Fundamentals of SENIOR

Accountancy, Business HIGH

SCHOOL
and Management 1 (FABM 1)

Self-Learning

Terminologies used in Module

Merchandising Business
8
Reversing Entries 666
Quarter 4
Fundamentals of Accountancy, Business and Management 1
Quarter 4 – Self-Learning Module 8: Terminologies used Merchandising Business
First Edition, 2020

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 Fundamentals of
SENIOR
Accountancy, Business HIGH
and Management 1 SCHOOL

(FABM 1)

Self-Learning

Terminologies used in
Module

8
Merchandising Business
12
Quarter 4
Introductory Message
For the facilitator:

Welcome to the Senior High School – Fundamentals of Accountancy,

Business, and Management 1 Quarter 4 Self Learning Module on Terminologies used
in Merchandising Business!

This Self-Learning Module was collaboratively designed, developed, and

reviewed by educators from the Schools Division Office of Pasig City headed by its
Officer-in-Charge Schools Division Superintendent, Ma. Evalou Concepcion A.
Agustin, in partnership with the City Government of Pasig through its mayor,
Honorable Victor Ma. Regis N. Sotto. The writers utilized the standards set by the K
to 12 Curriculum using the Most Essential Learning Competencies (MELC) in
developing this instructional resource.

This learning material hopes to engage the learners in guided and independent
learning activities at their own pace and time. Further, this also aims to help learners
acquire the needed 21st-century skills especially the 5 Cs, namely: Communication,
Collaboration, Creativity, Critical Thinking, and Character while taking into
consideration their needs and circumstances.

In addition to the material in the main text, you will also see this box in the
body of the module:

Notes to the Teacher

This contains helpful tips or strategies that
will help you in guiding the learners.

As a facilitator, you are expected to orient the learners on how to use this
module. You also need to keep track of the learners' progress while allowing them to
manage their learning. Moreover, you are expected to encourage and assist the
learners as they do the tasks included in the module.
For the learner:

Welcome to Fundamentals of Accountancy, Business and Management 1

Quarter 2 Self Learning Module on Terminologies used in Merchandising Business!

This module was designed to provide you with fun and meaningful
opportunities for guided and independent learning at your own pace and time. You
will be enabled to process the contents of the learning material while being an active
learner.

This module has the following parts and corresponding icons:

Expectations - This points to the set of knowledge and skills

that you will learn after completing the module.

Pretest - This measures your prior knowledge about the lesson

at hand.

Recap - This part of the module provides a review of concepts

and skills that you already know about a previous lesson.

Lesson - This section discusses the topic in the module.

Activities - This is a set of activities that you need to perform.

Wrap-Up - This section summarizes the concepts and

application of the lesson.

Valuing - This part integrates a desirable moral value in the

lesson.

Posttest - This measure how much you have learned from the
entire module.
 EXPECTATIONS

After going through this module, you are expected to:

1. identify and familiarize the terminologies used in merchandising business;

2. discuss each of the terminologies used in merchandising business;
3. enumerate and differentiate the two major activities of a merchandising
business; and
4. differentiate periodic inventory system from perpetual inventory system.

PRETEST
Directions: Write true if the statement is correct and false if it is wrong.

_____1. Statement 1: Freight-in expense is an operating expense.

Statement 2: Generally, sales are recorded only when the sale is on a cash
basis.
A. Only statement 1 is correct.
B. Only statement 2 is correct.
C. Both statements are correct.
D. Both statements are incorrect.
_____2. Statement 1: Purchases items other than which form part of the inventory
and intended for sale in the normal course of business are recorded as purchases.
Statement 2: Sales return will increase the total net sales for the period
A. Only statement 1 is correct.
B. Only statement 2 is correct.
C. Both statements are correct.
D. Both statements are incorrect.
_____3. Statement 1: If the seller grants an allowance for the reported defective
merchandise, the seller has to issue a credit note to the buyer for the corresponding
amount.
Statement 2: A debit note issued by the supplier to the buyer will increase the
payables of the buyer.
A. Only statement 1 is correct.
B. Only statement 2 is correct.
C. Both statements are correct.
D. Both statements are incorrect.
_____4. Which of the following accounts are not included in the computation of net
purchases but included in computing for total purchases?
A. Freight-In
B. Purchase allowance
C. Purchase discount
D. Purchase returns
_____5. Which of the following is reported as part of the operating expenses?
A. Cost of sales
B. Freight-In
C. Freight-Out
D. Sales allowance
 RECAP

