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Operating Cycle
A firm that engages in the buying/selling of finished goods (i.e. grocery, clothing, similar items ready for use or for consumption) Items on hand intended for sale; under the account Merchandise Inventory at preparing post-closing trial balance. Steps: iii. Preparing Trial Balance iv. Preparing Worksheet ii. Posting i. Journalizing The time a company takes in converting inventory to receivable and then to cash; transaction time It is inclusive of multiple operating cycles.
4. Accounting Cycle
A series of steps involving accounting activities beginning from recording transactions and ending
viii. Preparing Post-Closing Trial Balance Documents common in a merchandising business objectivity/reliability/verifiability GAAP. 1. Purchase Order relevant information) These documents are used as evidence or proof in order for accounting information to be in accordance to the ix. Preparing Reversing Entries
Contains the details of good to be bought (i.e. no. of units, brand or model, unit price, and other Prepared by the buyer and forwarded to the seller Contains the detail of goods sold on account Contains details of goods sold on cash basis Similar to the charge sales invoice Prepared by the seller based on the purchase order received from the buyer
Introduction-to-merchandising-transactions
ACTBAS2: Introductory Accounting--Part 2 Introduction to Merchandising Transactions sale of non-inventory items Issued on collection on accounts
Issued by the seller when he (she) collects from a credit customer, or when cash is received from A document prepared by the buyer informing the seller of the return of defective goods and the corresponding reduction of liability (Accounts Payable) This may only be used if the transaction is made on account, and there is previous credit to consideration or reduction of liability when a replacement is made. (Accounts Receivable) from the buyer or promissory notes. A document prepared by the seller informing the buyer that he has reduced his collectible Involved in other transactions except merchandising transactions
5. Debit Memorandum
6. Credit Memorandum
Accounts Payable. Otherwise, the buyer must demand for refund. However, there is no return of
Note: The debit and credit memorandums do not apply to any other form of considerations such as cash This method does not maintain ledger accounts for Cost of Sales and does not update the purchases and sales are recorded in alternative accounts. determined through physical count of the goods. There is a need to compute for the cost of sales. voluminous but with cheaper unit prices. transactions: iii. Purchase Discount iii. Sales Discount i. Sales i. Purchases Merchandise Inventory ledger account.
All purchases and sales of merchandise do not affect Merchandise Inventory. Instead, all
The cost of merchandise sold and the cost of merchandise on hand at the end of the period is
An adjusting entry is needed to set up the ending balance of the Merchandise Inventory account. The buyer uses the following unique and exclusive account titles in recording merchandising iv. Freight-In (also known as Transportation-In) ii. Sales Returns and Allowances ii. Purchase Returns and Allowances
This method is used by firms whose transactions are recorded manually and whose inventories are
The seller uses the following account titles in recording merchandising transactions: iv. Freight-Out (also known as Transportation-Out or Delivery Expense)
Introduction-to-merchandising-transactions
2. Perpetual Inventory
Separate ledger accounts are maintained for Merchandise Inventory and Cost of Sales. Merchandise Inventory per ledger.
Cost of goods already sold and cost of goods not yet sold are always (perpetually) available from Physical count of goods on hand at the end of the year is also made to confirm the balance of
Computerized systems can afford to employ this method of recording merchandising transactions. If the physical count is less than the ledger balance, there is inventory shortage, otherwise, inventory overage. Inventory Shortage or Inventory Overage is closed to the Cost of Sales account. more costly unit price. ii. Cost of Sales v. Freight-Out i. Sales The seller uses the following accounts: iii. Sales Returns and Allowances iv. Sales Discount vi. Merchandise Inventory Any different between the physical count and the ledger balance of the Merchandise Inventory account is either debited or credited to Inventory Shortage or Inventory Overage account. Under a manual environment, this inventory method is used by firms with few inventories but a The buyer uses the Merchandise Inventory account only for all merchandising transactions.
Merchandising Transactions (Periodic Inventory Method) A. Buying Phase 1. Purchases. The account debited for the cost of merchandise bought whether on cash basis or on credit Purchases Cash/Accounts Payable xxx xxx
2. Purchase Returns and Allowances. The account credited for the cost of merchandise returned due to made on account whether fully or partially. Accounts Payable Purchase Returns and Allowances defect or wrong specifications. This is supported by a debit memorandum in the case of a purchase xxx xxx
However, if the purchase was made on cash basis, the entry would be for a refund received.
