Fundamentals of

Accountancy, Business
and Management 2
MODULE 1

Prepared by:

Claudine B. Carcueva
Instructor

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Dear Student,
Panagdait sa tanang kabuhatan!
The success of this module lies in
your hands. This was prepared for you to
learn diligently, intelligently, and
independently. As you embark on this
new learning journey, have this material
as your map and compass in venturing
the world of Accounting. heart, but it is theknowledge
“An investment in
n’s
pays the best
Lord’s purpose
– interest.” Benjamin Franklin

Bon Voyage!

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STUDY SCHEDULE AND HOUSE RULES
Course Title: Fundamentals of Accountancy, Business and Management
Course Description: This is an introductory course in accounting, business and
management data analysis that will develop students’ appreciation of accounting as a
language of business and an understanding of basic accounting concepts and principles
that will help them analyze business transactions.

STUDY SCHEDULE
MODULE 1: ACCOUNTING FOR MERCHANDISING BUSINESS (January 18- February 8)

WEEK TOPIC Date Time

Week 1 Lesson 1 – The Merchandising Business

Lesson 2 – The use of Freight-in and Freight-out Accounts

Week 2 Lesson 3 – Cash Discount and Trade Discounts

Lesson 4 – Periodic Inventory and Perpetual Inventory

Week 3 Lesson 5 – Journalizing Major Transactions of Merchandising

Business

PRELIM EXAMINATION

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The following guides and house rules will help you to be on track and complete the
module with a smile on your face.
1. Read and understand every part of the module. If there are some contents or tasks
which you find difficult to understand, try to re-read and focus. You may also ask help
from your family at home, if it doesn’t work, you may send a private message on my
Facebook account (Claudine Carcueva) or email with my Gmail account
[email protected]
2. Each module begins with an overview and a list of the topics you are expected to learn.
3. Before reading the module and working on the activities, answer the pretest first. Find
out how well you did by checking your answers against the correct answers in the
answer key.
4. At the end of each lesson try to reflect and assess if you were able to achieve the
learning objectives. Remember that you can always read again if necessary.
5. Learn to manage your time properly. Study how you can manage to work on this module
in consideration of your other modules.
6. Each module has worksheets where you can do all your activities. At the end of the
month, remove the worksheets and submit them to your teacher.
7. Have patience and do not procrastinate.
8. Practice the virtue of honesty in doing all your tasks.
9. Lastly, the activities in the module must be done by you and not by others. Your family
and friends may support and guide you but you must not let them do the work. DO
YOUR BEST AND GOD WILL DO THE REST.

CLAUDINE B. CARCUEVA
Instructor

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Module 1
INTRODUCTION TO
MERCHANDISING
CONCERN

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Pretest
To find out how much you already know about the concepts in this module,
Answer the Pretest below.
Name: ________________________________________________________ Course & Year:
____________
Directions: Perform the tasks below. Provide your answers on the space provided.

Test I. Encircle the letter that corresponds to your answer.

1. This type of business purchase goods that are ready for sale and then sell them to
customers
a. Service-concern
b. Merchandising-concern
c. Manufacturing-concern
d. Hybrid companies

2. All of the following are considered merchandising businesses, except

a. Auto dealership
b. Supermarkets
c. Salon
d. Sari-sari store

3. A merchandising company makes the products they intend to sell

a. True

b. False

c.
They could if they choose to. It’s the company’s prerogative
d. Maybe

4. Payment terms of 1/20, n40 means?

a. Invoice should be paid within 20 days for a 40% discount

b. Invoice can be paid in 20 days with a 1% discount

c. Invoice can be paid within 40 days of the due date without a discount

d. Choices a and b are correct

e. Choices b and c are correct

5. When payment terms are FOB Destination, who is responsible for paying for shipping? a.
Buyer
b. Seller
c. Both
d. Either, depending on their agreement

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The Merchandising
Module 1

Lesson 1 Business
Learning Outcomes:
▪ Define the merchandising business
▪ Understand the nature of merchandising business
▪ Distinguish the service and merchandising concern using income statement pro-
forma
▪ Differentiate the difference of gross profit from net profit of merchandising concern

Content focus
⚫ MERCHANDISING BUSINESS – a firm that engages in buying and selling finished
goods such as grocery items, ready-to-wear clothing, and other similar items ready for
use or for consumption.
⚫ MERCHANDISE – any items on hand that are intended for sale. These items are
recorded under the account Merchandise Inventory.
⚫ OPERATING CYCLE – the period of time that a company takes in converting its
inventory into receivable and finally into cash. This cycle is oftentimes described as
“from cash to cash”.
⚫ ACCOUNTING CYCLE – the series of steps involving accounting activities that starts
with recording of transactions and ending with the preparation of post-closing trial
balance. 1. Journalizing
2. Posting
3. Preparing the trial balance
* (Preparing the worksheet – optional)
4. Preparing the adjusting entries
5. Preparing the financial statements
6. Preparing the closing entries
7. Preparing the post-closing trial balance
* (Preparing the reversing entries – optional)

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Merchandise (or merchandise inventory) refers to goods that are held for sale to customers in
the normal course of business. This includes goods held for resale. For example:
• Candies, canned goods, noodles sold at a grocery stores
• Juice, biscuits sold in a grocery store
• Medicines sold in a pharmacy
If a grocery store decided to sell an old computer used in the office, this would not be
merchandise because grocery stores do not normally sell computers and the store is simply
selling off old office equipment. But a computer would be merchandise for a computer store who
resells computer units. Merchandise for one firm may be a fixed asset (or property and
equipment) for another.
In another example, a pharmacy decided to sell a table used in their display area. This table is
not merchandise of a pharmacy. However, to a retail furniture store a table is merchandise
because the business of a furniture store involves the buying and selling of tables.

A merchandiser’s primary source of revenue is sales revenue or sales.

