Accounting for Merchandising Business_my Own

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Accounting for Accounting for

Merchandising BusinessMerchandising BusinessBy: Ms. Elma L. MallorcaBy: Ms. Elma L. Mallorca

Accountancy Faculty Accountancy Faculty

DLSUDLSU--DD



Nature of a MerchandisingNature of a Merchandising

BusinessBusiness

� An entity engaged in the activities of

buying and selling of products

� Sells products to generate revenue

� Does not produce its own products to sell

� Also described as ³trading enterprise´,

³trading firm´ or ³buy and sell business´



The Operating Cycle of A BusinessThe Operating Cycle of A Business

� Service Business

Cash

Phase 1 Phase 2 Render service Collect from

to customers customer

� MerchandisingBusiness

Cash

Phase 1 Phase 3

Buy merchandise Collect from

customers

Phase 2

Sell to customers

on account



Statement of IncomeStatement of Income

X Merchandising

Income Statement

For the year ended, December 31, 2011

Net Sales xxx

Less: Cost of Sales xxx

Gross Profit xxx

Less: Distribution Costs xxx

General & xxx

Administrative

Expenses ________

Net Income xxx

X Service Co.

Income Statement

For the year ended, December 31, 2011

Revenue xxx

Less: Operating Expenses xxx

Net Income xxx



Chart of Accounts of Chart of Accounts of

Merchandising BusinessMerchandising Business Acct.

No.

ASSETS

110 Cash in Bank

111 Cash on Hand

112 Petty Cash

120 Accounts Receivable

130 Allowance for Bad Debts

140 Notes Receivable

150 Interest Receivable

160 Merchandise Inventory

170 Supplies

180 Prepaid Rent

190 Prepaid Insurance

200 Land

210 Building

211 Accumulated Depreciation-Bldg.

220 Furniture & Fixtures

221 Accumulated Depreciation-F&F

Acct.

No.

LIABILITIES

310 Accounts Payable

320 Notes Payable

321 Interest Payable

330 Salaries Payable

340 Income Tax payable

350 Witthholding Tax payable

360 SSS Contribution Payable

370 PhilHealth Contribution Payable

380 Pag-ibig Contribution payable

390 Unearned Income

400 Loans Payable

410 Mortgage Payable

OWNER's EQUITY

510 Cruz, Capital

520 Cruz, Drawing



Chart of Accounts of Chart of Accounts of

Merchandising BusinessMerchandising Business Acct.

No.

COST and EXPENSES

710 Purchases

711 Purchase Returns & Allowances

712 Purchase Discounts

713 Freight-in

715 Cost of Goods Sold

720 Salaries Expense

730 Rent Expense

740 Utilities Expense

750 Bad Debts Expense

760 Advertising Expense

770 Insurance Expense

780 Taxes & Licenses

790 Supplies Expense

800 Interest Expense

810 Freight-out

820 Depreciation Expense

Acct.

No.

REVENUES

610 Sales

611 Sales Returns & Allowances

612 Sales Discounts

720 Interest Income

730 Rent Income

740 Miscellaneous Income



Major Business Activities of aMajor Business Activities of a

Merchandising FirmMerchandising Firm

� Purchasing Activities

± Purchases

± Freight-in ± Purchase Returns &

Allowances

± Purchase Discounts

� Selling Activities

± Sales

± Freight-out ± Sales Returns &

Allowances

± Sales Discounts



Trade Discounts vs. Cash DiscountTrade Discounts vs. Cash Discount

� Trade discounts ± Not journalized

± Amount deducted from

the supplier¶s price listor price catalogue toarrive at the invoiceprice

± Incentive to buy in big

quantity ± Example

� List price, P100,000,terms, 30, 10

� Cash Discounts ± Journalized

± Sales discount,

purchases discount ± Given to encourage

prompt payments

± Example� n/30

� 2/15, n/30� 2/15, EOM



Transportation CostTransportation Cost

Who shoulders the transportation cost?

� F. O. B. Shipping Point

� F.O. B. DestinationWho actually pays for the transportation

cost?

� Freight prepaid� Freight collect



Freight TermsFreight Terms

� F.O.B. Shipping Point, Freight Prepaid

� F.O.B. Shipping Point, Freight Collect� F.O.B. Destination, Freight Prepaid

� F.O.B. Destination, Freight Collect



Freight TermsFreight Terms

Term W ho should pay? W ho actually paid

W ho should record

freight? for the freight?

F.O.B. Shipping Point,

Freight Collect buyer buyer

F.O.B. Shipping Point,

Freight Prepaid buyer seller

F.O.B. Destination,

Freight Collect seller buyer

F.O.B. Destination,

Freight Prepaid seller seller



Inventory Accounting SystemsInventory Accounting Systems

� Periodic Inventory System ± No continuous record of the physical quantities

± Inventory acquired is debited to PURCHASES

± Ending inventory is determined by conducting a physical count at

the end of the period� Perpetual Inventory System

± There is continuous record of the changes of the physicalquantities

± Inventory acquired is debited to MERCHANDISE INVENTORY

± Physical count is not required but needed to be done at leastonce a year to verify the perpetual inventory balance



Value Added Tax (VAT)Value Added Tax (VAT)

� 12% VAT rate

� VAT on purchases of goods/services

± Input tax

� VAT on sale of goods/merchandise

± Output tax

Accounting for Merchandising Business_my Own

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