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CHAPTER 7

DIFFERENCE OF MANUFACTURING AND MERCHANDISING BUSINESS

MERCHANDISING BUSINESS ARE INVOLVED IN BUYING AND SELLING OF FINISHED

GOODS THAT WAS PRODUCED BY THE OTHER BUSINESS. MEANING MERCHANDISING
BUSINESS PURCHASE PRODUCT FOR SALE.

WHILE, MANUFACTURING BUSINESS, THEY ARE INVOLVED IN THE CONVERSION OF

RAW MATERIALS INTO A FINISHED PRODUCT OR A PHYSICAL PRODUCT.

THE REVENUE OF MERCHANDISING COMPANY IS TERMED AS SALES. THE GOODS

ACQUIRED FOR SALES BY ENTITY IS REPORTED AS MERCHANDISE INVENTORY

DIFFERENCE OF WHOLESALER AND RETAILERS

WHOLESALER BUYS ITS PRODUCT FROM ANOTHER WHOLESALER AND THEN SELLS
THE PRODUCT TO A COMPANY WHO WILL SELL IT TO THE CONSUMER

WHILE, RETAILERS BUYS ITS PRODUCTS FROM A WHOLESALER AND THEN SELLS THE
PRODUCTS TO THE CONSUMER.

FORMULA:

BI + PP = GA - EI = COGS

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A perpetual inventory system inventory updates purchase and sales records

constantly, particularly Merchandise Inventory and Cost of Goods Sold.

A periodic inventory system only records updates to inventory and costs of sales at
scheduled times throughout the year, not constantly.

It is needed to validate what has been recorded.

In order to determine the no. of packages - you need to have a period system.
It could be: Annual, Semi-Annual

Perpetual is already included in the accounting system. And it needs to be recorded constantly.
Free on board shipping point indicates that the buyer takes responsibility for its
shipping cost and for the loss or damage the product can get when it is being shipped.

● Ex. assume that company A in the philippines buys equipment from its supplier in
the USA and that company signs a FOB shipping point agreement.

Free on board destination indicates that the seller takes responsibility for the shipping
point and from the loss or damage of the goods until it is delivered to the buyer.

● Ex. Assume that on September 4 company A orders 50 computer equipment

from DELL and company A orders them with FOB destination shipping terms.
Now it’s the seller's responsibility to pay for the transportation cost.

NOTE: IF BUYER ANG NAGBAYAD SA TRANSPORTATION COST ANG ENTRY

WOULD BE:
● INVENTORY - DR
CASH - CR
IF SELLER NAMAN ANG NAGBAYAD SA TRANSPORTATION COST AND THE
ENTRY WOULD BE:
● FREIGHT OUT EXPENSE - DR
CASH - CR

Purchase returns and allowances is an account that is paired with and offsets the
purchases account in a periodic inventory system.

Purchase Return - happens when the buyer gives back to the seller the unsatisfactory
product he/she brought.

● Ex. Assume that on September 10 company A returns 6 of the 50 computers

purchased on September 4. Company A has not been paid Dell for the goods it
purchased.

Purchase Allowance - happens when the buyer or the purchaser keep the product
and as well receive a decreased amount for the shipments that the purchaser owe from
the seller.

● Ex. Assume that Company B buys goods from a supplier and later on find out the
business is faulty. So to compensate for the problems the business agrees to
retain the goods to company b and receives a credit amounting of 1,500
Purchase Discount - is an offer from the supplier to the purchaser, to reduce the
payment amount if the payment is made within a certain period of time.

Credit period - means that the purchaser needs to pay back the seller within uhm for
example 10 days, then the purchaser can get a 1% discount. However, if the purchaser
is unable to get a discount then he/she must do the payment within 30 days of
purchasing the product. Because a typical credit period for a wholesale distributor is 30
days.

● Ex. n/30 indicates a credit period of 30 days while n/45 indicates the 45 days
credit period.

Cash Discount or Sales Discount - is when the seller will usually reduce the amount
that the buyer owes by either a small percentage amount from the goods it purchased.

Discount Period - is the maximum amount of time period that a purchaser needs to
pay the seller to claim cash discount.

Since you are the owner if something happens in transits of whatever circumstances
you have to shoulder the law.