Expenses for a merchandising company are divided into two categories:

1. Cost of goods sold (COGS) – the total cost of merchandise sold during the period; and
2. Operating expenses (OP) - expenses incurred in the process of earning sales revenue
that are deducted from gross profit in the income statement. Examples are sales salaries
and insurance expenses.
The Gross Profit (GP) of a Merchandising Concern is computed as follows:
Gross Profit = Sales – Cost of Goods Sold
The Net Profit (NP) of a Merchandising Concern is computed as follows:
Net Profit = Sales – Cost of Goods Sold – Operating Expenses
Or Net Profit = Gross Profit – Operating Expenses

NATURE OF MERCHANDISING BUSINESS

Unlike service concern where the business generates income from rendering of services to
customers or clients, in merchandising business, it generates revenue from sale of goods or
commodities that it buys. The business, therefore could be a buyer at one hand and a seller on
the other hand. Basically, there are two (2) major activities that are involved in a merchandising
business: BUYING and SELLING activities.

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MERCHANDISING CONCERN
NET SALES
Minus
SERVICE CONCERN COST OF SALES (COST OF GOODS SOLD)
SERVICE INCOME OR REVENUE Equals
Minus GROSS PROFIT
Minus
EXPENSES
EXPENSES (OPERATING EXP)
Equals
Equals
NET PROFIT (LOSS)
NET PROFIT (LOSS)
The Operating Cycles for a merchandiser:

The merchandising entity purchases inventory sells 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:

Purchase
Cash

Cash Inventory
sales

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Self-check

Name: _____________________________________________ Course & Year: ________

Directions: Perform the tasks below. Provide your answers on the space provided.

1. What is the primary difference between a Merchandising Concern and Service Concern?
Answer:

2. Give three examples of a Merchandising Concern Answer:

3. Compute how much is the gross profit and the net profit.
Yeonsu recently opened her Convenience Store. After a month of operation, she
is now puzzled if she is earning from her business. She gathered all the receipts
and invoices and find the following data:
Total Sales: Php 150,500
Cost of Goods Sold: Php 84,665
Operating Exp:
Salaries Exp- Php 5,000
Utilities Exp- 2,500
Insurance Exp- 1,500
Freight-out- 1,275
Rent Exp- 3,500
Help her out by computing the gross profit and the net profit!
Solution:

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Module 1 The Use of Freight in and Freight
Lesson 2 out
Learning Outcomes:
1. Understand the concept of Freight-in and Freight-out
2. Differentiate Freight-in from Freight-out
3. Identify the types of shipping used by Merchandising concern
4. Differentiate FOB shipping point from FOB Destination

Content Focus

Freight or transportation expense on merchandise purchased is recorded as a debit to freight-in

or transportation-in while merchandise sold is recorded as a debit to freight-out or
transportation-out. The former is considered as part of cost and being added to purchase
account while the latter is considered as business expense.
When goods are shipped, either the supplier or the retailer has to pay for the shipping. Shipping
terms are established to clarify who is responsible for the cost of shipment. Shipping terms also
clarify who owns and is responsible for the goods while they are in transit. There are two types
of shipping used by merchandising businesses:

1. Free on board (FOB) shipping point

Free on board (FOB) shipping point is a shipping term indicating the buyer is
paying for freight costs for the shipping and that the title of ownership passes from
the seller to the buyer when the item has been picked up by a third-party shipper. As
a result, the shipping costs are added to the cost of inventory (see the journal entry
below).

2. Free on board (FOB) destination point

Free on board (FOB) destination point is a shipping term indicating the seller is
paying for shipping costs and that the title of ownership does not pass from the
seller to the buyer until the item arrives at the buyer's place of business.

Seller places goods Free On Board the carrier, and buyer pays freight costs.

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Seller places goods Free On Board to the buyer’s place of business, and seller pays
freight costs.

Freight costs incurred by the seller are an operating expense.

The Freight-in or Transportation-in

As stated earlier, Freight-In is the cost to have merchandise shipped to your store, hence
it is part of the cost of purchasing merchandise, and becomes part of Cost of Goods Sold in
the Income Statement. Sometimes a company has to pay a separate charge for Freight In. At
other times the cost may be included in the cost of merchandise from the supplier. In any case,
the cost of Freight-in is added to the cost of the merchandise.

Example: AOT, Co. buys 100 units of Product R with a purchase price of P75 each, the total
purchase price amounted to P7500. The trucking company charges P500 for the shipment. The
total cost of the merchandise is P8000. Each unit costs P8000 / 100 = P80. They should set
their selling price based on a cost of P80.

The Freight-out or Transportation-out/Transportation expense

Delivery Expense is the cost to ship or deliver merchandise to your customer after a sale.
Delivery Expense is a Selling Expense, and is included under that caption of Operating
Expenses in the Income Statement.

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Self-check
Name: ________________________________________________________ Course &
Year: ____________

Directions: Perform the tasks below. Provide your answers on the space provided.

Moonshine Co. buys 1500 units of Product T costing P15 each,

FOB Destination from Marley Company. The trucking company charges
P750 for the shipment.

