HO 10 – FINACR 030 1

HUA SIONG
COLLEGE OF ILOILO

FINANCIAL ACCOUNTING AND REPORTING ACCOUNTING CYCLE FOR A

MERCHANDISING BUSINESS PART 3 OF 4
 Steps 5 - 11

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.

Accounting Worksheet:

An accounting worksheet is a spreadsheet used to prepare accounting information and reports. Accounting
worksheets are most often used in the accounting cycle process to draft an unadjusted trial balance, adjusting
journal entries, adjusted trial balance, and financial statements.

Worksheets are prepared at the end of an accounting period and usually include a list of accounts, account
balances, adjustments to each account, and each account's adjusted balance all sorted in financial statement
order. As with most working papers, accounting worksheets are designed for internal purposes only. External
users like investors and creditors rarely if ever get to see a company's accounting worksheet. This means that
the worksheet format can be flexible. Companies can customize the format of their worksheets to fit their
internal demands and work flow needs.

Bookkeepers and accountants use accounting worksheets for a variety of reasons. Worksheets make
transferring t-accounts into an adjusted trial balance much easier. Worksheets also reduce the risk of errors
making errors when producing financial statements.

Worksheets can also be used for planning purposes. Since the worksheets are used to make adjusting journal
entries, managers can examine the worksheets before the adjustments are posted to see their effect on the
overall financial statements. Worksheets can also be helpful in preparing interim financial statements.

A typical worksheet consists of a column on the left showing main account titles and 10 more columns of debits
and credits showing trial balance, adjustments, adjusted trial balance, incomes statement and balance sheet.

Inventory under the Periodic Inventory System:

The amount of Merchandise Inventory to be reported in the Balance Sheet at the end of the year should be
equal to the Inventory count conducted at the end of the accounting period. Therefore, Inventory beginning
must be closed, as if all are considered part of the expense account, Cost of Sales. The Ending Inventory is
also recorded and credited to Income Summary because not all purchased merchandise were sold. The
following adjustments must be made at the end of the year:

Income Summary 10,000

Inventory, beginning 10,000
To close beginning inventory

Inventory, end 15,000

Income Summary 15,000
To record amount of Inventory at the end
HO 10 – FINACR 030 2

PROBLEM 1:

John dela Cruz put up a merchandising business. The following are the transactions of the Kumo Detis
Company for the year 2017:

1. Invested P 90,000 cash to the business.

2. Purchased office supplies for cash, P 10,000.
3. Purchased equipment from Mike Hardware for P 50,000 cash.
4. Purchased inventory from Selah on account, P 20,000.
5. Sold merchandise to Helen for cash, P 30,000.
6. Purchased inventory from Delilah for cash, P 30,000.
7. Paid freight for merchandise purchased, P 2,000.
8. Sold merchandise to Micah, P 50,000 on account.
9. Returned merchandise to Selah, P 2,000.
10. Received merchandise returned by Micah, P 5,000.
11. Paid salaries of salesmen, P 4,000.
12. Received payment from Micah, less sales discount of P 3,000.
13. Paid his account to Selah the full amount less purchase discount of P 2,000.

At December 31, 2017:

a. Equipment was purchased on January 1, 2017 with 5 years useful life and P 10,000 salvage value.
b. Inventory at the end is P 10,000.
c. Supplies used during the period were P 8,000.
d. Accrued salaries, P 3,000.
e. Accrued interest income, P 5,000.

Required:

A. Journalize the transactions

B. Prepare the worksheet.
C. Prepare the financial statements – Income Statement, Statement of Changes in Capital, and Balance
Sheet.
D. Journalize the adjusting entries.
E. Journalize the closing entries.
F. Prepare the post-closing trial balance
G. Journalize the reversing entries at the beginning of the next period.

PROBLEM 2

Using the post closing trial balance of the previous problem, the following are the transactions of Kumo Detis
Company for the year 2018:

1. Invested P 50,000 cash to the business.

2. Purchased office supplies for cash, P 10,000.
3. Paid wages including the amount accrued in 2017, P 30,000.
4. Received payment of customer for interest accrued last year.
5. Purchased inventory from Selah on account, P 30,000.
6. Sold merchandise to Helen for cash, P 70,000.
7. Purchased inventory from Delilah for cash, P 40,000.
8. Sold merchandise to Micah, P 70,000 on account.
9. Returned merchandise to Selah, P 2,000.
10. Received merchandise returned by Micah, P 5,000.
11. Paid salaries of salesmen, P 4,000.
12. Cash sales, P 20,000.
13. Paid freight for merchandise sold, P 3,000.
14. Received payment from Micah, less sales discount of P 3,000.
15. Paid his account to Selah the full amount less purchase discount of P 2,000.
16. Received P 9,000 cash advance payment of rent from a customer.

