SURVIVAL NOTES ACTBAS2

TERM 1 AY 2014-2015

Review of the Accounting Cycle

Accounting Cycle it is a process involving a series of sequential steps by
which companies produce their financial statement for a specific period of
time
10 Steps:
1.
2.
3.
4.
5.
6.
7.
8.
9.

Analyzing Transactions
Journalizing Entries
Posting to the Ledger
Creating Unadjusted Trial Balance
Journalizing and Posting Adjusting (Updating) Entries
Creating Adjusted Trial Balance
Preparing Financial Statements
Closing Entries
Creating Post-Closing Trial Balance

10. Reversing Entries (Optional)

Introduction to Merchandising
Business
Merchandising Business generates revenue through purchase and sale of
merchandise; involves wholesalers, retailers and consumers
Involves transactions like:
1. Purchase of Merchandise on cash basis or credit basis
2. Sale of Merchandise on cash basis or account basis
3. Collection of Receivables from customers
Operating Cycle- the period of time that a firm takes in converting its
inventory into cash Inventory
Cash
Receivable
Cash
(collection)
(Purchase)
(Sale)

- This is also known as cash-to-cash cycle

Terms to be familiar with:

Invoice Price original price of a product; price of an item listed in the

catalog of the company

Trade Discount quantity discount; discount from purchase or sale of
large quantities of merchandise; used to encourage bulk purchases

Accounting Pool Survival Notes for ACTBAS2

Page 1

Cash Discount discount given to buyers for prompt payment; involves

the use of credit terms

Credit Term usually comes with credit purchases or sales; agreement
by buyer and seller on how the account should be settled

2/10, n/30
2% discount, 10 days

net amount, 30 days

4/eom, 3/10eom
4% discount, end of month

3%

discount, 10 days after eom

Purchase Returns and Allowances credited in the books; reduction of

accounts payable due to unwanted quality or incorrect specifications of

merchandise purchased; evidenced by debit memos by supplier

Sales Returns and Allowances debited; reduction of accounts
receivable due to unwanted quality or incorrect specifications of

merchandise sold; evidenced by credit memos by supplier

Debit Memo issued by buyer to seller; credit purchase R and A (in

buyers books)
Credit Memo - issued by seller to buyer; debit sales R and A (in sellers
books)

Two Inventory Systems

1. Periodic
2. Perpetual
Periodic Inventory System

Involves physically counting of inventory at the end of an accounting

period
Usually used by small companies buying and selling large quantities of

inexpensive items (like bond papers, CDs, etc)

Inventory balances are known only at the beginning and end of the

reporting period
It does not contain a 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 goods.
It needs an adjusting entry for the Merchandise Inventory account to
set up the ending balance.
There is a need to compute for the Cost of Sales
Known as Physical Inventory System

Accounting Pool Survival Notes for ACTBAS2

Page 2

Perpetual Inventory System

Separate ledger accounts are maintained for Merchandise Inventory

and Cost of sales.
Physical count of goods on hand at the end of the year is also made to
confirm the balance of the merchandise inventory per ledger.
Any difference between the physical count and the ledger balance of
the merchandise inventory is either debited or credited to Inventory
Short or Over account.
The Inventory Short or Over account is closed to the Cost of Sales
account.
Requires use of stock cards that present the running balance of the

inventory item
Usually used by companies buying and selling small quantities of

expensive items (like cars, jewelry, etc)

Every purchase or sale updates the inventory balances of the company

Pro-Forma Entries: (In Buyers Books)

Periodic
Perpetual
1. To record purchase of merchandise (through cash or account)
xx
Purchases
Merchandise Inventory
x
Cash/Accounts
xx
Cash/Accounts
Payable
x
Payable
2. To record payment for freight
xx
Freight-In
x
Cash

