Fabm 1: Accounting For Merchandising Concern

NEW BRIGHTON SCHOOL OF THE PHILIPPINES, INC.
Module No. 11
Subject: FABM 1 Date of Submission: ____________

Name of Student: ______________________________________________________
Course and Year: ______________________________________________________
Semester and School Year: _____________________________________________
Accounting for Merchandising Concern
Learning Objectives:
After studying this chapter, we should be able to:
1. differentiate between merchandising and service concern activities;

2. discuss the purchasing and selling activities of the merchandising business as well as their respective entries;
3. differentiate cash discounts from trade discounts;
4. determine the accounting treatment for freight-in and freight out;
5. know the determination of ending inventory and calculation of net sales, cost of sales, and gross profit;
6. differentiate perpetual from periodic inventory systems;
7. prepare the worksheet and the basic financial statements of a merchandising concern;
8. complete the accounting cycle of a merchandising concern.
Previous modules deal mainly on sole proprietor engaged in service providing. However, some business may buy and sell goods
rather than perform services to earn profit.
The accounting process does not differ whether it is a service provider or a merchandising operation, although some account
titles may differ. In a service provider, the main source of income is service revenues, while in merchandising operations; the
primary source of income is the sales of merchandise or simply Sales. In addition, in merchandising operations, expenses are
categorized into two: (1) Cost of goods sold and (2) operating expenses.
In short, additional income statement accounts are added and income statement is presented differently compared to service
concern entities.
Merchandising Accounts
Specific accounts used in merchandising operations will be presented below:
(a) Merchandise Inventory (Real Account, Debit)

Inventories are assets which are held for sale in the ordinary course of the business.
(b) Sales revenue (Nominal Account, Credit)

Sales Revenues, like service revenues, are recorded when earned. Earned means when the goods are transferred from the seller to
the buyer. Sales may be made on credit or for cash, Pro-forma entries are presented below.
Sales on Account:
Accounts Receivable xx
Sales xx
Module for Fundamentals of Accountancy, Business and Management 1, Lehnard R. Gellor, CPA Page 1 | 29
Cash sale:
Cash xx
Sales xx
(c) Sales Returns and Allowances (Nominal Account, Debit)

Sales Returns occur when a dissatisfied customer returns inferior, defective or damaged merchandise sold. The customer may
return the goods to the seller for credit if the sale was made on account or for a cash refund if the sale was originally for a cash.
Alternatively, some customer may choose to keep the merchandise if the seller is willing to grant an allowance (deduction) from
the selling price, this is known as Sales Allowance.
To give the customer a sales return or allowance, the seller normally prepares a credit memorandum. This document informs a
customer that a credit has been made to the customer’s accounts receivable for a sales return or allowance. Pro-forma entries are
presented below.
For accounting purposes, sales returns and sales allowances are combined in one account, Sales Returns and Allowances. This
account is a contra-revenue account. Pro-forma entries are presented below.
Sales Returns and Allowances (initial sale was on account)

Sales Returns and Allowances xx
Accounts Receivable xx
Sales Returns and Allowances (initial sale was on cash)

Sales Returns and Allowances xx
Cash xx
(d) Sales Discounts (Nominal Account, Debit)

A seller may provide discount to customers on credit for prompt payment of the balance due. This incentive offers advantages to
both parties: The purchaser saves money, and the seller is able to convert the accounts receivable into cash earlier. This account
is a contra-revenue account.
Different credit terms may be agreed by the seller and buyer, these terms will be shown in a way of examples presented below.
2/10, n/30
This term is read as “2% cash discount if paid within ten days, payable in 30 days”.
1/10 EOM (End-of-month)

