FORMS OF BUSINESS ENTERPRISES:

1. Service business or service concern

 The simplest form of business.
 These enterprises provide services to clients or customers in exchange for fees
2. Merchandising business or trading concern
 These enterprises purchase goods from suppliers and, without altering the state of the
goods bought, sell the same at a higher price than cost.
 Buy-and-sell business.
3. Manufacturing business or manufacturing concern
 Involves the most complex activities.
 Like merchandising business, a manufacturer sells goods at a higher price than cost.
Dissimilar to merchandising business, the manufacturer produces the goods that it sells
to customers.

BUSINESS ORGANIZATIONS:

1. Sole Proprietorship
2. Partnership
3. Corporation

MERCHANDISING:

Merchandisers earn profit by buying and selling merchandise.

Merchandise inventories – represent goods intended for sale.

 Include only items that are held for sale in the normal course of business.
 May be engaged by a wholesaler or retailer.
 Current asset.
 The unsold portion of goods held for sale.

Wholesaler – an intermediary that buys products from manufacturers or other wholesalers and sells
them to retailers or other wholesalers.

Retailer – buys products from manufacturers or wholesalers and sells them to consumers or final users.

Accounting procedures:

The steps in the accounting cycle for a merchandising business are the same as the steps for a service
business. However, additional accounts and entries which are required in recording merchandising
transactions.
Cost of goods sold – the total cost of merchandise sold during the period.

 Often the largest single deduction on a merchandiser’s income statement.

 This expense is directly related to the revenue recognized from sale of goods.
 The expense portion of goods held for sale.

Operating expense

 May be distribution cost (or selling expense) or administrative expenses. Distribution cost –
expenses incurred in the process of earning sales revenue which was not found in a service
enterprise.

Normal operating cycle of a merchandising company is longer than that of service concern.

 Begins by purchasing merchandise and ends by collecting cash from selling the goods.
 The most common point of income recognition is at the point of sale, the time when ownership
changes hands, from the seller to the buyer.

Accounting for Sales and related accounts:

Sales – the revenue account title used to record the sale of all kinds of merchandise.

 Handled the same manner as the service revenue transactions under a service concern.
 Used only for the sale of merchandise.

Pro-forma entry:

Accounts Receivable/Cash xx
Sales xx
Output Tax xx
Output tax – the value-added tax (VAT) imposed on selling merchandise. 12% usually.

Sales returns and allowances – the return of the merchandise sold to customers.

 A sales return is evidenced by the issuance of a credit memorandum by the seller.

 Sales allowance happens when the buyer is still willing to accept the goods, but with reduction
in price.
 Sales returns happens when the buyer returned the goods to the supplier.
 Whatever it may be (a sales return or sales allowance), the journal entry will always be a debit
to sales returns and allowances.

Pro-forma entry:

Sales returns and allowances xx

Output Tax xx
Accounts Receivable/Cash xx
* It is justifiable that the output tax be reduced since the return of merchandise by the buyer will reduce
the sales account.

* Credit cash if the sale is a cash sale (refund). Credit A/R if the sale is a credit sale.
Sales discount – used to encourage credit customers to pay their accounts promptly.

 If payments are received within a certain number of days from the date of sale, the seller
reduces the amount to be paid by the buyer.
 This incentive offers advantages to both parties: the purchaser saves money, and the seller can
convert the accounts receivable into cash earlier.

Ex. 2/10, n/30

 2% discount may be availed within 10 days after the date of sale.

 If the customer does not pay within 10 days, he or she must pay the full price within 30days
from the date of sale.
 If he does not pay within 30 days from the date of sale, there may be an indication that the
customer will not be able to pay the said account and the company shall set up an estimation of
doubtful account.

Pro-forma entry:

Sales discount xx
Output Tax xx
Cash xx
Accounts Receivable xx

Trade discounts – the discount deducted from the list price or catalog price to arrive at its selling price.
 Used to reduce the list price to actual sales price which may be due to the volume of
transaction.
 Different from cash discounts.
 They are not recorded in the books of the seller and the buyer.
 When a sale or purchase is made, the amount recorded is always net of trade discount.

Accounting for Purchases and related accounts:

Purchases - the cost of goods bought for resale.

 Used only for goods purchased for resale.

Pro-forma entry:

Purchases xx
Input Tax xx
Cash xx
Accounts Payable/Cash xx
Purchase returns and allowances – return of the merchandise sold by a supplier.
 Purchase allowance happens when the buyer is still willing to accept the goods, but with
reduction in price.
 Purchase returns happens when the buyer returned the goods to the supplier.
 The purchaser issues debit memorandum to request for a reduction in the balance due.
 Whatever it may be (a purchase return or purchase allowance), the journal entry will always be
a credit to purchase returns and allowances.

Pro-forma entry:

Accounts Payable/Cash xx
Purchases returns and allowances xx
Input Tax xx

* It is justifiable that the input tax be reduced since the return of merchandise by the buyer will reduce
the purchase account.
* Debit cash if the purchase is a cash purchase (refund). Debit A/P if the purchase is a credit purchase.

Purchase discount – sales discounts, except that it is from a buyer’s viewpoint.

 Used to record the amount saved by paying promptly.
 A deduction from the purchases account and is closed to income summary at the end of the
period.
Three alternative methods of accounting for purchase discounts:
1. Gross price method – purchases and accounts payable are recorded at gross amounts. Purchase
discounts are recorded only when taken.
2. Net price method – purchases and accounts payable are recorded at net of the discounts
offered. A purchase discounts lost is used to record purchase discounts which have been
forfeited. Theoretically correct.
3. Allowance method – this is covered in higher accounting courses.

Shipping charges on merchandise purchased or sold:

Freight terms: FOB – Free on Board
1. FOB Shipping point – the purchaser agreed to pay all the shipping costs and the purchaser
receives title to the goods at point of shipment. Freight in (in the books of buyer), part of
purchase cost.
2. FOB Destination - the seller agreed to pay all the shipping costs and the purchaser receives title
to the goods at point of destination. Freight out (in the books of seller), a selling expense.

Freight payments:
1. Freight prepaid – seller paid the shipping costs.
2. Freight collect – buyer paid the shipping costs.
 It is immaterial to determine who paid the freight, but the agreed terms of freight
determines who shall be the owner of the goods during in transit.
Freight in – shall be added to the cost of goods.
Freight out – expensed outright
PRA – Purchase returns and allowances
PD – Purchase discount
SRA – Sales returns and allowances
Accounting for VAT:
Output tax – Input tax = VAT payable
 Should be remitted within 25 days from the end of month
Output Tax xx
Input Tax xx
VAT Payable xx

Setting up of ending inventory Under the periodic system:

 The purchases account is used to record purchases of merchandise.
 Purchases account is debited whenever goods are purchased.
 These are temporary (or nominal accounts):
o Purchases
o Purchase returns and allowances
o Purchase discounts
o Freight in
 To determine the cost of inventory on hand, a physical count should be done. Physical count
should be taken at or near the reporting date.
 The account inventory is used to record the cost of inventory on hand. This amount becomes
the beginning inventory for the next accounting period.

Adjusting journal entries:

 Close first the merchandise inventory beginning by debiting CGS and crediting inventory.
 Close the purchases account and purchases related accounts (debit all credit balances and credit
all debit balances) to CGS.
 Set up ending inventory by debiting inventory and crediting CGS. GROSS PROFIT= Net Sales –
Cost of goods sold

GROSS PROFIT = Net Sales – Cost of Goods Sold