1. Who is responsible for the payment of the shipment?

Answer:

2. Which of the company will record Freight-in on its journal entry?

Answer:

3. Which of the company will record Transportation-out on its journal entry?

Answer:

4. How much is the total cost of the merchandise? Provide solution.

Answer:

5. At what amount would Eldian Co. have based on their selling price?

Answer:

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Module 1 The Cash Discount and Trade
Lesson 3 Discount
Learning Outcomes:

1. Define Cash Discount and Trade Discount

2. Understand Payment Terms/ Discount Terms
3. Able to calculate the Cash Discount and Trade Discount of the purchase/sale
4. Differentiate the cash discount from trade discount

Content Focus

A cash discount is a deduction from the invoice price that can be taken only if the
invoice is paid within a specified time. The term cash discounts have two connotations.
It can be either Purchase Discounts or Sales Discounts depending upon from whose
viewpoint the term is used. Sellers call a cash discount a sales discount and buyers
call it a purchase discount. Companies often state payment terms as follows:

PAYMENT/DISCOUNT TERMS
Payment term tells you when an invoice is due and if a discount is offered for early
payment. The following are the common discount terms both for purchases and sales:
A. 2/10, N/30- this means that if the account is paid collected within 10days from the
date of the invoice, a 2% discount can be availed or given and no discount if the
account is after the 10th day or from 11th to 30th days.
B. 2/10, 1/20, N/30- this means that a 2% discount can be availed or given if the
account is being paid/collected within 10 days from the invoice date, 1% if
paid/collected from the 11th to 20th days and no discount if paid/collected from the
21st and 30th day.
C. 2/10, EOM – this means that a 2% discount can be availed or given if the account
is paid/collected 10 days after End of the Month.
D. 2/10/EOM, n/60—means a buyer who pays by the 10th of the month following
the month of purchase may deduct a 2% discount from the invoice price. If
payment is not made within the discount period, the entire invoice price is due 60
days from the invoice date.
E. 3/EOM, n/60—means a buyer who pays by the end of the month of purchase
may deduct a 3% discount from the invoice price. If payment is not made within
the discount period, the entire invoice price is due 60 days from the invoice date.
F. Net 30 —means the entire invoice price is due 30 days from the invoice date
without a discount.

Sellers cannot record the sales discount before they receive the payment since they do
not know when the buyer will pay the invoice. A cash discount taken by the buyer
reduces the cash that the seller actually collects from the sale of the goods, so the seller
must indicate this fact in its accounting records.

.
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Cash discounts are inducements to both buyer and seller for prompt payment or
prompt collection of account purchase and account sales. Both purchase discounts and
sales discounts are recorded in the books of the business.
Example: Amount of merchandise, P50,000 and 2% cash discount is given/availed
if paid/collected within 10 days. The deadline for payment was met.
Computation:
Amount of merchandise P 50,000
Less: 2% discount (2%X 50k) 1,000
Net amount paid/collected P49,000
Journal Entry:
Seller’s POV: Cash 49,000
Sales Discount 1,000
Accounts Receivable 50,000
#
Buyer’s POV: Accounts Payable 50,000
Cash 49,000
Purchase Discount 1,000
#
Unlike cash discounts, Trade Discounts are spot discounts or outright discounts from
cash that a buyer or seller can avail but are not recorded in the books of the business.
Example: 2% Trade Discount on merchandise amounting to P50,000 and 3%
cash discount is given/availed if paid/collected within 10 days. The deadline for payment
was met.
Computation:
List Price P 50,000
Less: 2% trade discount (2%X 50k) 1,000
Invoice Price P 49,000
Less: 3% Cash Discount (3%X49k) 1,470
Net Amount Paid/collected P 47,530
Journal Entry:
Seller’s POV: Cash 47,530
Sales Discount 1,470
Accounts Receivable 49,000
#

Buyer’s POV: Accounts Payable 49,000

Cash 47,530
Purchase Discount 1,470
#

Notice that the 2% trade discount (P1,000) is no longer recorded in the journal
entry, instead only the cash discount (either sales discount or purchase discount,
depending from whose POV) is recognized.
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Self-check
Name: ________________________________________________________ Course & Year:

____________ Directions: Perform the tasks below. Provide your answers on the space provided.

On April 5, A Company purchased merchandise from B Company for 25,000 terms 2/10,
net/30, FOB shipping point. On April 15, A Company paid the amount due to B Company in
full.

1. If A Company pay on April 15, would A company availed the discount?

Answer:

2. How much is the amount of the purchase discount? (Provide

Computation)

Answer:

3. What entry would be made by A Company if it avails the discount?

Answer:

4. What entry would be made by A Company if failed to pay within 10 days?

Answer:

Module 1 The Periodic Inventory and

Lesson 4
Perpetual Inventory

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Content Focus

Merchandise inventory is the cost of goods on hand and available for sale at any given time.
Merchandise inventory (also called Inventory) is a current asset with a normal debit balance
meaning a debit will increase and a credit will decrease.

To determine the cost of goods sold in any accounting period, management needs inventory
information. Management must know:

• its cost of goods on hand at the start of the period (beginning inventory)
• the net cost of purchases during the period
• and the cost of goods on hand at the close of the period (ending inventory).

Since the ending inventory of the one period is the beginning inventory for the next period,
management already knows the cost of the beginning inventory. Companies record purchases,
purchase discounts, purchase returns and allowances, and transportation-in throughout the
period. Therefore, management needs to determine only the cost of the ending inventory at the
end of the period in order to calculate cost of goods sold.

Cost of goods sold is the inventory cost to the seller of the goods sold to customers. Cost of
Goods Sold is an EXPENSE item with a normal debit balance (debit to increase and credit to
decrease). Even though we do not see the word Expense this in fact is an expense item found
on the Income Statement as a reduction to Revenue.

Accountants must have accurate merchandise inventory figures to calculate cost of goods sold.
Accountants use two basic methods for determining the amount of merchandise inventory—
perpetual inventory procedure and periodic inventory procedure.
THE INVENTORY SYSTEMS
Maintaining inventory items is a unique set-up in a merchandising business. There are two
methods of accounting for inventory, namely:
Perpetual Inventory System and Periodic Inventory System.
Merchandising entities may use either of the following inventory systems:

1. Periodic System — Cost of goods sold is determined only at the end of an accounting
period. This system involves:

• Record purchase of Inventory.

• Record revenue only when the item is sold.

• At the end of the period, you must compute cost of goods sold (COGS):

Merchandising companies selling low unit value merchandise (such as nuts and bolts,
nails, Christmas cards, or pencils) that have not computerized their inventory systems often find
that the extra costs of record-keeping under perpetual inventory procedure more than outweigh
the benefits. These merchandising companies often use periodic inventory procedure.