This term is read as “1% cash discount within the first 10 days of the next month”.
Be aware that the cash discount, discount period, and the maximum time period for paying the balance due may depend on the
agreement of the buyer and the seller. Also, any cash discount is based on the invoice price less any sales returns and
allowances.
When a seller prefers not to offer a cash discount for prompt payment, credit terms will specify only the maximum time period
for paying the balance due. For example, the time period may be stated as n/30, n/60, or n/10 EOM.
Illustration: Assume Domicel store has an Accounts Receivable balance of P3,500 from Mr.Sevilla with credit terms of 2/10,
n/30. On May 15, the last day of discount period, Domicel store received payment from Mr. Sevilla. The journal entry on May
15 Domicel (seller) store will be:
Cash 3,430
Sales Discounts 70
Accounts Receivable 3,500
(To record collection within 2/10, n/30 discount period)
If payment was made beyond the discount period, the entry of the seller would be:
Cash 3,500
(e) Purchase (Nominal Account, Debit)

When merchandise is purchased for resale to customers, Purchases is debited for the cost of the goods. However, not all
purchases are debited to purchase account. Purchase of assets acquired for use and not for resale, such as supplies, equipment,
and similar items, should be debited to specific asset accounts rather than to purchases. Remaining purchased merchandise at the
end of the period will be closed to merchandise inventory account. Pro-forma entries are presented below.
Purchase on account
Purchases xx
Accounts Payable xx
Cash Purchases
Purchases xx
Cash xx
(f) Purchase Returns and Allowances (Nominal Account, Credit)

A sales return and allowance on the seller’s books is recorded as a purchase return and allowance on the books of the purchaser.
The purchaser initiates the request for a reduction of the balance due through the issuance of a debit memorandum. A debit
memorandum is a document issued by a buyer to inform a seller that a debit has been made to the seller’s account. Pro-forma
entries are presented below.
Purchase Returns and Allowances (initial purchase was on account)

Accounts Payable xx
Purchase Returns and Allowances xx
Purchase Returns and Allowances (initial purchase was on cash)

Cash xx
Purchase Returns and Allowances xx
(g) Purchase Discounts (Nominal Account, Credit)

A cash discount may be given to a buyer to pay on time. The buyer calls this discount a purchase discount. Like sales discount, a
purchase discount is based on the invoice price less any sales returns and allowances.
Illustration: Assume Domicel store has an Accounts Receivable balance of P3,500 from Mr. Sevilla with credit terms of
2/10, n/30. On May 15, the last day of discount period, Domicel store received payment from Mr. Sevilla. The journal
entry on May 15 by Mr. Sevilla (buyer) will be:
Accounts Payable 3,500
Purchase Discounts 70
Cash 3,430
If payment was made beyond the discount period, the entry of the buyer would be:

Cash 3,500
(h) Trade Discount

Trade discounts are not cash discounts. These are deductions from the list price in order to arrive at the invoice price which is the
amount actually charged to the buyer. Trade discounts are not recorded. Trade discounts are made by sellers to persuade customers
to buy their products while cash discount is given to promote prompt payment.
Assume the catalog price of merchandise purchased is P700,000 less 30%, 10%, credit terms of 4/10, n/30.
List price P 700,000

First trade discount (30% x 700,000) (210,000)
490,000
Second trade discount (20% x 490,000) (49,000)
Invoice Price 441,000
Cash discount (4% x 441,000) (17,640)
Payment within the discount period P423,360
Upon purchase, the journal entry will be:
Purchases 441,000
Payment of purchase on account within the discount period:

Cash 423,360
Purchase discount 17,640
Note that trade discounts are not recorded, rather deducted to the list price to compute the invoice price.
(i) Freight Costs

The seller or buyer must have a sales agreement on who should pay the delivery costs. Freight terms are expresses as either FOB
shipping point or FOB destination. The letters FOB means free on board. FOB shipping point means that good are placed free
on board the carrier by the seller, and the buyer pays the freight costs. On the other hand, FOB destination means that the goods
are placed free on board at the buyer’s place of business and the seller pays the freight.
When a purchaser directly incurs freight cost, the account freight-in (or Transportation-in) is debited. Freight-in as an example of
an adjunct account, which is an account, added to other account (specifically purchases). In contrast, freight costs incurred by the
seller on outgoing merchandise are operating expenses to the seller. The costs are debited to Freight-out (or Delivery Expense).
Pro-forma entries are presented below.
Payment of freight, FOB shipping point

