Lesson 027 - Accounting for Merchandising Operations 1: Sales and Purchases

Summary

This video from Search was Accounting Lessons PH delves into the intricacies of accounting for merchandising operations. It explains the concept of inventory as a current asset, the operating cycle of a merchandising entity, and the importance of understanding gross invoice price, including trade and chain discounts. The lesson further explores sales transactions, including credit terms, sales returns, and allowances, providing examples of journal entries for various scenarios. It also covers purchase transactions, emphasizing the periodic inventory system and illustrating how to record purchases, returns, and discounts. The video concludes with a problem on computing net sales and purchases, offering practical insights into the accounting process for businesses dealing in goods.

Takeaways

• 😀 Merchandising operations involve buying and selling goods rather than providing services.
• 📦 Merchandise inventory, or simply inventory, is a company resource and is considered an asset, reported as a current asset on financial statements.
• 🔄 The operating cycle of a merchandising entity typically starts with cash, involves purchasing inventory, making sales (either for cash or on credit), and ends with collecting accounts receivable to regain cash.
• 📝 The gross invoice price in accounting for merchandising operations is recorded at the original list price before any trade discounts are applied.
• 💰 Trade discounts are deductions from the list price that encourage buyers to purchase more merchandise, but they do not affect the gross invoice price recorded.
• 🛒 Examples of merchandising operations include grocery stores, department stores, online retailers, and appliance centers.
• 📉 Sales returns and allowances are important aspects of merchandising; returns imply a cancellation of sale with a refund, while allowances are granted if the customer keeps the merchandise despite dissatisfaction.
• 📋 Sales transactions involve the transfer of legal ownership of goods from the seller to the buyer, and they are the main revenue-producing activity for merchandising operations.
• 📝 In sales transactions, terms of payment such as '2/10, net 30' are specified on the invoice, offering discounts for early payment and setting a deadline for the full amount.
• 🛍️ Purchase transactions, from the buyer's perspective, involve recording purchases and accounts payable, and may include purchase discounts and returns.
• 📊 To calculate net sales and net purchases, one must consider gross amounts, sales and purchase discounts, and returns and allowances, which are subtracted from the gross figures to arrive at net totals.

Q & A

What is the definition of merchandising operations?

Merchandising operations refer to the business activity of buying and selling goods. It involves purchasing goods first to be sold in a retail store, rather than providing services.

What is the term used for the goods that a merchandising company sells to its customers?

The goods that a merchandising company sells to its customers are called merchandise inventory or simply inventory.

How is inventory classified in financial statements?

Inventory is classified as a current asset in financial statements because it is a company resource that is expected to be converted into cash within a short period.

What is the operating cycle of a merchandising entity?

The operating cycle of a merchandising entity starts with cash, then to inventory from purchase transactions, followed by sales transactions, which may include accounts receivable, and finally, the collection of receivables leading back to cash.

What is the gross invoice price in the context of merchandising operations?

The gross invoice price is the original price of the merchandise before any trade discounts are applied. It is the amount recorded in the books before considering any deductions that may encourage the buyer to purchase more.

How do you calculate the gross invoice price when given a list price and a trade discount?

The gross invoice price is calculated by subtracting the trade discount from the list price or by multiplying the list price by the complement percentage of the trade discount (100% - trade discount percentage).

What is the significance of sales transactions in merchandising operations?

Sales transactions are significant in merchandising operations as they represent the transfer of legal ownership of goods from the seller to the buyer, and they are the main revenue-producing activity for a merchandising business.

What are the terms of payment called when goods are sold on account?

The terms of payment when goods are sold on account are called credit terms, which may include specific discount percentages and payment deadlines, such as '2/10 net 30'.

What are sales returns and allowances in the context of merchandising operations?

Sales returns are merchandise returned to the seller, implying a cancellation of the sale, while sales allowances are granted to customers who keep the merchandise despite being unsatisfied with their purchase.

How are sales transactions recorded in the books when goods are sold on account and a customer pays within the discount period?

When goods are sold on account and a customer pays within the discount period, the sales transaction is recorded with a debit to cash for the amount received minus the discount, a credit to sales discount for the discount amount, and a credit to accounts receivable for the original sales amount.

What is the difference between the periodic and perpetual inventory systems in recording purchases?