Under periodic inventory procedure, companies do not use the Merchandise Inventory
account to record each purchase and sale of merchandise. Instead, a company corrects the
balance in the Merchandise Inventory account as the result of a physical inventory count at the
end of the accounting period. Also, the company usually does not maintain other records
showing the exact number of units that should be on hand. Although periodic inventory
procedure reduces record-keeping, it also reduces control over inventory items. Firms assume
any items not included in the physical count of inventory at the end of the period have been
sold. Thus, they mistakenly assume items that have been stolen have been sold and include
their cost in cost of goods sold.
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THIS SYSTEM IS CHARACTERIZED BY THE USE OF THE FOLLOWING ACCOUNT TITLES:

Asset:
• Merchandise Inventory, end – this refers to unsold merchandise at the end of the
accounting period as determined by physical counting or inventory taking. It is
usually dated December 31. The normal balance of the account is a debit being
an asset.

Income Accounts:
• Sales – this account is credited for Merchandise that are sold either in cash or
on credit. This is recorded as follows:
Debit, Cash or Accounts Receivable Pxx
Credit, Sales Pxx
• Sales Discounts – this account is debited for sales discount given to a customer
for early collection from his/her account. The receipt of cash is recorded as
follows:
Debit, Cash or Accounts Receivable Pxx
Debit, Sales Discount Pxx
Credit, Accounts Receivable Pxx

• Sales Returns & Allowances-this account is debited for merchandise sold either
in cash or credit but were returned by the customer for reason of bad order or
does not fit the description of the merchandise ordered and were not replaced
due to non-availability of stocks. This is recorded as follows:
Debit, Sales Returns & Allowances Pxx
Credit, Cash or Accounts Receivable Pxx

Cost Accounts:

• Purchases-this account is debited when merchandise is purchased either in cash

or on credit. This is recorded as follows:
` Debit, Purchases Pxx
Credit, Cash or Accounts Payable Pxx

• Purchase Discount- this account is credited when there is discount availed from
a supplier for early payment of merchandise purchased on credit. This is
recorded as follows:
` Debit, Accounts Payable Pxx
Credit, Purchase Discount Pxx
Credit, Cash Pxx

• Purchase Returns and Allowances- this account is credited for merchandise

purchased either in cash or on credit that were returned to the supplier for the
reason of of bad order or does not fit the description of the merchandise ordered
and were not replaced due to non-availability of stocks by the supplier. This is
recorded as follows:
Debit, Cash Pxx
Credit, Purchase Ret. and Allowances Pxx

• Freight-in- this account is debited for the freight and handling charges of
merchandise purchased by the buyer or customer and shipped via land, sea and
air transportation. This is recorded as follows:
Debit, Freight-in Pxx
Credit, Cash or Accounts Payable Pxx

Operating Expense Account:

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• Freight-out- this account is debited for the freight and handling charges of
merchandise sold to customers and shipped via land, sea and air transportation.
This is recorded as follows:
Debit, Freight-out Pxx
Credit, Cash or Accounts Payable Pxx

2. Perpetual System — Detailed records of the cost of each item are maintained, and the
cost of each item sold is determined from records when the sale occurs. For example,
a car dealership has separate inventory records for each vehicle.
• Record purchase of Inventory.
• Record revenue and record cost of goods sold when the item is sold.
• At the end of the period, no entry is needed except to adjust inventory for
losses, etc. • The use of stock card is a must. And there’s no need to establish
ending inventory.

Companies use perpetual inventory procedure in a variety of business settings.

Historically, companies that sold merchandise with a high individual unit value, such as
automobiles, furniture, and appliances, used perpetual inventory procedure. Today,
computerized cash registers, scanners, and accounting software programs automatically
keep track of inflows and outflows of each inventory item. Computerization makes it
economical for many retail stores to use perpetual inventory procedure even for goods of
low unit value, such as groceries.

Under perpetual inventory procedure, the Merchandise Inventory account

provides close control by showing the cost of the goods that are supposed to be on hand
at any particular time. Companies debit the Merchandise Inventory account for each
purchase and credit it for each sale so that the current balance is shown in the account
at all times. Usually, firms also maintain detailed unit records showing the quantities of
each type of goods that should be on hand. Company personnel also take a physical
inventory by actually counting the units of inventory on hand. Then they compare this
physical count with the records showing the units that should be on hand.

THIS SYSTEM IS CHARACTERIZED BY THE USE OF MERCHANDISE INVENTORY ACCOUNT

AS AN ASSET WITH THE FOLLOWING DEBIT AND CREDIT POSTINGS:

Merchandise Inventory
1. to record purchases 1. to record purchase
2. to record freight-in returns and allowances
2. to record purchase
discounts
3. excess of actual
inventory against stock 3. to record actual cost of
card goods sold
4. excess of stock card
against actual inventory
Additional Considerations:
• Perpetual systems have traditionally been used by companies that sell merchandise with
high unit values such as automobiles, furniture, and major home appliances. With the use of
computers and scanners, many companies now use the perpetual inventory system.
• The perpetual inventory system is named because the accounting records continuously —
perpetually —show the quantity and cost of the inventory that should be on hand at any
time. The periodic system only periodically updates the cost of inventory on hand.
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• A perpetual inventory system provides better control over inventories than a periodic
inventory, since the records always show the quantity that should be on hand. Then, any
shortages from the actual quantity and what the records show can be investigated
immediately.
• The buyer uses only the Merchandise Inventory account for his merchandising transactions.
• The seller uses the following accounts:
• Sales
• Cost of Sales
• Sales Returns and Allowances
• Sales Discount
• Freight-Out (or Delivery Expense or Transportation-Out) Merchandise
Inventory

The main differences between the two inventory systems relate to the journal
entries used to record purchases and sales. The system a company chooses should be
cost effective and provide the desired levels of inventory management. Special journals are
often used to record sale and purchase transactions.