At December 31, 2018:

a. Equipment was purchased on January 1, 2017 with 5 years useful life and P 10,000 salvage value.
b. Close the beginning Inventory
c. Inventory at the end is P 15,000.
d. Supplies used during the period were P 5,000.
HO 10 – FINACR 030 3

e. Accrued salaries, P 10,000.

f. The P 9,000 advance payment for rent was received on December 1, 2018 for three month rent of a
customer.

Required:

A. Journalize the transactions

B. Prepare the worksheet.
C. Prepare the financial statements – Income Statement, Statement of Changes in Capital, and Balance
Sheet.
D. Journalize the adjusting entries.
E. Journalize the closing entries.
F. Prepare the post-closing trial balance
G. Journalize the reversing entries at the beginning of the next period.

PROBLEM 1
Page no.

General Journal
Date Account titles and Explanations Folio Debit Credit
HO 10 – FINACR 030 4

Page no.
HO 10 – FINACR 030 5

General Journal
Date Account titles and Explanations Folio Debit Credit

Kumo Detis Company

Income Statement
For the Year Ended December 31, 2017
HO 10 – FINACR 030 6

*
Sales
*
Sales Return and Allowances
*
Sales Discount
*
Net Sales
*
*Cost of Sales
*
Gross Profit
Operating Expenses:
*
Supplies Expense
*
Salaries Expense
* *
Depreciation Expense
*
Operating Income
*
Interest Income
*
Net Income

*Cost of Sales:
Inventory, beginning *
Purchases *
Purchase Return/Allowances *
Purchase Discount *
Net Purchases *
Freight in * *
TGAS *
Inventory, end *
*

Kumo Detis Company

Statement of Changes in Capital
For the Year Ended December 31, 2017

Cruz capital, beginning

Net Income
Shine, capital, end

Kumo Detis Company

Balance Sheet
December 31, 2017

Assets:
Current Assets:
HO 10 – FINACR 030 7

*
Cash
*
Supplies
*
Inventory
*
Total Current Assets

Non-current Assets:
*
Equipment
*
Accumulated Depreciation –Equipment
*
Net Book Value
*
Total Assets

Liabilities:
Salaries payable *
*
Wages payable
*
Unearned rent income
*
Total Liabilities
*
Cruz, capital
*
Total Liabilities and Capital

Kumo Detis Company

Post-Closing Trial Balance
December 31, 2017
Cash
Supplies
Inventory
Equipment
Accumulated Depreciation –Equipment
Salaries payable
Wages payable
Unearned rent income
Cruz, capital
Total
PROBLEM 2
Page no.

General Journal
Date Account titles and Explanations Folio Debit Credit
HO 10 – FINACR 030 8

Page no.

General Journal
Date Account titles and Explanations Folio Debit Credit
HO 10 – FINACR 030 9

Kumo Detis Company

Income Statement
For the Year Ended December 31, 2018
HO 10 – FINACR 030 10

*Cost of Sales:
Inventory, beginning *
Purchases *
Purchase Return/Allowances *
Purchase Discount *
Net Purchases *
TGAS *
Inventory, end *
*

Kumo Detis Company

Statement of Changes in Capital
For the Year Ended December 31, 2018

Kumo Detis Company

Balance Sheet
December 31, 2018
HO 10 – FINACR 030 11

Kumo Detis Company

Post-Closing Trial Balance
December 31, 2017

Exercise:

1. The account “income summary” is a ---A

A. Nominal account
B. Real account
C. Capital account
D. Mixed account

2. The income summary account ---B

A. Generally has a credit balance after all the accounts that should be closed have been
closed
B. Summarizes revenue, expense, and net earnings or loss for the accounting period
C. Summarizes changes in assets, liabilities, and net earnings or loss for the accounting
period
HO 10 – FINACR 030 12

D. Is used to close the retained earnings account

3. After the accounts have been closed ---D

A. All the accounts have zero balances

B. The assets, liabilities, and stockholder’s equity accounts have zero balance
C. The revenue, expense, income summary, and retained earnings account have zero
balances
D. The revenue, expense, and income summary accounts have zero balances
4. The credit balance in the income summary account represents ---A

A. Net income
B. Net loss
C. Liability
D. Capital
5. For sole proprietorship, the net income for the period is ---A

A. Credited to capital account

B. Debited to capital account
C. Credited to drawing account
D. Debited to drawing account
6. If revenues are greater that expenses, the income summary account will be closed by ---B

A. Crediting income summary and debiting retained earnings

B. Debiting income summary and credited retained earnings
C. Debiting cash and crediting income summary
D. Debiting income summary and crediting cash
7. Reversing entries –C

