Accounting for Merchandising Business PDF PDF

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Summary

Notes for merchandising activity...

Description

Unit 1 Accounting for Merchandising Business Overview Background

Merchandising business deals primarily with the buying and selling of finished goods. This unit will introduce readers on the different activities done by a trading business. A brief discussion of the perpetual inventory systems is also included.

Purpose

The purpose of Unit I “Accounting for Merchandising Business ” is to illustrate the various buying and selling activities of a trading business. This unit also illustrates the basic entries using perpetual inventory system. A brief discussion of business documents are also included to give readers ideas of what are the basic papers being used that support a merchandising transaction.

In this unit

This unit contains the following topics: Topics Merchandising Business Inventory System Merchandise Accounts Business Documents Proprietor’s Investment and Withdrawal Purchase of Merchandise Purchase Returns and Allowances Discounts on Purchases Sales Sales Returns and Allowances Discounts on Sales Freight on Merchandise Income Statement

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Merchandising Business

Overview

An organization that is engaged in the buying and selling of goods or merchandise is a merchandising or trading concern. Merchandise refers to goods purchased for resale in the same form. Unlike businesses rendering services for compensation, a trading concern derives its income through the resale at a profit of the merchandise purchased.

Activities

The activities of a merchandising concern that distinguish it from a service concern cover the following: •

Purchasing. Information as to the kind, quality, quantity, and cost of goods bought should be maintained for the use of management. Records as to supplies or merchandise bought are also maintained.

•

Handling. The costs of transporting and sorting of goods bear an important relation to the prices of goods bought. These should be recorded properly. Transportation costs include freight, express, drayage, and cartage.

•

Returning Of Goods Purchased. Some of the merchandise received may prove unsatisfactory and must be returned to the vendors, or if not returned, may be allowed some deductions from the original purchase price.

•

Selling. Goods purchased are sold at prices above the cost in order to provide adequate margin of profit. It is therefore imperative that the cost of goods bought should be known from the accounting records so that desirable selling prices may be set.

•

Returning Of Goods Sold. The customers may return some of the merchandise sold. Deductions from the original selling prices must be allowed for sales returns. If the goods delivered are defective and no return is made, the customers are granted reduction on the sales price.

•

Maintaining Adequate Stocks On Hand. In order to satisfy orders of customers at all times, a stock of merchandise must be maintained on hand. This is called Merchandise Inventory or Inventory on Hand

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Inventory System

Overview

A business firm selling a product must use an inventory record system to value the merchandise on hand at the end of an accounting period. Two different inventory systems may be used to record trading transactions in the accounting records. These systems are the periodic and perpetual inventory system.

Perpetual

In a perpetual inventory system a continual, or perpetual, record of the inventory activity is maintained. Consequently, any items that are sold or otherwise physically removed from inventory must be removed from the Merchandise Inventory account, and items that are purchased are added to the Merchandise Inventory account. This may result in significant extra record keeping as compared to a periodic system. However, a perpetual inventory system does have advantages, and businesses with a relatively low number of high-value transactions often find the extra effort to be worthwhile. Computers are also making it practical for businesses to use perpetual systems than would have been not feasible in the past.

Periodic or Physical

In the periodic inventory system, the ending inventory is determined by a physical count of the merchandise on hand at the end of an accounting period. The periodic inventory system receives its name because the balance in the inventory account is known only at the beginning and at the end of the accounting period. The periodic inventory is the simpler system commonly used in practice and was the only practical alternative for most businesses with large number of transactions before the advent of computers. The periodic inventory system will be used in the illustrations throughout this course unless otherwise stated. Continued on next page

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Inventory System, Continued

Transactions in Perpetual Inventory System

As mentioned earlier, a perpetual inventory system attempts to maintain a continual record of the inventory on hand. Thus, if Joseph Labrador purchased merchandise for cash, P50,000, the entry to record this transaction is : Merchandise Inventory Cash To record merchandise bought.

50,000 50,000

On the other hand, if Joseph sold P20,000 worth of merchandise for P40,000, the entry to record this transaction is: Cash Sales To record merchandise sold.

40,000

Cost of Goods Sold Merchandise Inventory To record the transfer of inventory sold to cost of goods sold account.

20,000

40,000

20,000

Assuming this time, Joseph Labrador purchased from Mary Trading merchandise on account, Php 100,000. And at the same time, paid for the freight on the said purchase, Php 2,500. The entries would be: Merchandise Inventory Accounts Payable To record merchandise bought.

100,000

Merchandise Inventory Cash To record freight paid.

2,500

100,000

2,500

Continued on next page

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Inventory System, Continued Transactions in Perpetual Inventory System, con’t.

