Fundamentals of Accountancy

Learning Area Grade Level 11

W3 Business and Management 1
Quarter FOURTH Date

I. LESSON TITLE The Nature of Transaction in a Merchandising Business

II. MOST ESSENTIAL LEARNING Describe the nature of transaction in a merchandising business (ABM_FABM11-
COMPETENCIES (MELCs) IVe-j -35)
III. CONTENT/CORE CONTENT Accounting Cycle of a Merchandising Business

IV. LEARNING PHASES AND ACTIVITIES

I. Introduction (Time Frame: 20 minutes)
Good day learners! Welcome to another day of learning. By the end of our topic, you should be able to:
1. describe the nature of transaction in a merchandising business,
2. prepare journal entries for sales and purchase transactions,
3. compute for net sales and net purchases, and
4. show self-reliance when working independently
Before we proceed to our new topic, let us have our review first. Call someone from the household members
and have a talk about the different types of business according to activities and differentiate each other.
D. Development (Time Frame: 120 minutes)
Let us start your Pre-test. Read and understand the following questions. Choose the letter of the correct answer and
write it in your accounting journal.
1. What is merchandising business?
A. One that creates and produces physical goods B. One that buys and sells goods in order to make a profit
C. One that renders services D. Choices A, B, and C are correct
2. Which of the following best defines merchandise?
A. The goods that customers buy B. The goods that company manufactures
C. The goods that company buys in order to resell D. Choices A, B, and C are correct
3. Which of the following is an example of a merchandising business?
A. Supermarkets B. Banking C. Consulting D. Hotel
4. What do you call the source document for purchase of merchandise?
A. Debit Memorandum B. Purchase Invoice C. Sales Invoice D. Credit Memorandum
5. What do you call the source document for a sale of merchandise?
A. Debit Memorandum B. Purchase Invoice C. Sales Invoice D. Credit Memorandum

Good job!
Now, let us talk about merchandising.
Merchandising business is one that buys and sells goods in order to make a profit. Vendor is the person who sells
merchandise. An example is buying school supplies and reselling it.
We have different types of merchandising business transactions. Simple transaction involves a simple
exchange between cash and goods. Complex transaction involves a series of transactions such as a number of papers
to be signed and provided before a sale of real estate is done. On–going transactions involve multiple types of
transactions such as contracts between manufacturer and retailer. On the other hand, we also have different types of
merchandising businesses. Wholesale businesses buy items in bulk from manufacturers and resell them to retailers or other
wholesale companies. Retail businesses sell products directly to customers. On the other hand, the following are the
common activities between retail and wholesale merchandising businesses: (1) Purchasing; (2) Selling; (3) Operating
cycle.
OPERATING CYCLE OF MERCHANDISING ENTITY
 Figure 1 Figure 2
Figure 1 shows that the company has cash and purchases goods to sell something. After the purchase transaction, there is
already merchandise inventory. This merchandise inventory refers to the goods available for sale. Usually, the merchandise is sold on
account. Since the sales transaction is on account, the payment will be collected on its due date in the form of cash. The cash is used
to purchase more inventories and the cycle continues. Figure 2 shows that the process and length of the operating cycle may vary. For
example, a small business that sells crafts to the local market may have a very short operating cycle if the crafts sell for cash shortly
afterward at the market.

The following are the types of transactions common for merchandising business:
● Purchase of merchandise refers to the buying of a good from someone in exchange for cash. The
source document is a purchase invoice. Notice that under the Purchase transaction the point of view is
that the company is the buyer.
● Purchase Return happens when merchandise must be returned to the vendor or an adjustment is made
to the amount due for the merchandise. The source document is a Debit Memorandum.
● Purchase Allowances are granted to customers if the customers keep the merchandise although
unsatisfied with what they bought. We use the Purchase Returns and Allowances to record these types
of transactions.
JOURNAL
Date Particulars Debit Credit
Cash XXX
Purchase Returns and Allowances XXX

● Sale of merchandise refers to the selling of a good from someone in exchange for cash. The source
document is a sales invoice. Notice that under Sales transaction the point of view is that the company is
the seller.
● Sales Return happens when merchandise must be returned by the customer to the vendor or an
adjustment is made. The source document is a Credit Memorandum.
● Sales Allowances are granted to customers if the customers keep the merchandise although unsatisfied
with what they bought. We use the Sales Returns and Allowances to record these types of transactions.
JOURNAL
Date Particulars Debit Credit
Sales Returns and Allowances XXX
Cash XXX

