers.
4. Freight Out: This is used to track the expenses related to shipping the goods to the buyer that
the vendor incurred. Other names for this account include "Transportation-out," "Transport
Expense," and "delivery Expense."
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Example:
On June 10, 2023, XYZ Retailers made credit sales of merchandise totaling P8,000 to various
customers. The merchandise had a cost of P5,000. Additionally, on the same day, XYZ Retailers
incurred freight expenses of P300 for shipping merchandise to customers. The entry to record the
transactions are:

June 10 Accounts Receivable 8,000
Sales 8,000
Sales on account
Freight-out 300
Cash 300
Transportation expense
5. Sales Returns and Allowances: This account title is used to record the value of merchandise
returned by customers or the allowances granted to customers for damaged or unsatisfactory
goods. It represents the reduction in sales revenue due to customer returns or allowances.
Example:
On June 15, 2023, ABC Retailers gave a customer credit on the terms of 2/10, net 30 for
goods with a total selling price of P5,000. The sold goods were priced at P3,000. The payment
was made by the client on June 22, 2023. The transaction's entry in the ledger:

June 22 Cash 4,900
Sales Discount 100
Accounts Receivable 5,000
Collection of sales within the discount period
Supporting Computation:
The discount available to the customer can be calculated as follows:
Discount Amount = Total Selling Price * Discount Percentage
Discount Amount = P5,000 * 2% = P100
"The successful warrior is the average man, with laser-like focus."

- Bruce Lee
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CHAPTER 3
ACCOUNTING FOR DISCOUNTS AND TRANSPORTATION COST
Students who complete this module successfully will be eligible to:
1. Recognize various types of discounts and apply discounts to purchases and sales
transactions based on the discount terms and the invoice amount.
2. Analyze the financial impact of discounts
3. Describe the distinction between Free On Board Shipping Point and Free On Board
Destination.
4. Journalize the transportation cost in the books of the seller and buyer.
CHAPTER OVERVIEW
This chapter typically covers the various aspects related to trade discounts and cash
discounts in business transactions. Discounts play a significant role in pricing strategies, sales
promotions, and financial management. Understanding the different types of discounts and their
accounting treatment enables businesses to effectively manage their revenue and optimize
customer relationships. It is also important for merchandising businesses to establish clear
discount policies, internal controls, and documentation procedures to ensure consistent and
accurate accounting treatment for discounts. This helps maintain transparency in financial reporting
and supports effective management of pricing and sales strategies. On the other hand,
Transportation costs are a significant aspect of operating a merchandising business that involves
the movement of goods from suppliers to customers. Understanding and effectively managing
transportation costs is crucial for a merchandising business to ensure efficient supply chain
operations, cost control, and customer satisfaction. By optimizing transportation processes and
closely monitoring expenses, businesses can enhance profitability and maintain competitive pricing
while meeting customer expectations for timely and reliable deliveries.
DISCOUNT
A discount is a price reduction for a good or service. Discounts are often offered by businesses to
incentivize customers to make purchases, pay invoices, or engage in specific behaviors. These are
important for businesses as they can attract customers, encourage sales, and help maintain
competitive pricing strategies.
What are the 2 kinds of discounts that can be offered by a business enterprise?
1. Trade Discount
2. Cash Discount
Trade Discounts
This refers a decrease in the selling price of products or services that a supplier or manufacturer
offers to a customer. It is a form of discount provided to customers based on various factors such
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as the volume of purchases, the relationship between the buyer and the seller, or other trade-
related considerations.
Trade discounts are primarily used to incentivize customers to make larger purchases or establish
on-going business relationships. They are often offered in business-to-business (B2B) transactions
and are commonly found in industries such as manufacturing, wholesale, and distribution.
Unlike cash discounts, which are offered to customers as an incentive for prompt payment, trade
discounts are incorporated into the initial selling price of goods or services. They are not separately
shown on invoices or financial documents. Instead, the trade discount is typically deducted directly
from the list or catalog price of the product, resulting in a lower net price for the buyer.
Trade discounts are negotiated and agreed upon between the buyer and the seller and are usually
based on predetermined discount rates or structures.
It is important to note that trade discounts are not recorded separately in the accounting records;
hence, it is never journalized. Instead, the net amount after the trade discount is considered the
actual selling price for the transaction. Therefore, trade discounts do not directly impact the
financial statements or affect the calculation of revenue or expenses. However, they do influence
the pricing and profitability of the products or services being sold.
Overall, merchandising businesses often use trade discounts to encourage bulk purchases or
provide incentives to specific customer categories. These discounts are typically negotiated with
suppliers based on factors such as purchase volume or customer status. Trade discounts are
applied to the list prices of merchandise and are not separately recorded in the accounting records.
Instead, the discounted price is directly offered to customers.
Example:
ABC Electronics is a manufacturer of electronic devices and offers trade discounts to their
wholesale customers. Here are catalog prices of a few products along with their respective trade
discounts:
Smartphones:
Catalog Price: P15,000
Trade Discount for Retailers: 15, 10
Calculation for Invoice Price would be:
List Price P15,000

