Chapter 14

• • A merchandising business buys goods and sells them to customers for a profit. 
• • The goods bought by the merchandising business from its suppliers are called purchases. 
• • The merchandiser add-up a value (i.e. markup or gross profit) to the purchase prices of goods and charges the total amount to the customer. 
• The total amount charged to customers is called sales.
• Agreed selling price of the goods ( sellers Perspective) Sales
• Agreed selling price of the goods ( buyers Perspective) Purchases
• Return by the buyer of defective or non-conforming goods to the seller

  (seller perspective) Sales return
• Return by the buyer of defective or non-conforming goods to the seller

  (buyers perspective) purchase return
• Agreed reduction in selling price (seller perspective) Sales discount
• Agreed reduction in selling price (buyers perspective) purchase discount
• • List price This is an established price determined by reference to a catalog or general price list before deducting any discounts.
• 1. Invoice price - This list price less any trade discounts. This is the gross billable amount by the seller to the buyer. This is the amount that is indicated in the billing statement of the seller.
• • Trade discount Also called volume discount or quantity discount, trade discount pertains to a direct deduction to the invoice price on account of volume purchases made by a buyer. This discount is usually given when the buyer is a fellow merchandiser in order to allow him to profit for the resaleof the goods to his customers.
• • Cash discount Also called settlement discount, this is an additional discount to the invoice price aside from the trade discount which is given to the buyer for early payment.
• 1. Purchases - An account used to record the cost of goods or merchandise bought for resale during the current reporting period. This is normally a debit balance.
• 1. Freight-in - An account used to record the transport cost of the goods purchased. This is an adjunct account (addition) to the purchases account; and hence, it has a normal debit balance.
• 1. Purchase discount - An account used for the agreed reduction in the price of goods. This is normally given by the supplier on account of early payment. Purchase discount is a contra-account to the purchase account; hence, it has a normal credit balance.
• 1. Purchase returns and allowances -An account used to record the cost of merchandise returned to the supplier and including price reductions to the purchase which is granted by a supplier on account of unsatisfactory goods delivered. Just like the purchase discount account, this is normally a credit balance.
• 1. Advances to supplier - An account used to record advance payments made to a supplier for goods tobe purchased in the future. This is an asset account and has a normal debit balance.
• 1. Sales - An account used to record the selling price of goods to a customer. The sales account has a normal credit balance
• Freight-out- - An account used to record the transport cost of the goods sold to customers. If goods are purchased from the business warehouse, customers normally shoulder the freight of their goods. Freight out is aseparate expense account and is not a contra account to the sales account. It may be alternatively called delivery expense.
• 1. Sales discount - An account used to record the agreed reduction in the price of goods sold to customers. This is the equivalent a of purchase discount from the buyer's perspective. Sales discount is a contra-account to the sales account; hence, it has a normal debit balance.
• 1. Sales returns and allowances - An account used under a periodic inventory system to record the amount of sales returned by customers including reductions in selling prices granted to customers because the merchandise was not satisfactory to a buyer. This is also a contra-account to the sales account and has a normal debit balance.
• 1. Advances from customer - An account representing advance payment made by a customer for goods to be delivered in the future. This is a liability account and has a normal credit balance.
• • FOB shipping point Ownership of the goods transfers to the buyer from the moment the goods leave the warehouse of the seller which is normally the shipping date or invoice date.
• FOB Destination - ownership of the goods transfers to the buyer from the moment the goods arrive at the warehouse of the buyer which is normally the delivery receipt date.
• • Freight prepaid the freight shall be paid by the seller to the freight or cargo forwarder upon release of the goods in his premises
• • Freight collect the freight shall be paid by the buyer to the freight or cargo forwarder upon arrival of the delivery in his premises