Merchandise Inventory
xx
x

xx
x
xx
x
xx
x
xx
x

Cash

3. To record returned merchandise (return of cash or issuance of debit

memo)
xx
xx
Cash/Accounts Payable
Cash/Accounts Payable
x
x
xx
Merchandise
Purchase R and A
x
Inventory

xx
x

4. To record partial payment of outstanding account

xx
Accounts Payable
Accounts Payable
x
xx
Cash
Cash
x

xx
x

5. To record full payment of account within discount period

xx
Accounts Payable
Accounts Payable
x
xx
Cash
Cash
x
xx
Merchandise
Purchase Discount
x
Inventory

xx
x

xx
x
xx
x
xx
x

6. To record full payment of account beyond discount period

Accounting Pool Survival Notes for ACTBAS2

Page 3

Accounts Payable

xx
x

Cash

Accounts Payable
xx
x

xx
x
xx
x

Cash

Pro-Forma Entries: (in Sellers Books)

Periodic
Perpetual
1. To record sale of merchandise (through cash or account)
Cash/Accounts
xx
Cash/Accounts
Receivables
x
Receivable
xx
Sales
Sales
x
Cost of Sales

xx
x
xx
x
xx
x
xx
x

Merchandise Inventory
2. To record payment for freight
xx
Freight-out
x
Cash

Freight-out
xx
x

xx
x
xx
x

Cash

3. To record returned merchandise (return of cash or issuance of credit

memo)
xx
xx
Sales R and A
Sales R and A
x
x
Cash/Accounts
xx
Cash/Accounts
Receivable
x
Receivable
Merchandise Inventory

xx
x
xx
x

Cost of Sales
4. To record partial collection of outstanding account
xx
Cash
Cash
x
xx
Accounts Receivable
Accounts Receivable
x
5. To record full collection of account within discount period
xx
Cash
Cash
x
xx
Sales Discount
Sales Discount
x
xx
Accounts Receivable
Accounts Receivable
x
6. To record full collection of account beyond discount period
xx
Cash
Cash
x

Accounting Pool Survival Notes for ACTBAS2

xx
x

xx
x
xx
x
xx
x
xx
x
xx
x
xx
x

Page 4

Accounts Receivable

xx
x

xx
x

Accounts Receivable

Freight
Freight-in transportation costs on merchandise bought
Freight-out transportation costs on merchandise sold
FOB (Free on Board) Shipping Point buyer needs to pay for freight;
ownership transfers as soon as cargo is loaded to the carrier
FOB (Free on Board) Destination Point seller needs to pay for freight;
ownership transfers as soon as the receipt of the buyer is gotten
Freight Prepaid seller paid for freight
Freight Collect buyer paid for freight
4 Combinations:
1. FOB Shipping, Prepaid
Record Freight-in and AP for buyer; AR and Cash for seller
2. FOB Shipping, Collect
Record Freight-in and Cash for buyer; no entry for seller
3. FOB Destination, Prepaid
Record Freight-out and Cash for seller; no entry for buyer
4. FOB Destination, Collect
Record Freight-out and AR(Cr) for seller; AP(Dr) and Cash for buyer
Example:
Assume an entity has bought merchandise on account. The entity is
following a periodic inventory system. Assume the following information:
Purchases
P5 000
Freight
500
Total
P5 500
1. If the purchase is FOB Shipping Point, prepaid, the journal entries in the
books of the buyer would be as follows:
Purchases
Freight in
Accounts Payable

5 000
500
5 500

2. If the purchase is FOB Shipping Point, collect, the journal entries in the
books of the buyer would be as follows:
Purchases
Freight in
Accounts Payable
Cash

5 000
500
5 000
500

3. If the purchase if FOB Destination Point, prepaid, the journal entries in

the books of the buyer would be as follows:
Accounting Pool Survival Notes for ACTBAS2

Page 5

Purchases
Accounts Payable

5 000
5 000

4. If the purchase if FOB Destination Point, collect, the journal entries in

the books of the buyer would be as follows:
Purchases
Accounts Payable
Cash

5 000
4 500
500

Value-Added Tax (VAT)