Less: first trade discount (15,000 x 15%) 2,250
Balance net of first trade discount P12,750
Less: second trade discount (12,750 x 10%) 1,275
Invoice Price P11,475
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Note: The trade discount mentioned above is a multiple discount, which is typically offered based
on the volume of goods purchased. Additionally, the vendor might only provide one trade discount.
The invoice cost in that situation is P12,750.
Cash Discount
A cash discount refers to a reduction in the cost of the products or services a client can acquire as
an incentive for prompt payment. The vendor offers this discount to entice the customer to pay their
invoice or payment within a certain time period. In contrast to trade discount, cash discounts are
journalized in the books of accounts.
Cash discounts are commonly expressed as a percentage of the total invoice amount or as a
specific peso amount. They are offered to motivate customers to make early payments, which
helps improve the seller's cash flow and reduces the risk of late or non-payment.
Typically, cash discounts are stated with terms such as "2/10, net 30" or "5/7, net 45". These terms
indicate the discount percentage, the payment window within which the discount is applicable, and
the net payment due date.
Let's break down the terms "2/10, net 30" as an example:
"2" represents the discount percentage: This means that the buyer can deduct a 2% discount from
the total invoice amount.
"10" represents the payment window: This indicates the number of days within which the buyer
must make payment to be eligible for the discount. In this case, the payment should be made
within 10 days.
"Net 30" represents the net payment due date: This is the maximum period within which the buyer
must make full payment without any discount. In this example, the full payment is due within 30
days.
If the buyer pays within the 10-day payment window, they can deduct a 2% discount from the total
invoice amount. However, if they pay after the 10-day window, they are not eligible for the discount,
and the full invoice amount is due within 30 days.
The purpose of cash discounts is to encourage prompt payment, improve cash flow for the seller,
and create an incentive for buyers to settle their obligations early. From an accounting perspective,
cash discounts are recorded as contra-revenue accounts, reducing the total revenue and reflecting
the actual amount received from the customer.
Other cash discount is 2/15, EOM. The term "2/15, EOM" is a cash discount term used in business
transactions. Let's break down its components:
"2" represents the discount percentage: This means that the buyer can deduct a 2% discount from
the total invoice amount if payment is made within the specified time frame.
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"15" represents the payment window: This indicates the number of days within which the buyer
must make payment to be eligible for the discount. In this case, the payment should be made
within 15 days.
"EOM" stands for "End of Month": This signifies that the payment due date falls at the end of the
calendar month, regardless of the invoice date.
So, if a buyer receives an invoice with the term "2/15, EOM," they can deduct a 2% discount from
the total invoice amount if they make payment within 15 days. If payment is not made within this
period, the full invoice amount is due. The payment due date, regardless of the invoice date, will be
at the end of the month.
For example, if the invoice is dated on the 10th of the month, the buyer has 15 days from that date
to make payment and receive the discount. If payment is made by the 25th of the same month,
they can deduct the 2% discount. If the payment is made after the 25th, the buyer must pay the full
invoice amount without any discount.
The "EOM" term simplifies the payment process by having a consistent due date at the end of each
month, regardless of the actual invoice date. It helps both buyers and sellers in managing their
payment schedules and cash flows.
It is important for buyers to carefully evaluate whether taking advantage of the cash discount is
financially beneficial, considering factors such as their cash position, available funds, and other
payment obligations.
Example:
Company A sells goods to Company B and offers a cash discount to encourage prompt payment.
The terms of the cash discount are "3/10, net 30." Here's how the example unfolds:
Company B receives an invoice from Company A for P1,000 for the goods purchased. The cash
discount terms are "3/10, net 30." Now, let's explore the possible scenarios:
Scenario 1: Company B takes advantage of the cash discount:
Company B pays the invoice within 10 days. They can deduct a cash discount of 3% from the total
invoice amount.
Calculation:
Cash Discount Amount = Total Invoice Amount x Discount Rate

Cash Discount Amount = P1,000 x 3% = P30
Net Amount payable by Company B:

Net Amount = Total Invoice Amount - Cash Discount Amount
Net Amount = P1,000 - P30 = P970
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In this scenario, Company B pays P970, taking advantage of the 3% cash discount by making
payment within the specified time frame.
The appropriate journal entries would be:
Books of Company A (SELLER)

Cash 970
Sales Discount 30
Collection of sales within the discount period
Books of Company B (BUYER)

Cash 970
Purchase Discount 30
Payment within the discount period
Scenario 2: Company B does not take advantage of the cash discount:
Company B pays the invoice after 10 days but within the net payment term of 30 days. They are
not eligible for the cash discount. The full invoice amount of P1,000 is due. In this scenario,
Company B pays the full invoice amount of P1,000 without any cash discount.
The cash discount terms "3/10, net 30" provide an incentive for Company B to make early payment
and reduce the overall cost of their purchase. It benefits both Company A by improving cash flow
and Company B by reducing their expenses if they can manage their payment timing effectively.
The journal entries would be:
Book of the Seller:

Cash 1,000
Collection of sales
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Book of the Buyer:

Cash 1,000
Payment of account
Cash Discounts on Partial Collection
Generally speaking, the seller should only permit the cash discount on the transaction if the buyer
paid in full during the discount period. Down payment, first payments, and escalating payments
cannot be discounted unless:
1. The account is fully paid within the discount period;