Introduction-to-merchandising-transactions
ACTBAS2: Introductory Accounting--Part 2 Introduction to Merchandising Transactions Cash Purchase Returns and Allowances
3. Purchase Discount. The account credited by the buyer when he fully pays the liability within the discount period. Cash Accounts Payable xxx
xxx
xxx
4. Freight-In (Transportation-In). The account debited when the buyer shoulders the cost of transporting the goods. Freight-In Cash xxx
Purchase Discount
xxx xxx
B. Selling Phase
1. Sales. The account credited for the selling price of merchandise sold whether on cash basis or on credit. Cash/Accounts Receivable Sales xxx
xxx
2. Sales Returns and Allowances. The account debited for the selling price of merchandise returned. partially. Sales Returns and Allowances Sales Returns and Allowances Cash Accounts Receivable xxx xxx
This is supported by a credit memorandum in the case of a sale made on account whether fully or
xxx
However, if the sale was made on cash basis, the entry would be made for a refund granted.
xxx xxx
3. Sales Discount. The account debited by the seller when a receivable is fully collected within the discount period Cash Sales Discount xxx xxx
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Accounts Receivable
xxx
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4. Freight-Out (Transportation-Out/Delivery Expense). The account debited when the seller shoulders the cost of transporting the goods Freight-Out Cash xxx xxx
1. The buyer debits the Merchandise Inventory account for the cost of merchandise bought for cash Merchandise Inventory Merchandise Inventory Cash Cash/Accounts Payable xxx xxx xxx xxx
2. The buyer debits the Merchandise Inventory account for the cost of transporting the goods.
3. The buyer credits the Merchandise Inventory account for the cost of merchandise returned. This partially. Accounts Payable Cash Merchandise Inventory Merchandise Inventory Cash xxx xxx xxx xxx xxx xxx xxx
is supported by the debit memorandum in the case of a purchase made on account whether fully or
However, if the purchase was made on cash basis, the entry would be for a refund received.
4. The buyer credits the Merchandise Inventory for the amount of discount granted by the seller. Accounts Payable Merchandise Inventory
B. Selling Phase
1. Every time there is a sale, the seller records two entries as follows: Cash/Accounts Receivable
Introduction-to-merchandising-transactions
xxx
2. Every time there is a return of goods, the seller records two entries as follows: Sales Returns and Allowances (for the selling price) Merchandise Inventory Accounts Receivable/Cash Cost of Sales (for the cost)
3. Sales Discount. The account debited by the seller when he fully collects the receivable within the discount period. Cash Sales Discount Freight-Out Cash xxx xx
4. Freight-Out. The account debited when the seller shoulders the cost of transporting the goods. xxx
Accounts Receivable
xxx xxx
Selected Merchandising Transactions Merchandise Inventory Purchases (Owner), Capital (Owner), Capital Purchases
1. Owners original investment of merchandise 2. Owners additional investment of merchandise 3. Owners withdrawal of merchandise (Owner), Drawing
Introduction-to-merchandising-transactions
4. Owners withdrawal of a second-hand computer (movable fixed asset) Accumulated Depreciation Office Equipment (Owner), Capital Cash Office Equipment
xxx xxx
Trade Discount
No account title to recognize trade discount. Example: 10-10-5 is the trade discount. Purchases Accounts Payable
The trade discount is expressed as a series of deductions in whole numbers. Bought merchandise for 100,000 less 10-10-5
List Price Trade Discount = Invoice Price (net amount placed in charge/cash sales invoice)
It is a deduction from the list or catalog price to encourage the buyer to make large volume (wholesale)
The invoice price is computed as follows: 100,000 (1 0.10) (1 0.10) (1 0.05) = 76,950 76,950 76,950
Cash Discount
It encourages full cash payment at the earliest time possible. discount period. within the discount period.
Purchase Discount. The account recording the discount the buyer receives when he fully pays within the Sales Discount. The account recording the discount the seller grants to the buyer when he fully collects as both accounts are involved in the same transaction. The amount to be recorded in the Purchase Discount and Sales Discount accounts are equivalent as long
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Unlike trade discount, cash discount is recorded in the books. Example: 2: Cash discount rate Discount period Credit period No discount given
Purchase Discount is credited by the buyer while Sales Discount is debited by the seller. Cash discount is presented in a transaction as a series of fractions. 10: n: 30: Bought merchandise for 20,000; terms are 2/10 n/30.
2/10
2% of the invoice price is allowed to the buyer if account is fully paid within 10 days
2/eom: 3/10:
after date of purchase. No discount is given if full payment is made after the 10th day.
3% of the invoice price is allowed if full payment is made within 15 days after 2% is allowed if account is fully paid on or before the end of the month. No discount is given after the end of the month.
3% is allowed if the account is fully paid within 10 days after purchase date. No discount is given after the fifth day of the next month.
2% is allowed if the account is fully paid within 5 days after the end of the month.
3. Determine the outstanding balance of a particular Accounts Payable or Accounts Receivable as of the 4. Determine the basis of purchase or sales discount as of full payment date using the following formula: For the Buyer: Initial Accounts Payable Less: Purchase Returns and Allowances Basis of Purchase Discount date of full payment.
1. Is the current year a leap year or an ordinary year? (If year number is divisible by 4, it is a leap year.)
Introduction-to-merchandising-transactions
ACTBAS2: Introductory Accounting--Part 2 Introduction to Merchandising Transactions Initial Accounts Receivable Basis of Sales Discount Less: Sales Returns and Allowances
5. Multiply the Basis of Discount by the applicable discount rate For the Buyer: Basis of Purchase Discount Multiplied by: Applicable Discount Rate Amount of Purchase Discount Basis of Sales Discount
Introduction-to-merchandising-transactions