Accounting for Retail Operations Converted

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Accounting for Merchandising Concern


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INTRODUCTION

Accounting concepts for a service business are

applicable for merchandising business but someadditional accounts, schedules and computationare needed to record its sales and purchases(accounting for inventories)

TYPES OF MERCHANDISERS

A wholesaler is one who buys in bulk from amanufacturer and sells to a retailer who in

turn sells to ultimate consumers or customers


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SERVICE CONCERN VERSUS MERCHANDISING CONCERN

* Excluding income taxes


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Major Income Statement Accounts

Sales comes from selling goods and

merchandise Merchandise represents the stock of goods

or items brought by the merchandiser forresale to its customers (also called

merchandise inventory) Cost of Sales is a major expense account of a

merchandiser which represents the cost of buyingthe merchandise which were sold to obtain

revenueGross Profit is the mark-up or margin of profit

in selling the goods to the customers


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INVENTORIES

DEFINITION

Assets which are held for sale in the ordinarycourse of business, in the process ofproduction for such sale or in the form ofsupplies to be consumed in the production

process or in the rendering of services (PAS 2)

Simply stated, these are the stock of goods oritems bought by a merchandiser for resale to

its customers


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INVENTORY SYSTEMS

Periodic calls for the physical counting of

goods on hand at the end of the reporting periodto determine the quantities.

Is generally used when the individualinventory items turn over rapidly and have

small peso investment Perpetual requires the maintenance of records

called stock cards that usually offer a running(continuous) summary of the inventory inflow

and outflow Is commonly used where the inventory items

treated individually represent a relatively largepeso investment

The periodic system will be illustrated in this discussion


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GOODS INCLUDIBLE IN THE INVENTORY

As a rule, all goods to which the entity has title

shall be included in the inventory, regardless oflocation

WHO IS THE OWNER OF GOODS IN TRANSIT?

This will depend on the terms

FOB DESTINATION ownership of goodspurchased is transferred only upon receipt of thegoods by the buyer. Ergo, the seller is the owner

of goods in transit FOB SHIPPING POINT ownership of goods is

transferred upon shipment of the goods. Ergo,the buyer is the owner of goods in transit.


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FREIGHT TERMS

Freight collect freight charge on the goods

shipped is not yet paid. Thus, under this, thefreight charge is actually paid by the buyer.

Freight prepaid this means that the freight

charge on the goods shipped is actually paid bythe seller.

NB: The terms FOB Destination and FOB Shipping

point determine the ownership of the goods intransit and the party who is supposed to pay thefreight charge.


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(AFI) PURCHASES

Total Cost of Goods Delivered sum of

Purchases and Freight-in (Transportation In)

Purchases account title used whenevermerchandise is bought for resale

It represents an owners equity account forgoods available for sale by the business (ISAccount)

Freight-in cost of delivery of the merchandisesold. (applicable only if the shipping terms inFOB Shipping Point)


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(AFI) PURCHASES ILLUSTRATION

Ronald David, the proprietor of AI Bookstore bought

on account, P50,000 worth of books to betransported by a boat at a cost of P1,000 under theterms FOB Shipping Point, Freight Collect. The goodswere received on August 5 and the freight was paidaccordingly

The entries to record the transaction would be:


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(AFI) PURCHASES ILLUSTRATION

Supposed the term is FOB Shipping Point Freight

Prepaid?

The journal entry would be:


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PURCHASE RETURN AND ALLOWANCES

Goods bought may be returned to the seller for

being defective, spoiled or not as ordered. Orinstead of returning these, buyer may justrequest a reduction in the price.

PURCHASE RETURN is the account to be

credited every time a merchandise is returned tothe seller.

PURCHASE ALLOWANCE is the account to becredited when a seller agrees to a reduction of

the buyers liability to the former. NB: For convenience purposes, companys usually

maintain only one account, Purchase Returns andAllowances. This is a contra account deducted to GrossPurchases (together with Purchase Discounts) to arrive atthe Net Cost of Purchases


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(AFI) PURCHASE RETURNS AN ALLOWANCESILLUSTRATION

Using the preceding illustration assume that

when the P50,000 goods bought on account werereceived, P5,000 were found defective and werereturned on August 7.

The journal entry would be:


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TRADE DISCOUNTS

Trade discounts are deductions from the listor catalog price in order to arrive at the invoiceprice which is the amount actually charged to thebuyer. Thus, trade discounts are not recorded.

Chain discount series of percentagereduction to the list price/catalog price.