FOB SHIPPING POINT - the buyers shoulders the shipping until the goods is delivered
to the buyer

Free on board shipping point indicates that the buyer takes responsibility for its
shipping cost and for the loss or damage the product can get when it is being shipped.
FOB shipping point transfers the title of the shipment of goods when the goods are
placed at the shipping point

FOB DESTINATION - the sellers shoulders the shipping until the goods is delivered to
the buyer

Free on board destination indicates that the seller shoulders the responsibility for the
shipping point and from the loss or damage of the goods during transit until it is
delivered to the buyer. The ownership will be transferred upon the delivery of the item.
because the buyer recognized purchases of good upon arrival in the warehouse of the buyer

In accounting’s Point of view of those three

The FOB point of view of buyer the entry would be freight in = dr cash = cr
While the Seller point of view = freight out = dr cash=cr

Point of view of the property law speaks about ownership will be transferred in the point of view
of the buyer

the buyer is the one responsible for the goods

Because recognized the goods

ACCOUNTING FOR PURCHASES OF MERCHANDISE

● If the company is using a perpetual inv. For the purchases merchandise on account the
entry would be: Debit:

TRANSPORTATION COST INCURRED BY BUYER

● Uses FOB shipping point where the buyer takes responsibility for its shipping
cost and for the loss or damage the product can get when it is being shipped.

● The entry would be: Dr: Inventory Cr: Cash

TRANSPORTATION COST INCURRED BY SELLER

● Uses FOB destination where the seller shoulders the responsibility for the
shipping point and from the loss or damage of the goods during transit until it is
delivered to the buyer.

● The entry would be: Dr: Freight-Out Cr: Cash

Purchase returns and allowances is an account that is paired with and offsets the
purchases account in a periodic inventory system.

Purchase Return - happens when the buyer gives back to the seller the unsatisfactory
product he/she brought.

● Ex. Assume that on September 10 company A returns 6 of the 50 computers

purchased on September 4. Company A has not been paid Dell for the goods it
purchased.
● Dr: Accounts payable Cr: Inventory

Purchase Allowance - happens when the buyer or the purchaser keep the product
and as well receive a decreased amount for the shipments that the purchaser owe from
the seller.
 ● Ex. Assume that Company B buys goods from a supplier and later on find out the
business is faulty. So to compensate for the problems the business agrees to
retain the goods to company b and receives a credit amounting of 1,500

Purchase Discount - is an offer from the supplier to the purchaser, to reduce the
payment amount if the payment is made within a certain period of time.

Credit period - means that the purchaser needs to pay back the seller within uhm for
example 10 days, then the purchaser can get a 1% discount. However, if the purchaser
is unable to get a discount then he/she must do the payment within 30 days of
purchasing the product. Because a typical credit period for a wholesale distributor is 30
days.

● Ex. n/30 indicates a credit period of 30 days while n/45 indicates the 45 days
credit period.

Cash Discount or Sales Discount - is when the seller will usually reduce the amount
that the buyer owes by either a small percentage amount from the goods it purchased.

Discount Period - is the maximum amount of time period that a purchaser needs to
pay the seller to claim cash discount.

PAYMENT WITHIN DISCOUNT PERIOD - happens when the purchaser pays the
goods within the discount period.

Ex. Assume that Anna makes a cash payment to DELL on March 13 which is the fifth
day of discount period.

The entry we have: Debit: Accounts Payable Credit: Inventory and Cash

PAYMENT MADE AFTER DISCOUNT PERIOD - happens when the purchaser failed to
pay the goods within the discount period.

Ex. Assume that Anna makes a cash payment to DELL on March 20 which is not part of
the discount period, so Ana will not receive the purchased discount because she is not
able to pay the goods within the discount period.

The entry we have: Dr: Accounts Payable Cr: Cash

A trade discount is the amount by which a manufacturer reduces the retail price of a
product when it sells to a reseller, rather than to the end customer. ... The trade
discount may be stated as a specific dollar reduction from the retail price, or it may be
a percentage discount.

Sales Returns and Allowances is a contra-revenue account deducted from Sales. It is

a sales adjustments account that represents merchandise returns from customers, and
deductions to the original selling price when the customer accepts defective products.

Jan. 0
Feb.1 50 pcs x 3,500