2. Partial payments made within the discount period are eligible for discounts under the vendor's
sales policy.
Example:
Let us consider the following sale transaction of Company A:
June 5 Company A sold merchandise to Company B with a list price of P80,000: 15; 8/15, n/30.
Company B paid P15,000 down payment.
7 Company B returned merchandise with a list price worth P2,000 due to some defects.
20 Company A collected P15,000.
30 Company A collected the remaining balance.
Scenario 1: No Discount Allowed for Partial Payment
The journal entries and supporting computations are presented below:

June 5 Cash 15,000
Account Receivable 53,000
Sales 68,000
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Supporting Computation
Calculation on the Invoice Price:

List Price P80,000
Less: trade discount (80,000 x 15%) 12,000
Invoice Price P68,000
Calculation of the remaining balance after the down payment:

Invoice price - Down payment = P68,000 - P15,000 = P53,000

June 7 Sales returns and allowances (2,000 x 85%) 1,700
Return of goods due to defects
20 Cash 15,000
Collection of accounts receivable
30 Cash 36,300
Supporting computation:
Accounts Receivable P53,000
Less: sales return P 1,700
June 20 collection 15,000 16,700
Remaining balance collected P36,300
Scenario 1: Discount Allowed for Partial Payment

If Company A allows cash discounts on partial payments within the discount period, the journal
entries would be:

June 5 Cash 13,800
Sales discount 1,200
Sales 68,000

25
20 Cash 13,800
Sales Discount 1,200
30 Cash 36,300
Total Receivables P53,000

Less: Sales return P1,700
Collection June 20 15,000 16,700
Another treatment for cash discount on partial collection is to deduct it from their customer’s future
receivables. The journal entries would be:

June 5 Cash 15,000
Sales 68,000

20 Cash 15,000
Sales discount (15,000+15,000) x 8% 2,400

Discount on partial payment
30 Cash 33,900
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Total Receivables P53,000
Less: Sales return P1,700
Collection June 20 15,000
Cash discount 2,400 19,100
Advantages if cash discounts are taken
Cash discounts are offered by businesses as an incentive for customers to pay their invoices
promptly or within a specified period. There are several reasons why customers should take
advantage of cash discounts:
1. Cost savings. By taking the cash discount, customers can reduce their overall purchase
cost. The discount represents a percentage or fixed amount of the invoice that they can
save by paying early. This can result in significant cost savings, especially for larger
purchases or recurring transactions.
2. Improved cash flow. Taking advantage of cash discounts allows customers to manage
their cash flow more effectively. By paying early and receiving the discount, customers can
free up their funds for other business needs or investments.
3. Strengthened vendor relationships. Paying invoices promptly and taking cash discounts
demonstrates good financial responsibility and helps build trust and positive relationships
with vendors. This can lead to benefits such as better customer service, preferential
treatment, or future discounts and incentives.
4. Enhanced creditworthiness. Consistently taking advantage of cash discounts can

contribute to a customer's reputation as a reliable and creditworthy partner. This can be
beneficial when seeking credit or negotiating favorable terms with vendors or financial
institutions.
5. Cost of capital. By paying early and receiving the discount, customers effectively lower
their cost of capital. The discount acts as a reward for the early payment, offsetting the
opportunity cost of holding onto the funds for a longer period.
It's important for customers to carefully evaluate the terms and benefits of cash discounts and
consider their own financial circumstances and cash flow capabilities. Taking advantage of cash
discounts can lead to significant savings and financial advantages for businesses.
Gross Method vs. Net Method of Recording Cash Discounts
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The recording of cash discounts depends on the method being used, either the gross method or
the net method. The choice between the gross method and the net method depends on factors
such as company policy, industry practices, and the materiality of the discounts. It is important to
consistently apply the chosen method and adhere to applicable accounting standards to ensure
accurate financial reporting. Here's how to record cash discounts under each method:
Illustration:
A company sells goods to a customer with an invoice amount of P1,000 and offers a 2% cash
discount if payment is made within 10 days.
1. To record credit sales
Gross Method Net Method

Accounts Receivable 1,000 Accounts Receivable 980
Sales 1,000 Sales 980
1,000 x 98%
Under the gross method, sales revenue or purchases are initially recorded at the full
invoice amount. Net method on the other hand, recorded sales revenue or purchases at
the discounted amount. The invoice amount is already reduced by the cash discount
when recording the transaction. No separate entry is made for the cash discount, as the
invoice amount already reflects the discounted price.
2. If collection/payment is made within the discount period
Seller:

Cash 980 Cash 980
Sales Discount 20 Accounts Receivable 980
Accounts Receivable 1,000 1,000 x 98%
Buyer:

Accounts payable 1,000 Accounts payable 980
Cash 980 Cash 980
Purchase Discount 20 1,000 x 98%
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Gross method provides more visibility into the discount taken and shows the impact of discounts on
revenue (or expense). Net method simplifies the accounting process by eliminating the
need for contra-revenue accounts and separate discount entries.
3. If collection/payment is made after the discount period
Seller:
Cash 1,000 Cash 1,000
Accounts Receivable 1,000 Accounts Receivable 980
Sales discount forfeited 20
Buyer:

Accounts payable 1,000 Accounts payable 980
Cash 1,000 Purchase discount lost 20
Cash 1,000
In the Statement of Comprehensive revenue (SCI), the sales discount forfeited account
will be classified as other operating revenue, whilst the purchase discount lost account
will be treated as other operating expenses (loss).
TRANSPORTATION COST
The costs of transportation can vary depending on various factors, including the mode of
transportation (by land, air or water), distance traveled, weight or volume of goods, fuel prices,
labor costs, and specific service requirements. When merchandise is shipped, the carrier or their
agent will issue a bill of lading to acknowledge the receipt of goods for shipment. The bill of lading
contains details such as the names and addresses of the parties involved, description of the goods,
quantity, packaging, marks, and numbers on the packages, the terms and conditions of the
transportation contract, and any special instructions. Within the bill of lading, specific clauses or
fields indicate who is responsible for paying the freight charges. These clauses may vary
depending on the agreed-upon trade terms or the specific arrangements made between the parties.
Common terms found in the bill of lading include:
1. Freight Prepaid - it means that the shipper (seller) has agreed to pay the freight charges. The
shipper has already paid or will pay the transportation provider for the cost of shipping the
goods.
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2. Freight Collect - means that the buyer is responsible for paying the freight charges upon
delivery. The buyer will be required to settle the transportation costs directly with the carrier or
through their designated agent.
In accounting, the burden of paying for transportation costs is typically assigned based on the
terms of the agreement or contract between the buyer and the seller. The responsibility for
transportation costs can be allocated in various ways, depending on the specific agreement or
trade terms negotiated between the parties. Here are a few common scenarios:
1. FOB Shipping Point. If the contract states "FOB (Free on Board) Shipping Point," the customer
is responsible for all transportation charges beginning at the point of shipment. In this instance,
the cost of transportation is the responsibility of the buyer. The expense of transportation is
consequently borne by the buyer who already owns the goods while they are in transit.
2. FOB Destination. If the contract states "FOB Destination," the seller is still responsible for
paying for transportation up until the items arrive at the buyer's chosen destination. In this
instance, the cost of transportation is the responsibility of the vendor. While the item is in
transit, the seller is still the owner, and title does not transfer until the buyer accepts the item at
the destination.
It's important for organizations to clearly define the responsibility for transportation costs in their
agreements and contracts to ensure proper accounting treatment. These terms should align with
industry practices and any applicable regulations or trade terms that govern the transfer of goods.
Typically, the expense of transportation is borne by the party who is in charge of paying for the
freight. Therefore, when the terms are FOB shipping point or FOB destination, products are
normally transported freight collect or freight prepaid. There are occasions, though, when the party
not accountable for paying the freight does so. In this case, the payment for the goods is simply
adjusted by the vendor and the customer.
Example:
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June 10, Lady Company buys merchandise from Lord Company on account., P1,000,
terms FOB Shipping point and pays the transportation cost P150. The entry to record the
transaction is:
(Books of the Buyer)
DATE DESCRIPTION PR DEBIT CREDIT

Accounts payable 1,000
Purchase merchandise
Freight-in 150
Cash 150
Paid shipping cost
(Books of the Seller)

Sales 1,000
Sales on account
What if the account was paid on June 15 and the terms were FOB Shipping Point and Freight
Prepaid?

Freight-in 150
Accounts payable 150
Shipping cost paid by the seller
15 Accounts payable 1,150

Cash 1,150
Payment of an account

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Sales 1,000
Sales on account
Accounts Receivable 150

Cash 150
15 Cash 1,150
Collection of an account
Freight-in account is recorded by the buyer since he is the party responsible in paying for
the freight considering the agreement FOB shipping point.
Example:
Feb Company sells goods to Mary Joy Company on June 15 for P1,100 under the stipulations FOB
Destination. The price of the sold goods is P800. Feb covers the P200 transportation expense..

Sales 1,100
Sales on account
Freight-out 200
Cash 200

What if terms is: FOB Destination, Freight Collect and the account was collected was on June 20
.

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Sales 1,100
Sales on account
Freight-out 200
Freight on goods in transit
20 Cash 900
Accounts receivable 1,100
Collection of an account

Accounts receivable 200

Cash 200
15 Accounts payable 1,100

Accounts receivable 200
Cash 900
Payment of an account
"Opportunities don't happen. You create them."

- Chris Grosser
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CHAPTER 4
THE INVENTORY SYSTEMS
By the end of this lesson, you will be able to:
1. Understand the periodic and the perpetual inventory systems