Freight-in xx
Cash xx
Payment of freight on goods sold FOB destination
Freight-out xx
Cash xx
The Basic Cost of Goods Sold equation
Cost of Goods Sold

Merchandise Inventory, Jan. 1 xxx
Purchases xxx
Less: Merchandise Inventory, Dec. 31 (xxx)
Cost of Goods Sold xxx
When expounded, the Cost of Goods Sold could be computed as follows:
Cost of Goods Sols

Merchandise Inventory, Jan. 1 xxx
Purchases xxx
Less: Purchase Discounts (xxx)
Purchase Returns and Allowances (xxx) xxx
Net Purchases xxx
Add: Freight In xxx
Delivered Cost of Purchases xxx
Goods Available for Sale xxx
Less: Merchandise Inventory, Dec. 31 xxx xxx
Gross Profit xxx
Work sheet presentation
An illustrative problem will be provided below to serve as a guide. The trial balance is already provided, assuming that
journalizing and posting are correct. In merchandising, there are two methods of work sheet preparation, Closing entry method
and adjusting entry method. The closing entry method will be presented first, since this is the one commonly used by
accountants.
The trial balance of Gensan Enterprises for its first year operation ending December 31, 2008, is shown below.
GENSAN ENTERPRISES
Trial Balance
December 31, 2008
Debit Credit
Cash P28,000
Merchandise Inventory 55,000
Prepaid Insurance 3,600
Store Equipment 84,000
Accumulated Depreciation-Store Equipment P18,000
Disay, Capital 130,600
Disay, Drawing 30,000
Sales
Sales Returns and Allowances 9,200
Sales Discounts 7,800
Purchases 344,000
Freight-in 10,000
Purchase Returns and Allowances 2,400
Purchase Discounts 4,000
Salaries Expense 55,400
Utilities Expense 12,200
P664,400 P664,400
Other data:
1. Merchandise inventory on hand at December 31, P77,200.

2. Insurance expired P1,600.
3. Depreciation expense, P6,000.
Before starting the work sheet, the adjusting entries are presented below:
1. The merchandise inventory is ignored in the adjustment column. This account will be shown in the preparation of closing
entries. Compare this approach with adjusting entry method which will be presented later.
2. To record expired insurance:
Insurance Expense 1,600

Note that asset method is used given that in the trial balance, the insurance is presented as an asset rather than expense. The
P1,600 is already the expense to be recorded since it is the amount representing the expired portion.
3. To record Depreciation for the year:
Depreciation Expense 6,000

Accum. Depreciation – Store Equip. 6,000
The worksheet of Gensan Enterprises using closing entry method is presented on the next page.
Trial Balance Adjustments Adjusted Trial Balance Income Statement Balance Sheet
Account Ttiles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Cash P28,000 28,000 28,000

Accounts Receivables 55,200 55,200 55,200
Merchandise Inventory 55,000 55,000 55,000 77,200 77,200
Prepaid Insurance 3,600 (2) 1,600 2,000 2,000
Store Equipment 84,000 84,000 84,000
Accumulated Dep - Store P18,000 (3) 6,000 24,000 24,000
Equipment
Accounts Payable 62,000 62,000 62,400
Disay Capital 130,600 130,600 130,600
Disay, Drawing 30,000 30,000 30,000
Sales 477,000 477,000 477,000
Sales Ret. & Allow. 9,200 9,200 9,200
Sales Discounts 7,800 7,800 7,800
Purchases 344,000 344,000 344,000
Freight-in 10,000 10,000 10,000
Purchase Ret. & Allow. 2,400 2,400 2,400
Purchase Discounts 4,000 4,000 4,000
Salaries Expense 55,400 55,400 55,400
Utilities Expense 12,200 12,200 12,200
Totals P664,400 P664,400
Additional Accounts
Insurance Expense (2) 1,600 1,600 1,600
Depreciation Expense (3) 6,000 6,000 6,000
Totals 7,600 7,600 700,400 700,400 501,200 560,600 276,400 217,000
Net Income 59,400 59,400
Balances 560,600 560,600 276,400 276,400
After preparing the work sheet, the Income Statement, Owner’s Equity and Balance sheet should be prepared:
GENSAN ENTERPRISES
Income Statement
For the Year Ended December 31, 2008
Sales revenues
Sales P477,000
Less: Sales returns and Allowances P9,200
Sales Discounts 7,800 17,000
Net sales: 460,000
Cost of goods sold
Inventory, January 1 55,000
Purchases P344,000
Less: Purchase Returns & Allowances P2,400
Purchase Discounts 4,000 6,400
Net purchases 337,600
Add: Freight-in 10,000
Cost of goods purchased 347,600
Cost of goods available for sale 102,600
Less: Inventory, December 31 72,200
Cost of goods sold 325,400
Gross Profit 134,600
Operating expenses
Total operating expense 75,200
Net income P59,400
GENSAN ENTERPRISES
Owner’s Equity Statement
December 31, 2008
Disay, Capital Jan. 1 P130,600

