Accounting Cycle for Merchandising Business (Part 1) PDF

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Accounting Cycle for Merchandising Business Introduction A merchandising business is one that buys and sells goods without changing their physical form. Inventory Systems Inventories are accounted for using either of the following inventory systems: 1. Perpetual Inventory System The perpetual inve...

Description

Accounting Cycle for Merchandising Business  Introduction A merchandising business is one that buys and sells goods without changing their physical form.  Inventory Systems Inventories are accounted for using either of the following inventory systems: 1. Perpetual Inventory System The perpetual inventory system is called as such because under this system, the “Inventory” account (or “Merchandise Inventory” account) is updated each time a purchase or sale is made. Thus, the “Inventory” account shows a continuing or running balance of the goods on hand. The perpetual inventory system is commonly used for inventories that are specifically identifiable and are relatively high valued, such as cars, machineries, furniture and heavy equipment. 2. Periodic Inventory System The periodic inventory system is called as such because under this system, the “Inventory” account (or “Merchandise Inventory” account) is updated only when a physical count of inventory is performed. Thus, the amounts of inventory and cost of goods sold are determined only periodically. The periodic inventory system is commonly used for inventories that are normally interchangeable, relatively low valued, and have a fast turnover rate, such as grocery items, medicines, electrical parts, and office supplies.  Perpetual vs. Periodic (Journal Entries) Perpetual Inventory System Periodic Inventory System You purchased goods worth P10,000 on account. Inventory 10,000 Purchases 10,000 Accounts Payable 10,000 Accounts Payable You paid shipping costs of P1,000 on the purchase above. Inventory 1,000 Freight-in 1,000 Cash 1,000 Cash You returned damaged goods worth P2,000 to the supplier. Accounts Payable 2,000 Accounts Payable 2,000 Inventory 2,000 Purchase Returns You sold goods costing P5,000 for P20,000 on account. Accounts Receivable 20,000 Accounts Receivable 20,000 Sales 20,000 Sales Cost of Goods Sold Inventory

1,000

2,000

20,000

5,000

No Entry 5,000 A customer returned goods with sale price of P800 and cost of P200. Sales Returns 800 Sales Returns Accounts Receivable 800 Accounts Receivable Inventory Cost of Goods Sold

10,000

200 200

No Entry

800 800...