Directions: Write the correct letter of your answer in the space provided.
_____1. Which of the following accounts is used in merchandising but not in service?
A. Depreciation expense
B. Allowance for bad debts
C. Sales return and allowances
D. Freight-out
_____ 2. Which of the following is equal to gross profit plus the cost of sale?
A. Beginning inventory
B. Goods available for sale
C. Ending inventory
D. Sale
_____ 3. Which of the following is equal to gross profit plus operating expenses?
A. Net Income
B. Cost of sales
C. Goods available for sale
D. Gross profit
_____ 4. Statement 1: The operations of a service business involve the purchase of
merchandise for sale (purchasing activity), the sale and distribution of the products
to customers (sales activity).
Statement 2: Operating cycles differ, depending upon the nature of the
business and its operations.
A. Only statement 1 is correct.
B. Only statement 2 is correct.
C. Both statements are correct.
D. Both statements are incorrect.
_____ 5. Statement 1: The revenue activities of a merchandising business involve
providing services to customers.
Statement 2: When merchandise is sold, the revenue is reported as fees
earned, and its cost is recognized as an expense called the cost of merchandise sold.
A. Only statement 1 is correct.
B. Only statement 2 is correct.
C. Both statements are correct.
D. Both statements are incorrect.

LESSON
 A business buys first goods and sells them after with a higher amount to have
a profit.
The two main activities of merchandising business are (1) purchasing
activities and (2) selling activities.

PURCHASING ACTIVITIES
❖ Refers to buying and selling of finished product intended for sale.

The common account titles used in purchasing activities are:

1. Purchases
❖ Under the periodic inventory system, the account title “PURCHASES” is
used to describe the goods that have been acquired and intended for
sale.
But if the business is using a perpetual inventory system, the account
title used to describe the acquisition of product for sale is “merchandise
inventory”

2. Freight-In
❖ Refers to the account title for transportation of cost incurred by the
buyer in transferring the merchandise from the seller. It is also known
as the “transportation-in” account.
❖ This account has a normal debit balance. It is an adjunct account (is
usual added to the related account) of purchases; therefore, it is added
to the purchases account to obtain the total purchases.

3. Purchase Returns
❖ Is used when some of the merchandise purchased is subsequently
returned to the supplier because of defects or noncompliance with the
desired specification of some items. It has a normal credit balance.
❖ A contra account of purchases; therefore, it is a deduction from the
purchases to obtain at the net purchases.

4. Purchase Allowances
❖ A contra-purchase account is used to explain the reduction in the
acquisition price due to reasons similar to purchase returns.
❖ There is no actual physical return of the merchandise to the seller when
there are purchase allowances since the buyer decides to keep them as
a former agreed to a price reduction.

5. Purchase Discounts
❖ A cash discount is used by the sellers to encourage the buyers to pay
earlier purchases made on the account. It is granted when the buyers
pay within the discount period as indicated in the terms of the contract
of sales.
❖ Used to describe the discount taken by the buyer. It reduces the
acquisition price of the merchandise purchased. It is also a contra-
purchase account to arrive at the net purchases and has a credit
normal balance.

The net purchases are computed as follows:

 Purchases P xxx
Add: Freight-In/Transportation In xxx
Total Purchases P xxx
Less: Purchase returns P xxx
Purchase allowances xxx
Purchase discounts xxx xxx
Net Purchases P xxx

SELLING ACTIVITIES
❖ The transferring the title of ownership over the merchandise from the seller
to the buyer for consideration either in money or any other thing of value.

1. Sales
❖ The sale of merchandise is the same as the sale of service, it is recorded
by crediting the revenue account. In a merchandising business, the
revenue account is described as “sales”.

Gross Sales – consists of totals cash sales and credit sales

2. Freight-Out
❖ Refers to the account title for transportation costs incurred by the seller in
transporting the merchandise to the buyer. It is also known as
“transportation-out”, “transportation expense,” or “delivery expense’
account.
❖ This account has a normal debit balance, but it is neither added nor
deducted from the sales account. Freight out is treated as a selling expense
account under the operating expense caption of the Statement of
Comprehensive Income.

3. Sales Returns
❖ Is used when some items of merchandise sold are returned by the buyer
customer because the items delivered are defective or do not comply
with the order’s specifications. To document the acceptance of the
return, the seller would issue a credit memo.
❖ Is a contra-revenue account, so, it is deducted from the sales account
to arrive at the net sales. It has a normal credit balance.

4. Sales Allowances
❖ Used to describe reduction to sales due to reasons similar to sales
returns. However, therefore, there is no actual physical return of the
goods to the seller because the buyer decides to keep them as the seller
allows a price reduction for the merchandise acquired by the buyer.
Likewise, a sale allowance account is a contra-revenue account and has
a normal debit balance.

