MODULE 9 ACCOUNTING FOR A MERCHANDISER

PROF ZENAIDA VC MANUEL

FINANCIAL ACCOUNTING AND REPORTING 2021
Accounting for a Merchandiser
Learning Outcomes:
a. compare profit earned for a service provider and a
merchandiser.
b. describe the periodic and perpetual inventory systems.
c. determine cost of sales, gross profit and operating profit.
d. account for sales and compute for net sales revenue.
e. account for purchases and compute for net cost of purchases.
f. Account for operating expenses classified into distribution and
administrative expenses.
g. recognize 12% VAT liability.
h. prepare properly classified financial statements.
 Objective a. Compare profit of a Service
Provider and a Merchandiser
SUPER BOOKSTORE
CRUZ DELIVERY SERVICE

Sales Revenue P 54,000

Service Fees Revenue P 30,000
Less Cost of Sales 30,000
Operating Expenses ( 12,000)
Operating Profit 18,000 Gross Profit 24,000
Other Revenues and Gains 3,000 Operating Expenses ( 16,000)
Other Expenses and Losses ( 2,000) Operating Profit
Net Profit P 19,000 8,000
Other Revenues and Gains 5,000
Other Expenses and Losses ( 2,000)
Net Profit P 11,000
Merchandising Business
•Carries a stock of goods called Merchandise
Inventory
• Computes for profit by putting a mark up on the
cost of merchandise
• Determines gross profit by deducting from
sales the cost of sales or the cost of goods sold.
• Classifies operating expenses into two: selling
and administrative which are practically the
same except for freight for goods delivered
• Determines taxable net profit by deducting
from gross profit the operating expenses.
•Determine tax obligations
 Business Documents
Recall that business transactions are supported by documents. For a merchandiser, a purchase
is supported by a supplier’s invoice while a sales is supported by a Sales Invoice. If the
letterhead bears your company name, then this invoice evidences your sales transactions. The
moment your name appears in the sold to line, then the invoice evidences a purchase made by
your company. The following is an example of an invoice:

Take note of the different parts of an

invoice:
1) Seller - Royal Furniture Mart 6) Quantity- 4
2) Buyer - Jim Perez Furnishers 7) Item: Book
cabinets
3) Invoice No. - 1008 8) Unit Price- P1,000
4) Date - March 10, 2018 9) Total Price- P4,000
5) Terms - cash 10) Signature of
Customer: Jim Perez

Seller is Royal Furniture Mart

Buyer is Jim Perez Furnishers
 Objective b. Inventory System
Under the perpetual method:
record merchandise - b) record cost of sales and = c) balance at year end should
inventory sales revenue tally with inventory count
To customer:

Under the periodic method:

record purchases b) record only sales revenue c) count unsold and record ending
inventory
To customer:

Both methods should give the same amount of cost of goods sold.
 Objective b. Inventory System
Perpetual Method. Under this method there is complete or
continuous recording of the merchandise (cost price, freight,
insurance), from the time it is purchased to the time it is sold. This
method is usually adopted by a business which sells high priced - low
volume goods such as car dealers and real estate companies.

Periodic Method. Under this method, merchandise bought is

recorded as Purchases representing goods available for sale. Adds
freight in and deducts returns, allowances and discounts. No entry is
made for the cost of merchandise sold. It is only at the end of the
accounting period that the cost of goods sold will be determined
after making an inventory count of the goods that were not sold and
deducting this from the total purchases or goods available for sale
during the current period.
Objective c. Cost of Sales and Gross Profit

Read pages 239-240. Note that in the stock card page 240, when ever there is
DO IT !!! stock to be issued, go to balance column and always reduce stock based on
the oldest or first price and no of units. Solve exercises 2 and 3 pages 246-247.
 Record using 2 methods

DO IT !!! Solve exercises 8 and 9

Inventory end becomes inventory beg
Movement the following year
 Merchandise Inventory
The ledger account, Merchandise Inventory, under the
perpetual method, will appear thus:

Merchandise Inventory
Date Explanation REF Debit Credit Balance

Debit Credit

2020 Purchased goods 50 000 50 000*

Sold goods 32 500 17 500

2021 Purchased goods 25 000 42 500

Sold goods 30 000 12 500

*Note the running balance representing what is unsold at any given date.
Objective d. Determining net sales
Two accounts are deducted from sales to arrive at net sales:
Sales P100,000
Less Sales Returns and Allowances P 5,000
Sales Discount 12,000 17,000
Net Sales P 83,000
Sales Returns- customer returns stock if found defective or not the right
stock ordered.
Sales Allowance- or instead of returning the stock, customer keeps it but
asks for a reduction in the price.
To illustrate: Jan 3 Ace Company sold 10 lamps for cash costing P5,000 for
P10,000.
Jan 5 Customer returned one lamp which was found defective.

DO IT !!! Solve exercises 5, 6, Chapter 9 of the textbook

Determining Net Sales: Entries
Jan 3 Cash 10,000
Sales 10,000
Sold 10 lamps for cash.
5 Sales Returns & Allowances 1,000
Cash 1,000
Refund given for a defective
lamp that was returned.

If the company is using the perpetual method additional entries

should be recorded as follows:
Jan 3 Cost of Sales 5,000
Merchandise Inventory 5,000
Jan 5 Merchandise Inventory 500
Cost of Sales 500
Jan 5 entry decreases the entry of Jan 3 because of the return made.
Trade discounts and Sales Discounts
Trade Discount- reduction from the list price given to customer at sale
date.
Sales Discount- reduction from the invoice price given to customer for
prompt payment made.
To illustrate: Jan 3 Sold to Perez goods with a list price of P1,000 .
Terms cash less 2% trade discount.
Jan 5 Sold to Arce goods invoiced at P1,000. Terms:2/10, n/30.
Jan 9 Arce paid his account.
Jan 3 Cash 980
Sales 980
Sold goods for cash
Jan 5 Accounts Receivable 1,000
Sales ` 1,000
Sold goods, term: 2/10,n/30
Jan 9 Cash 980
Sales Discount 20
Accounts Receivable 1,000
 Trade discounts Cash Discounts
1. A sales discount is granted to
1. A trade discount is granted to a
account customers.
customer for the following
2. Offered to encourage prompt
reasons:
payment.
• For being a regular customer
3. Recorded in the books or general
• Customer buys in bulk or
journal when discount is given.
wholesale
4. It is a contra revenue account
• Customer pays in cash
like Sales Returns and Allowances
2. Reduction is based on the list
5. Granted only after the total
price.
account is paid within the discount
3. The reduced amount appears in the
period.
invoice.
6. In practice, even partial
4. It is not recognized in the books
collections are given sales
or general journal
discount.
Solve exercises 8, 9, as is and 11 (comparative format perpetual
DO IT !!
and periodic methods)
Objective e. Net Cost of Purchases

Related to purchases and sales is freight in or transportation in (buyer’s

viewpoint) freight out or transportation out (sellers viewpoint) .
Kindly go over slides 32 to 35.
Net cost of purchases
Purchase Returns- goods bought may be returned if found defective or not as
ordered.
Purchase Allowances- purchaser may opt to keep the defective merchandise but
will ask for a reduction in the invoice price.
To illustrate: Jan 3 Bought goods from a supplier and paid cash, P10,000.
5 Returned defective stock and received a refund for P1,000.
Jan 3 Purchases (Merchandise Inventory) 10,000
Cash 10,000
Bought goods and paid cash.
5 Cash 1,000
Purchase Returns and Allowances (Mdse Invty) 1,000