VAT
The existing law regarding value-added tax is R.A. 9337 (Value-Added
Tax Reform Law)
Known as indirect tax; 12% of gross sales/receipts
All entities with gross annual sales/receipts of P1 500 000 or more shall
register
VAT return must be filed by 1. VAT-registered entity; and 2. An entity
required to register as a VAT taxpayer but failed to do so
If monthly paid on or before the 20th day of the following month
If quarterly paid on or before the 25th day of the month following the
close of the quarter
In VAT transactions, only the real accounts are affected by the 12%
value-added tax.
Pro-Forma Entries: (assume data below)
Purchase/Sale
VAT
Total

Php
6,000
720
Php
6,720

Books of Buyer:
1. To record purchase
Purchases
Input Tax
Accounts Payable

6000
720
6720

2. To record return of merchandise (assuming worth P400)

Accounts Payable
448
Purchase R and A
Input Tax

400
48

Books of Seller:
1. To record sale
Accounts Receivable
Accounting Pool Survival Notes for ACTBAS2

6720
Page 6

Sales
Output Tax

6000
720

2. To record return of merchandise (assuming worth P400)

Sales R and A
400
Output Tax
48
Accounts Receivable

448

*VAT Payable is used to record the excess of output tax over input tax
*Creditable Input Tax is used to record the excess of input tax over output
tax
Output Tax
Input Tax
VAT Payable

xxx

Creditable Input Tax

Output Tax
Input Tax

xxx
xxx

xxx
xxx

xxx

Recording of Business Transactions

Using Special Journals and the General
Journal Manual

The general journal is referred to as the book of original entry. For each
transaction the journal shows the debit and credit effects on specific
accounts.
o If a transaction cannot be recorded in a special journal, the
company records it in the general journal.
o The correcting, adjusting, and closing entries are recorded in the
general journal
Special journals are journals used to record transactions of similar
nature which frequently occur. Advantages of having special journals
include:
o Division of labor
o Economy in the use of space in the journal
o Minimize posting to the general ledger accounts with special
columns are posted in totals only once at the end of the period
o Information on specific accounts is readily available
Four commonly used special journals:
o Sales journal used to record all sale of merchandise on account.
Credit sales of assets other than merchandise go in the general
ledger.
o Cash receipts journal used to record all cash receipts for the
period regardless of source. Any entry debiting the CASH account
is recorded in this special journal. Generally, a cash receipts
journal includes the following columns: debit columns for Cash

Accounting Pool Survival Notes for ACTBAS2

Page 7

and Sales Discounts, and credit columns for Accounts Receivable,

Sales, and Other accounts.
o Purchase journal used to record all purchase of merchandise on
account. Each entry in this journal results in a debit to
Merchandise Inventory and a credit to Accounts Payable
o Cash payments journal used to record all cash payments
regardless of purpose. Any entry crediting the CASH account is
recorded in this special journal

Posting from the General and Special

Journals to the General and Subsidiary
Ledgers Manual

A general ledger contains all the asset, liability, and owners equity
accounts. It keeps in one place all the information about changes in
specific account balances.
o Companies arrange the ledger in the sequence in which they
present the accounts in the financial statements beginning with
the balance sheet accounts asset accounts, followed by liability
accounts, owners capital, owners drawing, revenues and
expenses
o There are two forms commonly used: the T-account form and the
three-column form of account or the running balance form of
account
o A general ledger account that summarizes the detailed data from
a subsidiary ledger is called a control account.
o At the end of the accounting period, each general ledger control
account balance MUST EQUAL the balance of the individual
accounts in the related subsidiary ledger.
A subsidiary ledger is a group of accounts with a common
characteristic. It is an addition to, and expansion of, the general ledger.
Two common subsidiary ledgers are:
o Accounts receivable (or customers) subsidiary ledger collects
transaction data of individual customers
o Accounts payable (or creditors) subsidiary ledger collects
transaction data of individual creditors
When control and subsidiary accounts are involved, there must be a
dual posting once to the control account and once to the subsidiary
account