Add: Investments -
Net Income 59,400
190,000
Less: Drawings 30,000
Disay, Capital December 31 P160,000
GENSAN ENTERPRISES
Balance Sheet
As of December 31, 2008
Cash
Accounts Receivable P28,000
Store Equipment P840,000 2,000
Less: Accumulated Depreciation-
Store Equipment 24,000 60,000
Total Assets P222,400
Liabilities and Owner’s Equity
Liabilities
Accounts Payable P62,400
Owner’s Equity
Disay Capital 160,000
Total liabilities and owner’s equity P222,400
The closing entries for Gensan Enterprises using closing entry method as follows:
1. To record ending inventory and close accounts with credit balances:
Merchandise Inventory (Dec.31) 77,200

Sales 477,000
Income Summary 560,600
2. To close beginning inventory and other temporary accounts with debit balances:
Income Merchandise 501,200

Merchandise Inventory (Jan.1) 55,000
Purchases 344,000
Freight-in 10,000
3. To transfer Net Income to Capital
4. To close Drawings to Capital

Disay Drawing 30,000
After the closing entries, the post-closing trial balance will be presented as follow:
GENSAN ENTERPRISES
Post-Closing Trial Balance
December 31, 2008
Debit Credit
Cash P 28,000
Accounts Receivables 55,000
Store Equipment 84,000
Accumulated Depreciation – Store Equipment P 24,000
Accounts payable 62,400
Disay Capital 160,000
P246,400 P246,400
Using Adjusting Entry method will produce the same effect; however, it has a different presentation in the adjusting entries,
work sheet preparation and closing entries. The financial statements in both methods are the same.
Instead of combining merchandise inventory beginning and ending in the closing entries, adjusting entry method prepares
adjusting entries as follows:
Dec. 31 Income Summary 55,000

(To remove beginning inventory)
Dec. 31 Merchandise Inventory 77,200

(To record ending inventory)
These adjusting entries will appear in the adjustment column with additional account title “Income Summary”. Other adjusting
entries are the same. Since the merchandise entry is already adjusted the closing entry will be prepared as follows:
1. To record ending inventory and close accounts with credit balances:
Sales 477,000
2. To close beginning inventory and other temporary accounts with debt balances:
Purchases 344,000
Freight-in 10,000
3. To transfer Net Income to Capital
Income Summary 59,400*

*After posting all the Income summary account, notice that the effect will result to the net income or net loss.
4. To close Drawings to Capital

Disay Drawing 30,000
The worksheet of Gensan Enterprises using adjusting entry method is presented on the next page.
Account Ttiles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Cash P28,000 28,000 28,000