In the periodic inventory system, inventory accounts are updated only periodically, usually at the end of an accounting period, whereas in the perpetual inventory system, inventory accounts are updated with each purchase and sale transaction.

How are purchase transactions recorded in the books when a company buys merchandise on credit?

When a company buys merchandise on credit, the transaction is recorded with a debit to purchases for the amount of the purchase and a credit to accounts payable for the same amount, indicating the obligation to pay the seller in the future.

What is the process for recording purchase returns and allowances in the books?

Purchase returns and allowances are recorded with a debit to cash for the amount of the refund and a credit to purchase returns and allowances, indicating the reduction in the purchase amount due to returned goods.

How are net sales and net purchases calculated for a merchandising company?

Net sales are calculated by subtracting sales discounts and sales returns and allowances from gross sales. Net purchases are calculated by subtracting purchase discounts and purchase returns and allowances from gross purchases.

Outlines

00:00

🛒 Introduction to Merchandising Operations

This paragraph introduces the concept of merchandising operations, which involves buying and selling goods rather than offering services. The speaker explains that the goods sold by a merchandising company are referred to as merchandise inventory or simply inventory, which is considered a company asset and reported as a current asset in financial statements. Examples of merchandising operations include grocery stores, department stores, and online retail. The paragraph also outlines the operating cycle of a merchandising entity, starting with cash, leading to inventory purchases, sales, and eventually the collection of accounts receivable, thus completing the cycle with cash again.

05:01

📝 Understanding Gross Invoice Price in Merchandising

The speaker delves into the specifics of recording transactions in merchandising, emphasizing the importance of the gross invoice price. Merchandise is recorded at its list price before any trade discounts are applied. Trade discounts are incentives for buyers to purchase more goods, but they are not recorded in the books; only the gross invoice price, which is the list price minus any trade discounts, is recorded. The paragraph provides an example calculation for determining the gross invoice price after a trade discount, illustrating two methods for doing so and highlighting the importance of understanding these calculations for accurate accounting in merchandising operations.

10:05

🏬 Sales Transactions and Legal Ownership Transfer

This section discusses the nature of sales transactions in merchandising, where the legal ownership of goods is transferred from the seller to the buyer. The speaker explains that revenue is earned each time a sale is made, and this is the main revenue-producing activity for merchandising operations. The paragraph also covers sales made on credit, where terms of payment, known as credit terms, are specified on the invoice. These terms may include discounts for early payment and deadlines for the full payment. The speaker provides an example of how to calculate the cash discount when a customer pays within the discount period.

15:05

🔄 Sales Returns and Allowances in Merchandising

The speaker addresses the topic of sales returns and allowances, explaining that sales returns occur when merchandise is returned to the seller, resulting in a cancellation of the sale and a refund to the buyer. Sales allowances, on the other hand, are granted when the customer keeps the merchandise despite dissatisfaction. The paragraph provides an example of journal entries for sales transactions, including sales returns and allowances, using transactions from Lisa Merchandising as a case study. The example illustrates how to properly record sales revenue, accounts receivable, and cash refunds for returned merchandise.

20:08

🛍️ Recording Sales Transactions in Journal Entries

This paragraph provides a detailed walkthrough of how to record sales transactions in journal entries, using specific transactions from Lisa Merchandising as examples. The transactions include sales made on credit with terms of payment, sales returns, and the subsequent collection of accounts receivable with the application of a cash discount. The speaker explains the process of debiting and crediting accounts such as cash, sales revenue, accounts receivable, sales returns and allowances, and sales discounts, providing a clear understanding of the accounting treatment for sales transactions.

25:23

🛍️ Purchase Transactions and Their Recording

The focus shifts to purchase transactions from the buyer's perspective. The speaker explains that purchases are a necessary part of the merchandising process to acquire inventory for resale. The paragraph outlines the process of recording purchase transactions using the periodic system of inventory, which updates inventory accounts periodically rather than with each transaction. Examples of purchase transactions, including cash purchases, purchases on credit, purchase returns, and the application of cash discounts, are provided, illustrating the journal entries for each scenario.

