Nueva Vizcaya State University Instructional Module

Republic of the Philippines
NUEVA VIZCAYA STATE UNIVERSITY

Bambang, Nueva Vizcaya
INSTRUCTIONAL MODULE
IM No.:IM-ACCTG1-1STSEM-2020-2021
College: College of Business Education

Campus : Bayombong Campus
DEGREE PROGRAM BSBA COURSE NO. Acctg 1

SPECIALIZATION Financial Management COURSE TITLE Financial Accounting and Reporting
YEAR LEVEL 1ST Year TIME FRAME 6 HRS WK NO. 8 IM NO. 07
I. UNIT TITLE/CHAPTER TITLE: CHAPTER VII
II. LESSON TITLE : ACCOUNTING CYCLE OF A MERCHANDISING BUSINESS
III. LESSON OVERVIEW

In this module, students will learn to compare and contrast the entries needed for the periodic and
perpetual inventory system.
IV. DESIRED LEARNING OUTCOMES:

At the end of the lesson, the students should be able to:
1. Compare and contrast the entries needed for the periodic and perpetual inventory system.
V. LESSON CONTENT
INTRODUCTION
A merchandising business is an entity engaged in the activities of buying and selling products. The main difference
between merchandising and the servicing business is the existence of physical products sold to the customers.
Merchandising sells products to generate revenue while servicing renders services to generate revenue.
COMPARISON OF INCOME STATEMENTS
Servicing companies perform services for a fee. In ascertaining profit, a basic income statement is all that is needed. In
Figure 8-1, profit is measured as the difference between revenues from services and expenses. In contrast, merchandising
companies earn profit by buying and selling goods. These entities use the same basic accounting methods as service
companies, but the process of buying and selling merchandise requires some additional accounts and concepts. This
process results in a more complex income statement.
To provide a better measure of performance, the income statement of a merchandising business presented with additional
items:
Service Company Merchandising Company
Income Statement Income Statement
Revenues from Services Net Sales

Minus
Cost of Sales
Minus Equals
Gross Profit
Add or minus
Income or Expenses
Expenses
(see details below)
Equals Equals
Profit Profit
Figure 7-1 Components of Income Statements for Service and Merchandising Entities
“In accordance with Section 185, Fair Use of Copyrighted Work of Republic Act 8293, the copyrighted works included in this material may be
reproduced for educational purposes only and not for commercial distribution,”
NVSU-FR-ICD-05-00 (081220) Page 1 of 14
Ricanitas Traders
Income Statement
For the Year Ended Dec.31, 2015
Net Sales P 2,393,250

Cost of Sales 1,313,600
Gross Profit 1,079,650
Operating Expenses 586,040
Operating Profit 493,610
Finance Costs 38,400
Profit 455,210
OPERATING CYCLE OF A MERCHANDISING BUSINESS
The merchandising entity purchases inventory, sell the inventory and uses the cash to purchase more inventory – and the
cycle continues. For cash sales, the cycle is from cash to inventory and back to cash. For sales on account, the cycle is
from cash to inventory to accounts receivable and back to cash. In any industry, the manager strives to shorten the cycle.
The faster the sale of inventory and the collection of cash, the higher the profits. The following illustrates the operating
cycle of a merchandiser:
Collection
Purchases
Cash Sales
Purchases
Cash Sales Sales on Account