Let us say, after two days, Joseph returned defective merchandise bought from Mary amounting to Php 5,000. The entry would be: Accounts Payable – Mary Trading 5,000 Merchandise Inventory 5,000 To record returned merchandise. If on the other hand, Joseph Labrador sold to Michael Supermart merchandise worth Php 50,000 on account at gross profit of 50 percent. The entries would be: Accounts Receivable 50,000 Sales 50,000 Sold merchandise on account. Cost of Goods Sold 25,000 Merchandise Inventory 25,000 To record cost of merchandise sold. Let us assume again that after three days, Michael issued a debit memorandum amounting to Php 1,800 for defective goods received from Joseph. The entries to record the return would be: Sales Returns & Allowances Accounts Receivable Received debit memorandum. Merchandise Inventory Cost of Goods Sold To record cost of good returned.

Importance

1,800 1,800 900 900

It is important to note that both periodic and perpetual inventory systems will record the sale of merchandise similarly. The only difference is that under the perpetual inventory system, there is a second entry that is required to be recorded together with the sale to indicate the transfer out of the amount sold from the Merchandise Inventory account to the Cost of Goods Sold account. It is possible to combine the two entries into a single compound entry with the same debits and credits. For example: Cash Cost of Goods Sold Sales Merchandise Inventory To record merchandise sold.

40,000 20,000 40,000 20,000

Continued on next page

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Inventory System, Continued

Pro-forma entry

At the end of the year, no further entries may be required if the balance in the inventory account equals the actual cost of the units on hand. Unfortunately, this seldom happens. Despite the extra effort necessary to maintain a perpetual record of the inventory, the facts often differ from the records. When the facts conflict with the records, the records must be corrected to reflect the facts. Therefore, an adjusting entry is necessary to record any missing inventory items and reduce the balance in the Inventory account to the correct level. The pro-forma entry is: Merchandise Inventory Short or Over Merchandise Inventory To adjust inventory account to actual balance.

xxx xxx

Merchandise Inventory Short or Over

The Merchandise Inventory Short or Over account is an expense account that reflects the cost of missing inventory items. However, depending on its materiality and on normal practice within the industry, the inventory shrinkage amount is often combined with cost of goods sold in the financial statements.

Net Income

The net income disclosed on the income statements prepared under the two inventory systems will reflect the same amount. This is also true with the ending inventory balance reported in the balance sheet. A business that combined its Merchandise Inventory Shrinkage account with its Cost of Goods Sold account would prepare an income statement identical to the one prepared under the periodic inventory system.

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Merchandise Accounts

Overview

The discussions on this topic are the account titles to be used in recording acquisition and sale of merchandise of a trading business using the periodic inventory system.

Sales

Sales of merchandise are recorded in this account at selling prices. This is a temporary or nominal account representing income from selling of merchandise. This account has a normal credit balance

Sales Returns and Allowances

This account is debited for all the merchandise returned by customers. The debit entry is at the original selling price of the merchandise. This account is also being used for all goods delivered to customers but is found to be defective or not as ordered and still the buyer desiring to retain the goods as is. The customer in this case is normally permitted to deduct a certain amount from the selling prices of the goods delivered.

Sales Discount

This account is debited in the book of the seller whenever the buyer avails of the cash discounts provided by the seller. This is a deduction from sales account.

Purchases

This is a temporary account to which the cost of goods bought during the period is debited. This account usually has a debit balance at the end of the accounting period.

Purchase Returns and Allowances

Goods bought and returned to supplier, or goods bought and received as defective, or not as ordered, when not returned to the supplier but is subjected to a certain reductions from their acquisition prices. These deductions and returns of purchased goods are credited to this account. Purchase returns and allowances account is a deduction from the Purchases account. Continued on next page

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Merchandise Accounts, Continued

Merchandise Inventory

At the end of every accounting period, a physical count of the unsold merchandise on hand is taken. The total amount of these goods on hand is debited to the Merchandise Inventory account.

Purchase Discount

This account is credited in the books of the buyer whenever the purchaser avails of the cash discount given by the seller. This is a deduction from Purchases account.

Freight In or Transportation In

If the buyer pays the expenses of transporting the goods from the place of the seller to his place of business, such expenses are debited to the Freight-in account.

Freight Out or Transportation Out

If the seller pays the expenses of transporting the goods from his place to the place of the buyer, such expenses are debited to the Freight out account. This is reported as part of operating expenses under the selling expenses classification.

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Business Documents

Overview

All business transactions are evidenced or supported by printed forms or documents. These business papers or oftentimes-called business documents, furnish the information needed in recording the transactions. Without business papers, it would be very difficult, if not impossible, to keep accurate records of these transactions.

Official Receipts

These are issued every time the business receives cash. They show the date on which the cash is received, the party from whom the cash is received, the amount received, the particulars of the transaction, and the signature of the one who received the cash. The sample given below is an official receipt of MDV Realty issued to Mayon Grocery. From the point of view of MDV Realty, there was an increase in both the asset cash and the income from rent. On the other hand, the asset cash of Mayon Grocery decreased, while its rental expenses increased, thus decreasing its proprietorship.

