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ACCOUNTING CYCLE OF A
MERCHANDISING BUSINESS
for Fundamentals of Accountancy, Business and Management 1
Senior High School (ABM)
Quarter 2 / Week 7
 FOREWORD

This self-learning kit for Fundamentals of Accounting

Business and Management 1 is designed specifically for
ABM students in the Senior High School to develop and
enhance their knowledge about accounting particularly
the accounting cycle.
In this learning kit, the students will gain knowledge
about the accounting cycle of a merchandising business.
It is aligned with the BEC of the Department of
Education following the prescribed MELCs (Most Essential
Learning Competencies.

It has the following features proven to be valuable

aids to learning Accountancy, Business, and Management
even at home.
What happened?
This section contains pre-activities like review of the
prior knowledge and a pretest on what the learners have
learned in their previous discussions.
What I Need to Know? (Discussion)
This section contains the guidelines in continuing the
steps of the accounting cycle for merchandising business.
What I Have Learned? (Evaluation/Post Test)
The exercises contained in this section are guaranteed
to build comprehension, skills, and competence with
regards to the topic. These will also serve as a diagnostic
tool to identify the learners’ areas of strengths and
difficulties.
OBJECTIVES:
K: Identify the remaining steps in completing the
accounting cycle of merchandising business.
S: Complete the accounting cycle by preparing financial
statements and closing entries.
A: Ensure the procedures and guidelines in accounting
are followed subserviently so that all the accounts are
updated and will be able to provide timely and accurate
data reporting.

LEARNING COMPETENCY:

Complete the Accounting Cycle of a Merchandising

Business ABM_FABM11-IVe-j -40

I. WHAT HAPPENED

REVIEW
Figure 1.
Accounting Cycle

1. Transaction 2. Journal Entries 3. Posting 4. Trial Balance

8. Closing 7. Financial 6. Adjusting 5. Worksheet

the Books Statements Journal entries

The Preparation of financial statements (Step 7) and Closing the books or

Closing Entries (Step 8) after the adjusting entries are the next steps to
complete the accounting cycle of merchandising business.

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 PRE-ACTIVITIES/PRE-TEST:
Direction: Read and analyze each item and choose the letter of the correct
answer. Write your answers on your activity sheet/notebook.

1. Gross profit from sales is the difference between

a. net sales and operating expenses
b. net sales and the cost of goods sold
c. net sales and the cost of goods sold plus all the expenses
d. gross sales less the sales discounts and sales returns and allowances

2. The buyer received an invoice from the seller for merchandise with a list
price of P400 and credit terms of 2/10, n/60. The number 10 in the credit terms
is the
a. credit period
b. cash discount allowed for early payment of the invoice
c. discount period
d. trade discount

3. The records for Uptown Pet Shop showed the following:

Sales P75,000 Beginning Inventory P10,000
Purchases 45,000 Cost of good sold 50,000
The ending merchandise inventory must have been
a. P5,000
b. P15,000
c. P25,000
d. P40,000

4. Under the periodic inventory system, the Purchases account is used to

record
a. only cash purchases of merchandise inventory
b. purchases of any asset on account or note payable
c. only purchases of merchandise inventory on account
d. purchases of merchandise inventory for cash or on account

5. Which of the following is used to determine the cost of goods available for
sale (periodic inventory)?
a. beginning merchandise inventory + purchases + ending
merchandise inventory
b. ending merchandise inventory + purchases - freight charges
c. beginning merchandise inventory + purchases - freight charges
d. beginning merchandise inventory + purchases - purchases discount
+ freight charges

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 II. WHAT YOU NEED TO KNOW?
Step 7 – Preparation of Financial Statements.

The first statement prepared is the Income Statement/Statement of

Comprehensive Income. All income statement/Statement of Comprehensive
Income accounts are extended to the appropriate column. Using the
periodic inventory system, the beginning balance of merchandise inventory
account is also extended to the debit side, while the result of the physical
count to determine the ending inventory is reflected on the credit side. The
total debit and total credit are determined and if credit balance is higher
than the debit side, the difference is added to the debit side. The difference
is actually the income for the period. However, if the total debit side exceeds
the total credit side, the difference is added to the credit side and this is the
net loss of the business. The statement of financial position is then prepared.
All assets, liabilities and equity accounts are extended. The ending
merchandise inventory is extended to the debit side.