Figure 7-2 Operating Cycle of a Merchandiser
SOURCE DOCUMENTS
Merchandising businesses use various business forms and documents to help identify the transactions that should be
recorded in the books. These source documents contain vital information about the nature and amount of the transactions.
1. Sales invoice is prepared by the seller of goods and sent to the buyer. This document contains the name and
address of the buyer, the date of sale and information – quantity, description and price – about the goods sold. It
also specifies the amount of sales, and the transportation and payment terms.
2. The bill of lading is a document issued by the carrier – a trucking, shipping or airline – that specifies contractual
conditions and terms of delivery such as freight terms, time, place, and the person named to receive the goods.
3. The statement of account is a formal notice to the debtor detailing the accounts already due.
4. The official receipt evidences the receipt of cash by the seller of the authorized representative. It notes the
invoices paid and other details of payment.
5. Deposits slips are printed forms with depositor’s name, account number and space for details of the deposit. A
validated deposit slip indicates that cash and checks with the supplies details were actually deposited or credited
to the account holder.
6. A check is a written order to a bank by a depositor to pay the amount specified in the check from his checking
account to the person named in the check. The entity issuing the check is the payor while the receiver is the
payee.
7. The purchase requisition is a written request to the purchaser of an entity from an employee or user department
of the same entity that goods be purchased.
8. The purchase order is an authorization made by the buyer to the seller to deliver the merchandise as detailed in
the form.
9. Receiving report is a document containing information about goods received from the vendor. It formally records
the quantities and description of the goods delivered.
10. A credit memorandum is a form used by the seller to notify the buyer that his account is being decreased due to
errors or other factors requiring adjustments.
STEPS IN A PURCHASE TRANSACTIONS
Whenever a purchase or sale of merchandise occurs, the buyer and the seller should agree on the price of the
merchandise, the payment terms and the party to shoulder the transportation costs.
The procedures are as follows:
1. When certain items are needed, the user department fills in a purchase requisition form and sends it to the
purchasing department.
2. The purchasing department then prepares a purchase order after checking with the price lists, quotations, or
catalogs of approved vendors. The purchase order, addressed to the selected vendor, indicates the quantity,
description, and price of the merchandise ordered. It also indicates expected payments terms and transportation
arrangements.
3. After receiving the purchase order, the seller forwards an invoice to the purchaser upon shipment of the
merchandise. The invoice – called a sales invoice by the seller and a purchase invoice by the buyer – defines
the terms of the transaction
4. Upon receiving the shipment of merchandise, the purchaser’s receiving department sees to it that the terms in the
purchase order are complied with, and prepare a receiving report.
5. Before approving the invoice for payment, the accounts payable department’s compares copies of the purchase
requisition, purchase order, receiving report and invoice to ensure that quantities, descriptions, and prices agree.
TERMS OF TRANSACTIONS
Merchandise may be purchased and sold either on credit terms or for cash on delivery. When goods are sold on account,
a period of time called the credit period is allowed for payment. The length of the credit period varies across industries
and may even vary within an entity, depending on the product.
Cash Discounts
Some businesses give discounts for prompt payment called cash discounts. If a trade discount is also offered, cash
discount is computed on the net amount after the trade discount. This practice however improves the seller’s cash position
by reducing the amount of money in accounts receivable. Cash discounts is designated by such notation as “2/10” which
means the buyer may avail of two percent discount if the invoice is paid within ten days from the invoice date. The period
covered by the discount, in this case – ten days, is called the discount period.
Cash discounts are called purchased discounts from the buyer’s viewpoint and sales discounts from the seller’s point
of view.
Illustration. Assume that an invoice for P150, 000 with terms 2/10, n/30, is to be paid within the discount period with
money borrowed for the remaining 20 days of the credit period. If an annual interest rate of 18 percent is assumed, the net
savings to the buyer is P1, 530 which is determined as follows:
Cash Discount of 2% on P150, 000 P 3,000

