HO 9 – FINACR 030 1

HUA SIONG
COLLEGE OF ILOILO

FINANCIAL ACCOUNTING AND REPORTING ACCOUNTING CYCLE FOR A

MERCHANDISING BUSINESS PART 2 OF 4
 Posting
 Preparation of unadjusted Trial Balance

Accounting cycle – is a sequence of operations used to account business transactions during a

specific period.

1. Analysis of transactions.
2. Recording of the transactions in the journal. (Journalizing)
3. Posting of the journal entries to the ledger. (Classifying)
4. Preparation of the unadjusted trial balance.
5. Compilation of data needed to adjust the accounts.
6. Preparation of a worksheet and adjusted trial balance.
7. Preparation of financial statements.
8. Journalizing and posting of adjusting entries.
9. Journalizing and posting of closing entries.
10. Preparation of post-closing trial balance.
11. Journalizing and posting of reversing entries.

3. Posting the journal entries in the ledger.

Posting is the process of transferring the records from the journal to the ledger. A ledger constitutes a group of
accounts. It is also called the book of final entry. The simpler form of a ledger is the T-account.

Need for a ledger:

1. Items of similar nature are grouped together.

2. It is easier to locate the item if information about it is needed.

4. Preparation of the Trial Balance

A trial balance is a list of accounts with open balances in the general ledger. It proves the equality of the debits
and the credits in the general ledger.

Exercises:

A. Lito Santos put up a Hyper Enterprise, a merchandising business on December. Lito uses the periodic
inventory system. The following are the transactions of Hyper Enterprise for the month of December,
2017. :

2017
Dec 1 Invested cash, P 50,000 to the business.
3 Purchased supplies for cash, P 10,000.
3 Purchase equipment on account, P 50,000.
4 Purchased inventory from Michael for cash, P 20,000.
6 Purchased inventory from Mary P 40,000, 2/10, n/30.
7 Sold merchandise for cash, P 50,000.
10 Sold merchandise to Trish, P 30,000, 3/5, n/30
12 Purchased inventory from Michael, P 30,000, 3/10, n/30.
13 Received CM from Mary, 5,000.
16 Paid accounts payable to Michael.
17 Received P 20,000 cash from Trish.

Prepare the journal entries and the unadjusted trial balance of Hyper Enterprise. Compute the cost of goods
sold at the end of the period, assuming that inventory at the end is P 30,000.
HO 9 – FINACR 030 2

2 2
0 0
1 1
7 Dr Cr 7 Dr Cr

Sales
Sales Ret./Allow.
Sales Discount
Net Sales
Cost of Goods Sold
Gross Profit

Beginning Inventory
*Cost of Purchases
TGAS
Ending Inventory
Cost of Sales

*Cost of Purchases
Purchases
Purchase Discount
Purchase Ret. and Allow.
Net Purchases

Hyper Enterprise
Unadjusted Trial Balance
For the month ending December 31, 2017

Dr Cr
Cash
Accounts Receivable
Supplies
Equipment
Accounts Payable
Santos, capital
Sales
Sales discount
Sales Return and Allowances
Purchases
Purchase Discount
Purchase Return and Allowances
Total
HO 9 – FINACR 030 3

B. Lito Santos put up a Hyper Enterprise, a merchandising business on December. Lito uses the periodic
inventory system. The following are the transactions of Hyper Enterprise for the month of December,
2017. :

2017
Dec 1 Invested cash, P 60,000 to the business.
3 Purchased supplies on account, P 10,000.
3 Purchase equipment for cash, P 30,000.
4 Purchased inventory from Michael for cash, P 30,000.
6 Purchased inventory from Mary P 40,000, 2/10, n/30.
7 Sold merchandise for cash, P 60,000.
10 Sold merchandise to Trish, P 30,000, 2/5, n/30
11 Issued CM to Trish, P 5,000 for damaged merchandise.
12 Purchased inventory from Michael, P 20,000, 3/10, n/30.
13 Sold merchandise to Mark, P 20,000, 3/5, 1/10, n/30.
15 Received payment of Trish.
26 Paid accounts payable to Mary.

Prepare the journal entries and the unadjusted trial balance of Hyper Enterprise. Compute the Cost of sales at
the end of the period assuming Inventory at the end is P 8,000.