30:23

📊 Computing Net Sales and Purchases for Financial Statements

The speaker introduces the computation of net sales and purchases, which are essential for preparing the income statement. The paragraph explains how to calculate net sales by starting with gross sales and subtracting sales discounts and sales returns and allowances. Similarly, net purchases are calculated by deducting purchase discounts and purchase returns and allowances from gross purchases. The example provided uses figures from Gab Company to demonstrate the computation process, resulting in the determination of net sales and net purchases, which are crucial for understanding the company's true sales and cost of goods sold.

35:37

🎓 Conclusion of Merchandising Operations Lesson

In the concluding paragraph, the speaker summarizes the lesson on merchandising operations and hints at the next topic to be covered, which involves transportation and the determination of ownership of goods when the buyer and seller are located in different places. The speaker thanks the audience for watching the accounting lesson and wishes them a great day, indicating the end of the current educational session.

Keywords

💡Merchandising Operations

Merchandising operations refer to the business activity of buying and selling goods. In the context of the video, it is the core activity of the company being discussed, where the company purchases goods with the intent to resell them for a profit. The script mentions that the goods sold are called merchandise inventory or simply inventory, highlighting the importance of understanding this concept for accounting purposes.

💡Inventory

Inventory is a term used to describe the goods that a merchandising company has on hand for sale. It is considered a current asset in financial statements, as it is a company resource that is expected to be converted into cash within a short period. The script explains that inventory is recorded as an asset, emphasizing its significance in the accounting process for a merchandising business.

💡Gross Invoice Price

The gross invoice price is the original price of the merchandise before any discounts are applied. The script discusses how this price is recorded in the books of a merchandising company and provides examples of how to calculate the gross invoice price after trade discounts have been deducted, which is crucial for accurately accounting for the cost of goods purchased.

💡Trade Discounts

Trade discounts are reductions given by the seller to the buyer to encourage purchases in larger quantities or to offer special pricing. The script explains the concept of trade discounts with examples, showing how they affect the gross invoice price and ultimately the cost recorded in the company's books.

💡Sales Transaction

A sales transaction involves the transfer of legal ownership of goods from the seller to the buyer. The script emphasizes that revenue is earned each time a sale is made, and it is the main revenue-producing activity for a merchandising operation. The video provides examples of how sales transactions are recorded in the company's books, including the transfer of ownership.

💡Credit Terms

Credit terms specify the conditions under which payment for goods sold on credit is expected to be made. The script discusses various credit terms, such as '2/10 net 30', which means the buyer can take a 2% discount if they pay within 10 days, but the full amount is due within 30 days. Understanding credit terms is essential for managing accounts receivable and offering competitive payment options.

💡Sales Returns and Allowances

Sales returns and allowances refer to merchandise that is returned to the seller and the subsequent adjustments made to the sales revenue. The script explains that sales returns involve the cancellation of a sale and a refund to the buyer, while allowances are granted when the customer keeps the merchandise despite dissatisfaction. These concepts are important for accurately reflecting the company's revenue and handling customer dissatisfaction.

💡Journal Entries

Journal entries are the recording of financial transactions in the books of a company. The script provides examples of how to create journal entries for various transactions, such as sales, purchases, and returns. These entries are essential for maintaining accurate financial records and understanding the impact of each transaction on the company's financial position.

💡Purchase Transactions

Purchase transactions are the accounting records of goods bought by a company to be sold at a later date. The script discusses how these transactions are recorded, using the periodic inventory system, and provides examples of journal entries for purchases, including cash payments and purchases on credit.

💡Purchase Discounts and Returns

Purchase discounts are reductions in the purchase price given by the seller to the buyer for prompt payment, while purchase returns are goods that are returned to the seller by the buyer. The script explains how to calculate and record these items, which are important for determining the net cost of purchases and managing inventory costs effectively.

💡Net Sales and Purchases

Net sales and net purchases are the final amounts of sales and purchases after deducting any discounts, returns, and allowances. The script shows how to compute these figures, which are crucial for preparing an accurate income statement and understanding the true revenue and cost of goods sold for a merchandising company.

Highlights

Introduction to accounting for merchandising operations, focusing on the business activity of buying and selling goods.

Explanation of merchandise inventory as a company resource and its classification as a current asset.

Examples of merchandising operations, including grocery stores, department stores, and online retail.

The operating cycle of a merchandising entity, starting with cash and ending with sales on account.

Understanding the concept of gross invoice price and its calculation in accounting for merchandising.