Interest for 20 days at an annual rate of 18% on the
Amount due within the discount period
P147, 000x18%x20/360 1,470
Saving effected by borrowing P 1,530
Trade Discounts
Trade discounts encourage the buyers to purchase products because of markdowns from the list price. Trade discounts
should not be confused with cash discounts. This type of discount enables the suppliers to vary prices periodically without
the inconvenience of revising price lists and catalogs.
There is no trade discount account and there is no special accounting entry for this discount. Instead, all accounting
entries are based on the invoice price which is obtained by subtracting the trade discount from the list price.
Illustration. Pinnacle Technologies quoted a list price of P2, 500 for each 5 gigabyte flash drive, less a trade discount of
20%. If Video Fantastic Company ordered seven units, the invoice price would be as follows:
List Price (P2, 500x7) P 17,500
Less: 20% trade discount 3,500
Invoice Price P 14,000
Trade discounts may be stated in a series. Assume instead that the trade discount given by Pinnacle to Video Fantastic is
20% and 10%, the invoice price will be:
List Price (P2, 500x7) P 17,500
Less: 20% Trade discount 3, 500
Balance 14,000
Less: 10% trade discount 1,400
Invoice price 12,600
Transportation Costs
When merchandise is shipped by ac common carrier – a trucking company or an airline – the carrier prepares a freight bill
in accordance with the instructions of the party making the shipping arrangements. The freight bill designates which party
shoulders the costs, and whether the shipment is freight prepaid or freight collect.
Freight bills usually show whether the shipping terms are FOB shipping point or FOB destination. F.O.B. is an abbreviation
for “free on board”.
 FOB shipping point – the buyer shoulders the shipping costs; ownership over the goods passes from seller to
the buyer when the inventory leaves the seller’s place of business – the shipping point. The buyer already owns
the goods while still in transit and therefore, shoulders the transportation costs.
 FOB destination – the seller bears the shipping costs. Title passes only when the goods are received by the
buyer at the point of destination; while in transit, the seller is still the owner of the goods so the seller shoulders
the transportation costs.
 If freight prepaid, the seller pays the transportation costs before shipping the goods sold; while in freight
collect, the freight company collects from the buyer.
Normally, the party bearing the freight cost pays the carrier. Thus, goods are typically shipped freight collect when the
terms are FOB shipping point; and freight prepaid when the terms are FOB destination.
Sometimes, as a matter of convenience, the firm not bearing the freight cost pays the carrier. When this situation occurs,
the seller and buyer simply adjust the amount of the payment for the merchandise. Figure 8-3 shows which party – the
buyer or the seller – shoulders the transportation costs and pays the shipper for various freight terms:
Who Shoulders the
Freight Terms Who Pays the Shipper?
Transportation Costs?
FOB Destination, Freight Prepaid Seller Seller
FOB Shipping Point, Freight Collect Buyer Buyer
FOB Destination, Freight Collect Seller Buyer
FOB Shipping Point, Freight Prepaid Buyer Seller
Figure 7-3 Treatment of Transportation Costs
The shipping costs borne by the buyer using the periodic inventory system are debited to transportation in (freight in)
account. In accounting the cost of the asset – the merchandise inventory – includes all costs incurred to bring the asset to
its intended use. In the cost of sale section of the income statement, the balance in this account is added to purchases in
computing the net purchases for the period. Shipping cost borne by the seller is debited to transportation out (freight out)
account. This account which is also called delivery expense is an operating expense in the income statement.
INVENTORY SYSTEMS
Merchandise inventory is the key factor in determining the cost of sales. Because merchandise inventory represents goods
available for sale, there must be a method of determining both the quantity and the cost of these goods. There are two
systems available to merchandising entities to record events related to merchandise inventory: the perpetual inventory
system and the periodic inventory system.
Perpetual Inventory System
Under the perpetual inventory system, the inventory account is continuously updated. Perpetually updating the inventory
account requires that at the time of purchase, merchandise acquisitions be recorded as debits to the inventory account. At
the time of sale, the cost of sales is determined and recorded by a debit to the cost of sales account and a credit to the
inventory account. With a perpetual inventory system, both the inventory and cost of sales accounts receive entries
throughout the accounting period.
When a company uses the perpetual inventory system, the ending inventory should reconcile with the actual physical
count at the end of the period assuming that no theft, spoilage or error has occurred.
Periodic Inventory System
A characteristic of the periodic inventory system is that no entries are made to the inventory account as the merchandise is
bought and sold. When goods are purchased, a separate set of accounts – purchases, purchase discounts, purchase
returns and allowances, and transportation in – is used to accumulate information on the net cost of purchases. Only at the
end of the period, when the inventory is counted, will entries be made to the inventory account to establish its proper
balance.
NET SALES
Net sales is the first part of the merchandising income statement as presented below:
Ricanitas Traders
Partial Income Statement
For the Year Ended Dec. 31, 2015
Net Sales
Gross Sales P 2,463,500
Less: Sales Returns and Allowances P 27,500
Sales Discounts 42,750 70,250
Net Sales P 2.393.250
Exhibit 7-4 Partial Income Statement – Net Sales
Gross Sales
Under accrual accounting, revenues from the sale of merchandise are considered to be earned in the accounting period in
which the title of goods passes – usually at the point of delivery – from the seller to the buyer. Gross sales consist of total
sales for cash and on credit during an accounting period.
As an income account, the sales account is credited whenever sales on account or cash sales are made. Only sales of
merchandise held for resale are recorded in the sales accounts. If a merchandising firm sold one of its delivery trucks, the
credit would be made to the delivery equipment, not to sales account.
The journal entry to record the sale of merchandise for cash is as follows:
Sept. 16 Cash 25,000

Sales 25,000
To record sale of merchandise for cash
If the sale of merchandise is made on credit, the entry will be:
Sept. 16 Accounts Receivable 25,000

Sales 25,000
To record sale of merchandise for credit
Sales Discounts
Assume that Ricanitas Traders sold merchandise on Sept. 20 for P3, 000; terms 2/10, n/60. At the time of sale, the entry
is:
Sept. 20 Accounts Receivable 3,000

