Fundamentals of Accountancy, Business and

Management 1
Module 11:
Accounting Cycle of a Merchandising Business

I
 What I Need to Know

This module was designed and written with you in mind. It is here to help
you master the Accounting Cycle of a Merchandising Business. The scope of
this module permits it to be used in many different learning situations. The
language used recognizes the diverse vocabulary level of students. The
lessons are arranged to follow the standard sequence of the course. But the
order in which you read them can be changed to correspond with the
textbook you are now using.

The module has one lesson, namely:

• Lesson 1 – Nature of Transactions of a Merchandising Business

After going through this module, you are expected to:

1. define merchandising business;
2. describe the nature of transactions of a merchandising business;
3. differentiate merchandising business from service business; and
4. give examples of merchandising business within the community
 What I Know

Directions: Choose the letter of the best answer. Write the chosen letter on a
separate sheet of paper.

1. The main difference of a merchandising business over a service

business is
a. It has no inventory.
b. It has production facility.
c. It does not need employees.
d. It provides tangible products.

2. Which of the following statements regarding merchandising is false?

a. Provide tangible products.
b. May sell directly either to customers or retailers.
c. Buy raw materials, convert them into finished goods, and sell
the goods to customers.
d. Generally incur less cost relative to other types of business as
they consume less conversion time and effort.

3. This is the most important assets of a merchandising business.

a. Accounts Receivables
b. Building
c. Equipment
d. Inventory

4. Which of the following is an example of a merchandising business?

a. Beauty Salon
b. Bus Company
c. Carwash Business
d. Drug store

5. What is the primary source of revenues of merchandising business?

a. Performance of service
b. Sale of goods
c. Both a and b
d. None of the above

6. Cost of goods sold is computed by __________.

 a. Adding the gross purchases to beginning inventory to get the
cost of goods available for sale from which the ending inventory
is deducted from.
b. Adding the net purchases to beginning inventory to get the cost
of goods available for sale from which the ending inventory is
deducted from.
c. Subtracting the gross purchases to beginning inventory to get
the cost of goods available for sale from which the ending
inventory is deducted from.
d. Subtracting the net cost of purchases to beginning inventory to
get the cost of goods available for sale from which the ending
inventory is deducted from.

7. The following are examples of operating expenses, except one

a. Cost of goods sold
b. Depreciation
c. Salaries
d. Utilities

8. Cost of goods sold is deducted from sales revenue in order to get

__________ in the income statement of a merchandising business.
a. Ending inventory
b. Gross profit
c. Net profit
d. Operating expenses

9. What is the normal operating cycle of a merchandising business?

a. Provide services to customers.
b. Buy raw materials, convert them into finished goods, and sell
the goods to customers.
c. Consists of buying merchandise, selling merchandise, billing
customers, and collecting customer accounts.
d. None of the above.

10. Statement 1: The accounting cycle for a service business is the same
with that of a merchandising business.
Statement 2: The major difference of the operating cycle of a
merchandising business and a service company is the storing of
inventory.
a. Statement 1 is true; statement 2 is false.
b. Statement 1 is false; statement 2 is true.
c. Both statements are true.
d. Both statements are false.
Lesson
Nature of Transactions of a
1 Merchandising Business

Aside from service and manufacturing, merchandising business is

also a type of business according to activities under Chapter 5. This type of
business is engage in buying and selling of goods or merchandise. In this
module, the nature of transactions of a merchandising business will be
discussed.

What’s In

Activity 1. Complete the diagram below by recalling the accounting cycle of

a service business.

Analyzing
Transactions

5. ? Journalizing

Post Closing
Trial Balance 1. ?

ACCOUNTING
CYCLE

4. ? Trial Balance

Financial
Statements
Preparation
2. ?

3. ?
 Notes to the Teacher
The accounting cycle for a merchandising business is the
same with that of a service business.

What’s New

Directions: Read and answer the following questions.

Imagine yourself putting up a merchandising business. What will be

your business name? What goods or merchandise are you going to sell to
your target customers?
Questions:

1. What is the most important asset of a merchandising business?

2. Differentiate merchandising business and service business.
3. What are the possible activities or transactions of a merchandising
business?

What is It

Merchandising Business – refers to an enterprise that buys and sells goods

to earn a profit.

Buy
Merchandise

Collect
Sell
Customer
Merchandise
Accounts

Bill
Customers

Merchandising Operating Cycle

MERCHANDISE OR MERCHANDISE INVENTORY - refers to an item
bought by a business for the purpose of reselling it.

SALES OR SALES REVENUE – this is the primary source of revenue in

merchandising business.

Sales Returns and Allowance - a customer may return merchandise

if it broken or if it is not as ordered.

Sales Discount – two usual discounts granted to customers are (1)

trade discounts and (2) cash discounts:

Trade Discounts – a percentage reduction from a published list

price may be granted to customers for patronizing the business.
This is immediately deducted from the list price.