Accounts Receivables 55,200 55,200 55,200
Merchandise Inventory 55,000 55,000 55,000 77,200 77,200
Prepaid Insurance 3,600 (2) 1,600 2,000 2,000
Store Equipment 84,000 84,000 84,000
Accumulated Dep - Store P18,000 (3) 6,000 24,000 24,000
Equipment
Accounts Payable 62,000 62,000 62,400
Disay Capital 130,600 130,600 130,600
Disay, Drawing 30,000 30,000 30,000
Sales 477,000 477,000 477,000
Sales Ret. & Allow. 9,200 9,200 9,200
Sales Discounts 7,800 7,800 7,800
Purchases 344,000 344,000 344,000
Freight-in 10,000 10,000 10,000
Purchase Ret. & Allow. 2,400 2,400 2,400
Purchase Discounts 4,000 4,000 4,000
Salaries Expense 55,400 55,400 55,400
Utilities Expense 12,200 12,200 12,200
Totals P664,400 P664,400
Additional Accounts
Insurance Expense (2) 1,600 1,600 1,600
Depreciation Expense (3) 6,000 6,000 6,000
Totals 7,600 7,600 700,400 700,400 501,200 560,600 276,400 217,000
Net Income 59,400 59,400
Balances 560,600 560,600 276,400 276,400
Accounts Receivable and Inventory
In a merchandising concern entity, accounts receivable and inventory plays a vital role. These two accounts are used in the buy
and sell transactions of the business. With that, an extensive discussion for its accounting will be discussed.
When businessmen try to sell their goods, it could either be for cash or through collectibles. Due to free trade, competitors try to
win the same customers. And customers would buy to someone who can give them better terms. That is why it is more common
for merchandising companies to sell through collectibles. In addition, businessmen would provide cash discounts to their
customers to encourage prompt payment.
Accounting for Credit Sales
These are two methods of recording credit sales (sales on account): Gross Method and Net Method. Prior illustrations presented
gross method since it is common and easy to use.
1. Gross method
This method records accounts receivable and sales at gross amount of the invoice, meaning cash discount is not deducted
from the invoice price.
2. Net method
This method records accounts receivable and sales at net amount of the invoice, meaning cash discount is deducted from the
invoice price.
Gross Method
(a) Merchandise is sold for 50,000 terms 3/10, n/30

Sales 50,000
(b) Received payment from customer within the discount period
Cash 48,500
Sales Discount 1,500
(c) The customer paid beyond the discount period.
Cash 50,000
The sales discount forfeited is presented as other income.
Accounting for Bad Debts
When a merchandiser sells on credit, he assumes the possibility that the customer may not pay on time or worse will not pay at
all. Thus, enterprises assess the experience of the company on whether to treat an accounts receivable as collectible or not.
There are two methods of accounting for bad debts:
1. Allowance method
When the company decides that certain accounts doubtful of collection, a journal entry is recognized. This method conforms
to the matching principle, thus commonly used than the direct writeoff method.
2. Direct writeoff method
No entry is made when accounts are only doubtful of collection. This method only recognizes an account as bad debts when
it is certain that it cannot be collected anymore.
Allowance method
(a) 20,000 worth of accounts receivable become doubtful of collection.

Bad debts expense 20,000
Allowance for Bad Debts 20,000
(b) Later, the above accounts become worthless or uncollectible.
(c) Soon after, the written off account is recovered
Cash 20,000
Direct Writeoff Method
(a) 20,000 worth of accounts receivable become doubtful of collection
If collection is only doubtful, no entry is needed.
(b) Later, the above accounts become worthless or uncollectible.

Bad Debts Expense 20,000
(c) Soon after, the written off account is recovered
Bad Debts Expense 20,000
Cash 20,000
Accounting for Inventories
There are two ways to record inventories, namely periodic system and perpetual system.
1. Periodic
This method is used when items being sold have small peso value and have fast turnover. Businesses that usually use this
method are grocery stores, hardware and school/office supplies store. The physical counting is done every end of the
accounting period. This is the method used in the precious chapters.
2. Perpetual
This method is used when items being sold have large peso value and usually have slow turnover. This method is commonly
used by car dealers and jewelers.
When using this method, records are maintained through the use of stock cards. Stock cards show the running balance of the
inventory flow. That means, someone looks on the stock card, he will know the inventory on hand at any particular time.
The perpetual system has greater internal control compared to Periodic Inventory System; however, it would be very costly
for small retailers to use this method. Still, it is proper to count inventories on hand at least once a yesar.
Periodic System
(a) Purchase of merchandise on account, 150,000