5. Sales Discounts
❖ The cash discounts on the sale of merchandise are described by the
account title “sales discounts.” This is recorded in the books of
accounts when the buyer pays within the discount period. It reduces
 the sales price of merchandise purchased by the buyer. It is treated as
a contra-revenue account against sales.

The following is a partial income statement presentation of Revenue from Sales

which will be discussed fully in Module 15.
Gross Sales (Cash sales and credit sales) P xxx
Less: Sales returns P xxx
Sales allowances xxx
Sales discounts xxx xxx
Net Sales P xxx

TRADE DISCOUNT VS. CASH DISCOUNT

Most businesses offer a discount to their customers especially those who are
regular customers to encourage them to buy in bulk and to pay their accounts
promptly. There are two kinds of discounts that may be offered by the merchandising
business (1) trade discount and (2) cash discount. The comparison of these two
discounts is shown below:
DISCOUNT- reduction from a certain price or amount
TRADE DISCOUNT CASH DISOOUNT
* offered to encourage customers to buy * offered to encourage customers to pay
in bulk their accounts promptly

* A deduction from the list price granted * A deduction from the selling or purchase
to customers purchase price granted to customers

* This is not recorded in the buyer nor in * Purchase discount (Buyer's book)
in seller's books
* Sales discount (Seller's book)

* This is recorded in the buyer's or

seller's book

Terms:
List Price - original price of goods
Purchase/Sales Price (also called as Invoice Price ) - list price less trade discount
HOW TO COMPUTE THE TRADE DISCOUNT AND CASH DISCOUNT?
TRADE DISCOUNT (BUYER’S POINT OF VIEW)

a. DEF Co. bought merchandise for cash with a list price of P10,000 less
10% trade discount.

List price P10,000

Less: 10% Trade discount (P10,000 x .10) 1,000
Purchase Invoice P 9,000

Journal entry on the books of DEF Co.

Purchases P9,000
Cash P9,000
Purchased merchandise for cash

TRADE DISCOUNT (SELLER’S POINT OF VIEW)

b. GHI Co. bought merchandise for cash with a list price of P50,000.
Terms:10%, 15%

List price P50,000

Less: 10% Trade discount (P50,000 x .10) 5,000
Balance P45,000
Less:15% Trade discount (P45,000 x .15) 6,750
Sales Invoice P38,250

Alternative Computation:
P50,000 x 0.90 = 45,000
45,000 x 0.85 = 38,250

Journal entry on the books of GHI Co.

Cash P38,250
Sales P38,250
Sold merchandise for cash

CASH DISCOUNT

When goods are gold on credit, both parties should have an understanding as
to the amount, mode, and date of payment. These terms are usually printed on the
sales invoice and constitute part of the sales agreement.

To encourage customers to pay their accounts promptly, sellers offer a cash

discount. This discount is usually given if payments are received within a certain
number of days from the date of sale. From the seller’s point of view, a cash discount
is called a SALES DISCOUNT.

To encourage buyers to pay their accounts promptly, a cash discount is

usually given if payments are made within a certain number of days from the date of
purchase. From the seller’s point of view, a cash discount is called PURCHASE
DISCOUNT.
 Some common examples of cash discount terms are:
1. 2/10, n/30 – means that 2% discount will b pay m the date of
transaction.
2. 3/15 – This means that a 3% discount is granted if an account is
paid within 15 days from the date of purchase
3. N/30 – means no cash discount is granted
4. EOM – means that no cash discount is granted but to be settled at
the end of the month

Illustration: Assuming on January 5, S Company sold merchandise to B

Company, P15,000 terms 2/10, n/30 and on January 7, S Company issued a credit
memo to B Company for defective merchandise returned previously purchased on
January 5 amounting to P2,000 and on January 15, S Company received full
payment from B Company.

The journal entries for the above transactions will be discussed in Module 10.

Computation: (from the seller’s point of view)

Accounts Receivable P15,000
Less: Returns on Jan. 7 2,000
Balance P13,000
Less: 2% cash discount (13,000 x 2%) 260
Amount due from B Company P12,740

Computation: (from the buyer’s point of view)

Accounts Payable P15,000
Less: Returns on Jan. 7 2,000
Balance P13,000
Less: 2% cash discount (13,000 x 2%) 260
Amount due to S Company P12,740

As you compare the account titles used are different from each other since the
first computation is on the seller’s point of view which accounts receivable will be
used while the second computation is on the buyer’s point of view which accounts
payable will be used.