Illustration of how to calculate gross invoice price with examples, including trade and chain discounts.

Discussion on sales transactions, emphasizing the transfer of legal ownership from seller to buyer.

Clarification of sales revenue as the main revenue-producing activity in merchandising operations.

Explanation of credit terms in sales, such as '2/10, net 30', and their impact on cash flow.

Accounting for sales returns and allowances, including the cancellation of sales and refunds.

Journal entries for sales transactions, including cash sales and sales on credit with discounts.

Recording of purchase transactions from the buyer's perspective using the periodic inventory system.

Journal entries for purchase transactions, including cash purchases and purchases on credit.

Accounting for purchase returns and allowances, and their impact on inventory valuation.

Computing net sales and purchases for financial reporting, including adjustments for discounts and returns.

Upcoming lesson on transportation in merchandising, addressing ownership of goods during transit.

Conclusion and summary of key points in merchandising operations accounting.

Transcripts

[Music]

hello everybody welcome to another video

lesson this is search was accounting

lessons ph

and we will be discussing accounting for

merchandising operations

so in the previous lesson we're done

with the whole accounting process

for a service company and now we will be

focusing our discussion in merchandising

and specifically for today

we will be discussing sales and

purchases okay let's start

merchandising operations so

merchandising is a business activity of

buying and selling of goods so we don't

give services here or we don't do the

goods that we are selling

it's just that we will be selling goods

your mommy will buy first the things

that are needed in your sarasota store

okay the goods that a merchandising

company

sells to its customers are called

merchandise inventory

or simply inventory okay so

okay uh formally in accounting we call

it inventory or merchandise inventory

okay so it is a company resource nagina

gaming

and since because it is a company

resource it is an

asset and it is reported in the

financial statements as a current asset

okay so the definition of current versus

non-current asset

will be discussed with you in

fundamentals of abm part two

for now uh you can imagine the balance

sheet uh

and young assets

okay that's it so

okay so we have many examples of

merchandising operations

grocery marathon department store human

emerge official merchandise

online marine time appliance centers so

when your company is buying goods before

you

sell those goods then that's what you

call

a merchandising operation okay so

in discussion of merchandising

operations

independent hindi nothing

the operating cycle of a merchandising

entity goes like this

shampred the company has cash in order

for them to sell something s

congratulations you already have

merchandise inventory

your room merchandise inventory

and the operating cycle goes forward and

goes forward

credit sales in credit sales sales on

account

accounts receivable transactions

service companies service

let's make the operating cycle much more

simpler

it looks like this okay so thank you

to principlesofaccounting.com for this

um a very simple diagram

okay so it starts with cash the company

has cash they will have

an inventory from a purchase transaction

and then they will have a sales or they

will undergo a sales transaction

on account so there's an account

receivable and then the

accounts receivable will be collected by

the company and then the company has

cash again

and the cycle goes forward and goes

forward again

okay my cash and company pacabilenta

okay so before we formally discuss

anything about

selling or purchasing we need to

understand first

what is a gross invoice price in

accounting for merchandising operations

we always record the gross invoice

price in the books merchandises are

always coated in the original price

called

list price

merchandise on a company set up indeed

usually uh you will be given what you

call a list price

this is the original price however

there will be uh deductions that will

you're the buyer

and encourage the buyer to sell

to to buy more merchandise okay

trade discounts okay now

list price papa

hindi rinpo natin nirei record ang trade

discounts

gross invoice price okay

so let's have an example so we have

problems one and two number one is find

the amount that will be recorded in the

books of gym in trading regarding their

purchase of merchandise

listed as six thousand pesos and is

given a trade discount of twenty percent

dunamis the list price is seven thousand

and then my chain discounts in the

thirty and twenty five percent so i have

prepared a video lesson

way back

to discuss how to get gross invoice

price let's listen

to myself sir chua okay so let's try

this two problems first the first one

is so this is about girls invoice price

so number one

find the amount that will be reported in

the books of giving trading regarding

their purchase of merchandise

listed as 6 000 and is given a trade