2. Define each inventory system and identify its characteristics
3. Record transactions using periodic and perpetual inventory system.
CHAPTER OVERVIEW
This chapter provides an in-depth examination of the two primary inventory systems used
by merchandising businesses: periodic inventory system and perpetual inventory system.
Understanding the characteristics, advantages, and limitations of each system is crucial for
effective inventory control and financial reporting. This chapter explores the key features,
implementation considerations, and implications of using periodic and perpetual inventory systems.
By the end of this chapter, readers will have a comprehensive understanding of periodic and
perpetual inventory systems, their respective advantages and limitations, and the considerations
involved in implementing and transitioning between these systems. This knowledge will enable
businesses to make informed decisions about selecting and optimizing their inventory management
processes to improve efficiency, accuracy, and financial reporting.
Two methods of accounting for cost of goods sold and merchandise inventory
1. Periodic Inventory Systems
Inventory levels are not continuously monitored under the periodic inventory system, which is
one type of inventory management. Instead, physical counts of inventory are made on a
regular basis (weekly, monthly, or annually), and the inventory balance is calculated by
comparing the counts and taking into account any purchases and sales made during the
counting period. The cost of goods that the company purchases is recorded in the Purchase
account. The revenue account (sales) is recorded when goods are sold, but not the cost of the
goods sold. The company physically counts the ending merchandise when preparing the
financial statements, and that count is utilized to determine the cost of products sold. This
accounting approach is appropriate for businesses that sell goods in huge volumes and at low
prices.
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2. Perpetual Inventory Systems
The cost of the item is applied to the Merchandising Inventory account using this manner. The
merchandise inventory account is credited for each item sold, while the cost of goods sold account
is debited for the cost of each item sold. As a result, using this strategy, the accounting records are
constantly updated with the quantity of products in inventory and the cost of goods sold. Real-time
tracking and updates of inventory levels are provided by this type of inventory management. With
the help of this system, firms may keep an on-going and accurate record of the quantities and
values of their inventory. Every inventory activity, including purchases, sales, returns, and
modifications, is instantly logged in the system, enabling the provision of accurate and timely
information about the state of the inventory. For retail businesses that sell high-unit-value goods in
small quantities, such automobiles and industrial machinery, this accounting approach is
appropriate.
Comparative Entries for Periodic and Perpetual Inventory Systems
Assume that Moderna Company provided the following summary of inventory transactions for the
year 202x:
The company has 500 units of beginning inventory at P20 per unit.
On May 4, the company purchased 800 units at P20 per unit. Terms is 2/10, n/30 .The
transportation cost paid by Moderna Company is P250.
On May 8, there were 15 of merchandise were returned due to factory defect.
On May 10, Moderna paid the balance of their account.
On May 12, the company sold 650 units to Cinovac at P50 each, terms 2/10, n/30.
On May 13, Cinovac returned 10 units.
The company collected its account within the discount period on May 20.
At the end of the month, there were 600 units on hand.
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The cost of sales, purchase returns and allowances, and purchase discounts all
reduce the inventory account under the perpetual inventory system, while purchases,
freight-in, and sales returns raise it.
The shortage is computed as follows:
Beginning inventory P10,000

Purchases 16,000
Freight-in 250
Sales return 200
Total P26,450
Less: Cost of Sales P13,000
Purchase returns 300
Purchase discount 314 13,614
Merchandise inventory per ledger P12,836
Less: Merchandise inventory per physical count 12,000
Shortage of merchandise P 836
"The future belongs to those who believe in the beauty of their dreams." -Roosevelt
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CHAPTER 5
SPECIAL JOURNALS
By the end of this lesson, you will be able to:

1. Understand the purpose and importance of special journals
2. Identify and analyze the different types of merchandising transactions
3. Applying proper journalizing techniques for merchandising transactions
SPECIAL JOURNAL OF MERCHANDISING BUSINESS
The Special Journals need to be constructed to provide for the practical and efficient recording of
comparable and recurring transactions that could cause congestion and confusion if reported
repeatedly in the General Journal over the course of a day or a month. A merchandising type of
business records five often occurring transactions, namely:
1. Cash-based purchases
2. Account payments for purchases
3. Selling
4. Receiving payment from customers
5. Unrelated business transactions
RELATIONSHIP OF SPECIAL JOURNALS AND GENERAL JOURNAL
JOURNALS TRANSACTIONS CONTENT

1. Purchases Journal Buying of merchandise Keep track of all product
purchases on account.
2. Cash Disbursement Cash payments Records all cash payments
Journal
3. Sales Journal Selling of merchandise Records all sales on account
4. Cash Receipts Journal Cash collection Records all cash collected
5. General Journal Miscellaneous Records all transactions not
recorded in special journals
Using the Purchases Journal
All purchases made on account are tracked in the purchasing diary, a unique journal. This session
teaches you how to record the purchase of goods and other assets using the purchases and cash
payments diaries.
Recording the Purchase of Merchandise on Account
When an invoice has been verified, note the purchase in the purchases journal:
1. The date should be entered in the Date column.
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2. Fill out the Invoice Number column with the invoice number.
3. Type the creditor's name in the section marked "Creditor's Account Credited."
4. Fill out the Purchases Debit field with the invoice's entire amount.
5. Fill out the Input VAT debit column with the VAT amount.
6. Fill in the Accounts Payable Credit field with the invoice's total.
7. Calculate the sum for each column.
8. Type their account number after the grand total.
General Ledger posting from the Purchases Journal
When recording and posting business transactions, special journals save time. For general ledger
posting:
1. Type in your account number.

2. Type the transaction date in the ledger account's Date column.
3. Type the invoice number or a succinct description of the things you purchased.
4. In the Posting Reference field, provide the journal page number, or just check the box to
indicate that it has already been posted.
5. Into the Purchases account in the general ledger, enter the total amount of purchases from the
Purchase Journal.
6. To determine the new account balance, multiply the sum in the Debit column by the amount of
the old balance.
7. Add the total Input VAT from the Purchase Journal to the General Ledger for Input VAT.
8. To determine the new account balance, multiply the sum in the Debit column by the amount of
the old balance.
9. In the Credit column of the Accounts Payable ledger account, enter the sum due to the creditor.
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10. Add the amount in the Credit column to the previous balance amount to determine the new
account balance.
11. Go back to the purchasing log and mark the Post Reference column with a check.
The transactions entered in the purchase journal are posted to the GENERAL LEDGERS as
follows:
Posting from the Purchases Journal to Subsidiary Ledger
To post to the subsidiary ledger for accounts payable:
1. Type in the supplier's name.