You can usually tell whether a company is using the Periodic or Perpetual system by the accounts they
use to record inventory purchases. Here's a chart that shows the differences:

Self-check
Name: ________________________________________________________ Course & Year: ____________

Directions: Perform the tasks below.

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proper permission and authorization.
1. Merchandise inventory is what type of account?
a. Current Asset
b. Non-Current Asset
c. Expense
d. Current Liability

2. Cost of goods sold is the cost of inventory purchased and now sold. We classify
this account as a:
a. Current Asset
b. Non-Current Asset
c. Expense
d. Current Liability

3. Which inventory method continuously updates the inventory account to reflect the
value of items hand?
a. Perpetual
b. Periodic
c. Either of the inventory system
d. None

4. Which inventory method does not use the merchandise inventory account to
record each purchase and sale of merchandise?
a. Perpetual
b. Periodic
c. Either of the inventory system
d. None

5. Identify five differences between a Periodic system and a Perpetual System

Answer:
___________________________________________________________
___________________________________________________________

___________________________________________________________

___________________________________________________________

___________________________________________________________

___________________________________________________________

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Module 1 Journalizing Major Transactions
Lesson 5
of Merchandising Concern

Content Focus

JOURNALIZING MERCHANDISING BUSINESS TRANSACTIONS

Merchandising businesses record their transactions much like any other type of business. They
do, however, have a few accounts and transactions that are unique to their business type in
order to record the purchase of merchandise and freight charges, make entries to track
inventory, and record the cost of the merchandise when it is sold.

Under Perpetual Inventory System:

A. Purchase from Supplier

The purchase of inventory items for sale to consumers is recorded in the merchandise
inventory account. Merchandise inventory is the merchandise on hand and is a current asset.
Purchase of Merchandise Inventory can be Cash Purchase or Purchase on Account.

For example, Happy T's, a local retailer, buys and resells T-shirts. When the business
purchases an order of T-shirts in cash from their supplier for P1,000, it would make an entry
to properly record the purchase.

Journal entry: Merchandise Inventory P1,000

Cash P1,000
#

Another example, Happy T's, a local retailer, buys and resells T-shirts. When the business
purchases an order of T-shirts on account from their supplier for P1,000, it would make an
entry to properly record the purchase.

Journal entry: Merchandise Inventory P1,000

Accounts Payable P1,000
#
When goods are shipped, either the supplier or the retailer has to pay for the shipping, as
mentioned from the previous lesson, the payment will be based according to the type of
shipment (FOB Shipping Point or FOB Destination). Continuing our example,

Happy T's purchased its T-shirts with FOB shipping point terms, shipping fee is
worth Php50. This means that Happy T's owned the T-shirts as soon as the carrier
picked up the T-shirts from the supplier and that Happy T's is responsible for paying
for the shipping. Happy T's would make an entry to record the P50 cost of shipping.

Journal entry: Merchandise Inventory P50

Cash P50
#

If Happy T's had purchased its T-shirts with FOB destination terms, it would have owned the
T-shirts when they arrived rather than when the seller shipped them. Happy T's also would
not be responsible for the cost of shipping and would not make a journal entry.

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proper permission and authorization.
Application of Purchase Return

Under Perpetual Inventory system, any inventory flows shall be reflected on

the account of Merchandise Inventory. Hence any return of purchases shall be
recoded on the Merchandise Inventory.
To illustrate, assume that the Russell Company purchased on account, for future
resale, 10 television sets at a total cost of P2,800. Under the perpetual inventory
system is used, and the payable is recorded at the gross or invoice price. If 1
television costing P280 is found defective and is returned, the Russell Company will
make the following entry:
Journal entry: Accounts Payable P 280
Merchandise Inventory P280
#
However, if Russell Company made a cash purchase for future resale, 10 television
sets at a total cost of P2,800. And find that 1 television costing P280 is found defective
and is returned, the Russell Company will make the following entry:
Journal entry: Cash P280
Merchandise Inventory P280
#

B. Payment to Supplier

Purchase on account resulted to accounts payable, wherein the entity will pay its supplier on
or before due.
For example, when Happy T's purchases an order of T-shirts on account from their supplier
for P1,000, the entry needed upon payment would be:
Journal entry: Accouts Payable P500
Cash P500
#

Application of Purchase Discount

Merchandise businesses may also be offered discount terms from their suppliers, just
like the discount terms they could offer to their customers. Any discounts related to prompt
payment will be recorded in “Merchandise Inventory”.
For example, if Happy T's had received 1% 10-day, net 30 terms on the purchase of a
shipment of T-shirts costing 2,000, the business would record two entries. The first when the
order is placed and the second when the amount due is paid within the discount period. Upon
Purchase, journal entry of Happy T’s (1st entry)
Merchandise Inventory P2000
Accounts Payable P2000
#

Upon Payment if the discount was not availed, journal entry of Happy T’s:
Accounts Payable P2000
Cash P2000

This module is made to ACADEMICALLY HELP and ENRICH the SCC-SHS students. Please DON’T REPLICATE without
proper permission and authorization.
#

However, if Happy T’s paid within the 10-day discount period, JE would be:
Accounts Payable P2000
Cash P1980
Merchandise Inventory P 20
#

C. Sale to Customer

Sales are the primary source of revenue for merchandising businesses. Merchandising
businesses can generate Cash Sales or Sales on Account.

If cash is collected at the time of the sale, this is known as a cash sale. For example, if Happy
T's sells a T-shirt (that cost P75) to a customer for P100 and the customer pays them in cash,
the business would make an entry to record the transaction.