TRANSPORTATION COST ON MERCHANDISE PURCHASED OR SOLD

The buyer and the seller must agree on who is responsible for paying any
freight cost on merchandise bought or sold. In computing, transportation costs play
a very vital role. Failure to include transportation costs will affect the cost of goods
sold and ultimately affect the net income. The following terms are important in
understanding transportation costs on merchandise:
 COMMON
CARRIER

Freight Bill Designates:

Who will pay for the
cost, the buyer or the
seller?
➢ FOB Destination
➢ FOB Shipping
Point
Whether the shipment is
➢ Freight prepaid
➢ Freight collect

MERCHANDISE

FOB SHIPPING POINT VS. FOB DESTINATION

▪ FOB is an abbreviation for “free on board”

Freight Terms:

1. FOB Shipping Point

➢ The buyer shoulders the shipping costs (debit Freight In or
Transportation In)
➢ Ownership of the goods passes from the seller to the buyer when
the inventory leave’s the seller’s place of business (shipping
point)
➢ The buyer already owns the goods while in transit

2. FOB Destination
➢ The seller bears the shipping costs (debit Freight Out or
Transportation Out)
➢ 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.
 FOB SHIPPING POINT FOB DESTINATION

Buyer pays Seller pays

freight costs freight costs

SELLER BUYER SELLER BUYER

Figure 8.2. The illustration shows who will shoulder the shipping cost

FOB SHIPPING POINT FOB DESTINATION

Ownership
Ownership
passes to
passes to
buyer here
buyer here

SELLER SELLER BUYER

BUYER

Figure 8.3. The illustration shows who will be the owner while the goods is in transit

FREIGHT PREPAID VS. FREIGHT COLLECT

▪ Both refer to freight payment

▪ Specifically, the terms refer to WHO is paying for the freight shipping would
be the seller or the buyer
▪ FREIGHT PREPAID
➢ The seller pays the transportation costs before the goods sold
▪ FREIGHT COLLECT
➢ The seller pays the transportation costs before shipping the
goods sold
▪ Payment by either party will not dictate who should ultimately shoulder the
costs.
 WHO SHOULDER THE
WHO PAYS THE
FREIGHT TERMS TRANSPORTATION
SHIPPER?
COSTS
FOB Destination,
Seller Seller
Freight Prepaid
FOB Destination,
Seller Buyer
Freight Collect
FOB Shipping Point,
Buyer Seller
Freight Prepaid
FOB Shipping Point,
Buyer Buyer
Freight Collect
Figure 8.4 Shows which party – the buyer or the seller – shoulders the transportation
costs and pays the shipper for various freight terms.

Shipping costs carried by the buyer using the periodic inventory system are
debited to transportation in the account which is added to purchases in computing
for the net cost of purchases for the period, in the income statement.

Shipping costs shouldered by the seller are debited to transportation out the
account, which is also called delivery expense (an operating expense) in the income
statement.

COST OF GOODS SOLD

The cost of goods sold refers to the cost of merchandise sold to customers
during an accounting period. Oftentimes, the cost of goods sold represents the largest
single deduction in a company’s income statement.

The format of the cost of goods sold section of the income statement is shown
as follows:

Merchandise Inventory, beginning P xxx

Add: Purchases P xxx
Transportation-in xxx
Total P xxx
Less: Purchase Returns and Allowances P xxx
Purchase Discounts xxx xxx
Net Purchases xxx
Total Cost of Goods Available for Sale P xxx
Less: Merchandise Inventory, end xxx
Cost of Goods Sold P xxx
ACCOUNTING FOR INVENTORIES

The cost of inventory is a significant item in many businesses’ financial

statements. Thus, good internal control over inventory must be maintained. The
primary objectives of internal control over inventory are safeguarding the inventory
and properly reporting it in the financial statements. At the end of the period, some
of the merchandise will be in inventory or some will have been sold. But which costs
relate to the sold merchandise and which costs relate to the merchandise in
inventory? An accurate merchandise inventory figure is needed to determine the cost
of the merchandise in the inventory and the cost of merchandise sold.

The two accounting systems used for inventories are:

1. Perpetual inventory system

2. Periodic inventory system

Both systems can be used to record information about the cost of beginning
and ending inventory and the cost of goods sold.

PERPETUAL INVENTORY SYSTEM

The perpetual inventory system provides detailed records of the quantity and
cost of each item of inventory and continuously shows the cost of goods on hand.
This inventory system has traditionally been used by companies that sell high-unit
value items such as automobiles, computers, stereo, television sets, furniture, and
other large home appliances since the system also provides an effective means of
control over inventory.