discount of 20

so recalling the formula that was

discussed in the theory

we have less price

less trade

discount that is your

gross invoice

price okay so using this formula for

number one

the list price is 6 000

and then the trade discount is you will

be multiplying

six thousand by twenty percent so that

is six thousand

times point two which gives you

one thousand two hundred so that

that came from six thousand times

twenty percent okay so you just deduct

the list price to the trade discount so

six thousand minus one thousand two

hundred

gives you a gross invoice price of four

thousand eight

okay another approaches you can do is

you just multiply

6 000 to the complement percentage of 20

so 100 minus 20 that's 80 okay

so what you will do is

to get this one you can also do 6 000

times 80 percent automatically

that is your gross invoice price of

4 000 even okay and then for number two

find the amount that will be recorded in

the books of gym in trading regarding

their purchase of merchandise

listed as seven thousand and is given

chain discounts of 30

and 25 so in dealing with saying

discounts you will first apply

the 30 discount and then apply the next

25

discount okay so this is what you will

do okay

list price would be seven thousand

minus trade discount of seven thousand

times thirty percent so seven thousand

times point

three is two thousand one hundred and

then this is your

first gross invoice price so 7 000

minus 2 100 gives you 4

900. however we are still subject

to 25 discount so you multiply again

another trade discount

four thousand eight hundred so you will

be using this one

times twenty five percent okay so four

thousand eight hundred times point

twenty five gives you

one 1225 okay

then you deduct both so this will be

your final gross invoice price

so 4 900 minus one two to five gives you

three thousand hundred

now for to make it easy you can also do

this approach so what you can do is

7 000 multiply it by the complement of

30

which is 17 and then you again multiply

it to the complement of 25

which is 75 so let's try

7000 times 0.7 times 0.75

gives you 3675 okay

so these are our problems for the gross

invoice price

okay i hope you understand uh sir chua

on that

okay so let's move forward let's talk

about a sales transaction

in the sales transaction the legal

ownership of the goods is transferred

from the seller of the goods to the

buyer of the merchandise

this is technically transfer of legal

ownership so when we say

sales transaction when someone buys

merchandise

the legal ownership is transferred and

remember when the legal ownership is

transferred that is transferred from the

seller to the buyer

of the merchandise when you purchased a

flat screen television from an appliance

center

the appliance center first had the

ownership of the television when they

bought it from the supplier so at that

point palang

say supplier moon eleni appliance center

transfer and ownership kai appliance

center

and now that you are ready to buy that

television

the appliance center then sells you the

television and transfer the ownership to

you in the sales transaction so hapagana

billionaire flat screen television

the legal ownership of the goods is

transferred from the seller

which is the appliance center to you the

buyer

the uh consumer okay so

always remember it's a sales transaction

revenue is earned each time a sale

is made merchandising operations

sales revenue is our main revenue

producing

activity

sales can be accepted in cash or

accounts

companies

when goods are sold on account the terms

of payment must be specified in on the

invoice

so this term of payment is called the

credit term

fraction 2 over 10 n over thirty

two over fifteen five over ten n

over sixty five over ten n over e o

m parameter okay so let's discuss

when sales are sold on account

terms of payment so for example i'm

being again the terms of payment don't

say credit term or

okay two percent discount when you paid

within 10 days but the deadline of

payment

for the whole amount of the merchandise

without

discount is 30 days

2 over 15 5 over 10 and over 60.

be begin can a seller see by your ib

beginning seller

now 2 discount if paid within 15 days

five percent discount if paid within 10

days

within 10 days

the whole merchandise and deadline for

payment is

60 days five over 10 and over eom

pakistan

and over eon

okay very good

okay so five percent discount if paid

within 10 days but the deadline of

payment is at the

end of month young eoms

and over sixty per depot one over ten

and over fifteen poeden

company policy me seller

sales whether in cash or on account are

sometimes returned to the seller because

of wrong call or wrong size inferior

quality and many other reasons

sales returns and allowances

sales returns are merchandise returned

to the seller

which implies a cancellation of sale

[Music]

the seller will return the payment made

of the buyer

because the sales transaction or the

sale transaction is

cancelled on sales allowances which are

granted to customers if customers keep

the merchandise

although unsatisfied with what they

bought

[Music]