Credit terms indicate when payment is due for a company's sales invoice (which the customer will refer to as a purchase
invoice). The credit terms also indicate whether a discount can be taken if the invoice is paid in a shorter period of time
(the discount period). For example, the credit terms might be 2/10, net 30. This means the amount is due in 30 days;
however, if the amount is paid in 10 days a discount of 2% will be permitted. Another example is 5/10, n/EOM this
means if the amount is paid in 10 days a discount of 5% will be permitted but the deadline of payment is at the end of
the month.
Net Purchases and Net Sales were computed as follows:
Gross Purchases XXX Gross Sales XXX
Less: Purchase discount (XX) Less: Sales discount (XX)
Purchase Returns and Allowances (XX) Sales Returns and Allowances (XX)
Net Purchases XXX Net Sales XXX

We also have the following Inventory System of Merchandising Business:

 Perpetual inventory system in merchandising business refers to the system that updates inventory as
●
each sale is made. It gives the actual inventory counts at any given point and time and is usually
updated once a quarter.
● Periodic inventory system is a system that updates inventory at a specific point in time. However, it lacks
the capability of giving an up-to-date inventory count at any given time.
Methods of Inventory Valuation:
● First – In, First – Out (FIFO) method assumes that the first items that are added to inventory are the first
ones sold.
● Last – In, First – Out (LIFO) method assumes that the last items added to inventory are the first items sold.

Let us analyze the following transaction using Periodic and Perpetual Inventory System.
February 01 Purchased merchandise from National Book Store for P30,350, terms 2/10, n/30
February 02 Returned P1.200 worth of defective merchandise to National Book Store
February 03 Sold merchandise on account to Mr. Caktiong for P16,550 selling price, 2/10, n/30. The merchandise costs
P10,440
February 05 Sold merchandise for cash to Mr.Sia for P5,680. The merchandise cost P3,500
February 08 Purchased computer set from PC Express amounting P57,880
February 10 Paid National Book Store in full
February 11 Sold merchandise on account to Ms. Tueres at P25,000 selling price , 2/10, n/30. The merchandise cost
P22,000
February 12 Mr. Caktiong paid his account in full
February 25 Ms.Tueres paid her account in full
Periodic Inventory System
Date Particulars Debit Credit
February 01 Purchases 30.350
Accounts Payable – National Book Store 30,350
February 02 Accounts Payable – National Book Store 1,200
Purchase Returns and Allowances 1,200
February 03 Accounts Receivable – Mr. Caktiong 16,550
Sales 16,550
February 05 Cash 5,680
Sales 5,680
February 08 Equipment 57,880
Cash 57,880
February 10 Accounts Payable – National Book Store 29,150
Purchase Discount 583
Cash 28,567
February 11 Accounts Receivable – Ms. Tueres 25,000
Sales 25,000
February 12 Cash 16,219
Sales Discount 331
Accounts Receivable – Mr. Caktiong 16,550
February 25 Cash 25,000
Accounts Receivable – Ms. Tueres 25,000

Perpetual Inventory System

Date Particulars Debit Credit
February 01 Merchandise Inventory 30.350
Accounts Payable – National Book Store 30,350
February 02 Accounts Payable – National Book Store 1,200
Merchandise Inventory 1,200
February 03 Accounts Receivable – Mr. Caktiong 16,550
Sales 16,550
Cost of Goods Sold 10,440
Merchandise Inventory 10,440
 February 05 Cash 5,680
Sales 5,680
Cost of Goods Sold 3,500
Merchandise Inventory 3,500
February 08 Equipment 57,880
Cash 57,880
February 10 Accounts Payable – National Book Store 29,150
Merchandise Inventory 583
Cash 28,567
February 11 Accounts Receivable – Ms. Tueres 25,000
Sales 25,000
Cost of Goods Sold 22,000
Merchandise Inventory 22,000
February 12 Cash 16,219
Sales Discount 331
Accounts Receivable – Mr. Caktiong 16,550
February 25 Cash 25,000
Accounts Receivable – Ms. Tueres 25,000
Lastly, the Cost of Goods Sold (COGS)
Cost of Goods Sold in a merchandising business refers to the costs related to these purchases. It includes the
elements such as employee payroll, freight charges and merchandise inventory purchases. It is subtracted from the
company's net sales to determine the gross profit, from which the operating expenses are subtracted to determine the
net profit, also called the bottom-line profit. COGS will be taught in detail in the latter part of the Accounting Cycle of
Merchandising Business.
COMPARISON
Merchandising Service Business
Net Sales Revenues
Less: COGS Less: Operating Expense
Gross Profit Net Profit
Less: Operating Expense
Net Profit