Sales 3,000
To record sales on credit; term 2/10, n/30
The customer may take advantage of the sales discount any time on or before Sept. 30, which is 10 days after the date of
the invoice. If the client paid on Sept. 30, the entry is:
Sept. 16 Cash 2,940

Sales Discount 60
Accounts Receivable 3,000
To record the collection on the Sept. 20 sale,
discount taken
At the end of the accounting period, the sales discounts account as accumulated all sales discounts for the period. The
account is considered a contra-income account and deducted from gross sales in the income statement (see Exhibit 8-2).
Sales Returns and Allowances
Buyers may be dissatisfied with the merchandise received either because the goods are damaged or defective, of inferior
quality or not in accordance with their specifications. In such cases, the buyer may return the goods to the seller for credit
if the sale was made on account or for cash refund if the sale was for cash.
Alternatively, the seller may just grant an allowance or deduction from the selling price. A high sales returns and
allowances figure is not recommendable because it may signal poor quality of goods and thus may result to dissatisfied
customers.
Each return or allowance is recorded as a debit to an account called sales returns and allowances. An example transaction
follows:
Sept. 17 Sales Returns and Allowances 760

Account Receivable (or Cash) 760
To record return or allowance on unsatisfactory
merchandise
The seller usually issues the customer a credit memorandum, which is a formal acknowledgment that the seller has
reduced the amount owed by the customer. Sales returns and allowances is a contra income account and is accordingly
deducted from gross sales in the income statement (see Exhibit 8-2)
Transportation Out
When the freight term in FOB destination, the seller shoulders the transportation costs, when the term is FOB shipping
point, the buyer bears the shipping costs.
Case No. 1. Assume that Ricanitas Traders sold merchandise totaling P17, 000 FOB destination, freight prepaid; terms
2/10, n/30. The transportation costs amounted to P1, 900. The entry to record this transaction would be:
Nov. 25 Accounts Receivable 17,000

Transportation Out 1,900
Sales 17,000
Cash 1,9000
Sales on account: terms 2/10, n/30: FOB
destination, freight prepaid, P1, 900.
If this invoice is collected on Dec. 5, the sales discount will be P340 (P17, 000x2%). Transportation out is an operating
expense.
Dec. 5 Cash 16,660
Sales Discounts 340
Account Receivable 17,000
Case No. 2. Assume that Ricanitas Traders sold merchandise totaling P17, 000 FOB shipping point freight collect; terms
2/10, n/30. The transportation costs amounted to P1, 900. The entry to record this transaction would be:
Sales 17,000
Sold merchandise on account; term 2/10, n/30:
FOB shipping point, freight collect
There is no debit to transportation out account since the shipping term provided that the buyer should shoulder the
transportation costs. If this invoice is collected on Dec. 5, the sales discount will be P340 (P17, 000x2%). The entry would
be:
Dec. 5 Cash 16,660

Sales Discounts 340
Case No. 3. Now, assume that Ricanitas Traders sold merchandise totaling P17, 000 FOB destination, freight collect;
terms 2/10, n/30. The transportation costs amounted to P1, 900. The entry to record this transaction would be:

Transportation Out 1,900
Sales 17,000
destination, freight collect, P1, 900.
Accounts receivable is decreased by the transportation charges paid by the buyer for the benefit of the seller. If this invoice
is collected on Dec. 5, the sales discount will be P340 (P17, 000x2%) since the discount applies to total sales. The entry
would be:
Dec. 5 Cash 14,760

Sales Discounts 340
Case No. 4. Assume further that Ricanitas Traders sold merchandise totaling P17, 000 FOB shipping point, freight
prepaid; terms 2/10, n/30. The transportation costs amounted to P1, 900. The entry to record this transaction would be:

Sales 17,000
Cash 1,900
If this invoice is collected on Dec. 5, the sales discount will be P340 (P17, 000x2%). The discount only applies to total
sales.
Dec. 5 Cash 18,560