The worksheet for these two financial statements are presented below:

Table 1. Sample Worksheet of Agila Merchandising business

AGILA MERCHANDISING
Worksheet
For the month ending January 30, 2020

Adjusted Trial Income Statement of

Balance Statement Financial Position
DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
Balance Sheet
Accounts
Cash 149,429 - 149,429 -
Accounts 28,433 - 28,433 -
Receivable
Merchandise - - 438,700 438,700 -
Inventory
Prepaid Expenses 5,000 - 5,000 -
Transportation 150,000 150,000 -
Equipment
Accum. Deprn-Off - 1,250 - 1,250
Eqpt
Accounts Payable - 231,190 - 231,190

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Accrued Expenses - 2,180 - 2,180
Agila, Capital - 500,000 - 500,000
- -
Income Statement - -
Accounts
Sales - 83,562 83,562
Sales Discounts 1,410 - 1,410 -
Purchases 459,750 - 459,750 -
Purchase Discount - 8,560 - 8,560
Salaries Expense 14,000 - 14,000 -
Supplies Expense 5,490 - 5,490 -
Advertising Expense 4,800 - 4,800 -
Rental Expense 5,000 - 5,000 -
Depreciation 1,250 - 1,250 -
Expense
Fuel Expenses 2,180 - 2,180 -
493,880
Net Income 36,942
36,942

826,742 826,742 530,822 530,822 771,562 771,562

Step 8 – Closing Entries. The closing journal entries consist of the following:

• All of the nominal revenue accounts should be closed to the income

summary account by a Debit to revenue and credit to income summary.
• All of the nominal expense and cost of goods sold accounts should be closed
to the income summary by a Credit to expense and a debit to income
summary.
• The Merchandise Inventory, Beginning is closed to Income summary
account by a debit to Income Summary and a credit to Merchandise
Inventory.
• The Merchandise Inventory, Ending is set up in the books by a debit to
Merchandise Inventory, Ending and a credit to Income Summary. The
amount that will be used is the result of the physical count.
• The balance in the income summary account should now reflect the net
income for the accounting period. The next journal entry should close the
income summary account to the equity or capital account. If there is a net
profit this entry will be a debit to income summary and a credit to owner’s
capital account.

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Once the closing journal entries have been entered into the general journal,
the information should be posted to the general ledger. When this is
accomplished, all of the nominal accounts in the general ledger should have
zero balances. To double check on this, we prepare another trial balance
based on the new balances in the general ledger. If we have any nominal
accounts with positive balances, a mistake was made along the way and will
need to be corrected before proceeding to the next accounting period.

The closing entries of Agila are:

GENERAL JOURNAL
DATE ACCOUNT TITLE AND REF DEBIT CREDIT
EXPLANATION
1/30/20 Sales 83, 562
Sales Discounts 1,410
Income Summary 82,152
To close nominal revenue
accounts

Income Summary 483,910

Purchase Discount 8,560
Purchases 459,750
Salaries Expense 14,000
Supplies Expense 5,490
Advertising Expense 4,800
Rental Expense 5,000
Depreciation Expense 1,250
Fuel Expense 2,180
To close nominal expense and
cost of goods sold account
accounts

Merchandise Inventory, Ending 438,700

Income Summary 438,700
To set up merchandise inventory
ending
After these entries, the income summary account has a balance of:

Total Credits (82,152 + 438,700) = 520,852

Total Debit = 83,910
Net (credit balance) 36,942

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 The last closing entry is to close the balance of income summary to the
capital account:

GENERAL JOURNAL
DATE ACCOUNT TITLE AND REF DEBIT CREDIT
EXPLANATION
1/30/20 Income Summary 36, 942
Agila, Capital 36, 942

III. WHAT HAVE I LEARNED

EVALUATION/POSTTEST:
Complete the accounting cycle using the adjusted trial balance below.