okay

returns and allowances to record

these types of transactions okay so

example problem uh dealt

with uh the following transactions were

dealt with by lisa merchandising

so we have uh transactions april 1 april

2 april 5 and april 11

and sir chu has a video on that let's

watch

myself

okay so we now proceed to your problem

regarding

sales transactions okay so the following

transactions were dealt with by

lisa merchandising so we will be doing

journal entries on how to properly

record

sales transaction of sales transactions

over merchandise

okay so on april 1 sold merchandise to

gen

company with a price of 12 000

cash on delivery so immediately after

the merchandise has been delivered to

the customer

which is jenny cash has already been

received

by lisa merchandising okay

so we will do a simple entry that

will record the receipt of cash and

recording a sales revenue or sales on

the side of lisa merchandising

so your essay would be april

1 cash

for the amount of the selling price of

the merchandise

which is 12 000

and then credit sales revenue or

simply sales that is another

twelve thousand okay we proceed with

april two

sold merchandise to reserve company with

a price

of 8 000 with terms 2 over 10

and over 30. earlier we have discussed

this type of credit term so again let's

review

2 percent discount will be given if the

customer pays

us within 10 days but the deadline of

payment is in 30 days

okay and since the customer is not yet

paying the merchandise

this will be recorded to accounts

receivable

so debit

accounts receivable and then we put the

name of the customer

because this will be recorded in the

subsidiary ledger

this is for eight thousand

and then credit sales revenue to record

sales

for another eight thousand

okay next on april 5

jenny returned 3 000 worth of defective

merchandise and in which

cash refund was granted so what happened

is that

our customer in april 1 was not happy

with the merchandise which is worth 3

000 because some of them some of them

were defective

so we will be recording an entry

that would give back the cash to

the customer and this is the time that

we will be using the account title

sales returns and allowances okay so you

sales returns and

allowances

for the amount of merchandise that was

returned 3

000 and then credit cash three

thousand so if you will ask what

happened with the sales revenue

as regards to uh jenny company as our

customer

so sales of twelve thousand however uh

jenny returned 3 000 so our sales

revenue

as far as jenny is concerned is only 9

000.

