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Chapter 7

This document discusses merchandising businesses and inventory accounting methods. It explains that merchandising businesses purchase inventory from suppliers to sell to customers for a profit. There are two inventory accounting methods - periodic and perpetual. The periodic method uses temporary accounts to track inventory levels, while the perpetual method continuously updates the inventory account with each transaction. The document also covers typical journal entries for purchases and sales under both the periodic and perpetual methods. It discusses freight charges and common credit terms for merchandising businesses.

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38 views5 pages

Chapter 7

This document discusses merchandising businesses and inventory accounting methods. It explains that merchandising businesses purchase inventory from suppliers to sell to customers for a profit. There are two inventory accounting methods - periodic and perpetual. The periodic method uses temporary accounts to track inventory levels, while the perpetual method continuously updates the inventory account with each transaction. The document also covers typical journal entries for purchases and sales under both the periodic and perpetual methods. It discusses freight charges and common credit terms for merchandising businesses.

Uploaded by

mayhipolito01
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Chapter 7: Merchandising Business

1. Concept of Merchandising Business


The focus of this chapter is bookkeeping for the transactions of merchandising businesses.
The business purchases products from its suppliers which it sells to its customers for a
profit. Businesses in this type includes the following:

 Sari-sari stores, groceries and market stalls


 Hardware
 Appliance store
 Gadgets and electronics store
 Online product sellers

In contrast to a service business, a merchandising business is more complex due to the


presence of inventory. The inventory items needed to be purchased, transported, kept and
then sold to the customers.

In purchasing merchandise inventory, the company pays for the purchase price of the
goods. There could be an agreement for credit terms between the buyer and seller. The
buyer might be offered discounts within a certain period to encourage early or prompt
payments. This is also true in selling the merchandise inventory. The company might also
offer credit terms and discounts to its customers.

In the next pages, we will study the bookkeeping for purchases, freight charges, credit terms
and discounts, and the periodic and perpetual inventory systems.

2. Periodic and Perpetual Inventory Methods


There are two methods of accounting for the inventory of merchandising businesses,
namely periodic inventory method and perpetual inventory method.

Periodic Inventory Method


The Periodic Inventory Method is generally used when the individual inventory items have
small peso values.

Under this method, the business maintains temporary accounts like purchases, purchase
returns, and sales returns. At the end of the accounting period, these temporary accounts
are used to determine the amount of inventory available for sale.
Perpetual Inventory Method
Under this method, the inventory account is continually updated for each inventory
transaction. For every journal entry of sales, a corollary journal entry for the cost of
inventory sold is also recorded. Purchases and returns are recorded in directly in the
Merchandise Inventory account. Physical count of inventory is conducted to confirm the
balances in the stock cards.

PERIODIC INVENTORY SYSTEM


Typical Journal Entries
PURCHASES

1. To record purchase goods from a


supplier:

Purchases
xxxx

Cash/Accounts Payable
xxxxx

2. To record purchase freight costs:

Freight-in xxxx

Cash xxxx

3. To record purchase discount:

Accounts Payable xxxx

Purchase Discounts xxxx

4. To record purchase return:

Accounts Payable xxxx

Purchase Returns and Allowances xxxx


SALES

1. To record sales to customer:

Cash/Accounts Receivables xxxx

Sales xxxx

2. To record freight costs:

Freight Out xxxx

Cash xxxx

3. To record sales discount:

Sales Discount xxxx

Accounts Receivable xxxx

4. To record sales return:

Sales Returns and Allowances xxxx

Cash/Accounts Receivable xxxx

PERPETUAL INVENTORY SYSTEM


Typical Journal Entries
PURCHASES

1. To record purchase goods from a


supplier:

Merchandise Inventory
xxxx

Cash/Accounts Payable
xxxxx

2. To record purchase freight costs:

Merchandise Inventory xxxx


Cash xxxx

3. To record purchase discount:

Accounts Payable xxxx

Merchandise Inventory xxxx

4. To record purchase return:

Accounts Payable xxxx

Merchandise Inventory xxxx

SALES

1. To record sales to customer:

Cash/Accounts Receivables xxxx

Sales xxxx

Cost of Goods Sold xxxx

Merchandise Inventory xxxx

2. To record freight costs:

Freight Out xxxx

Cash xxxx

3. To record sales discount:

Sales Discount xxxx

Accounts Receivable xxxx


4. To record sales return:

Sales Returns and Allowances xxxx

Cash/Accounts Receivable xxxx

Merchandise Inventory xxxx

Cost of Goods Sold xxxx

3. Freight Charges and Credit Term


In purchasing and selling, merchandise inventory needs to be shipped from the seller to the
buyer. The costs of shipping the goods may be charged to the buyer or the seller depending
on their agreement. There are two most common freight charge agreement:

1. Free on board, Shipping point (FOB-SP), and


2. Free on board, Destination (FOB-D)

Credit Terms:

2/10, n/30

means:

 2% cash discount if paid within 10 days

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