TIONX MERCHANDISING COMPANY

Adjusted Trial Balance
December 31, 2019

Account Title Debit Credit

Balance Sheet
Cash ₱ 154,929
Accounts Receivable 29,933
Merchandise Inventory - -
Prepaid Expenses 6,7000
Transportation Equipment 153,333
Accum. Deprn-Off Eqpt ₱ 1,750
Accounts Payable 234,523
Accrued Expenses 2,209
Tionx, Capital 505,500

Income Statement Accounts

Sales 85,262
Sales Discounts 1,910
Purchases 460,500
Purchase Discount 11,780
Salaries Expense 14,029 -
Supplies Expense 5,530 -
Advertising Expense 5,450 -
Rental Expense 5,023 -
Depreciation Expense 1,500 -
Fuel Expenses 2,187 -
Totals ₱ 841,024 ₱ 841,024

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Requirements:
1. Prepare Financial Statements( Income statement and Statement of
financial Position) using periodic inventory system, wherein
merchandise inventory and net income is equivalent to 443,529 and
44,442 respectively.
2. Prepare closing entries in the general journal.

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 REFERENCES

Teaching Guide for Senior High School FUNDAMENTALS OF

ACCOUNTANCY, BUSINESS, AND MANAGEMENT 1 SPECIALIZED SUBJECT
| ACADEMIC – ABM. Published by the Commission on Higher
Education, 2016 Chairperson: Patricia B. Licuanan, Ph.D.

McGraw-Hill Ryerson.Copyright © 2001 McGraw-Hill Ryerson Limited.

Pre-test Retrieved from
https://tools.mheducation.ca/college/larson10/student/olc/10fal_mc_
06.html retrived on 11/5/2020

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 DEPARTMENT OF EDUCATION
SCHOOLS DIVISION OF NEGROS ORIENTAL

SENEN PRISCILLO P. PAULIN, CESO V

Schools Division Superintendent

FAY C. LUAREZ, TM, Ed.D., Ph.D.

OIC - Assistant Schools Division Superintendent
Acting CID Chief

NILITA L. RAGAY, Ed.D.

OIC - Assistant Schools Division Superintendent

ROSELA R. ABIERA
Education Program Supervisor – (LRMS)

ARNOLD R. JUNGCO
Education Program Supervisor – (SCIENCE & MATH)

MARICEL S. RASID
Librarian II (LRMDS)

ELMAR L. CABRERA
PDO II (LRMDS)

JOVIT A. TIONGCO
Writer

IVANNE RAY A. GIDOR

Lay-out Artist
_________________________________

ALPHA QA TEAM
RICKLEOBEN V. BAYKING
LITTIE BETH S. BERNADEZ
MERCYDITHA D. ENOLPE
RONALD TOLENTINO

BETA QA TEAM
RICKLEOBEN V. BAYKING
LITTIE BETH S. BERNADEZ
GIL S. DAEL
MARIA SOLEDAD M. DAYUPAY
MARIA ACENITH D PASTOR
JEE LIZA T. INGUITO
MERCYDITHA D. ENOLPE
RONALD G. TOLENTINO

DISCLAIMER

The information, activities and assessments used in this material are designed to provide accessible learning modality to the teachers
and learners of the Division of Negros Oriental. The contents of this module are carefully researched, chosen, and evaluated to comply with the
set learning competencies. The writers and evaluator were clearly instructed to give credits to information and illustrations used to substantiate this
material. All content is subject to copyright and may not be reproduced in any form without expressed written consent from the division.

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 ANSWER KEY

Evaluation Requirement No. 1

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Evaluation Requirement No. 2

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 SYNOPSIS AND ABOUT THE AUTHOR

SYNOPSIS
This Self Learning Kit (SLK) is all about the guidelines to be
followed in the accounting cycle particularly steps 7 (Preparation of
Financial Statements) and 8 (Preparation of Closing Entries) for
merchandising business. This knowledge is very important for ABM
students to develop their bookkeeping skills which is an important
requirement to pass the NCIII bookkeeping TESDA assessment.
In this learning kit the students will gain knowledge in applying
the accounting cycle with sufficient knowledge to complete the
cycle which enhances their bookkeeping skills whether to be applied
in a small sari-sari store or a larger company.

AUTHOR

JOVIT A. TIONGCO completed his bachelor’s degree in Business

Administration Major in Management Accounting at
Foundation University. He is currently pursuing his master’s
degree in Business Administration at St. Paul University
Dumaguete City and presently the Teacher of ABM in SHS
Department of Maria Macahig National High School, Siaton IV
District. He has significantly contributed to the craft of sports in
the said school as one the winning coach in volleyball during
the municipality meet in Siaton. He is also the Career Guidance
Coordinator and GAD coordinator-SHS of the District of Siaton
IV.
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