If the company is using the perpetual method, instead of Purchases, debit

Merchandise Inventory on Jan 3 and instead of Purchase Returns and Allowance
on Jan 5, credit Merchandise Inventory.
Purchase Discount vs Trade Discount
Purchase Discount- is a rebate or reduction in the invoice price granted to
purchaser for paying promptly its account. Since it is granted at payment
date, it is recognized in the book or general journal.
Trade Discount- is a reduction in the list price granted to purchaser for
buying in bulk or paying immediately in cash. Since it is immediately granted,
invoice price is immediately net of discount and no formal recognition is
needed for this.
To illustrate:
Jan 3 Ace Company purchased from Supplier A 10 lamps with a list price of
P1,000. Terms: Cash less a 3% discount.
Jan 5 Ace Company purchased from Supplier B 50 lamps invoiced for
P50,000. Terms:2/10, n/30.
Jan 9 Ace Company paid Supplier B half of its account and was given the
corresponding discount.
Entries in the next slide.
 Cash Discount Terms
When goods are sold or purchased on credit, term of payment depends on
the custom of the industry. The usual credit terms which will appear on
the invoices are:
• n/30 the gross amount is due within 30 days from the date of sale
• 2/10, n/30- the account is due within 30 days with a 2% discount given if the
account is paid within 10 days from date of sale/purchase.
• 3/EOM, n/60 - the account is due within sixty days with a 3% discount given if
the account is paid until the end of the month from the date of sale/purchase
• 2/10, 1/15, n/n/630- the account is due within thirty days with a 2% discount
offered if the account is paid within ten days from date of sale/purchase, but
only a 1% discount if the account is paid after ten days but within fifteen days
from sale or purchase date.
Trade discount vs Purchase discount
Jan 3 Purchases 970
Cash 970
Bought 10 lamps for cash

Jan 5 Purchases 50,000

Accounts Payable `50,000
Bought goods, term: 2/10,n/30

Jan 9 Accounts Payable 25,000

Purchase Discount 750
Cash 24,250
DO IT !!SOLVE EXERCISES 16 (comparative format periodic
and perpetual) PAGE 249
Freight In
FOB Shipping Pt Freight Collect
 FOB Shipping Pt Freight Prepaid
Suppose the term is FOB Shipping Point Freight Prepaid? It means that the
buyer should pay for the freight which was advanced by the seller.
Entry in the buyer's book: Entries in the seller’s book:
Aug. Purchases 50 000 Aug. Accounts Receivable 50 000
5 5
Sales 50 000
Freight In 1 000
To record sales on
Accounts Payable 51 000 terms of 2/10, n/30, FOB
2/10, n/30 FOB shipping point, freight
Shipping Point, Freight prepaid.
Prepaid
Accounts Receivable 1,000
Cash 1 000
Charged buyer for
Using perpetual method: freight prepaid.
Buyer debits Merchandise Inventory
P51,000 for both purchases and freight in. Remember Sales includes a mark-up based
Seller makes another entry: debit Cost of on cost, say 100% mark-up. To get the cost
50,000/200%= cost of P25,000.
Sales and credit Merchandise Inventory at
the cost price.
 Freight Out
If the term is FOB Destination which means free on board at destination, the seller is
liable for the freight and is still considered owner of the goods until it reaches the
buyer’s place.
This time the freight should be debited by the seller to the account Freight Out or
Transportation Out which is a selling expense. In the previous illustration, if the
term is FOB Destination freight prepaid, the entries will be:
Seller’s Book Buyer’s Book
Aug. Aug.
5 Accounts Receivable 50 000 5 Purchases(or 50 000
Sales 50 000 Merchandise Inventory)
Term:2/10, n/30 Accounts Payable 50 000
FOB destination. Term 2/10,n/30
Freight Out 1 000 FOB Destination.
Cash 1 000
Paid freight for
goods sold. DO IT !! SOLVE EXERCISES 15, 19 AND 22
 Objective f. Operating Expenses
Operating expenses are classified into two:
selling and administrative.
• Selling or distribution expenses are those incurred in storing,
promoting, packaging, and delivering the merchandise such as
Freight Out, Sales Salaries, Advertising, Sales Commission, and
Depreciation Expense- Store Furniture and Equipment.
• General or administrative expenses are expenses needed in the
general administration of the office other than the store such as
Bad Debts Expense, Office Supplies Expense, Office Salaries,
Utilities Expense, and Depreciation - Office Furniture and
Equipment.
The operating expenses need not be classified if the business has
only a small office to administer to its needs.
Objective g. 12% VAt
VAT Illustrated
To illustrate, assume Alonzo Shoe Emporium, a vat-registered company, bought goods on
account for P22,400 from Marikina Shoe Store which is also a vat-registered company. A few
days after, Alonzo sold the goods to cash customers for P33,600. Remember that the
invoices are VAT inclusive which means that it is equal to 112%.
Purchases and sales should be recorded at cost or sales price without the VAT.

