FABM1 Q4 Module 8 Terminologies Used in Merchandising Business
FABM1 Q4 Module 8 Terminologies Used in Merchandising Business
Self-Learning
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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(FABM 1)
Self-Learning
Terminologies used in
Module
8
Merchandising Business
12
Quarter 4
Introductory Message
For the facilitator:
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:
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:
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.
Posttest - This measure how much you have learned from the
entire module.
EXPECTATIONS
PRETEST
Directions: Write true if the statement is correct and false if it is wrong.
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.
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.
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”.
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.
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)
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.
b. GHI Co. bought merchandise for cash with a list price of P50,000.
Terms:10%, 15%
Alternative Computation:
P50,000 x 0.90 = 45,000
45,000 x 0.85 = 38,250
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.
The journal entries for the above transactions will be discussed in Module 10.
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.
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
MERCHANDISE
Freight Terms:
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
Figure 8.2. The illustration shows who will shoulder the shipping cost
Ownership
Ownership
passes to
passes to
buyer here
buyer here
Figure 8.3. The illustration shows who will be the owner while the goods is in transit
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.
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:
Both systems can be used to record information about the cost of beginning
and ending inventory and the cost of goods sold.
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.
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
WRAP-UP
To summarize what you have learned from the lesson, answer the following.
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. 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
References
Epstein, Lita, MBA Bookkeeping Workbook for Dummies. Wiley Publishing, Inc.
Hernane, Milagros B.,et.al 2014. Principles of Accounting. Allen Adrian Books Inc.
Valencia, Edwin G. 4th Edition. Basic Accounting (Concepts, Principles, Procedures and
Applications) . Valencia Educational Supply