Journal entry: (1st Entry) Cash P100

Sales P100
#

(2nd Entry) Cost of Goods Sold P75

Merchandise Inventory P75
#
** 2nd entry is needed to record the cost of merchandise and update the
balance of the merchandise inventory after sale

If cash is not collected at the time of the sale and the customer agrees to pay for the sale at a
later time, this is known as a sale on account. For example, if Happy T's sells a large order of
shirts with a cost of P400 for P500 to a local customer for its company picnic and agrees to
let the customer pay in 30 days, it would make an entry for accounts receivable.

Journal entry: (1st Entry) Accounts Receivable P500

Sales P500
#

(2nd Entry) Cost of Goods Sold P400

Merchandise Inventory P400
#
** 2nd entry is needed to record the cost of merchandise and update the
balance of the merchandise inventory after sale

When goods are shipped, either the entity or the customer has to pay for the shipping, as
mentioned from the previous lesson, the payment will be based according to the type of
shipment (FOB Shipping Point or FOB Destination). Continuing our example,

Happy T's customer purchased its T-shirts with a shipping term of FOB Destination,
shipping fee is worth Php25. This means that Happy T's still owned the T-shirts as
long as the T-shirt is still on the carrier and it means that Happy T's is responsible for
paying for the shipping. Happy T's would make an entry to record the P25 cost of
shipping the merchandise to its customer.

Journal entry: Freight-out or Transportation Expense P25

This module is made to ACADEMICALLY HELP and ENRICH the SCC-SHS students. Please DON’T REPLICATE without
proper permission and authorization.
Cash P25
# Application
of Sales Return and Allowances

A sales return, is when a customer brings back a product they bought from a
business, either for a refund or exchange. No matter how great your products are,
you’re bound to have purchase returns at some point or another.

A customer might return an item for several reasons. Maybe the customer:

• Bought more than they needed

• Bought the wrong product
• Found a better-priced good elsewhere
• Received the wrong good
• Received a damaged good

For Example, Happy T's sells a 100pcs of shirts (costing P4 each T-shirt) for P500 to a local
customer for its company picnic and agrees to let the customer pay in 30 days, it would make
an entry for accounts receivable.

Journal entry: (1st Entry) Accounts Receivable P500

Sales P500
#

(2nd Entry) Cost of Goods Sold P400

Merchandise Inventory P400
#

Later on, the customer found out that 20 T-shirts were ripped. The ripped T-shirts were
priced at 5pesos each, and decided to return it to Happy T’s. Hence, it would make an
entry for the return:

Journal entry: (1st Entry) Sales Returns and Allowances P100

Accounts Receivable P100
#

(2nd Entry) Merchandise Inventory P80

Cost of Goods Sold P80
#

Note: Some companies do not maintain a 'Sales Returns and Allowances" account. They record
customer returns by directly debiting "Sales". However, it is good to maintain the aforementioned
account to be able to track returns and allowances and make decisions about them if necessary.

D. Collection from Customer

Sales on account resulted to accounts receivable, wherein customers will pay on or its due or
the collection shall be made. For example, when Happy T's sells a large order of shirts for
P500 to a local customer for its company picnic and agrees to let the customer pay in 30 days.
After 30 days the customer pays Happy T's the P500 they owe them, Happy T's would make
an entry to record the payment.
Journal entry: Cash P500
This module is made to ACADEMICALLY HELP and ENRICH the SCC-SHS students. Please DON’T REPLICATE without
proper permission and authorization.
Accounts Receivable P500
#
Application of Sales Discount

Early payment discounts provided to the buyer from the seller, offered to encourage
customers to make early payments. This incentive is recorded in the sales discounts account.
Sales discounts is a contra revenue account and is used to reduce the total sales to arrive at
net sales in the multiple-step income statement. A contra account is an account that has a
balance opposite of the normal balance. Revenue accounts normally have a credit balance.
The sales discount contra revenue account has a normal debit balance and reduces total sales.
In order to determine the amount of the discount provided, the seller will issue credit terms to
the buyer.
For example, in the sale to the local business having a company picnic amounting to
P500, Happy T's might have offered a 2% 10-day, net 30 (2/10, n/30) discount. This means
that if the customer pays Happy T's within 10 days of the invoice date, they can take
advantage of a 2% discount; otherwise, the full amount is due 30 days from the invoice date.
In this case, the customer would pay P490 if they pay within 10 days or pay the full
$500 if they pay in 11 to 30 days. If the customer paid within the 10-day discount period,
Happy T's would make an entry to record the transaction.
Journal entry of Happy T if customer availed the discount:

Cash P490
Sales Discount P 10
Accounts Receivable P500
#

Under Periodic Inventory System:

A. Purchase from Supplier

The purchase of inventory items for sale to consumers is recorded in the Purchase account.
Purchase account is a cost account. Purchase of Merchandise Inventory can be Cash
Purchase or Purchase on Account.

For example, Happy T's, a local retailer, buys and resells T-shirts. When the business
purchases an order of T-shirts in cash from their supplier for P1,000, it would make an entry
to properly record the purchase.

Journal entry: Purchase P1,000

Cash P1,000
#

Another example, Happy T's, a local retailer, buys and resells T-shirts. When the business
purchases an order of T-shirts on account from their supplier for P1,000, it would make an
entry to properly record the purchase.

Journal entry: Purchase P1,000

Accounts Payable P1,000
#
When goods are shipped, either the supplier or the retailer has to pay for the shipping, as
mentioned from the previous lesson, the payment will be based according to the type of
shipment (FOB Shipping Point or FOB Destination). Continuing our example,
This module is made to ACADEMICALLY HELP and ENRICH the SCC-SHS students. Please DON’T REPLICATE without
proper permission and authorization.
Happy T's purchased its T-shirts with FOB shipping point terms, shipping fee is
worth Php50. This means that Happy T's owned the T-shirts as soon as the carrier
picked up the T-shirts from the supplier and that Happy T's is responsible for paying
for the shipping. Happy T's would make an entry to record the P50 cost of shipping.