A. Are normally prepared for accrued, prepaid and estimated items

B. Are necessary to achieve a proper matching of revenue and expense
C. Are desirable to exercise consistency and establish standardized procedures
D. Must be made at year end
8. Reversing entries apply to ---C

A. All adjusting entries

B. All deferrals
C. All accruals
D. All closing entries
9. The purpose of adjusting entries –B

A. Prepare revenue and expense accounts for recording the transaction of the next period
B. Apply the realization principle and the matching principle to the transactions affecting two
or more accounting periods
C. Adjust daily the balances in asset, liability, revenue, and expense accounts for the effects
of business transactions
D. Adjust the capital account for the revenue, expense, and withdrawal transactions which
occurred during the year
10. In preparing 10-column worksheet –D

A. The beginning inventory is extended as a credit in the income statement columns

B. The beginning inventory is extended as a credit in balance sheet columns
C. The ending inventory is extended as a debit in the income statement columns and as a
credit in the balance sheet columns
D. The ending inventory is extended as a credit in the income statement columns and as a
debit in the balance sheet columns

11. The balancing figure in the worksheet is net income or net loss. There is net loss if –D

A. The total of the credits exceeds the total of the debits in the income statement columns
B. In the balance sheet columns, the total of debits exceeds the total credits
C. The total of the credits is the same as the total of the debits in the income statement
columns
D. In the balance sheet columns, the total of the credits exceeds the total of debits
HO 10 – FINACR 030 13

12. In preparing a worksheet and the company is profitable in the current period, the total of the balance
sheet credit column will be—B

A. Larger than the balance sheet debit column

B. Smaller than the balance sheet debit column
C. Larger than the income statement debit column
D. Larger than the income statement credit column

13. Which of the following accounts can be included in the balance sheet?

a. Sales Discount c. Purchases

b. Freight out d. Accumulated Depreciation

14. Which of the following accounts is included in the computation of Gross Profit under the Periodic
Inventory System?

a. Office Supplies c. Freight in

b. Freight out d. Salesmen’s commission

15. Which of the following is deducted in computing the Gross Profit under the periodic inventory system?

a. Sales Discount c. Sales

b. Freight out d. Accumulated Depreciation

16. Which of the following expenses is part of administrative expense?

a. Sales Discount c. Purchases

b. Freight out d. Office supplies

17. Gross profit is equal to

a. Operating Income minus Other Expenses c. Net Income plus Interest expense
b. Net Sales minus Cost of Sales d. Sales minus Sales Discount

18. Inventory count is needed in what type of inventory systems?

a. Periodic and Perpetual c. Perpetual only

b. Periodic only d. Inventory count is not needed

19. It is a form used by the seller to notify the buyer that his account is being decreased due to errors or
defective products delivered or other factors requiring adjustments.

a. Purchase invoice c. Credit memorandum

b. Bill of Lading d. check

20. It is a formal notice to the debtor detailing the amount already due.

a. Purchase invoice c. Credit memorandum

b. Statement of Account d. check

Exercise:

Assume the following information:

Sales P 50,000
Sales Return and Allowances 5,000
Purchases 40,000
Purchase Return and Allowances 3,000
Freight in 2,000
Beginning Inventory 4,000
Ending Inventory 6,000

1. Compute the Net Sales___________________________

2. Compute the Cost of Sales__________________________

HO 10 – FINACR 030 14

3. Compute the Gross Profit___________________________

Assume the following information:

Sales P 60,000
Sales Return and Allowances 5,000
Purchases 40,000
Purchase Return and Allowances 3,000
Freight in 1,000
Beginning Inventory 6,000
Ending Inventory 6,000
Sales Discount 3,000
Purchase Discount 2,000

4. Compute the Net Sales___________________________

5. Compute the Cost of Sales__________________________

6. Compute the Gross Profit___________________________

Assume the following information:

Sales P 70,000
Sales Return and Allowances 5,000
Purchases 40,000
Purchase Return and Allowances 3,000
Freight in 2,000
Beginning Inventory 10,000
Sales Discount 3,000
Gross Profit 30,000

7. Compute the inventory at the end of the business. _________________________

Assume the following information:

Gross Profit P 20,000

Sales Return and Allowances 5,000
Purchases 35,000
Purchase Return and Allowances 3,000
Freight in 2,000
Beginning Inventory 10,000
Sales Discount 3,000
Cost of Sales 30,000
Operating expenses 5,000

8. Compute the net sales of the business____________________

HO 10 – FINACR 030 15

9. Compute the Ending Inventory_____________________

10. Compute the Operating Income______________________