Control Accounts
General Ledger

Accounting Pool Survival Notes for ACTBAS2

Subsidiary
Ledger
Page 8

Cash

Account
s
Receiva
ble

Custome
rA

Custome
rB

Account
s
Payable
Creditor
X

Owner's
Capital

Creditor
Y

Advantages of Subsidiary Ledgers:

o They show in a single account transactions affecting one
customer or one creditor thus providing up-to-date information
on specific account balances
o They free the general ledger of excessive details
o They help locate errors in individual accounts by reducing the
number of accounts in one ledger and by using control accounts
o They make possible division of labor in posting. One employee
can post to the general ledger while someone else posts to the
subsidiary ledgers

Preparing Schedules of Accounts

Receivable and Payable Manual
Schedule of Accounts Receivable (Pro-Forma)
COMPANY NAME
Schedule of Accounts Receivable
Date
Customer
A
B
C
Total

Amou
nt
P xxx
xxx
xxx
P xxx

Schedule of Accounts Payable (Pro-Forma)

Accounting Pool Survival Notes for ACTBAS2

Page 9

COMPANY NAME
Schedule of Accounts Payable
Date
Creditor/Suppli
er
D
E
F
Total

Amou
nt
P xxx
xxx
xxx
P xxx

Manual vs. Computerized Accounting

Systems

The Accounting Information System collects and processes

transaction data and communicates financial information to decision
makers. It may be either manual or computerized.
The basic principles in developing an accounting information system
are cost effectiveness, useful output, and flexibility.
Advantages of computerized accounting systems over manual
accounting systems:
o Company enters data only once in a computerized system
o The computer does most steps automatically thus eliminating
errors in posting or preparation of financial statements
o Computer systems provide information up-to-the-minute
Importance of manual accounting systems:
o To understand computerized accounting systems
o Small businesses still abound. Most of them begin operations
with manual accounting systems and convert to computerized
systems as the business grows

Income Statement
2 Forms:
1. Natural Form
Mostly used by service companies
Simply separates income from expenses
2. Functional Form
Used by merchandising and manufacturing companies
Segregates expenses and income according to its usage

Accounting Pool Survival Notes for ACTBAS2

Page 10

Pro-Forma Income Statement

Company Name
Income Statement
For the year ended
Net Sales
Cost of Goods Sold
Gross Profit
Add: Other Income
Total Revenues
Operating Expenses
Distribution Expenses
Administrative Expenses
Finance Cost
Other Expenses
Total
Net Income/Loss
Note 1 - Net Sales
Sales
Sales Discount
Sales Returns and Allowances
Total

Note 2 - Cost of Goods Sold

Merchandise Inventory, Beg
Purchases
Purchase Discount
Purchase Returns and Allowances
Net Purchases
Freight-In
Cost of Goods Available for Sale
Merchandise Inventory, End
Cost of Goods Sold

xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx

xxx
(xxx)
(xxx)

(xxx)
xxx

xxx
xxx
(xxx)
(xxx)

xxx
xxx
xxx
xxx
(xxx)
xxx

Note 3 - Other Income

Gain on Sale
Interest Income
Total

xxx
xxx
xxx

Note 4 - Distribution Expenses

Store Salaries
Store Rent
Expenses involving the store
Total

xxx
xxx
xxx
xxx

Note 5 - Administrative Expenses

Accounting Pool Survival Notes for ACTBAS2

Page 11

Office Salaries
Depreciation
Expenses that don't involve store
Total

xxx
xxx
xxx
xxx

Note 6 - Finance Cost

Interest Expense
Discount Loss
Total

xxx
xxx
xxx

Note 7 - Other Expenses

Loss on Sale of Asset

xxx

Accounting Pool Survival Notes for ACTBAS2

Page 12