2. Type in the supplier's address.
3. Type in the supplier's account number.
4. Type the transaction date in the Subsidiary Ledger Account's Date column.
5. Type the invoice number or a brief summary of the transaction.
6. Type the journal page number in the Post Reference column or tick the box.
7. Fill out the Credit column of the subsidiary ledger account with the amount owing to the
creditor.
8. To determine the new account balance, multiply the amount in the Credit column by the total of
the old balance.
9. Go back to the purchase journal and mark the first Post Reference column with a checkmark.
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Each supplier has subsidiary ledger account and should be arrange in alphabetical
order.
The components of accounts payable are posted to the suppliers’ individual SUBSIDIARY
LEDGER as follows:
We are going to use this problem until the end of the accounting cycle.
Illustrative Problem
Dolly G. started his company, Dolly Trading, in January 200x. This company was involved in the
purchase and selling of merchandise from various establishments in Tacloban City. The company
creates adjusting and closing entries at the end of each month since it creates financial statements
on a monthly basis.
The company's accounting policy includes the following:

1. The company uses special journals to record sales, purchases, cash receipts, and cash
disbursements in addition to general journal. It also maintains subsidiary ledger both for its
customers and suppliers or creditors.
2. Based on the balance of the store and office equipment, 10% of the equipment depreciates
annually.
3. Supplies purchases are charged to expenses right away.
4. The inventory of goods was P120,000 as of February 28.
40
Dolly Trading made the following purchases from several suppliers on February 200x:
Pants Suppliers Charge No. 1521

Tacloban City Date: Feb. 10, 200x
Bill to: Dolly Trading
QTY D E S C R IP T IO N U N IT AM O UNT
300 Pants maong P100 ₱30,000.00
150 Shorts- cotton 150 ₱22,500.00
150 Pajama-catcha 50 ₱7,500.00
Total ₱60,000.00
12% VAT ₱7,200.00
Total Amount ₱67,200.00
Shoes Suppliers Charge No. 10866

Cebu City Date: Feb. 15, 200x
QTY D E S C R IP T IO N U N IT AM OUNT
200 Nike P500 ₱100,000.00
200 Adidas 400 ₱80,000.00
Total ₱180,000.00
12% VAT ₱21,600.00
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Dress Suppliers Charge No. 34568
Tacloban City Date: Feb. 25, 200x
QTY D E S C R IP T IO N U N IT AM O UNT
200 Kimona P50 ₱10,000.00
250 Palda 60 ₱15,000.00
Total ₱25,000.00
12% VAT ₱3,000.00
Toys Suppliers Charge No. 68543

Quezon City Date: Feb. 28, 200x
QTY D E S C R IP T IO N U N IT AM OUNT
200 Barbie Doll P50 ₱10,000.00
200 Power Pop Girl 40 ₱8,000.00
Total ₱18,000.00
The transactions are entered into the purchase journal and posted into the ledgers as follows:
The transactions entered in the purchases journal are posted in the general ledger as follows:
42
The components of accounts payable are posted to the suppliers’ individual subsidiary ledger as
follows:
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Using the Cash Disbursements Journal
All transactions in which cash is paid out are recorded in the cash payments log. Among these
transactions are:
 cash drops for bank service fees and bankcard fees,
 payments to creditors for goods purchased on credit,
 payments for various expenses,
 payments for wages and salaries, and
 payments to creditors for products purchased on account.
Recording the cash purchase of an asset, payment of expenses and payment of an account
A transaction involving a cash purchase of an asset, payment of expenses and account are
recorded using the following steps:
1. Enter the transaction date in the Date column.
2. Enter the Check Voucher No.
3. Enter the check number in the Check Number column.
4. Enter the in the account debited column the name of the supplier or the account title debited.
5. Put check mark when it is already posted.
6. Enter the debit amount in the Sundry Debit column for items classified under sundries.
7. Enter the debit amount in the Salaries Expense column the total gross payable to employees.
8. Enter the credit amount in the SSS, PH, Pagibig Payable the employees and employer’s
contribution to be paid.
9. Enter the credit amount in the withholding tax payable all the taxes withheld from the
employees.
A voucher is a form with a serial number that lists the payee's name and address, the due date, the
terms, the description, and the invoice amount. The part on this form where authorized officers can
sign their consent to payment is there. It also includes information like the payment date, the check
number, and ledger entries.
Sundry – are miscellaneous small items or accounts that do not really fit into the standard category
and so are classified as being under sundries
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Posting from the Cash Disbursements Journal
To post from the Cash Disbursements Journal, you follow the same steps when you posted the
Purchase Journal in the General Ledger. Just post it to their specific accounts in the general ledger.
Illustration:
Dolly made the following cash payments for the month of February 200x:
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46
47
48
49
50
The following are recorded in the cash disbursements journal as follows:
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Using the Sales Journal
All company sales of goods made on account are tracked in the sales journal.
Benefits of a Sales Journal:

 Time is saved by only requiring a single line of entry for each sales transaction;
 Only totals, not individual entries, are submitted to the General Ledger.
 There is a division of work
Keeping track of sales of goods purchased on credit
Move from left to right while taking the following activities to enter transactions in the sales journal:
1. Fill out the date column with the sales date.
2. Fill up the Invoice No. column with the sales invoice number.
3. Type the name of the client in the Accounts Debt column.
4. After it has been posted, tick the box.
5. Fill out the Sales credit column with the total amount of goods sold.
6. Fill out the Output VAT credit field with the sales tax.
7. Fill up the Accounts Receivable Debit field with the entire amount to be received.
Posting from the Sales Journal
To post from the Sales Journal, you follow the same steps when you posted the Purchase Journal
in the General Ledger. Just post it to their specific accounts in the general ledger.
Illustration:
Dolly Trading made the following sales on account to several customers in February 200x:
52
53
The sales shall be recorded in the Sales Journal as follows:
Maintaining a Cash Receipts Journal
o Companies keep track of all cash receipts in the cash receipts journal.
o The process for posting the cash receipts journal is comparable to that for posting the sale
journal.
How to record Cash collections in the Cash Receipts Journal
1. In the date column, enter the transaction date.

2. Fill out the OR No. column with the receipt number.
3. Fill up the Invoice No. column with the invoice number.
4. Fill out the Accounts Credited section with the name of the client.
5. After PR has been published, check the box.
6. Fill out the Accounts Receivable Credit column with the reduced amount owed.
7. Note the quantity of goods sold in cash.
8. Make a note of the amount of sales tax that was paid in cash.
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9. Keep track of the monetary discounts that charge clients have received.
10. Note the total sum of money that was actually received throughout the transaction.
Column totals being posted to the general ledger
To post totals to the general ledger, take the following actions:
1. Enter the date and a brief description in the item column, and the PR column should contain the
page number of the special journal.
2. Add the Accounts Receivable sum to the Credit column for the Controlling Account for Accounts
Receivable.
3. Add the Sales total to the column for Sales account credit.
4. Add the Output VAT Credit column with the Output Tax Payable.
5. Add the total of the sales discounts to the debit column for the sales discounts account.
6. Add the Cash total to the debit column for the Cash account.
7. Determine the revised balances for each account in the general ledger.
Illustration:
Dolly Trading have made the following cash receipts for the month of February:
55
56
The collection is recorded in the cash receipts journal as follows:
Using the General Journal
While special journals are designed to handle specific types of transactions, there are instances
when the use of a general journal is necessary. Here are some situations when the general journal
is typically used alongside special journals:
1. Non-routine or infrequent transactions. Special journals are primarily used for routine and
frequently occurring transactions such as credit sales or credit purchases. However, if a non-
routine or infrequent transaction occurs that does not fit into any of the special journals, it
should be recorded in the general journal. Examples of such transactions include recording an
asset disposal, adjusting entries, or correcting errors.
2. Opening entries When starting a new accounting period or setting up a new accounting system,
opening entries may need to be recorded. Opening entries include initial balances,
adjustments, and transfers of accounts from the previous period or system. Since these entries
are not part of routine transactions, they are typically recorded in the general journal.
3. Closing entries. At the end of an accounting period, closing entries are made to transfer
temporary accounts' balances to the appropriate permanent accounts. These entries are
necessary to prepare the financial statements and reset the temporary accounts for the next
accounting period. Closing entries are usually recorded in the general journal.
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4. Correcting errors. If an error is identified in the special journals or subsidiary ledgers, a
correcting entry is required to rectify the mistake. Such errors may include misposting,
incorrect amounts, or omissions. Correcting entries are recorded in the general journal to
ensure that the financial records are accurate.
5. Adjusting entries. Adjusting entries are made at the end of an accounting period to account for
accrued revenues, accrued expenses, prepaid expenses, unearned revenues, and other
adjustments necessary to match revenues and expenses accurately. These entries, which are
not part of routine transactions, are typically recorded in the general journal.
It's important to note that the use of the general journal should be minimized, and routine
transactions should primarily be recorded in the appropriate special journals. Special journals are
designed to increase efficiency and accuracy in recording common transactions. However, when
faced with non-routine or exceptional transactions, the general journal becomes necessary to
ensure complete and accurate financial records.
Illustration:
The General Ledger and Subsidiary Ledger of Dolly Trading are shown below:
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The Subsidiary Ledgers of Dolly Trading are shown below:
Completing the Accounting Cycle
A firm or organization's financial transactions and information are recorded, summarized, analyzed,
and reported using a systematic set of stages and activities known as an accounting process. The
main goal of the accounting process is to deliver accurate and trustworthy financial data that can
be used for financial reporting, decision-making, and compliance with relevant laws and regulations.
The periodicity assumption is the foundation of the accounting cycle. The periodicity assumption,
often referred to as the time period assumption or accounting period concept is an accounting
principle that presupposes that a business' economic operations may be split into distinct and
recurring time periods for the purpose of financial reporting. It suggests that financial statements
ought to be created and presented for particular timeframes, like a month, quarter, or year.
60
Illustration: The Worksheet of Dolly Trading and the Financial Statements are shown below:
The Worksheet shows a Net Income of P36,466 which is the difference of the
debit and credit total of Statement of Comprehensive Income (SCI) and Statement
of Financial Position (SFP). It means Net Income when total credit is greater than
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total debit in SCI column and total debit is greater that total debit in the SFP
column.
Adjusting Entries
Illustration: Dolly Trading has the following transactions in March 200x:
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The entries in the General Journal of Dolly Trading are as follows:
After preparing the adjusting entries, update the 3rd and 4th money column of your
worksheet.
Preparation of the Financial Statements:
Illustration:
The financial statement of Dolly Trading and shown below:
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The Net Income (Loss) will be forwarded to the Statement of Changes in Owner’s
Equity.
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The ending balance of the capital account will be forwarded to the Statement of Financial
Position
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The next financial report to prepare is the Statement of Cash Flows. Please refer your data to the
Cash account in the general ledger.
Posting Adjusting Entries and Closing Entries:
The accounting cycle includes crucial processes that assist maintain the accuracy of financial
statements, including posting adjusting entries and closing entries. Here is a summary of each
procedure:
1. Transfer the general journal entries to the general ledger: Put the debit and credit amounts
from the adjusting entries in the appropriate general ledger accounts. This reflects the effect of
the adjustments and updates the account balances.
2. To prepare for the following period, closing entries are performed at the conclusion of an
accounting period to reset temporary accounts (revenue and expense accounts) to zero. The
66
owner's equity or retained earnings account will receive the balances of these accounts. To
perform closing entries:
 The temporary accounts should be noted. All revenue and expenses are included in
temporary accounts.
 Close the sales account. Move the revenue account balances over to the income
summary account. By taking this move, the revenue is cancelled out and the balance
is zero.
 Close spending accounts and move their amounts to the income summary account in
a similar manner. By doing this, the expenses are neutralized and the balance is
brought to zero.
 Connect the capital account and the income summary account.
 A drawing account should be closed to a capital account.
Post all affected accounts to the general ledger after finishing the general journal's closing entries.
All temporary accounts will show a balance of zero, and the owner's equity account will show
whether the company made a profit or incurred losses during the specified time period. New
transactions may then be recorded, and the subsequent accounting period may start anew.
Illustration:
The closing entries of Dolly Trading in the General Journal are shown below:
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The General Ledger will after closing entries are posted is presented below:
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Post-Closing Trial Balance
A post-closing trial balance is created to confirm the accuracy of the closure procedure after the
closing entries have been made to reset the temporary accounts to zero balances. Only the
permanent or actual accounts that are open at the end of the accounting period are included in the
post-closing trial balance.
The purpose of the post-closing trial balance is to confirm that the closing entries have been
properly made and that the ledger is in balance. It also provides a starting point for the next
accounting period by carrying forward the correct balances of the permanent accounts. It's
important to note that the post-closing trial balance is not a financial statement but rather an
internal tool used by accountants and auditors to ensure the accuracy of the closing process.
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Illustration:
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Accounting For Merchandising Activities