Sales Discounts 340
COST OF SALES
Cost of sales or cost of goods sold is the largest single expense of the merchandising business. It is the cost of inventory
that the entity has sold to customers. Every merchandising business has goods available for sale to customers. The goods
available for sale during the year is the sum of two factors – merchandise inventory at the beginning of the year and net
cost of purchases during the period.
If an entity is able to sell all the goods available for sale during a given accounting period, the cost of sales would then
equal goods that had been available for sale. In most cases, however, the business will have goods still unsold at the end
of the year. To find the actual cost of sales, the merchandise inventory at the end of the period is subtracted from the
goods available for sale.
Ricanitas Traders
Partial Income Statement
For the Year Ended Dec.31, 2015
Cost of Sales
Merchandise Inventory, 1/1/15 P 528,000
Purchases P 1,264,000
Less: Purchases Returns and Allow. P 56,400
Purchases Discounts 21,360 77.760
Net Purchases P 1,186,240
Transportation In 82, 360
Net Cost of Purchases 1,268,600
Goods Available for Sale P
1,796,600
Less: Merchandise Inventory, 12/31/15 483,000
Cost of Sales P
1,313,600
Exhibit 7-5 Partial Income Statement – Cost of Sales
Merchandise Inventory
The inventory of a merchandising entity consists of goods purchased for resale. The merchandise inventory at the
beginning of the accounting period is called beginning inventory. Conversely, the merchandise inventory at the end of
the accounting period is called the ending inventory. As presented in Exhibit 8-3, beginning and ending inventories are
used in calculating cost of sales in the income statement. The ending inventory shown in the income statements will be the
merchandise inventory reported in the balance sheet. Effectively, the ending inventory of the current period will be the
beginning inventory of the next period.
Net Cost of Purchases
Under the periodic inventory method, net cost of purchases consist of gross purchases minus purchases discounts and
purchases returns and allowances equals net purchases plus transportation costs.
Purchase
When the periodic inventory method is used, all purchases of merchandise are debited to the purchases account as shown
below:
Nov. 12 Purchases 15,000

Accounts Payable 15,000
To record purchases of merchandise; terms 2/10,
n/30.
The purchases account, a temporary account, is used only for merchandise purchased for resale. Its sole purpose is to
accumulate the total cost of merchandise purchased during an accounting period. Purchases of other assets such as
equipment should be recorded in the appropriate asset accounts. Recording merchandise purchases at invoice price is
known as the gross price method of recording purchases.
Purchases Returns and Allowances
Sales returns and allowances in the seller’s books are recorded as purchases returns and allowances in the books of the
buyer. This should be recorded as follows:
Nov. 14 Accounts Payable 2,000

Purchases Returns and Allowances 2,000
Return of damaged merchandise purchased on Nov.
12.
Purchases returns and allowances is a contra account and is accordingly deducted from purchases in the income
statement (see Exhibit 8-3). It is important that a separate account be used to record purchases returns and allowances
because management needs the information for decision making.
Purchases Discounts
Merchandise purchases are usually made on credit and commonly involve purchases discounts for early payment. In
relation to the Nov. 12 and 14 transactions, the payment is recorded as follows:
Nov. 22 Accounts Payable 13000

Purchases Discounts (P13, 000x2%) 260
Cash 12,740
Like purchases returns and allowances, purchases discounts is a contra account that is deducted from purchases on the
income statement. If the entity makes a partial payment on an invoice, most creditors will allow the company to take the
discount applicable to the partial payment. The discount does not apply to transportation or other charges that might
appear on the invoice.
Transportation In
Case No. 1. Assume that Ricanitas Traders make purchases totaling P17,000 FOB destination, freight prepaid; terms
2/10, n/30. Transportation costs amounted to P1, 900. The entry would be:

Purchased Merchandise on account; term 2/10, n/30;
FOB destination, freight prepaid
There is no debit to transportation in account since the shipping term provided that the seller should shoulder the
transportation costs. In addition, the seller prepaid the freight. If this invoice is paid on Dec. 5, the purchases discounts will
be P340 (P17, 000x2%). The entry would be:
Dec. 5 Accounts Payable 17,000

Purchases Discounts 340
Cash 16,660
Case No. 2. Assume that Ricanitas Traders made purchases totaling P17, 000 FOB shipping point, freight collect; terms

Transportation In 1,900
Cash 1,900
Purchases on account; terms 2/10, n/30; FOB
shipping point, freight collect, P1, 900.
If this invoice is paid on Dec. 5, the purchases discount will be P340 (P17, 000x2%). Transportation in will form part of the
net cost of purchases.

Cash 16,660
Case No. 3. Now, assume that Ricanitas Traders made purchases totaling P17,000 FOB destination, freight collect; terms

Cash 1,900
Purchases on account; terms 2/10, n/30; FOB,
Accounts payable is decreased by the transportation charges paid by the buyer for the benefit of the seller. If this invoice is
paid on Dec. 5, the purchases discount will be P340 (P17, 000x2%) because the discount applies to total purchases.