Purchases 50,000
(b) Paid freight on the purchased goods, 10,000
Freight-in 10,000
Cash 10,000
(c) Defective merchandise purchased returned to supplier, 15,000
Purchases Returns 15,000
(d) Sales of merchandise on account, 200,000. Gross profit is 30%
Sales 200,000
(e) Received returned goods from customer 12,500
Sales Returns 12,500
Perpetual System
(a) Purchase of merchandise on account, 150,000

(b) Paid freight on the purchased goods, 10,000
Cash 10,000
(c) Defective merchandise purchased returned to supplier, 15,000
(d) Sales of merchandise on account, 200,000. Gross profit is 30%
Sales 200,000
Cost of Goods Sold 140,000
The gross profit is 30%, which implies that 70% is the cost of goods sold computed as 200,000 x 70%.
(e) Received returned goods from customer 12,500. The cost of merchandise when sold is 70% or 8,750.
Sales 12,500
Cost of Goods Sold 8,750
(f) At the end of the period, physical count for inventory is to be adjusted to 32,500.
If all recordings are made properly, no adjustment is necessary since inventory account will reflect the ending balance when
posted.
But there are times when the stock cards do not match with the actual physical count made. In this instance, there will either be
shortage or overage, and an adjustment should be made. Posting the merchandise inventory will reflect a debit balance of 13,750.
For example, if the physical count reflects inventory on hand amounting to 10,000 the following adjusting entry should be made.
Inventory shortage 3,750

Gross Method
(a) Goods are purchased on account, 300,000, with terms, 3/10, n/30
Purchases 300,000
(b) Assume supplier is paid within the discount period.
Cash 291,000
Purchase Discount 9,000
(c) Assume supplier is pad beyond the discount period
Cash 300,000
Net Method
(a) Goods are purchased on account, 300,000, with terms, 3/10, n/30
Purchases 291,000
(d) Assume supplier is paid within the discount period.
Cash 291,000
(e) Assume supplier is pad beyond the discount period
Purchase Discount Lost 9,000
Cash 300,000
The purchase discount lost account is to be presented as other expense.
References:
Ma. Elinita Balatbat Cabrera, BBA, MBA, CPA, CMA & Gilbert Anthony B. Cabrera, BBA, MBA, CPA (2018-2019).
Financial Accounting and Reporting Fundamentals
Win Ballada, CPA, MBA & Susan Ballada, CPA (2011). Basic Accounting Made Easy
Rafael M. Lopez, Jr., CPA (2011). Fundamentals of Accounting (Simplified Procedural Approach)
Rafael M. Lopez, Jr., CPA (2016). FUNDAMENTALS of Accountancy, Business & Management 1 (For Senior High School
Students)
Dominador Dizon, CPA, Amor Irish Dizon, CPA, Zondrex Allan Dizon, CPA, & Leandro Ador Dizon, CPA (2008). BASIC
ACCOUNTING Module 1
1-1 REVIEW QUESTIONS:
1. Compare service concern from merchandising business as far as the manner of generating revenue is concerned.
2. Differentiate perpetual from periodic inventory systems.
3. Under perpetual inventory system, why is there a need to conduct an inventory count at the end of the period despite of
having a stock card as a means of control?
4. Differentiate freight-in from freight-out
5. Why is there a need to conduct physical inventory count under periodic inventory system?
2-1 True of False
Write “T” if the statement is correct and “F” if incorrect.
___1. Buying and selling are the primary activities of a merchandising business.
___2. Perpetual and periodic are the two inventory systems of a merchandising inventory.
___3. Under periodic inventory system, merchandise purchased is debited to Purchases account.
___4. Freight-out is part of the computation of the cost of goods sold.
___5. The entity has a sales of 100,000 with a gross profit of 30%. The cost of goods sold is 70,000.
___6. Merchandise inventory end is being priced at selling price.
___7. Net sales is arrived at after deducting sales.
___8. The excess of sales over cost of sales is called net income.
___9. If gross profit is bigger than the operating expense, the result is profit.
___10. Freight-in has a normal balance of credit.
2-2 Multiple Choice
Encircle the letter of the correct answer in each of the given question.
1. The business that derives its income from rendering of services to its clients
a. Merchandising company
b. Service concern
c. Sole proprietorship
d. All of the above
2. It generates from buying and selling of inventory items
a. Partnership business
b. Merchandising business
c. Sole proprietorship
d. Grocery
3. Which of the following is cost?
a. Merchandise Inventory, End
b. Freight-out
c. Freight-in
d. Shipping term
4. Which of the following is expensed?
a. Merchandise Inventory, End
b. Freight-out
c. Freight-in
d. Shipping term
5. Merchandise left on hand and unsold at the end of period.
a. Accounts receivable
b. Supplies
c. Inventory
d. Expense
6. Cost of merchandise that are sold is referred to
a. Cost of goods manufactured
b. Merchandise inventory, beginning
c. Accounts receivable
d. None of the above
7. Which of the following is a component of Cost of sales?
a. Trade discount
b. Freight-out
c. Purchases
d. All of the above
8. The shipping term wherein the buyer shoulders the freight on shipment of merchandise
a. FOB, shipping point
b. FOB, freight collect
c. COD, freight collect
d. COD, shipping point
9. The shipping term wherein the seller shoulders the freight on shipment of merchandise
a. FOB, destination
b. FOB, shipping point
c. COD, freight collect
d. COD, freight prepaid
10. Which of the following accounts is not used under perpetual inventory system?
a. Purchases
b. Sales
c. Merchandise inventory
d. Cost of sales
3-1 Activity
Insert the missing figures in the following income statement. Note that gross profit is 40% of net sales and profit is 10% of net
sales.
Net Sales
Gross Sales
Less: Returns and allowances 45,000
Net sales
Cost of Goods Sold