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Accounting For Merchandising Activities

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CHAPTER 1

INTRODUCTION TO MERCHANDISING: EXPLORING THE WORLD OF RETAIL

Nature of a Merchandising Business

Supplies vs. Inventory

Types of Retail Businesses and Their Key Characteristics:

Examples: Robinson's or SM Department Store

4. Convenience Stores. are small-scale retail businesses with a limited assortment of

Examples: 7-Eleven, Ministop, Family Mart

Examples: Robinson’s Supermarket or SM Supermarket

Examples: Amazon, Alibaba, eBay.

Examples: Whole Foods Market, Trader Joe's, Dean & DeLuca.

Examples: McDonald's, Subway, Anytime Fitness.

Examples: Lazada, Shopee, Zalora

2. Freight-In or Transportation-In: This account is used to track the transportation costs

Date Description PR Debit Credit

The total purchases are computed as follows:

Date Description Folio Debit Credit

Date Description Folio Debit Credit

The Net Purchases are computed as follows:

Date Description PR Debit Credit

Illustrative Problem on Purchasing Activity

Date Description PR Debit Credit

Date Description PR Debit Credit

Date Description PR Debit Credit

2) The amount of Net Purchases is computed as follows:

Date Description Folio Debit Credit

Date Description PR Debit Credit

"The successful warrior is the average man, with laser-like focus."

Students who complete this module successfully will be eligible to:

Calculation for Invoice Price would be:

List Price P15,000

Let's break down the terms "2/10, net 30" as an example:

Scenario 1: Company B takes advantage of the cash discount:

Cash Discount Amount = Total Invoice Amount x Discount Rate

Net Amount payable by Company B:

Books of Company A (SELLER)

Books of Company B (BUYER)

Date Description PR Debit Credit

Scenario 2: Company B does not take advantage of the cash discount:

The journal entries would be:

Book of the Seller:

Date Description Folio Debit Credit

Cash Discounts on Partial Collection

1. The account is fully paid within the discount period;

Let us consider the following sale transaction of Company A:

20 Company A collected P15,000.

30 Company A collected the remaining balance.

Scenario 1: No Discount Allowed for Partial Payment

The journal entries and supporting computations are presented below:

Date Description Folio Debit Credit

Calculation on the Invoice Price:

Calculation of the remaining balance after the down payment:

Date Description PR Debit Credit

Scenario 1: Discount Allowed for Partial Payment

Date Description PR Debit Credit

June 7 Sales returns and allowances (2,000 x 85%) 1,700

Total Receivables P53,000

Date Description PR Debit Credit

June 7 Sales returns and allowances (2,000 x 85%) 1,700

Sales discount (15,000+15,000) x 8% 2,400

Advantages if cash discounts are taken

4. Enhanced creditworthiness. Consistently taking advantage of cash discounts can