Introduction to

MERCHANDISING
BUSINESS
Placido M. Menaje, Jr.
BSC-Accounting; CPA; MSA
Accountancy Department

COLLEGE OF BUSINESS &

ACCOUNTANCY

NATIONAL UNIVERSITY

DEFINITION OF TERMS
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.

DEFINITION OF TERMS
continued

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

REVIEW OF THE
ACCOUNTING CYCLE
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)

COMMON BUSINESS
DOCUMENTS
USED IN MERCHANDISING
BUSINESS

BUSINESS DOCUMENTS
Business transactions are
recorded in the books
based
on
source
documents.
This
is
supported
by
the
principle of OBJECTIVITY
(or
reliability
or

BUSINESS DOCUMENTS

PURCHASE ORDER a document

which contains the details of
goods to be bought: number of
units, brand or model, unit price,
and other relevant information.
This is prepared by the buyer and
forwarded to the seller.

CHARGE SALES INVOICE a

document which contains the
detail of goods sold on account.
This is prepared by the seller
based on the purchase order

BUSINESS DOCUMENTS . . .
continued

CASH SALES INVOICE a

document similar to the
charge sale invoice which
contains the detail of goods
sold on cash basis.
OFFICIAL RECEIPT a
document issued by the seller
when he (she) collects from a
credit customer, or when cash
is received from sale of non

BUSINESS DOCUMENTS . . .
continued
DEBIT MEMORANDUM (Debit
Memo) a document prepared
by the buyer informing the
seller of the return of defective
goods and the corresponding
reduction of liability (Accounts
Payable).

CREDIT MEMORANDUM (Credit

Memo) a document prepared
by the seller informing the
buyer that he has reduced his

METHODS OF RECORDING
MERCHANDISING
TRANSACTIONS
1.

Periodic Inventory
Method

2.

Perpetual Inventory
Method

PERIODIC INVENTORY
METHOD

PERIODIC INVENTORY
METHOD

It does not maintain ledger

account for Cost of Sales.

It does not update the
Merchandise Inventory
ledger account.
The cost of merchandise sold
and the cost of merchandise
on hand at the end of the period
is determined through
physical count of the goods.

PERIODIC INVENTORY
METHOD - continued
There is a need to compute for

the Cost of Sales.

This method is used by firms
whose transactions are recorded
manually and whose inventories
are voluminous but with low unit
prices.
It needs an adjusting entry for
the Merchandise Inventory
account to set up the ending

PERIODIC INVENTORY
METHOD - continued
The buyer uses the following

account titles in recording

merchandising transactions:
1. Purchases
2. Purchase Returns and
Allowances
3. Purchase Discount
4. Freight-In

PERIODIC INVENTORY
METHOD - continued
The seller uses the following

account titles in recording

merchandising transactions:
1. Sales
2. Sales Returns and
Allowances
3. Sales Discount
4. Freight-Out
(Transportation-Out or

PERPETUAL
INVENTORY
METHOD

PERPETUAL INVENTORY
METHOD - continued
Separate ledger accounts are

maintained for Merchandise

Inventory and Cost of Sales. In
this way, the cost of goods
already sold and cost of goods
not yet sold are always
(perpetually) available from records.
Physical count of goods on hand
at the end of the year is also
made to CONFIRM the balance of
merchandise
inventory
per

PERPETUAL INVENTORY
METHOD - continued
Any difference between the

physical count and the

ledger balance of the
merchandise inventory
account is either debited or
credited to Inventory Short
or Over account.
If the physical count is less
than the ledger balance,
there is inventory shortage;

PERPETUAL INVENTORY
METHOD - continued
The Inventory Short or Over is

closed to the Cost of Sales

account.
The perpetual inventory method
is
used
by
firms
whose
transactions
are
already
computerized.
Under a manual environment,
this inventory method is used by
firms that maintain few

PERPETUAL INVENTORY METHOD continued

The buyer uses only the

Merchandise Inventory account

for his merchandising
transactions.
The seller uses the following
accounts:
1. Sales
2. Cost of Sales
3. Sales Returns and Allowances
4. Sales Discount
5. Freight-Out (or Delivery
Expense or

End of introduction to

MERCHANDISING
BUSINESS
Next Topic:

MERCHANDISING
TRANSACTIONS