ACCOUNTING FOR MERCHANDISING CONCERN
Accounting for a merchandising concern business uses the following accounts, under periodic inventory system, that a servicing concern, generally, does not:
Purchases - for the purchases of merchandise inventories ONLY. Purchases of other assets not classified as inventories will use their specific accounts. Example, purchases of Office Supplies will be entered into "Office Supplies" and not to "Purchases" account.
Purchase Returns and Allowances - for the returns of merchandise.
Purchase Discounts - For discounts from early payments of merchandise purchased.
Relationship: Purchases - Purchase returns and allowances - Purchase discounts = Net Purchases.
Transportation In/ Freight In - for transportation paid for the purchase of merchandise inventory.
Relationship: Purchases + Transportation In = Net Cost of Purchases .
Sales - for sales of merchandise inventory at their sales price.
Sales Returns and Allowances - for the peso amount of the merchandise returned by the customers.
Sales Discounts - for the discounts taken by the customers for paying their dues within the discount period.
Relationship: Sales - Sales returns and allowances - Sales discounts = Net Sales.
Transportation Out - for transportation fees paid for the delivery of the merchandise sold to the customer.
JOURNAL ENTRIES - PERIODIC INVENTORY SYSTEM
Seller's viewpoint:
Gello normally sells pencils for P100.00 (List Price) for a bunch of 10 pieces. He offered Mark 10% Trade Discount if he ever purchases from him. Mark purchased 10 pencils, for a total of P90.00 (Invoice Price), which he intends to resell in his business. He was offered 2/10, n/30. Transportation fee shouldered by Mark was P9.00. After product checking, 1 pencil was returned. Mark paid Gello within the discount period and took advantage of the discount that he was offered to.
1. Accounts Receivable -- P90.00
Sales ---------------------- P90.00
Explanation:
Trade discount = P100.00 x 10%
Trade discount = P10.00.
Invoice Price = List Price - Trade Discount
Invoice Price = P100.00 - P10.00
Invoice Price = P90.00.
Trade discounts do not appear/ recorded in books of accounts: not in seller's books nor in the buyer's books.
2. Sales Returns and Allowances-- P9.00
Accounts Receivable ------------ P9.00
*At the date of payment:
3.
Cash ------------------------------ P79.38
Sales discount ------------------P1.62
Accounts receivable -----------P81.00
Explanation:
Sales discount = Accounts Receivable x 2%
Sales discount = P81.00 x 2%
Sales discount = P1.62