Journal entry: Freight-in P50

Cash P50
#

If Happy T's had purchased its T-shirts with FOB destination terms, it would have owned the
T-shirts when they arrived rather than when the seller shipped them. Happy T's also would
not be responsible for the cost of shipping and would not make a journal entry.

Application of Purchase Return

Under Periodic Inventory system, Purchase Returns and Allowances account is used.
To illustrate, assume that the Russell Company purchased on account, for future
resale, 10 television sets at a total cost of P2,800. Under the perpetual inventory
system is used, and the payable is recorded at the gross or invoice price. If 1
television costing P280 is found defective and is returned, the Russell Company will
make the following entry:
Journal entry: Accounts Payable P 280
Purchased Return and Allowances P280
#
However, if Russell Company made a cash purchase for future resale, 10 television
sets at a total cost of P2,800. And find that 1 television costing P280 is found defective
and is returned, the Russell Company will make the following entry:
Journal entry: Cash P280
Purchased Return and Allowances P280
#

B. Payment to Supplier

Purchase on account resulted to accounts payable, wherein the entity will pay its supplier on
or before due.
For example, when Happy T's purchases an order of T-shirts on account from their supplier
for P1,000, the entry needed upon payment would be:
Journal entry: Accouts Payable P500
Cash P500
#
(same entry from the Perpetual Inventory system)
Application of Purchase Discount

This module is made to ACADEMICALLY HELP and ENRICH the SCC-SHS students. Please DON’T REPLICATE without
proper permission and authorization.
Merchandise businesses may also be offered discount terms from their suppliers, just
like the discount terms they could offer to their customers. Any discounts related to prompt
payment will be recorded in an account titled "purchases discounts" (contra account).
For example, if Happy T's had received 1% 10-day, net 30 terms on the purchase of a
shipment of T-shirts costing 2,000, the business would record two entries. The first when the
order is placed and the second when the amount due is paid within the discount period. Upon
Purchase, journal entry of Happy T’s (1st entry)
Purchases P2000
Accounts Payable P2000
#

Upon Payment if the discount was not availed, journal entry of Happy T’s:
Accounts Payable P2000
Cash P2000
#

However, if Happy T’s paid within the 10-day discount period, JE would be:
Accounts Payable P2000
Cash P1980
Purchase Discount P 20
#

C. Sale to Customer

Sales are the primary source of revenue for merchandising businesses. Merchandising
businesses can generate Cash Sales or Sales on Account.

If cash is collected at the time of the sale, this is known as a cash sale. For example, if Happy
T's sells a T-shirt (that cost P75) to a customer for P100 and the customer pays them in cash,
the business would make an entry to record the transaction.

Journal entry: (1st Entry) Cash P100

Sales P100
#
** 2nd entry is no longer needed under periodic inventory system

If cash is not collected at the time of the sale and the customer agrees to pay for the sale at a
later time, this is known as a sale on account. For example, if Happy T's sells a large order of
shirts with a cost of P400 for P500 to a local customer for its company picnic and agrees to
let the customer pay in 30 days, it would make an entry for accounts receivable.

Journal entry: (1st Entry) Accounts Receivable P500

Sales P500
#
** 2nd entry is no longer needed under periodic inventory system

When goods are shipped, either the entity or the customer has to pay for the shipping, as
mentioned from the previous lesson, the payment will be based according to the type of
shipment (FOB Shipping Point or FOB Destination). Continuing our example,

Happy T's customer purchased its T-shirts with a shipping term of FOB Destination,
shipping fee is worth Php25. This means that Happy T's still owned the T-shirts as
long as the T-shirt is still on the carrier and it means that Happy T's is responsible for
This module is made to ACADEMICALLY HELP and ENRICH the SCC-SHS students. Please DON’T REPLICATE without
proper permission and authorization.
paying for the shipping. Happy T's would make an entry to record the P25 cost of
shipping the merchandise to its customer.

Journal entry: Freight-out or Transportation Expense P25

Cash P25
#
(same entry from the Perpetual Inventory system)

Application of Sales Return and Allowances

A sales return, is when a customer brings back a product they bought from a
business, either for a refund or exchange. No matter how great your products are,
you’re bound to have purchase returns at some point or another.

A customer might return an item for several reasons. Maybe the customer:

• Bought more than they needed

• Bought the wrong product
• Found a better-priced good elsewhere
• Received the wrong good
• Received a damaged good

For Example, Happy T's sells a 100pcs of shirts (costing P4 each T-shirt) for P500 to a local
customer for its company picnic and agrees to let the customer pay in 30 days, it would make
an entry for accounts receivable.

Journal entry: (1st Entry) Accounts Receivable P500

Sales P500
#

Later on, the customer found out that 20 T-shirts were ripped. The ripped T-shirts were
priced at 5pesos each, and decided to return it to Happy T’s. Hence, it would make an entry
for the return:

Journal entry: (1st Entry) Sales Returns and Allowances P100

Accounts Receivable P100
#

Note: Some companies do not maintain a 'Sales Returns and Allowances" account. They record
customer returns by directly debiting "Sales". However, it is good to maintain the aforementioned
account to be able to track returns and allowances and make decisions about them if necessary.