To illustrate, assume that the list price of 100pair of shoes is P500,000. Terms: Less 10-5-2.Determine the Invoice price:

List price P500,000

1st Trade discount (500,000*.1) (50,000)

2nd Trade discount (500,000*.9*.05) (22,500)

3rd Trade discount (500,000*.9*.95*.02) ( 8,500)

Invoice Price P418,950


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CASH DISCOUNTS

Cash discounts are deductions from theinvoice price when payment is made within thediscount period. The purpose of cash discount isto encourage prompt payment. Cash discounts are recorded as purchase discount by

the buyer and sales discount by the seller.

A discount (pov of buyer) is recorded by debiting theliability and crediting the contra purchases accountcalled Purchase Discount.

The usual credit terms are:

n/30 (account is payable within 30 days)

2/10, n/30 (the account is payable within 30 dayswith a 2% discount given if paid within 10days fromthe date of sale)

3/EOM, n/60 days (account is payable within 60days with a 3% discount if paid at the end of themonth on the date of sale)


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(AFI) PURCHASE DISCOUNT ILLUSTRATION

On May 1 Calungsod of Cebu bought goods to Marikina ShoeFactory for P20,000. A 2% trade discount was granted and theterm of purchase was 2/15, n/30, FOB Shipping Point, FreightCollect. Calungsod paid the freight amounting to P1,000 uponreceipt of the shipment and paid the account on May 15 by issuing

checks on the said dates.


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(AFI) PURCHASE DISCOUNT ILLUSTRATION (continued)

Suppose on the preceding illustration the term is

FOB Shipping Point, Freight Prepaid. The entrieswill appear thus:


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NET COST OF PURCHASES

Formula


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COST OF SALES

represents cost of merchandise given to the

customer for the sales revenue received. under the periodic method, cost of sales as

well as merchandise inventory balance aredetermined only at the end of the reportingperiod based on an inventory count.

Formula


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REVENUE ACCOUNT OF MERCHANDISERS

SALES - is earned when the merchandiser or seller of thegoods transfers the merchandise to the customer.

Supported by a source document called Invoice.

SALES DISCOUNT is a contra revenue accountwhich is the cash discount on the point of view of theseller

SALES RETURNS AND ALLOWANCES contrarevenue account used when the buyer returnsmerchandise due to wrong specifications or damagegoods or when the seller grants allowance in price forthe goods purchased.

FREIGHT OUT cost to the seller of transporting thegoods to the buyer. (Appicable only if the shipping

term is FOB Destination)


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(AFI) REVENUE TRANSACTIONSAssume that on March 1 AI Bookstore sold

goods to Ronald David for P6,000 with a

P2,000 down payment and balance on term2/10, n/30 FOB Destination, FreightPrepaid. On March 8 the customer paidP1,000 and returned defective goods

amounting to P1,000 and the balance waspaid on March 10. Freight cost amounted toP1,000 and was paid by means of check.


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(AFI) REVENUE TRANSACTIONS


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(AFI) REVENUE TRANSACTIONS

Supposed that the term was P2,000 down, balance2/10, n/30 FOB Destination, Freight Collect? The

entries will be?


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NET SALES

At the end of the reporting period, several

accounts are deducted from gross sales to arriveat the net sales revenue.

Formula:


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VALUE-ADDED TAX Is a tax levied by the government to both buyers and

sellers.

Increases the amount to be paid by the buyer but it shouldnot increase the cost of purchase.

INPUT TAX is the account to be debited for the VAT portionevery purchase. (Buyer debits)

Increases the amount to be collected by the seller but itshould not increase the revenue.

OUTPUT TAX is the account to be credited for the VATportion every sale. (Seller credits)

INPUT TAX and OUTPUT TAX are closed against each other.

If OUTPUT TAX > INPUT TAX, the balancing figure isVAT PAYABLE (credit)

If INPUT TAX > OUTPUT TAX, the balancing figure isPREPAID VAT (debit)


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(AFI) PURCHASE AND SALE TRANSACTIONS WITH VAT

On July 1 Calungsod bought goods from Marikina

Shoe Exchange on account P100,000 plus 12%VAT terms, 2/10, n/30. On July 10 Calungsodsold the goods to cash customers for P150,000plus a 12% VAT. Calungsod issued check to pay

the amount owed to Markina Shoe exchange onJuly 11.


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(AFI) PURCHASE AND SALE TRANSACTIONS WITH VAT

Accounting for Retail Operations Converted

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