Cash Discounts – when goods are sold on credit, terms of

payment depend on the custom of the industry. Usual credit
terms: n/30 (gross amount is payable within 30 days from the
date sale), or 2/10,n/30 (gross amount is payable within 30
days with 2% discount given if the account is paid within 10
days).

PURCHASES - represents goods available for sale by the business for a

particular accounting period.

Purchase Returns and Allowances – goods bought may be returned

to the seller for being defective, spoiled or not as ordered.

Purchase Discount – discount claimed by the buyer.

TRANSPORTATION/FREIGHT COSTS – The two most common

arrangements for transportation or freight costs are FOB Shipping Point
and FOB Destination.
 FOB Shipping Point – buyer should pay for the freight. This is added
to Purchases to get the gross purchases.

FOB Destination – seller is liable for the freight.

Expenses:

• Cost of Goods Sold or Cost of Sales – the amount of merchandise

sold by the business for a given period. The formula to compute for
cost of goods sold is:

Merchandise Inventory, beginning

Add: Net Purchases
Cost of Goods Available for Sale
Less: Merchandise Inventory,
ending
Cost of Goods Sold

• Operating Expenses – refer to expenses incurred by the business in

their day-to day operations. Examples: salaries, utilities, rent,
supplies, insurance, transportation, depreciation, delivery, and
advertising.
In the income statement for merchandising business, cost of goods sold
is deducted from sales revenue in order to get gross profit. Operating
expenses are then deducted from gross profit to get the net income or net
loss for the period. Below is a comparison of a service business and a
merchandising business income statement:

Service Business Merchandising Business

Revenues Net Sales Revenues
Less: Cost of Goods Sold
Gross Profit
Less: Operating Expenses Less: Operating Expenses
Net Income (Loss) Net Income (Loss)
 What’s More

Crossword Puzzle. Read the clues below and fill in the correct answer.

Across: Down:
2. amount of merchandise sold by 1. 2/10, n/30
the business for a given period 3. item bought by a business for the
4. FOB Shipping Point, FOB purpose of reselling it
Destination 5. cost of goods sold is deducted
6. discount claimed by the buyer from sales revenue
7. primary source of revenue in 8. trade discount, cash discount
merchandising business
9. goods available for sale by the
business for a particular accounting
period
 What I Have Learned

Directions: Use the Frayer Model to complete the key concepts

associated with a merchandising business.

DEFINITION CHARACTERISTICS

MERCHANDISE
BUSINESS

EXAMPLES NON-EXAMPLES
 Notes to the Teacher
The Frayer Model is a graphic organizer used for word
analysis that prompts students to think about and describe
the meaning of a word or concept.

What I Can Do

Supposed you named your merchandise business #WeHealAsOne

Drug Store and operated it in your community, how will you keep your
business running during the COVID-19 pandemic?
Rubrics for Essay:
Content Organization Conventions
3 Substantial, specific, Sophisticated Evident control of
points and/or illustrative arrangement of grammar,
content content with evident mechanics,
demonstrating strong and/or subtle spelling, usage
development and transitions. and sentence
sophisticated ideas. formation.
2 Sufficiently developed
Functional Sufficient control
points content with adequate arrangement of of grammar,
elaboration or
content that mechanics,
explanation. sustains a logical spelling, usage
order with some and sentence
evidence of formation.
transitions.
1 Limited content with Confused or Limited control of
point inadequate inconsistent grammar,
elaboration or arrangement of mechanics,
explanation. content with or spelling, usage
without attempts at and sentence
transition. formation.

Assessment

True or False. Write true if the statement is correct, otherwise, false on the
space before each item.

_____ 1. Merchandise businesses may be referred to as buy-and-sell

companies.

_____ 2. The transactions for a service business are similar to those in a

merchandising business except in the recording of transactions
that relate to the primary source of revenue and related costs.

_____ 3. In order to generate revenue in a merchandising business, the

business must be able to render services.
_____ 4. The major difference of the operating cycle of a merchandising
business and a service company is the storing of inventory.

_____ 5. The existence of a tangible product provides a leeway to service

and merchandising business to make customers notice their
products, thereby promoting sales.

_____ 6. Cost of goods sold is computed by adding the net cost of

purchases to beginning inventory to get the cost of goods
available for sale from which the ending inventory is deducted
from.

_____ 7. Gross profit is equal to sales revenue less the operating

expenses.

_____ 8. Cost of goods sold is deducted from gross profit to get the net
income or net loss for the period of merchandising business.

_____ 9. The normal operation of a merchandising business is

consisting of buying merchandise, selling merchandise, billing
customers, and collecting customer accounts.

_____ 10. Merchandise inventory is the most important asset of a

merchandising business.
 Additional Activities

Directions: Identity at least three (3) merchandising businesses within your

community and describe the nature of their transactions. An example is
provided below for your reference.

Merchandise Business Nature of Transactions

GNO Shop ‘N Carry A self-service supermarket offering a
wide variety of goods such as food,
beverages and household products
offered in retail and wholesale prices.