Under the periodic inventory method, the cost of each item is debited to the
Merchandise Inventory account as it is purchased. As items are sold, the
Merchandise Inventory account is credited and the Cost of Goods sold is debited for
the cost of the items sold. At the end of the accounting period, a physical inventory
is taken by actually counting the number of units on hand which is then compared
with the records showing the number of units remaining.

The records for the perpetual inventory system may be maintained manually.
However, such a system is costly and time-consuming for businesses with a large
number of inventory items with many purchase and sales transactions. In most
cases, the record-keeping for the perpetual inventory system is computerized.
PERIODIC INVENTORY SYSTEM

Under the periodic inventory system, the count of the physical inventory takes
place periodically, usually at the end of the accounting period, and no detailed
records of physical inventory on hand are maintained during the period. The
Purchases account is used to record the cost of merchandise bought by the
business. When merchandise is sold, revenue is recorded but not the cost of
merchandise sold. When financial statements are prepared, the company takes a
physical count of the ending merchandise inventory which is then used in computing
the cost of goods sold.

The periodic inventory system is used by merchandising companies with low-

value items of inventory. This is used for its simplicity, but it provides little control
over inventory. Any items not included in the physical count of inventory at the end
of the period are assumed to have been sold. Thus, even if items have been stolen,
they are assumed to have been sold and their cost is included in the cost of goods
sold.

ACTIVITIES

Activity 1
Complete the missing amounts

COMPANIES
A B M
Sales ₱ 200,000 ₱ 300,000 (5)
Beginning Inventory 50,000 50,000 (6)
Purchases 150,000 (3) 100,000
Freight-in 5,000 5,000 10,000
Purchase discount 2,000 2,000 5,000
Goods available for sale (1) 253,000 110,000
Ending inventory 53,000 (4) 75,000
Gross Profit (2) ₱ 83,000 ₱ 50,000

Requirement: Replace the numbered blanks with the appropriate amounts.

Activity 2 Matching: Match column A with the correct answer on column B.
Column A Column B

1. Under which inventory system is a a. Trade Discount

stock card for subsidiary ledger
necessary

2. Contra account that reduces b. Sales Revenue

revenue because of defective items
sold.

3. A discount provided to cutomers to c. Periodic Inventory System

encourage promt payment.

4. A discount provided to customers to d. Sales Returns and Allowances

buy in bulk.

5. A representation of the inflow of e. Cash Discount

assets from the sale of the product.

f. Perpetual Inventory System

WRAP-UP
To summarize what you have learned from the lesson, answer the following.

1. discuss each of the terminologies used in merchandising business;

2. enumerate and differentiate the two major activities of a merchandising

business; and

3. differentiate periodic inventory system from perpetual inventory system.

VALUING

Reflect on this!
 1. What do you mean by the above quotations?
2. How will you able to apply this in your life as a student?

POSTTEST

Directions: Identify each item below. Write your answer before the item number.

_____1. The purchases of G have a list price of P250,000; terms 10/5; n/30. To record
the purchase, the journal entry would be
A. Debit Purchases, Credit Accounts Payable
B. Debit Accounts Payable, Credit Purchases
C. Either A or B
D. Neither A nor B

_____ 2. M is selling a list price of P80,000; 10/5; 1/30; n/60. To record the sales
the debit
A. Debit Sales, Credit Accounts Receivable
B. Debit Accounts Receivable, Credit Sales
C. Either A or B
D. Neither A nor B

_____ 3. (True or False) Generally, sales are recorded only when the sale is on a cash
basis.

_____ 4. Which company would most likely use a periodic inventory system?
A. Toyota
B. Camella Homes
C. SM Hypermarket
D. Honda

_____ 5. Which is not a contra account?

A. Freight In
B. Purchase Returns and allowances
C. Sales Discount
D. Sales Returns and Allowances
 KEY TO CORRECTION

5. A
5. C D 5. 4. C
4. A C 4.
3. False
A 3.
3. A 2. B
D 2.
2. A C 1. 1. A
1. D POSTTEST
PRETEST RECAP

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Management 1. Bandolin Enterprise. San Juan, DA. 2018. Fundamentals
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Rabo, JS. Tugas,FC.Salendrez, HE. 2016. Fundamentals of Accountancy, Business,

and Management 1. Vibal Group Inc.

Manuel, Zenaida Vera-Cruz 18th Edition Accounting Process_Basic Concepts and

Procedures

Epstein, Lita, MBA Bookkeeping Workbook for Dummies. Wiley Publishing, Inc.

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