handout 6

• Merchandising business is engaged in buying and selling goods or products
• Primary products may include clothing, stationary, and food items
• Merchandising businesses incur costs such as labor and materials to present and sell products
• A product is purchased wholesale at a cost price and sold to customers at a retail price
• Service businesses offer services to clients based on expertise or specialization
• Service providers use base fees and hourly rates for marketing their products and services
• Merchandising business activities differ from service business activities
• Operating cycle of a merchandising business includes:
• Cash: arranging money to purchase products from a wholesaler
• Purchase: buying necessary goods in bulk at a discounted price
• Merchandise Inventories: goods held for sale to make a profit
• Credit Sales: customers buy inventory at a price specified by the shopkeeper
• Accounts Receivables: amount to be received for goods sold on credit
• Cash Collection: earnings are used to develop and enlarge the business
• Inventory methods in merchandising business:
• Perpetual Inventory System: provides a running balance of cost of goods sold and available for sale
• Periodic Inventory System: updates the inventory account for each purchase and sale at the end of the period
• Credit terms in merchandising business:
• Credit terms specify timing and amount of payments the buyer will make in the future
• Standard term rate is 2/10 N/30, offering a 2% discount if payment is settled within ten days
• Other credit terms include 5/10, 2/15, n/30 and Cash on Delivery (COD)
• Purchase Discounts account tracks the value of purchase cost deductions given to buyers for timely payments
• Sales Discount reduces the amounts owed to sellers when buyers pay within the discount periods
• Sales Return and allowances are deducted from the Sales account in the computation of merchandise inventory
• Sales returns occur when customers send the seller unwanted, damaged, or defective goods
• Sales allowances occur when customers agree to keep a product in exchange for a lower selling price
• Purchases Return and allowances record items returned to suppliers and those allowed by suppliers to be deducted from purchases
• When goods purchased on account are returned to the supplier, it is recorded in the Accounts Payable and Purchase Return & Allowances accounts
• When goods are returned by a customer who purchased it in cash, it is recorded in the Sales Return & Allowances and Cash accounts
• Montreal Enterprises purchased merchandise worth P10,000 from Sudbury Enterprises with agreed terms of 1/15, n/30, FOB Shipping Point
• Montreal Enterprises recorded the transaction in its accounting records through journal entries for purchases and shipping charges
• Sudbury Enterprises recorded the transaction in their accounting records through journal entries for merchandise sold on account and shipping charges
• Cash receipts journal records cash-generating transactions with separate columns for sales discounts, sales, accounts receivable, and an "Other" column for various cash receipts
• Each subsidiary ledger account receives daily payments from accounts receivable
• The column total is recorded in the general ledger account at the top of the column after the accounting period
• Cash disbursements journal records cash-depleting transactions with debit columns for accounts payable and other cash payment transactions
• Entries debits a control account (accounts payable) or an account in the "Other" column
• Creditor account numbers are placed in the reference column of the cash disbursements journal
• Inventory sold, cost of goods sold, and supplies expense appear only on the adjusted trial balance
• Inventory and supplies accounts show up on both the original and adjusted trial balance