Inventory, Beg 220,000
Purchases 985,000
Less: Purchases returns and allowances 31,000
Purchases discounts 20,000
Net Purchases
Freight-in 36,000
Net cost of purchases
Cost of goods available for sale
Less: Inventory, end 260,000
Cost of goods sold
Gross Profit 620,000
Operating Expenses
Profit
3-2 Fill in the Blanks

The following are the General Ledger account balance of Gellor Merchandise after adjustments are given. Extend to either debit
or credit in the worksheet under the statement of comprehensive income column each of the account.
Accounts Amount Debit Credit

Sales 300,000
Purchases 150,00
Purchase Returns and Allow. 2,000
Freight-In 6,000
Freight-Out 1,000
Sales Salaries 15,000
Depreciation 10,000
Merchandise Inventory, End 105,000
Total
3-3 Complete the missing items.
CASE 1 Merchandise Inventory, Beg. 180,000

Purchases
Goods available for sale 370,000
Cost of sales 220,000
Merchandise Inventory, End. 150,000
CASE 2 Purchases 350,000

Purchases Returns and Allowances 15,000
Merchandise Inventory, Beg.
Freight-in 25,000
Cost of sales
Total Goods Available for Sale 510,000
Merchandise Inventory, End. 285,000
CASE 3 Merchandise Inventory, Beg. 220,000

Cost of sales 270,000
Purchases
Total Goods Available for Sale 750,000
Merchandise Inventory, End.
CASE 4 Net Sales 520,000

Sales 560,000
Sales Discounts
CASE 5 Gross Profit 150,000

Net Sales 350,000
Operating Expenses
Net Profit 50,000
Cost of Sales
3-4 Worksheet Procedures
Required: A portion of a worksheet for a merchandising entity is presented. Put a “check mark” (✓) in the columns where
balance of the listed accounts should be extended.
Income Statement Balance Sheet

Account Titles
Debit Credit Debit Credit
Merchandise Inventory, Beg
Sales
Sales Returns and Allowances
Purchases
Purchases Returns and Allowances
Purchases Discounts
Freight-in
Salaries Payable
Merchandise Inventory, End
Freight-out
3-5 Worksheet Preparation

Required: Prepare the worksheet
The unadjusted trial balance of the Johnny Yes Papa Company as at Dec. 31, 2020 follows:
Johnny Yes Papa Company