Sales
Sales Ret./Allow.
Sales Discount
Net Sales
Cost of Goods Sold
Gross Profit

Beginning Inventory
*Cost of Purchases
TGAS
Ending Inventory
Cost of Sales

Hyper Enterprise
Unadjusted Trial Balance
For the month ending December 31, 2017

Dr Cr
Cash
Accounts Receivable
Supplies
Equipment
Accounts Payable
Santos, capital
Sales
Sales discount
Sales Return and Allowances
Purchases
Purchase Discount
Purchase Return and Allowances
Total
HO 9 – FINACR 030 4

C. The following is the post closing trial balance in December 31, 2016.

Cash 20,000
Accounts Receivable 30,000
Inventory 10,000
Accounts payable 20,000
Santos, capital ____ 40,000
Total 60,000 60,000
2017 Dr Cr
Lito Santos put up a Hyper Enterprise, a
merchandising business last year. Lito uses
the periodic inventory system. The following
are the transactions of Hyper Enterprise for
the month of January 2017. :

2017
Jan 1 Invested cash, P 90,000 to the business.
3 Purchased supplies for cash, P 30,000.
3 Purchase equipment on account, P 50,000.
4 Purchased inventory from Michael for cash, P 20,000.
5 Paid freight for merchandise purchased from Michael, P 2,000.
6 Purchased inventory from Mary P 40,000, 2/10, n/30.
7 Sold merchandise for cash, P 70,000.
8 Received CM from Mary, 5,000.
10 Sold merchandise to Trish, P 30,000, 3/10, n/30
12 Purchased inventory from Michael, P 30,000, 3/10, n/30.
13 Paid his account to Mary
14 Sold merchandise to Danny, P 30,000, 2/10, n/30.
16 Paid accounts payable to Michael.
17 Received full payment of Trish.
18 Purchase merchandise from Rey, P 30,000, 2/10, n/30.
19 Issued CM to Danny for damaged merchandise, P 3,000.

Prepare the journal entries and the unadjusted trial

balance of Hyper Enterprise. Compute the cost of
sales at the end of the period assuming inventory
count on January 31, 2017 is 20,000.
Sales
Sales Ret./Allow.
Sales Discount
Net Sales
Cost of Goods Sold
Gross Profit

Beginning Inventory
*Cost of Purchases
TGAS
Ending Inventory
Cost of Sales

*Cost of Purchases
Purchases
Purchase Discount
Purchase Ret. and Allow.
Net Purchases
Freight in
HO 9 – FINACR 030 5

Hyper Enterprise
Unadjusted Trial Balance
For the month ending January 31, 2017

Dr Cr
Cash
Accounts Receivable
Supplies
Inventory
Equipment
Accounts Payable
Santos, capital
Sales
Sales discount
Sales Return and Allowances
Purchases
Purchase Discount
Purchase Return and Allowances
Freight in
Total

Income Statement Preparation

The following is the sample income statement of a merchandising firm that uses the periodic inventory system:

Great Merchandising
Income Statement
For the year ended December 31, 2017

Net Sales Revenue P 9,000,000

*Cost of Sales (5,400,000)
Gross Profit/Income 3,600,000
Operating Expenses:
Selling Expenses 1,500,000
Administrative Expenses 1,000,000
HO 9 – FINACR 030 6

Total Operating Expenses 2,500,000

Operating Income 1,100,000
Other Income 400,000
Other Expenses (100,000)
Finance Cost (400,000)
Income before tax 1,000,000
Income tax expense (350,000)
Net Income after tax 650,000

*Sample Cost of Sales Computation:

Inventory, beginning (Jan. 1,2017) P 1,000,000

Purchases 6,000,000
Purchase Discount (200,000)
Purchase Return and Allowances (400,000)
Net Purchases 5,400,000
Freight in 200,000
Cost of Purchases 5,600,000
Total Goods Available for Sale 6,600,000
Inventory, end (Dec. 31, 2017) (1,200,000)
Cost of Sales 5,400,000
Computing the Cost of Goods Sold or Cost of Sales:

Cost of Goods Sold or Cost of Sales is the largest single expense of the merchandising business. It is the cost
of inventory that the entity has sold to customers.

If the company is using the periodic inventory system, there is no separate account maintained for cost of
sales. Every time that the company purchases inventory, the amount is debited to the account “Purchases”.
The cost of goods available for sale during the year is determined by adding the cost of merchandise inventory
at the beginning of the year and the total cost of purchases during the year. The assumption in this system is
that if a firm is able to sell all the goods available for sale during a given accounting period, the cost of goods
sold would then equal the goods that had been available for sale. However, in most cases, the business will
have goods still unsold at the end of the year. To find the actual cost of goods sold, the merchandise inventory
at the end of the period is subtracted from the goods available for sale.

If the company is using the perpetual inventory system, there is a separate account maintained for cost of
sales. Every time there is a sale, the cost of sales account and merchandise inventory account are updated.
The amount of cost of sales at the end of the period will be used to compute the net income of the
merchandising business. Take note that periodic inventory count is still needed under perpetual inventory
system to confirm the existence of merchandise inventory according to the records of the business.

Computing the Net Income:

The following are the formulas used in computing the net income of a merchandising business:
 Net Sales = Sales - Sales Discounts - Sales Return and Allowances

 Cost of Goods Sold (COGS) – (also Cost of Sales) is the largest single expense of the merchandising
business. It is the cost of inventory that the entity has sold to customers. It is also equal to Total
Goods Available for Sale (TGAS) minus Inventory at the end.