Entries will appear as follows in Alonzo's books:

July 1 Purchases (22,400/1.12) 20 000
Input Tax (20,000 x .12) 2 400
Accounts Payable 22 400
Account purchases including 12% VAT.
10 Cash 33 600
Sales (33,600/1.12) 30 000
Output Tax (30,000 x .12) 3 600
Cash sales including a 12% VAT.
31 Output Tax 3 600
Input Tax 2 400
VAT Payable 1 200
To record VAT liability.
 Percentage Tax
PERCENTAGE TAX. A percentage tax, instead of a 12% VAT, is levied if
annual gross revenues exceed P250,000 but does not reach P3,000,000. In
this case, the company does not record an Output Tax when recording
sales neither does it record Input Tax when recording purchases or services
received even if there is a 12% VAT included in the price. Just like a service
provider (refer to Chapter 5) the pro-forma entry to record the 3%
percentage tax assuming quarterly gross sales of P120,000 is:
Taxes Expense (120,000 x .03) 3,600
Cash In Bank 3,600

WHO ARE EXEMPT FROM VAT OR PRIVILEGE TAX?

Some companies are exempted from paying VAT or privilege tax. If annual gross
revenues or receipts do not exceed P250,000 or if the business is a/an : provider of
educational services duly accredited by the DECS or CHED; publishers, dealers and
distributors of magazines, newspapers, books and bulletins; seller of agricultural and
marine products in its original state, poultry, livestock, fish, to name a few.
Do IT !!

Solve exercise 20 pages 249

 Objective h. Statement of Income
The natural form was illustrated for a service type of business in the preceding chapter.
This time the functional form will be used for a merchandiser. This form shows the costs and
expenses according to function: cost of sales, selling expenses, administrative expenses and
finance cost. It is also recommended that the income statement be presented at the
minimum using line items with supporting notes. Using the Alonzo problem, it will appear as
follows: ALONZO SHOE STORE
INCOME STATEMENT
For the year ended December 31, 2018
Net Sales (Note 1) P1,722,500
Cost of Sales (Note 2) 935,000
Gross Profit P 787,500
Other Revenues and Gains (Note 3) 7,000
Selling Expenses (Note 4) ( 132,000)
Administrative Expenses (Note 5) ( 66,600)
Operating Income P595,900
Other Expenses and Losses: Interest Expense ( 2,000)
NET INCOME P 593,900
 Supporting Notes
Note 1: Gross Sales P1,750,000
Less Sales Returns & Allowances P 7,500
Sales Discount 20,000 27,500
Net Sales P1,722,500

Note 2: Merchandise Inventory, Jan. 1 P 30,000

Add Net Cost of Purchases:
Purchases P950,000
Add Freight In 5,000
Total Cost of Goods Delivered 955,000
Less Purchase Returns & Allowances P3,000
Purchase Discount 7,000 10,000 945,000
Total Goods Available for Sale 975,000
Less Merchandise Inventory, Dec. 31 40,000
Cost of Sales P 935,000

Note 3: Commission Income P 4,500

Interest Income 2,500
Other Revenues and Gains P 7,000
 Supporting Notes
Note 4: Sales Salaries P 54,000
Advertising 50,000
Rent Expense – Warehouse 20,000
Freight Out 5,000
Store Supplies Expense 3,000
Total Selling Expenses P132,000

Note 5: Office Salaries P 30,000

Rent Expense – Office 20,000
Bad Debts 7,500
Depreciation - Office Equipment 5,500
Office Supplies Expense 3,600
Total Administrative Expense P 66,600

DO IT Solve exercise 26 page 252

Accounting process for a Merchandiser

END OF MODULE

u Financial Accounting and Reporting

u Prof Zenaida Vera Cruz-Manuel