Cash 14,760
Case No. 4. Assume further that Ricanitas Traders made purchases totaling P17,000 FOB shipping point, freight prepaid;
terms 2/10, n/30. Transportation costs amounted to P1, 900. The entry would be:

Purchased merchandise on account; term 2/10, n/30;
FOB shipping point, freight prepaid, P1, 900.
If this invoice is paid on Dec. 5, the purchases discount will be P340 (P17, 000x2%). The buyer is not entitled to discounts
on the transportation costs. Discounts apply only to total purchases.

Cash 18,560
VI. LEARNING ACTIVITIES
A. Journalize the following transactions using Periodic and Perpetual system.
Transaction Periodic Perpetual

1. Bought merchandise for cash
from Onesto SuperStore,
P20,000
2. Paid freight on merchandise

purchased P5,000
3. Bought merchandise on
account from J. Araw Co.
costing P25,000
4. Returned P2,000 cost of

merchandise to J. Araw CO.
5. Paid the amount to J. Araw

and availed a 2% discount
6. Sold merchandise on account

to D. Pateno Co., P30,000.
Actual cost of merchandise
sold, P20,000.

sold to D. PAteno, P1,000.
8. Received P2,000 worth of

merchandise returned by D.
PAteno Co., Actual cost of
merchandise returned was
P1,500.
9. Collected the account of D.

Pateno and give a 3%
discount.
10. Sold merchandise on cash,

P6,000 and gave a 5% trade
discount. Actual cost of
merchandise sold, P5,000.

sold P300
12. Bought merchandise on

account from Cenon Co.,
costing P40,000
13. Paid the account with Cenon

and availed a 2% discount
B. Compute the merchandise inventory as at Jan 1, 2015.
Below are important information from the books of Jefara Pharmacy:
Cost of Goods Sold 836,000

Merchandise Inventory, 1/31/2015 180,000
Purchase Discounts 18,000
Purchase Returns & Allowances 9,000
Purchases 900,000
Required: Compute the merchandise inventory as at Jan 1, 2015.
VII. ASSIGNMENT
The following account titles are given for a Merchandising Business. Determine the accounts debited and credited with
their respective amounts.
Assets Revenue
Cash in Bank Sales
Accounts Receivable Sales Discounts
Building Sales Returns and Allowances
Furniture & Fixtures
Office Machines and Equipment Costs
Purchases
Liabilities Purchase Discounts
Notes Payable Purchase Returns & Allowances
Accounts Payable Freight-In
Capital Expenses
P, Capital Freight Out
P, Drawing Salaries & Wages
Transactions were as follows:
1. Piso Invested P600,000 cash to start with a merchandising business.

Entry:
2. Purchased merchandise for cash of P150,000 from Solis Supermart.

Entry:
3. Paid cash of P1,200 for freight and handling on purchases.

Entry:
4. Returned P2,000 cost of merchandise to Solis merchandise due to bad orders.

Entry:
5. Purchase merchandise on account P85,000 from V. Ruben Mall

Entry:
6. Paid the account with Ruben Mall P85,000 less 5% discount for early payment.
Entry:
7. Piso has withdrawn P20,000 for his personal use.

Entry:
8. Sold merchandise on account, P65,000 to Fonta Superstore.

Entry:
9. Received merchandise worth P5,000 returned by FOnta Superstore due to sizes differences.
Entry:
10. Sold merchandise for cash P58,000 to Medina Convenience Store.