MDV REALTY 150 Rizal Avenue Manila OFFICIAL RECEIPT No. __120____ Date ___June 30, 20X1______ RECEIVED from _____Mayon Grocery________ the sum of _____Ten Thousand___ pesos (P10,000.00) in payment of ___July rental__.

Cash_____P10,000 Check No._

_________________________ (Cashier)

Continued on next page

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Business Documents, Continued

Sales Invoice and Purchase Invoice

After a sale has taken place, the seller fills in the business form called the invoice. The invoice shows the date of the sale, name and address of the seller, name and address of the buyer, terms of the sale, list of articles bought with the unit price and entire cost of each, total amount of the invoice, and method of shipment. Invoices are numbered and usually made out in triplicate or quadruplicate. The original is given to the buyer. When the buyer receives the goods, they are examined. Then the invoice is checked to determine whether there are any discrepancies in quantity or price and any errors in calculation. From the point of view of the seller, the invoice is a sales invoice; from that of the buyer, it is a purchase invoice. The sample given below shows that from the standpoint of the seller, Diamond Grocery, the invoice price of P1,750 is the gross income from sales, which covers the cost of the juice sold and the gross profit. There was an increase in assets in the form of an amount receivable from Mayon Grocery, there was an increase in cost of merchandise available for sale and an increase in liabilities (the amount of P1,750 is payable within 30 days).

DIAMOND GROCERY 930 Del Monte Avenue Quezon City IN V O IC E No. ___532___ Sold to: ______Mayon Grocery____ Address __945 Mayon St., Q.C.____ Quantity 50 boxes

DESCRIPTION Happy Orange Juice Drink

Date ______June 10, 20X1_____ Term: ___Net 30 days _______ Unit Price P 60.00

Amount P 3,000.00

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Business Documents, Continued

Credit Memorandum

Whenever the buyer finds an error in an invoice, or when merchandise is damaged, he should notify the seller at once. If his claim is admitted as valid, the seller sends him a credit memorandum, which shows the amount by which his account is reduced. Credit memorandum is often shortened to credit memo. The credit memo illustrated below shows that because of the return of two boxes of Funchum juice drink, the gross income from sales of Diamond Grocery decreased, and the amount receivable from Mayon Grocery (asset) decreased. From the point of view of Mayon Grocery, the merchandise available for sale and also the debt to Diamond Grocery decreased.

DIAMOND GROCERY 930 Del Monte Avenue Quezon City CREDIT MEMO No. ___121___ To: ______Mayon Grocery____ __945 Mayon St., Q.C.____

Date ______June 15, 20X1_____

We have credited your accounts as follows: Inv. No. 532

Explanation Return of two boxes of slightly defective Happy orange juice drink.

Unit Price P 35.00

Amount P 70.00

Continued on next page

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Business Documents, Continued

Promissory Notes

A promissory note is a written promise signed by one party, called the maker, to pay a certain specified sum to another, called the payee, at a certain future time. The amount to be paid on maturity date may or may not include interest. The amount due, not including interest, is called the face of the note. Promissory notes may be received by the business from its debtors, or the business may give it to its creditors. The following is a sample of a promissory note.

Php 10,000

Quezon City, May 1, 20X1

Thirty days after date, I promise to pay to the order of Joseph Labrador, Ten thousand Pesos, payable at COCOBANK, Vito Cruz Branch for value received with interest at 12%.

(Signed) Maria de Jesus

Bank deposit For control and safekeeping of cash most businesses maintain checking or slips and checks current accounts with the banks. They deposit their money in banks and

payments from the deposit are then made by means of checks. The bank deposit slip is filled in every time the business deposits money in the bank. It shows the date when the deposit is made, for whose account the deposit is made, the amount of the deposit classified into currency and checks received from others, and the signature of the depositor. Continued on next page

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Business Documents, Continued

Check

An order to the bank signed by the person issuing it, to pay to bearer or order a certain sum of money. After the bank has paid the payee, the amount is deducted from the deposit account of the one who issued the check.

Cash register slips

Some cash registers are operated in such a way that a strip or slip of paper comes out as evidence that money was received. The slip shows the date and the amount of cash received.

Miscellaneous bills

Some businesses, like the Meralco, Philippine Long Distance Telephone Co., MWSS, etc., send bills to their customers to notify them of the amounts they have to pay. Thus, there are advertising bills, light bills, water bills, telephone bills, and others.

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Proprietor’s Investment and Withdrawal Overview

Owners of merchandising firms may want to invest merchandise into its business operations. The following are the entries that would be recorded under the periodic inventory system if the proprietor invests or withdraws merchandise.

Investment of merchandise

Recording of the investment of the owner in the business will be treated in the same way the recording is done in a service business. The only difference would be if the owner invested an asset into the business in the form of merchandise. When merchandi...