E. Engagement (Time Frame: 60 minutes)

I can do all things through Christ which strengtheneth me - Philippians 4:13 KJV
To better understand the lesson, answer the following activities. For activities 1 and 2 make journal entries of the
following transactions made by J&J Merchandising. For activity 3, compute for the net sales and purchases. Write your
answer in your accounting journal.
Activity 1 – Purchase Journal Entries
1. August 1, purchased merchandise from Office Warehouse Company amounting to P15,000 cash on delivery.
2. August 2, purchased merchandise from Pandayan Bookshop amounting to P6,000, terms 5/10, n/EOM
3. August 7, J&J returned P3,000 worth of merchandise to Office Warehouse Company. Cash refund was granted.
4. August 10, J&J paid their account balance to Pandayan Bookshop.
Activity 2 – Sales Journal Entries
1. December 1, sold merchandise to Kumon Learning Center with a price of P12,000, cash on delivery.
2. December 2, sold merchandise to Maranatha Christian Academy with a price of P8,000, terms 2/10, n/30.
3. December 5, Kumon Learning Center returned P3,000 worth of defective merchandise. Cash refund was
granted.
4. December 11, Maranatha Christian Academy paid their account balance.
Activity 3 – Compute for net sales and net purchases
J&J Merchandising has gross sales of P400,000, sales discount of P10,000, and sales returns and allowances of
P12,000. Also, J&J has purchased worth P200,000 inventory, a purchase discount of P8,000 and purchase returns and
allowances of P5,000.
A. Assimilation (Time Frame: 30 minutes)
 Draw an operating cycle of a merchandising business that you want to own someday excluding the school
supplies business since it was our sample already. Write a brief explanation of the cycle.
V. ASSESSMENT (Time Frame: 30 minutes )
(Learning Activity Sheets for Enrichment, Remediation, or Assessment to be given on Weeks 3 and 6)
To test your understanding of the topics, please answer the following question. Write your answer in your
accounting journal.
1. Which accounts are used in a merchandising business but not in a service firm? Briefly define each.
2. What are the two systems of maintaining inventory? Briefly define each.
VI. REFLECTION (Time Frame: 10 minutes)
● In your notebook, write your personal insights about the lesson using the prompts below.
I understand that ___________________________________________________________________________________.
I realize that ________________________________________________________________________________________.
I need to learn more about __________________________________________________________________________.

● Communicate your personal assessment as indicated in the Learner’s Assessment Card.

Personal Assessment on Learner’s Level of Performance
Using the symbols below, choose one which best describes your experience in working on each given task. Draw it in the
column for Level of Performance (LP). Be guided by the descriptions below:
✰ - I was able to do/perform the task without any difficulty. The task helped me in understanding the target content/ lesson.
✔ - I was able to do/perform the task. It was quite challenging, but it still helped me in understanding the target content/lesson.
? – I was not able to do/perform the task. It was extremely difficult. I need additional enrichment activities to be able to do/perform
this task.
Learning Task LP Learning Task LP Learning Task LP Learning Task LP
Number 1 Number 3 Number 5 Number 7
Number 2 Number 4 Number 6 Number 8

VII. REFERENCES Commission on Higher Education. Teaching Guide for Senior High School Fundamentals of
Accountancy Business and Management 1., 2016.
Joy S. Rabo, Herminigilda E. Salendrez,& Florenz C. Tugas. Fundamentals of Accountancy,
Business and Management 1. Quezon City: Vibal Group, Inc., 2016.
QuexhubPERC Learning Portal

Josephine P. Canlas/ Adora G. del

Prepared by: Jennifer B. Fernandez Checked by:
Mundo/ Cherie L. Logatoc/ Feliz A. Tayao