Entry:
11. Paid cash of P1,000 for freight and handling on merchandise shipped to Medina Store.
Entry:
12. Collected the account of Fonta Superstore the amount of P60,000 less 3% discount for early payment of account.
Entry:
13. Purchased merchandise on account costing P100,000 from Jude Lee Market Basket and issued a promissory
note.
Entry:
14. Paid the account with Jude Lee Market Basket and get the promissory note.
Entry:
15. Sold merchandise on account worth P35,000 to John Sorima Company and received a promissory note.
Entry:
16. Collected cash of P35,000 from payment of John Sorima Company account and returned the promissory note.
VIII. EVALUATION
A. TRUE OR FALSE. Write “T” if the statement is correct and “F” if incorrect.
1. The balance in the merchandise inventory account at the beginning of the period represents the cost of
the merchandise on hand at that time.
2. The ending inventory of one period is the beginning inventory of the next period.
3. The debit balance of the inventory account in the trial balance under the periodic inventory system is the
amount of the inventory at the end of the current year.
4. There is no need for a physical inventory count in the perpetual inventory system.
5. The perpetual inventory system requires recording the cost of each sale as it occurs.
6. The term freight prepaid or collect will dictate who shoulders the transportation costs.
7. If the seller is to shoulder the cost of delivery, the term is stated as FOB destination.
8. The purchase of equipment not for resale should be debited to the purchases account.
9. The cost of merchandise purchased during the period is determined by subtracting from the net
purchases the amount of transportation cost incurred during the period.
10. Purchases returns and allowance is a deduction from purchases.
11. Discounts offered to the buyer to encourage early payment are trade discount
12. The bill of lading is a document prepared by the seller detailing the terms of delivery.
13. For cash sales, the operating cycle is from cash to inventory to accounts receivable and back to cash.
14. Under perpetual system, the Purchases account is used to accumulate all purchases of merchandise
for resale.
15. Transportation In is treated as a deduction in the cost of goods sold section of the income statement.
16. On the worksheet of a merchandising company that uses the perpetual inventory system, the
Merchandise Inventory account balance is not adjusted.
17. When using the perpetual inventory system, the Merchandise Inventory account will not appear in the
closing entries.
18. The worksheet of a merchandising company that uses the perpetual inventory system will not have a
Transportation In account.
19. When preparing a worksheet for a merchandising company that uses the perpetual inventory system,
the cost of goods sold can be derived from the balances of several accounts in the Income Statement
columns.
20. Under the perpetual inventory system, the ending merchandise inventory balance is closed at the same
time as Cost of Goods Sold.
B. MATCHING TYPE. Select the one that relates to each of the following statements. Write the letter beside the item
number.
A. Purchase Requisition G. Invoice

B. Purchase Order H. Official Receipt
C. Credit Memorandum I. Periodic Inventory System
D. Debit Memorandum J. Perpetual Inventory System
E. FOB Destination K. Purchase Discounts
F. FOB Shipping Point L. Trade Discounts
1. This is an authorization made by the buyer to the seller to deliver the merchandise as detailed in the form.
2. It is the discount taken by the buyer for the early payment of an invoice.
3. The document issued by the seller authorizing the return of merchandise or the grant of an allowance.
4. This document evidences the receipt of cash by the seller.
5. This transportation arrangement passes ownership to the goods to the buyer only when the buyer
receives the merchandise.
6. Under this inventory system, revenues from sales are recorded when sales are made, but no attempt is
made on the sales date to record the cost of goods sold.
7. Under this inventory system, both the sales amount and the cost of goods sold amount are recorded
when each item of merchandise is sold.
8. The document prepared by the seller of goods and sent to a buyer detailing the specifics of a sale.
9. This discount encourages the buyers to purchase goods because of markdowns from the list price.
10. This is the shipping term if the buyer shoulders the shipping cost.
C. MULTIPLE CHOICE
Use the following information to answer questions 1-5 below:
Account Name Debit Credit
Sales 750,000
Sales Returns and Allowances 15,000
Sales Discounts 10,000
Purchases 170,000
Purchase Returns and Allowances 20,000
Selling Expense 75,000
General and Administrative Expense 275,000
In addition, beginning merchandise inventory was P55,000 and ending merchandise inventory was P35,000.
1. Net Sales for the period were

