MERCHANDISING

TRANSACTIONS
A wholesale business is a firm which sells goods
to another firm who will then, sell it to the final
consumer.

The basic procedures used by wholesalers to handle

sales and accounts receivable are the same as those
used by retailers.

However, many wholesalers offer:

 Cash discounts (discount for early payment)

 Trade discounts (reduction from the list price.)

 Single Trade Discount
Example

Suppose the list price of goods is $1,500 and the trade

discount is 40 percent.
Purchases 900
QUESTION: Accounts Payable 900

What is the net price?

$1,500
List price – trade discount – 600

ANSWER:
$ 900
 Series of Trade Discounts
Suppose the list price is $1,500 and the trade discount
is quoted as a series of 25 and 15 percent.
Purchases 956.25
QUESTION: What is the net price ?
Accounts Payable 956.25

List price $1,500.00

- first discount (25%)
- 375.00
- second discount (15%)
- 168.75

ANSWER:
$956.25
 A business may be able to take advantage of an early
payment discount if it pays the invoice within a certain
period of time.
Here are some examples:
 Net 30 days or n/30:
Payment in full is due 30 days after the date of the invoice.

 Net 10 days EOM, or n/10 EOM:

Payment in full is due 10 days after the end of the month
in which the invoice was issued.

 2% 10 days, net 30 days; or 2/10, n/30:

If payment is made within 10 days of the invoice date, the
customer can take a 2 percent discount. Otherwise,
payment in full is due in 30 days.
 Recording Purchases (with cash discount)

Suppose the following events happened in Tuazon Company.

Aug 1 Purchased inventory worth P100 000. Discounts of 5%
will be given if payment is received 10 days from the
date of purchase.

Purchases 100 000

Accounts Payable 100 000

Purchased inventory on account

Aug 7 CASE A: Payment is made in order to avail the purchase
discount.

Accounts Payable 100 000

Cash 95 000
Purchase Discount 5 000
To record payment within discount period
Aug 15 CASE B: Payment is made after the discount
period granted.

Accounts Payable 100 000

Cash 100 000
To record payment for purchased inventory
 Recording Sales – with cash discount

Suppose the following events happened in Simon Company.

July 16 Made sales on account with total invoice price of
P150 000. Discount of 3% is available upon prompt
payment (within 15 days).

Accounts Receivable150 000

Sales 150 000
To record sales on account
July 21 CASE A: Payment is received. Customer availed of the
sales discount granted.

Cash 145 500

Sales Discount 4 500
Accounts Receivable 150 000
Collection from customer within discount period
Aug 5 CASE B: Payment is received. Customer did not avail of
the discount.

Cash 150 000

Accounts Receivable 150 000
Collection from customer
 Advantages of Credit Sales
The volume of both sales and profits will increase if
buyers are given a period of a month or more to pay for
the goods or services they purchase.

Disadvantages of Credit Sales

 Sales on credit will lead to increases in realized profit only if
each customer completes the transaction by paying for the
goods or services purchased.
 If payment is not received, the expected profits become
actual losses and the purpose for granting the credit is
defeated.
 Therefore, businesses need to closely analyze a customer’s
ability to pay before granting credit.
 Merchandising Accounts
ASSUMPTION: PERIODIC INVENTORY
SYSTEM IS USED

DESCRIPTION ACCOUNT TITLE

1. Debited for cost of goods bought
2. Debited for cost of transporting goods
under the term FOB shipping point
3. Credited for cost of goods returned or
for reduction in purchase price
4. Credited for revenue for goods sold
5. Credited for discount taken when
account is paid within the discount
period
 Merchandising Accounts

DESCRIPTION ACCOUNT TITLE

6. Credited when owner withdrew
merchandise
7. Debited for cost of delivering goods
under the term FOB destination point
8. Debited for returns of goods sold or
for allowances granted
9. Debited for discount given to
customer for early payment