Accounting for Merchandising Business

By: Ms. Elma L. Mallorca Accountancy Faculty DLSUDLSU-D

Nature of a Merchandising Business

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 trading enterprise, trading firm or buy and sell business

The Operating Cycle of A Business

Service Business Cash Merchandising Business Cash

Phase 1 Buy merchandise

Phase 3 Collect from customers

Phase 1 Render service to customers

Phase 2 Collect from customer

Phase 2 Sell to customers on account

Statement of Income
X Merchandising Income Statement For the year ended, December 31, 2011 Net Sales Less: Cost of Sales Gross Profit Less: Distribution Costs General & Administrative Expenses Net Income xxx xxx xxx xxx xxx ________ xxx

X Service Co. Income Statement For the year ended, December 31, 2011 Revenue Less: Operating Expenses Net Income xxx xxx xxx

Chart of Accounts of Merchandising Business

Acct. No. ASSETS 110 111 112 120 130 140 150 160 170 180 190 200 210 211 220 221 Cash in Bank Cash on Hand Petty Cash Accounts Receivable Allowance for Bad Debts Notes Receivable Interest Receivable Merchandise Inventory Supplies Prepaid Rent Prepaid Insurance Land Building Accumulated Depreciation-Bldg. Furniture & Fixtures Accumulated Depreciation-F&F 510 520 OWNER's EQUITY Cruz, Capital Cruz, Drawing 310 320 321 330 340 350 360 370 380 390 400 410 Acct. No. LIABILITIES Accounts Payable Notes Payable Interest Payable Salaries Payable Income Tax payable Witthholding Tax payable SSS Contribution Payable PhilHealth Contribution Payable Pag-ibig Contribution payable Unearned Income Loans Payable Mortgage Payable

Chart of Accounts of Merchandising Business

Acct. No. COST and EXPENSES 710 711 712 713 715 720 730 740 750 760 770 780 790 800 810 820 Purchases Purchase Returns & Allowances Purchase Discounts Freight-in Cost of Goods Sold Salaries Expense Rent Expense Utilities Expense Bad Debts Expense Advertising Expense Insurance Expense Taxes & Licenses Supplies Expense Interest Expense Freight-out Depreciation Expense 720 730 740 Interest Income Rent Income Miscellaneous Income 610 611 612 REVENUES Sales Sales Returns & Allowances Sales Discounts Acct. No.

Major Business Activities of a Merchandising 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 Discount

Trade discounts
Not journalized Amount deducted from the suppliers price list or price catalogue to arrive at the invoice price 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 Cost
Who shoulders the transportation cost? F. O. B. Shipping Point F.O. B. Destination Who actually pays for the transportation cost? Freight prepaid Freight collect

Freight 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 Terms
Term Who should pay? Who should record freight? F.O.B. Shipping Point, Freight Collect F.O.B. Shipping Point, Freight Prepaid F.O.B. Destination, Freight Collect F.O.B. Destination, Freight Prepaid seller seller seller buyer buyer seller buyer buyer Who actually paid for the freight?

Inventory 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 physical quantities Inventory acquired is debited to MERCHANDISE INVENTORY Physical count is not required but needed to be done at least once a year to verify the perpetual inventory balance

Value Added Tax (VAT)

12% VAT rate VAT on purchases of goods/services
Input tax

VAT on sale of goods/merchandise

Output tax