A. P775,000 B. P725,000
C. P735,000 D. P775,000
2. Net Purchase for the period were

A. P150,000 B. P180,000
C. P210,000 D. P430,000
3. Cost of goods sold for the period was

A. P235,000 B. P160,000
C. P200,000 D. P170,000
4. Profit for the period was

A. P525,000 B. P450,000
C. P250,000 D. P175,000
5. If the beginning and ending merchandise inventories were ignored in computing profit then profit would be
A. understated by P55,000 B. overstated by P20,000
C. understated by P35,000 D. understated by P20,000
6. The entry to record a sale of P7,500 with terms of 2/10, n/30 would include a
A. debit to Sales Discounts for P150
B. debit to Sales for P7,350
C. credit to Accounts Receivable for P7,500
D. credit to Sales for P7,500
7. The collection of a P4,000 account within the 2% discount period would result in a
A. debit to Sales Discounts for P80
B. debit to Accounts Receivable for P3,920
C. credit to Cash for P3,920
D. credit Accounts Receivable for P3,920
8. Assuming that net purchases was P900,000 during the year and that ending merchandising inventory was P20,000
less than the beginning merchandise inventory of P250,000, how much was cost of goods sold?
A. P1,130,000 B. P670,000
D. P920,000 D. P1,170,000
9. Goods totaling 50,000 were purchased February 2 with terms of 2/10, n/30. Returns of 10,000 were made on
February 10. What discounts, if any, can be availed of if the invoice was paid on February 12?
A. None B. P1,000
C. P800 D. P200
10. Olive Traders purchased merchandise from San Jose Suppliers for 3,600 list price subject to trade discount of
25%. The goods were purchased on terms of 2/10, n/30, FOB Destination. Olive paid 100 transportation costs.
Valenzuela returned 400 (list price) of the merchandise to San Jose and later paid the amount due within the discount
period. What is the amount paid to San Jose Suppliers?
A. P2,254 B. P2,246
C. P2,252 D. P2,352
IX. REFERENCES
Ballada, S. and Ballada, W. (2015). Accounting Fundamentals. Padre Campa St., Sampaloc, Manila:
Domdane Publishers & Made Easy Books
Ballda, W. (2015). Basic Accounting. Padre Campa St., Sampaloc, Manila: Domdane Publishers & Made
Easy Books
Beticon, J., Garcia, E., Ireneo, S., James,G.,(2013). Fundamentals of Accounting, Volume 1, (2013).
Lopez, R., (2015). Learning the Basics of ACCOUNTING (Simplified Procedural Approach-Near to Self-
teaching). Davao City, Philippines: MS LOPEZ Printing & Publishing
Macapilit, C., (2011). Worktext in Basic Accounting, Revised Edition(2011),

Sampaloc, Manila: Rex Bookstore Incorporated
Ong, Flocer Lao, (2012). Fundamentals of Accounting, Textbook for Beginners, Third Edition. South
Triangle Quezon City, Philippines: C & E Publishing, Inc.
Valencia, E. and Roxas, G. (2009). Basic Accounting Concepts, Principles, Procedures and Applications,
3rd Edition. Baguio City, Philippines: Valencia Educational Supply
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Republic of the Philippines

NUEVA VIZCAYA STATE UNIVERSITY

College: College of Business Education

DEGREE PROGRAM BSBA COURSE NO. Acctg 1

I. UNIT TITLE/CHAPTER TITLE: CHAPTER VII

II. LESSON TITLE : ACCOUNTING CYCLE OF A MERCHANDISING BUSINESS

III. LESSON OVERVIEW

IV. DESIRED LEARNING OUTCOMES:

COMPARISON OF INCOME STATEMENTS

Service Company Merchandising Company

Income Statement Income Statement

Revenues from Services Net Sales

Net Sales P 2,393,250

OPERATING CYCLE OF A MERCHANDISING BUSINESS

Cash Sales Sales on Account

STEPS IN A PURCHASE TRANSACTIONS

Cash Discount of 2% on P150, 000 P 3,000

Perpetual Inventory System

Periodic Inventory System

Sept. 16 Cash 25,000

If the sale of merchandise is made on credit, the entry will be:

Sept. 16 Accounts Receivable 25,000

Sept. 20 Accounts Receivable 3,000

Sept. 16 Cash 2,940

Sales Returns and Allowances

Sept. 17 Sales Returns and Allowances 760

Nov. 25 Accounts Receivable 17,000

Nov. 25 Accounts Receivable 17,000

Dec. 5 Cash 16,660

Nov. 25 Accounts Receivable 15,100

Dec. 5 Cash 14,760

Nov. 25 Accounts Receivable 18,900

Dec. 5 Cash 18,560

Nov. 12 Purchases 15,000

Purchases Returns and Allowances

Nov. 14 Accounts Payable 2,000

Nov. 22 Accounts Payable 13000

Nov. 25 Purchases 17,000

Dec. 5 Accounts Payable 17,000

Nov. 25 Purchases 17,000

Dec. 5 Accounts Payable 17,000

Nov. 25 Purchases 17,000

Dec. 5 Accounts Payable 15,100

Nov. 25 Purchases 17,000

Dec. 5 Accounts Payable 18,900

VI. LEARNING ACTIVITIES

A. Journalize the following transactions using Periodic and Perpetual system.

Transaction Periodic Perpetual

2. Paid freight on merchandise

4. Returned P2,000 cost of

5. Paid the amount to J. Araw

6. Sold merchandise on account

7. Paid freight on merchandise

8. Received P2,000 worth of

9. Collected the account of D.

10. Sold merchandise on cash,

11. Paid freight on merchandise

12. Bought merchandise on

13. Paid the account with Cenon