and the amount of cash that we also

receive from jenny is also 9000

okay and then lastly 11 real estate

company paid

their account balance let's go back to

what has happened

on april 2 okay so the terms

is 2 over 10

and over 30. now let's check the

deadline for the two percent discount

okay if this is april 2 then we add 10

days the deadline

is on april 12th and then

per se was able to pay on the 11th day

of the month

so 2 plus 10 is 12 11 days so we can

grant her the discount

okay so what we will do is to compute

first for the cash discount that will be

given to jose

okay so if the sales revenue is eight

thousand we multiply uh we

we compute first for the cash distance

so the cash discount

would be eight thousand times

two percent discount okay so 8 000

times 0.02 this is 160. so we will give

per say 160 pesos worth of discount this

will be

recorded as a sales

discount so your entry

in the receipt of cash upon collection

of the account receivable from rsa

would be like this debit cash

for the amount that you will receive

minus the

so if the sales transaction or the

selling price

8000 minus 160

then you will only receive 7840

and then you record the sales discount

so that will be

sales discount

for 160 and then

we will be crediting

accounts receivable so that we will be

erasing

that effect through a company so credit

accounts

receivable per se

company or the whole eight

house so that's how we record

transactions

under sales transactions

okay i hope you understand uh how it was

discussed with you let's continue

with purchases

the cash collected by the merchandising

entity will then be used to purchase

goods that will be selling by the firm

sentence

and to purchase merchandise

merchandising entities need to purchase

inventory in order to be able to sell

and gain profit

we can say that purchases are also sales

transactions however the viewpoint here

is that the company that accounts for

the transaction

will be the buyer of the merchandise

purchase transaction a sales transaction

on point of view details of purchases

okay now so

let's try these uh this problem

so this is also from lisa merchandising

and we have transactions on may 1

may to may 7 and may 10 so for the

explanation let's watch

myself

and now we're ready to prepare journal

entries

for purchases transactions so purchase

transaction

so our point of view today is that we

are the buyer

of the merchandise okay the following

transactions

were dealt with by lisa merchandise okay

may 1 purchase merchandise from

m company amounting to 15 000 cash on

delivery so before anything else

what we will be using in these journal

entries are

the periodic system of inventory as

opposed to the perpetual system of

inventory

so in the periodic system of inventory

inventory accounts are only done

periodically so we will be using the

account title

purchases rather than debiting it

directly to merchandise inventory

okay so on may 1 purchase merchandise

from

m company amounting to 15 000

cash on delivery okay so in this target

we in the second problem we are the

buyer here

so we are the one to pay the cashier

so your transaction on may 1

would be debit

purchases for the amount of the purchase

transaction

you have which is 15 000

and then credit cash for 15

000 much like how you purchase an asset

okay so you just debit purchases

and then credit cash okay next is made

to

purchase merchandise to give companies

who give companies the seller here

amounting to 6 000 terms 5 over 10

n over e o m so this is a bit familiar

again to you

when we have this uh credit term it

means that we are not yet paying or

a cash transaction is nothing okay

so on day two your energy would be would

still be

debit purchases for the amount of your

purchase

which is the six thousand and then

credit accounts payable

and then we write again the name of the

seller for us to be able to record it

later in the subsidiary ledgers

so this is kim company

amounting to 6 thousand

okay so we continue with the may 7

transaction

lisa returned 3 000 worth of merchandise

to

m company cash refund was granted so

earlier in sales transactions we were

able

to use the account sales returns and

allowances

now the prospect of the buyer and that

lisa merchandising is our buyer

we will be receiving cash because we

were granted

of a country fund so debit cash

for the amount of merchandise returned

to m company 3

000 and then credit

purchase returns

and allowances so we will be using this

account title

in order for us to signify that this is

the purchase returns and announcements

okay and then on mated lisa paid

their account balance to kim company now

looking at this again at game company

the deadline of payment is within 10

days for

lisa to get five percent uh discount

so 5 over 10 and over eof so let's add

again

10 days to this transaction which is

on may 12 however we

paid already or lisa the company paid

already on may 10

so they will be granted of the cash

discount

five percent okay so let's compute again

for the cash

discount the cash discount would be

the amount of six thousand this one

multiplied by five percent okay so let's

multiply six thousand times

five percent that gives you three

hundred

okay so this will be your purchase

discount so your entry since you will be

paying

your account payable to kim company

debit accounts

payable kim

company for the wool amount of 6 000

credit cash because you were granted of

a cash discount

six thousand minus three hundred our

cash payment will only be

five thousand seven hundred and then

record the discount as

purchase discount

for three so these are

our transactions and journal entries for

purchases okay i hope you understand how

to record purchase transactions

and then we we also have another problem

here gab company has

gross sales of 400 000 in the

valentine's sales discounts

and sales returns and allowances and

then uh

purchases worth 200 000 and then

purchase discount and purchase returns

and allowances

so let's watch again sir chua for the

discussion of this problem

so now we will be computing for the

amounts of sales and purchases that will

be presented later

in the income statement so later we will

be preparing an income statement but for

now

let's work on some problems which

relates sales and purchases

gab company has gross sales of 400 000

sales discounts of 10 000 and sales

returns and allowances of twelve

thousand

also gaba's purchase were two hundred

thousand inventory

in which purchase discount is eight

thousand purchase returns and allowances

is five thousand compute for the net

sales and then purchases

okay so let's first compute for

the net sales

in computing for net sales we start with

the gross amount of sales

so gross sales

gross sales amounted to 400

000

then we will deduct all of our contra

sales accounts which are two we have

your

sales discount

which amounts to 10 000

and you also deduct your sales returns

and allowances which is twelve thousand

okay so you deduct the two so we have

four hundred thousand minus ten thousand

minus twelve thousand which gives us

three hundred

seventy eight thousand and this is the

amount of your

mail sales okay so always remember that

these two

are your contra sales

a house let's now move on to net

purchases

in-net purchases so we have here net

purchases and that purchases is work it

works the same way as how we do it in

cash

so we have gross purchases

amounting to 200

000 less

purchase discount the purchase discount

that was granted to the company

is 8 000 and then we also deduct

purchase returns and allowances

of five thousand so

we compute for that again two hundred

thousand

minus eight thousand minus five thousand

gives us

187 thousand and that is your

net purchases okay

so that is the amount of net sales and

then purchases

and then this one always remember this

is your contra

purchases account

okay i hope you understand our lesson

today so our next lesson would be about

transportation

there are sometimes the buyer is in

manila

and then the seller is in cebu or vice

versa

so who owns the goods

and this is still in relation to our

lesson on merchandising operations

this search was accounting lessons ph

thank you

and have a great day