Business Transactions And Their Analysis- Merchandising.docx

Business Transactions and Their Analysis as Applied to the Accounting Cycle of a Merchandising Business Merchandising Business A merchandising business is one that buys and sells goods without changing their physical form. Example: • Grocery stores • Department stores • Sari-sari stores • 2nd hand car dealers The main difference between a merchandising and a service business is that a merchandising business necessarily holds inventory of physical goods for sale. Income Statement- Merchandising Below is the format of income statement of a merchandising business: Net Sales Less: Cost of Goods Sold Gross Profit Less: Operating Expenses Net Profit

xx (xx) xx (xx) xx

Net Sales Sales Less: Sales Return Sales Discount Net Sales

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xx (xx) (xx) xx

Sales- include both cash sales and credit sales Sales return- the account used to record the goods sold but returned by customers Sales discount- the account used to record cash discounts given to and taken by customers.

Inventory This refers to goods that a merchandising business purchased with the main intention of reselling them, normally in their original form and without any further processing.

Inventory Systems Inventories are accounted for using either of the following inventory systems: Perpetual inventory system; or Periodic inventory system

Thus, the “Inventory” account shows a continuing or running balance of the goods on hand. All increases and decreases in inventory, such as purchases, freight-in, purchase returns, purchase discounts, cost of goods sold, and sales returns are recorded in the “Inventory” account. Perpetual Inventory System is commonly used for inventories that are specifically identifiable and are relatively high in value, such as cars, machineries, jewelries, etc. Periodic Inventory System Under this system, the “Inventory” account is updated ONLY when a PHYSICAL COUNT is performed. Thus, the amounts of inventory and cost of goods sold are determined only periodically. Under this system, the business does not maintain records that show the running balances of inventory on hand and cost of goods sold as at any given point of time. To determine this information, a physical count of the quantity of goods on hand must be performed periodically. The quantity counted is then multiplied by the unit cost to get the balance of the “Inventory” account. This amount is then used to compute for the “Cost of Goods Sold” Periodic Inventory System is commonly used for inventories that are normally interchangeable, relatively low in value, and have a fast turnover, such as grocery items, medicines, office supplies, etc. Cost of Goods Sold The cost of goods sold is the cost of the merchandise that a retailer, distributor, or manufacturer has sold. Beginning Inventory Add: Net Purchases* Total Goods Available for Sale Less: Ending Inventory Cost of Goods Sold *Net Purchases Purchases Add: Freight-in Less: Purchase returns Purchase discounts Net Purchases

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 Perpetual Inventory System Under this system, the “Inventory” account is updated each time a purchase or sale is made.

xx xx xx (xx) xx

xx xx (xx) (xx) xx

Purchases- the account used to record purchases of inventory under the periodic system. Freight-in (Transportation in)- the account used to re cord the shipping costs incurred on purchases of inventory under the periodic system. Purchase returns- the account used to record returns of purchased goods to the supplies

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Purchase discounts- the account used to record cash discounts availed of on the purchased goods.

Gross Profit Gross profit (gross income or gross margin) is simply “Net sales minus Cost of Goods Sold”. Gross profit represents the profit a business earns after deducting the costs directly associated with making the product or providing a service but before deducting other expenses. Profit or Net Profit is different from gross profit. Profit is the amount derived after deducting all other expenses from the gross profi ILLUSTRATION:

PERPETUAL INVENTORY SYSTEM

PERIODIC INVENTORY SYSTEM

1. Purchased on account inventory for P6,000; terms were 2/10 n/30.

2. Paid P1,500 for the shipping costs.

3. Returned damaged goods worth P2,000 to the supplier

4. Paid the merchandised purchased, refer to no. 1 (cash discount taken)

5. Sold merchandise on account costing P5,000 for P20,000.

6. Customer returned merchandise costing P200 that had been sold on account for P500.

7. Received payment from customer for merchandise sold above (cash discount taken)