ACCOUNTING FOR MERCHANDISING BUSINESS (TERMS)
Sales Discount
A cash discount on the point of view of the seller.
Sales discount
A contra-revenue account used when a buyer avails of the cash discount from the seller due to early payment of his account.
Periodic Inventory System
A method of inventory valuation for financial reporting purposes in which a physical count of the inventory is performed at specific intervals.
Purchase discount
Account to record the cash discount availed by the company.
Purchase Account
Account which Periodicl Inventory System utilizes.
Merchandise Inventory Account
Account which Perpetual Inventory System utilizes.
Cost of Goods Sold and Inventory
Accounts which the perpetual inventory system provides continuous record.
Trade Discounts
Are a reduction granted by a supplier of goods/services on the list or catalogue prices of the goods supplied. It is provided due to business considerations such as trade practices, large quantity orders, market competitions, etc.
Revenue from sales
Arise from the sale of goods.
Invoice Price
Basis for invoicing and recording after discount is deducted from the published list price.
Freight Collect
Buyer agrees to pay the transportation cost upon receipt of goods at destination point.
Free on Board (FOB) Shipping Point
Buyer agrees to shoulder transportation cost from shipping point up to destination.
Periodic Inventory System
Company determines the quantity of inventory on hand only periodically by having physical count.
Periodic Inventory System
Company determines the quantity of inventory on hand only periodically.
Perpetual Inventory System
Continuously tracks changes in the inventory account. Directly record purchases to the inventory account.
Sales returns and allowances
Customers return merchandise because it is damaged or defective, of inferior quality and not in accordance with their specifications, the seller.
Returns
Defective, poor quality or erroneous merchandise returned and delivered to source.
Operating Expenses
Expenses other than the cost of goods sold incurred to run the business.
Cost of Goods Sold Available for Sale=Net Purchases+Beginning Inventory
Formula for Cost of Goods Sold Available
Gross Profit=Net Sales-Cost of Goods Sold
Formula for Gross Profit
Net Income=Gross Profit-Expenses
Formula for Net Income
Net Purchases= Purchases+Freight-in-(Purchase returns and allowances-Purchase Discount)
Formula for Net Purchases
Cost of Goods Sold= Cost of Goods Sold Available for Sale-Ending Inventory
Formula for cost of goods sold
Net Sales= Sales-(Sales returns and allowances)-(Sales Discount)
Formula for net sales
Discount
Given to encourage early payment of accounts.
Refund or replacement of product
If the payment is made through cash, the seller will issue this to the buyer when there is a return of sale.
Cost of Goods Sold
In perpetual inventory system, it is recorded (debit) every sale.
Perpetual Inventory System
Inventory management that provides detailed records of real-time transactions of received or sold stock and continuously shows the cost of goods on hand.
Purchase Discount
Is a cash discount on the point of view of the buyer
Sales returns and allowances
Is a contra revenue account used when customers return merchandise.
Chain Discount
Is a series of trade discounts.
Purchases
Is an account used to record all acquisitions of inventory during the accounting period.
Sales or sales revenue
Is the account which represents the revenue of the merchandising business.
List Price
Is the stated value of the merchandise. It is also known as tag price or catalogue price.
Transportation-in or Freight-in
Is used to record the transportation cost borne by the buyer.
Gross Sales
It consists of total sales for cash and on account/credit during an accounting period.
Credit Terms
It is the agreement between a seller and buyer that lists the timing and amount of payments the buyer will make in the future.
Operating Cycle of Merchandising Business
It refers to the number of days a company takes in converting its inventories to cash.
Cost of Goods Sold
Known as the cost of sales. It is the highest single expense of a merchandising business. Represents the cost of a merchandise sold to a customer.
Allowance
Merchandise with some defects accepted by customer provided a reduction in the invoice price.
Periodic Inventory System
Records all acquisitions of inventory during the accounting period by debiting purchase accounts and for transportation cost by debiting freight in. Purchase returns and allowances and purchase discounts are recorded.
Freight Prepaid
Seller agrees to pay the transportation cost at shipping point.
Free on Board (FOB) Destination
Seller agrees to shoulder all transportation cost from shipping point up to destination point.
Cost of Goods Sold
Tells how much the business paid for the goods or merchandise sold.
Gross Margin from Sales
Tells the difference between the revenue from sales and cost of goods sold.
Free on Board (FOB) Shipping Point
The buyer shoulders the shipping cost. Ownership of the goods passes to the buyer when the inventory leaves the seller's place. The buyer already owns the goods while in transit.
Freight Collect
The freight company collects the freight cost from the buyer.
Free on Board (FOB) Destination
The seller bears the shipping cost. The title passes when the goods are received by the buyer. The seller still owns the goods while in transit.
Freight Prepaid
The seller pays the transportation cost before shipping the goods.
Credit memorandum
The seller usually issues this to the customer which acknowledges that the seller has reduced the amount owed by the customer.
Merchandising Business
These are businesses that buy the products that they sell.
Invoice Price
To account for sales, the amount is represented to this account title which is equal to the list price less any trade discount.
Discount
To encourage customers to pay their accounts promptly or earlier, sellers offer a cash discount.
Net Income
What is left after deducting operating expense from gross margin.
Purchase returns and allowances
account is maintained for return of merchandise purchase.