D. Collection from Customer

Sales on account resulted to accounts receivable, wherein customers will pay on or its due or
the collection shall be made. For example, when Happy T's sells a large order of shirts for
P500 to a local customer for its company picnic and agrees to let the customer pay in 30 days.
After 30 days the customer pays Happy T's the P500 they owe them, Happy T's would make
an entry to record the payment.
Journal entry: Cash P500

This module is made to ACADEMICALLY HELP and ENRICH the SCC-SHS students. Please DON’T REPLICATE without
proper permission and authorization.
Accounts Receivable P500

#
Application of Sales Discount
Early payment discounts provided to the buyer from the seller, offered to encourage
customers to make early payments. This incentive is recorded in the sales discounts account.
Sales discounts is a contra revenue account and is used to reduce the total sales to arrive at
net sales in the multiple-step income statement. A contra account is an account that has a
balance opposite of the normal balance. Revenue accounts normally have a credit balance.
The sales discount contra revenue account has a normal debit balance and reduces total sales.
In order to determine the amount of the discount provided, the seller will issue credit terms to
the buyer.
For example, in the sale to the local business having a company picnic amounting to
P500, Happy T's might have offered a 2% 10-day, net 30 (2/10, n/30) discount. This means
that if the customer pays Happy T's within 10 days of the invoice date, they can take
advantage of a 2% discount; otherwise, the full amount is due 30 days from the invoice date.
In this case, the customer would pay P490 if they pay within 10 days or pay the full
$500 if they pay in 11 to 30 days. If the customer paid within the 10-day discount period,
Happy T's would make an entry to record the transaction.
Journal entry of Happy T if customer availed the discount:

Cash P490
Sales Discount P 10
Accounts Receivable P500
#

Self-check

Name: ________________________________________________________ Course & Year: ____________

Directions: Prepare the journal entries under Periodic System

Chart of Accounts: Cash; Accounts Receivable; Merchandise Inventory; Accounts Payable;

Sales; Sales Returns & Allowances; Sales Discount; Utilities Expense; Salaries Expense; Rent
Expense; P. Sako, Capital

This module is made to ACADEMICALLY HELP and ENRICH the SCC-SHS students. Please DON’T REPLICATE without
proper permission and authorization.
After winning a lotto worth a million peso, Ms. Pina Sako decided to put up her own
merchandising business “PAPASA Commercial”. The following were the narrative transactions
of PAPASA Commercial for the month of December 20A:

Dec. 1- Mrs. Pina Sako invested the following: Cash amounting to P600,000 and Merchandise
inventory with a fair value of P200,000.

Journal Entry:

Dec. 5- Sold merchandise on account costing P20,000 for P35,000; terms were 2/10, N/30

Journal Entry:

Dec. 6- Customer returned the merchandise that had been sold on account for P2000.

Journal Entry:

Dec. 7- Received payment from customer for merchandise sold on December 5.

Journal Entry:

Dec. 10- Purchased on account merchandise for resale for P8,000; terms were 2/10, N/30
(purchases recorded at invoice price)

Journal Entry:

Dec. 11- Paid P200 freight on the 8,000 purchase; term FOB Shipping point.

Journal Entry:

Dec. 15- Return merchandise costing P500 (part of the 8000 purchase)

Journal Entry:

Dec. 18- Paid for merchandise purchased (refer to December 10 transaction)

Journal Entry:

Dec. 20- Paid the following expenses: Utilities- 5,000; Salaries- 3,000; and Rent- 2,000 Journal

Entry:

Directions: Prepare the journal entries under Perpetual System

Chart of Accounts: Cash; Accounts Receivable; Merchandise Inventory; Accounts Payable;

Sales; Sales Returns & Allowances; Sales Discount; Purchases; Purchase Returns &
Allowances; Purchase Discount; Freight-in; Utilities Expense; Salaries Expense; Rent Expense;
P. Sako, Capital

After winning a lotto worth a million peso, Mrs. Pina Sako decided to put up her own
merchandising business “PAPASA Commercial”. The following were the narrative transactions
of PAPASA Commercial for the month of December 20A:

This module is made to ACADEMICALLY HELP and ENRICH the SCC-SHS students. Please DON’T REPLICATE without
proper permission and authorization.
Dec. 1- Mrs. Pina Sako invested the following: Cash amounting to P600,000 and Merchandise
inventory with a fair value of P200,000.

Journal Entry:

Dec. 5- Sold merchandise on account costing P20,000 for P35,000; terms were 2/10, N/30

Journal Entry:

Dec. 6- Customer returned the merchandise that had been sold on account for P2000.

Journal Entry:

Dec. 7- Received payment from customer for merchandise sold on December 5.

Journal Entry:

Dec. 10- Purchased on account merchandise for resale for P8,000; terms were 2/10, N/30
(purchases recorded at invoice price)

Journal Entry:

Dec. 11- Paid P200 freight on the 8,000 purchase; term FOB Shipping point.

Journal Entry:

Dec. 15- Return merchandise costing P500 (part of the 8000 purchase)

Journal Entry:

Dec. 18- Paid for merchandise purchased (refer to December 10 transaction)

Journal Entry:

Dec. 20- Paid the following expenses: Utilities- 5,000; Salaries- 3,000; and Rent- 2,000

Journal Entry:

------------------------------------------------------------- End of Lesson 5 ----------------------------------------------------------

Good job! Keep on reading the rest of the module to learn more. God Bless

REFERENCES:

DIWA, Fundamentals of Accountancy, Business, and Management 2nd ed

Rafael M. Lopez Jr. (2016), Fundamentals of Accountancy, Business and Management 1 Wild,
J. (2009). Principles of Accounting 19th Ed. McGraw Hill Publishing.
This module is made to ACADEMICALLY HELP and ENRICH the SCC-SHS students. Please DON’T REPLICATE without
proper permission and authorization.
Haddocl, M., Proce, J., & Farina, M. (2012). College Accounting: A Contemporary Approach,
2nd ed. New York: McGraw-Hill/Irvin

Valencia, E.G. & Roxas, G.F. (2010). Basic Accounting 3rd ed.

Mandaluyong City, Philippines: Valencia Educational Supply.

https://courses.lumenlearning.com/ https://openstax.org/books/principles-financial-
accounting https://www.wyzant.com/resources/lessons/accounting
https://www.coursehero.com

This module is made to ACADEMICALLY HELP and ENRICH the SCC-SHS students. Please DON’T REPLICATE without
proper permission and authorization.