 Total Goods Available for Sale (TGAS) - is equal to Beginning Inventory + Cost of Purchases

 Cost of purchases = Net Purchases + other costs incurred in bringing the inventories to their present
location and condition such as freight, import duties and taxes, and handling costs.

 Net Purchases = Purchases – Purchase Discount – Purchase Return and Allowances

 Gross Profit (Gross Margin) = Net Sales – Cost of Goods Sold

 Operating Income = Gross Profit – Operating Expenses

 Operating Expenses = Selling/Distribution Expense + General and Administrative Expense.

HO 9 – FINACR 030 7

Selling expenses constitute costs which are directly related to selling, advertising, and delivery of goods
to customers. These ordinarily include salesmen’s salaries sales commissions, traveling and marketing
expenses, advertising and publicity expenses, freight out or delivery expenses, depreciation of delivery
equipment and store equipment, and other expenses related directly with the selling function.

Administrative expenses constitute cost of administering the business. These ordinarily include all
operating expenses not related to selling and cost of goods sold, such as doubtful accounts, office
salaries and expenses of general executives and of the general accounting and credit department,
office supplies used, certain taxes, contributions, professional fees, depreciation of office building and
office equipment and amortization of intangibles.

Exercises:
A. Determine the Net Sales in each case:

1 2 3 4
Sales 1,000 2,200 80,000 800,500
Sales Discount 120 320 4,500 90,200
Sales Returns and Allowances 50 150 2,000 -
Net Sales
B. Determine the Cost of Goods Sold in each case using the correct format:

1 2 3 4
Merchandise Inventory, beginning (Jan. 1) 300 623 56,230 328,400
Purchases 200 520 20,000 665,300
Purchase Returns and Allowances 30 120 3,200 23,670
Purchase Discounts 10 36 - 19,250
Freight In 40 - 600 85,110
TGAS
Merchandise Inventory, ending (Dec. 31) 50 412 45,600 410,500
Cost of Goods Sold

C. Using the information from letter A and B, compute for the Net Income:

1 2 3 4
Total Operating Expense 300 320 10,200 70,000
Net Income
1 2 3 4
Net Sales
Cost of Sales
Gross profit
Operating Expenses
Net Income

D. Complete the table below, by using the following sample format of computing the gross profit:

Net Sales 600

Beginning Inventory 20
Net Purchases 550
Total Goods Available for Sale 570
Ending Inventory (10)
Cost of Goods Sold (560)
Gross Profit 40

A. B. C. D. E. F. G. H.

Net Sales 500 200 100 540

Beginning Inventory 100 20 20 80 30
Net Purchases 220 500 70 260
HO 9 – FINACR 030 8

Total Goods Available for sale 340 600 300

Ending Inventory 30 180 60 80 10
Cost of Goods Sold 280 540 65 500 440
Gross Profit 320 200 20 50 80 90

Classify whether the following accounts is part of the Computation of Cost of Sales (CS) a Selling Expense
(SE) or Administrative Expense (AE):

1. Depreciation of delivery equipment 6. Freight out

2. Office salaries 7. Salesmen’s salaries
3. Office supplies used 8. Legal fees
4. Traveling and marketing expenses 9. Depreciation of office building
5. Purchases 10. Freight in

Exercise:

Record the following transactions to the journal. Solve for the 1.) Sales, 2.) Cost of Goods Sold, and 3.) Gross
Profit at the end of the month.

The following are the transactions of Sunrise Trading during the month of December, 2017.

2017
July 1 Rose Lee began a general merchandising business by investing 300,000 cash.
2 Purchased store equipment from Sampaguita Commercial, P 40,000, term: 1/10, n/30.
3 Paid rent for the store space, P 10,000.
6 Purchased merchandise from Rose Trading, P 52,300, term: 1/15, n/30.
7 Purchased merchandise for cash, P 80,000
9 Received a credit memo for P 2,300 for defective merchandise returned to Rose Trading
9 Sold merchandise to Gold Co., P 15,000. Term 2/10, n/30
10 Sold merchandise to Silver Co. P 25,000. Term 2/10, n/30
11 Issued credit memo to Silver Co. for defective merchandise returned, P 5,000
16 Paid Sampaguita Commercial in full.
17 Collected the account of Gold Co. in full.
17 Sold merchandise to Diamond, P 40,000, Term: 2/10, n/30
19 Purchased office supplies, P 3,000, and store supplies, P 4,000 from Sunflower
Enterprises
19 Paid Rose Trading in full.
20 Purchased Store Furniture from Sampaguita Commercial, P 21,000
20 Collected the account of Silver Co. in full.
24 Received a credit memo for P 1,000 from Sampaguita Commercial for damage in the paint
of the Store Furniture
25 Cash sales, 100,000
27 Purchased merchandise from Rose Trading, P 80,000, Term: 1/15, n/30.
30 Sold merchandise to Gold Co., P 50,000. Term: 2/10, n/30
30 Received 20,000 from Diamond as partial payment of her account
31 Paid the salaries of employees for the month, P 20,000
31 Paid utilities expense, P 3,000