Unadjusted Trial Balance
Dec. 31, 2020
Cash 31,000
Inventory 627,000
Office Supplies 68,000
Office Equipment 370,000
Accumulated Depreciation 50,000
Papa, Company 517,000
Papa, Withdrawals 87,000
Sales 2,675,000
Purchases 1,512,000
Purchases Discounts 19,000
Freight-in 38,000
Advertising Expense 61,000
Rent Expense 26,000
Total 3,333,000 3,333,000
Additional Information:
a. Merchandise inventory as at Dec. 31, 2020 amounted to 532,000.

b. Insurance coverage with premiums of 18,000 has expired during the year.
c. Depreciation for the year amounted to 25,000.
d. Office supplies remaining at year-end amounted to 15,000.
e. Salaries in the amount of 9,000 have accrued as at Dec. 31, 2020.
Account Ttiles Dr Cr Dr Cr Dr Cr Dr Cr Dr Cr
4-1 Preparing the Income Statement
Required: Prepare the Income Statement.
Sales 9,630,000
Purchases 4,720,000
Inventory, Beg 2,170,000
Inventory, End 1,430,000
Salaries Expense 1,140,000
Office Supplies Expense 460,000
Freight-out 170,000
Selling Supplies Expense 80,000
Freight-in 50,000
Miscellaneous Expense 30,000

Fabm 1: Accounting For Merchandising Concern

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Fabm 1: Accounting For Merchandising Concern

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NEW BRIGHTON SCHOOL OF THE PHILIPPINES, INC.

Subject: FABM 1 Date of Submission: ____________

Accounting for Merchandising Concern

1. differentiate between merchandising and service concern activities;

(a) Merchandise Inventory (Real Account, Debit)

(b) Sales revenue (Nominal Account, Credit)

(c) Sales Returns and Allowances (Nominal Account, Debit)

Sales Returns and Allowances (initial sale was on account)

Sales Returns and Allowances (initial sale was on cash)

(d) Sales Discounts (Nominal Account, Debit)

1/10 EOM (End-of-month)

(e) Purchase (Nominal Account, Debit)

(f) Purchase Returns and Allowances (Nominal Account, Credit)

Purchase Returns and Allowances (initial purchase was on account)

Purchase Returns and Allowances (initial purchase was on cash)

(g) Purchase Discounts (Nominal Account, Credit)

Accounts Payable 3,500

Accounts Payable 3,500

(h) Trade Discount

List price P 700,000

Upon purchase, the journal entry will be:

Payment of purchase on account within the discount period:

Accounts Payable 441,000

(i) Freight Costs

Payment of freight, FOB shipping point

Payment of freight on goods sold FOB destination

The Basic Cost of Goods Sold equation

Cost of Goods Sold

Cost of Goods Sols

1. Merchandise inventory on hand at December 31, P77,200.

2. To record expired insurance:

Insurance Expense 1,600

3. To record Depreciation for the year:

Depreciation Expense 6,000

Cash P28,000 28,000 28,000

Disay, Capital Jan. 1 P130,600

Liabilities and Owner’s Equity

1. To record ending inventory and close accounts with credit balances:

Merchandise Inventory (Dec.31) 77,200

Income Merchandise 501,200

3. To transfer Net Income to Capital

4. To close Drawings to Capital

Disay, Capital 30,000

Dec. 31 Income Summary 55,000

Dec. 31 Merchandise Inventory 77,200

1. To record ending inventory and close accounts with credit balances:

Income Summary 446,200

3. To transfer Net Income to Capital

Income Summary 59,400*

4. To close Drawings to Capital

Disay, Capital 30,000

Cash P28,000 28,000 28,000

Accounting for Credit Sales

(a) Merchandise is sold for 50,000 terms 3/10, n/30

The sales discount forfeited is presented as other income.

Accounting for Bad Debts

There are two methods of accounting for bad debts:

(a) 20,000 worth of accounts receivable become doubtful of collection.

Direct Writeoff Method

(a) 20,000 worth of accounts receivable become doubtful of collection

If collection is only doubtful, no entry is needed.

(b) Later, the above accounts become worthless or uncollectible.

Accounting for Inventories