Accounting Cycle of a

Merchandising
Business
FUNDAMENTALS OF ACCOUNTANCY,
BUSINESS, & MANAGEMENT 1
Merchandising Business
A merchandising business refers to an enterprise that buys
and sells goods to earn a profit.
Elements of a Merchandising
Business
MERCHANDISE OR MERCHANDISE INVENTORY refers to an
item bought by a business for the purpose of reselling it.
SALES OR SALES REVENUE is the primary source of revenue
in merchandising business.
◦ Sales Returns and Allowance - a customer may return
merchandise if it broken or if it is not as ordered.
◦ Sales Discount – two usual discounts granted to customers are
(1) trade discounts and (2) cash discounts.
Trade Discounts vs. Cash
Discounts
Trade Discounts – a percentage reduction from a published
list price may be granted to customers for patronizing the
business. This is immediately deducted from the list price.
Cash Discounts – when goods are sold on credit, terms of
payment depend on the custom of the industry. Usual credit
terms: n/30 (gross amount is payable within 30 days from
the date sale), or 2/10,n/30 (gross amount is payable within
30 days with 2% discount given if the account is paid within
10 days).
Elements of a Merchandising
Business
PURCHASES - represents goods available for sale by the
business for a particular accounting period.
◦ Purchase Returns and Allowances – goods bought may be
returned to the seller for being defective, spoiled or not as
ordered.
◦ Purchase Discount – discount claimed by the buyer.
Elements of a Merchandising
Business
TRANSPORTATION/FREIGHT COSTS – The two most
common arrangements for transportation or freight costs
are FOB Shipping Point and FOB Destination.
◦ FOB Shipping Point – buyer should pay for the freight. This is
added to Purchases to get the gross purchases.
◦ FOB Destination – seller is liable for the freight.
Elements of a Merchandising
Business
Cost of Goods Sold or Cost of Sales – the amount of
merchandise sold by the business for a given period. The
formula to compute for cost of goods sold is:
Elements of a Merchandising
Business
Operating Expenses – refer to expenses incurred by the
business in their day-to day operations.
◦ Examples: salaries, utilities, rent, supplies, insurance,
transportation, depreciation, delivery, and advertising.
In the income statement for merchandising business, cost of
goods sold is deducted from sales revenue in order to get
gross profit. Operating expenses are then deducted from
gross profit to get the net income or net loss for the period.
Elements of a Merchandising
Business
Below is a comparison of a service business and a
merchandising business income statement:
Journalizing the Transactions
of a Merchandising Business
Businesses initially record transactions and events in
chronological order. Thus, the journal is referred to as the
book of original entry.
There are two types of journals, the general journal and the
special journal.
General Journal
The General Journal contains all journal entries of a
company.
Special Journals
Special Journals – to eliminate the problem of congestion of
recording repeating business transactions in the general
journal, other businesses use special journals.
The following are the example of special journals:
◦ a. Cash Receipts Journal –used to record all cash that had been
received
◦ b. Cash Disbursements Journal –used to record all transactions
involving cash payments
◦ c. Sales Journal (Sales on Account Journal) –used to record all
sales on credit (on account)
◦ d. Purchase Journal (Purchase on Account Journal) –used to
record all purchases of inventory on credit (or on account)
INVENTORY SYSTEMS
Perpetual Inventory System – updating of inventory is done
every time there are changes in the quantity of the goods.
(High Price – Low Volume)
Periodic Inventory System – updating of inventory is done
periodically which is usually one or twice a year through
physical counting. (Low price – High Volume)
PURCHASES
SALES REVENUE
SALES REVENUE
TRANSPORTATION/ FREIGHT COST
Any Questions?

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