NC3 BOOKKEEPING REVIEW NOTES

TOPIC:

ACCOUNTING CYCLE OF A MERCHANDISING BUSINESS

Nature and examples of merchandising company.

A merchandising company is an enterprise that buys and sells goods to earn a profit

Merchandise (or merchandise inventory) refers to goods that are hold for sale to customers in the normal
cause of business.

If a grocery store decided to sell an old computer used in the office, this would not be merchandise
because grocery stores do not normally sell computers and the store is simply selling off old office
equipment. But a computer would be merchandise for a computer store who resells computer units.

Merchandise for one firm may be a fixed asset (or property and equipment) for another

A merchandiser's primary source of revenue is sales revenue or sales.

Expenses for a merchandising company are divided into two categories:

1. Cost of goods sold (COGS) – the cost of merchandise sold during the period

2. Operating expenses (OP) - expenses incurred in the process of earning sales revenue that are
deducted from gross profit in the income statement Examples are sales salaries and insurance
expenses.

Gross profit (GP) is equal to Sales Revenue less the Cost of Goods Sold

Income measurement process for a merchandiser follow as:

Operating Net Income

Sales - COGS = Gross Profit - Expense = (Loss)

The Operating Cycles for a merchandiser:

Merchandising Company operating cycle (cash to cash) involves

1. buy merchandise inventory

2. sell inventory
3. obtain Accounts Receivable
4. receive cash

JOURNALIZING THE TRANSACTIONS IN A MERCHANDISING BUSINESS

Prior to the discussion on the journal entries, recall the first step in the accounting cycle discussed in
previous chapters (specifically Chapter 10) on financial and non-financial transactions

In step 1, transactions are identified and measured. At this stage, the documents used by the business are
analyzed to see whether these transactions have financial impact or effect.

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Recall the rule that only financial transactions are recorded and that the amount can be measured. These
two conditions must exist in order for a particular transaction to be recognized or recorded. As defined,
financial transactions are those activities that change the value of an asset, liability or equity.

Step 2 is the Preparation of Journal Entries (Journalization)

A merchandising company may use special and general journals to record its transactions

SPECIAL JOURNALS

Some businesses encounter voluminous quantities of similar and recurring transactions, which may create
congestion if these transactions are recorded repeatedly in a single day or monthly in the general journal.
The use of special journals will eliminate this problem.

The following are the commonly used special journals:

1. Cash Receipts Journal – used to record all cash that had been received
2. Cash Disbursements Journal used to record all transactions involving cash payments
3. Sales Journal (Sales on Account Journal) -used to record all sales on credit on account)
4. Purchase Journal (Purchase an Account Journal) -used to record all purchases of inventory on credit
for an account

INVENTORY SYSTEMS

Maintaining inventory items is a unique set-up in a merchandising business. There are two methods of
accounting for inventory, namely:

Merchandising entities may use either of the following inventory systems:

1. Perpetual System - Detailed records of the cost of each item are maintained, and the cost of each
item sold is determined to records when the sale occurs.
For example, a car dealership has separate inventory records for each vehicle
● Record purchase of Inventory.
● Record revenue and record cost of goods sold when the item is sold
● At the end of the period, no entry is needed except to adjust inventory for losses, etc
2. Periodic System - Cost of goods sold is determined only at the end of an accounting period. This
system involves
● Record purchase of Inventory.
● Record revenue only when the item is sold
● At the end of the period, you must compute cost of goods sold (COGS):
1. Determine the cost of goods on hand at the beginning of the accounting period (Beginning
Inventory = BI)
2. Add it to the cost of goods purchased (COGP).
3. Subtract the cost of goods on hand at the end of the accounting period
4. (Ending Inventory – End illustrated as follows:

Cost of goods available for

BI + COGP = sale - EI = COGS

Additional Considerations:

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 ● Perpetual systems have traditionally been used by companies that sell merchandise with high unit
values such as automobiles, furniture and major home appliances. With the use of computers and
scanners, many companies now use the perpetual inventory system
● The perpetual inventory system is named because the accounting records continuously –
perpetually -show the quantity and cost of the inventory that should be on hand at any time. The
periodic system only periodically updates the cast of inventory on hand.
● A perpetual inventory system provides better control over inventories than a periodic inventory,
since the records always show the quantity that should be on hand. Then any shortages from the
actual quantity and what the records show can be investigated immediately

Note: The periodic inventory system will be used in all illustrations of this chapter while the perpetual
system will be included in the “enrichment" portion of this guide

PERIODIC INVENTORY SYSTEM

Recording purchases and related transactions under the Periodic Inventory System

PURCHASES OF MERCHANDISE PERIODIC SYSTEM

1. When merchandise is purchased for resale to customers, the account, Purchases, is debited for the
cost of goods purchased
2. Like sales, purchases may be made for cash or on account (credit)
3. The purchase is normally recorded by the purchaser when the goods are received from the seller
● Each credit purchase should be supported by a purchase invoice
● A purchase invoice received by the buyer is actually a sales invoice or a change invoice prepared
by the supplier or vendor
● Note that only purchases of merchandise are debited to the 'Purchase' account Acquisition
purchases of other assets: supplies, equipment, and similar items are debited to their respective
accounts

TO ILLUSTRATE:

Magaling Computer Store started its operations on January 2, 2016. The store is located in Sikat Mall in
Bicol The owner invested PHP500,000 to start the business. On January 3, 2016, Magaling purchased 20
units of computers on account for PHP10,000 eads upon delivery of the units, the supplier, Delta, Inc.
issued Charge Invoice No 145 to Magaling.

Entry:

General Journal
Date Account Title and Explanation Ref Debit Credit
1/3/2016 Purchases   200,000.00
  Accounts Payable      200,000.00
To record purchases of 20 units of computer at
PHP10,000 per unit from Delta, Inc. as per charge
Invoice 145.
       

PURCHASE RETURNS AND ALLOWANCES

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 ● A purchaser may find the merchandise received to be unsatisfactory because the goods are:
● damaged or defective
● of inferior quality
● not in accord with the purchaser's specifications
● The purchaser initiates) the request for a reduction of the balance due through the issuance of a
debit memorandum. The debit memorandum is a document issued by a buyer to inform a seller that
the seller’s account has been debited because of unsatisfactory goods
● A return of the merchandise la deduction from the purchase price when unsatisfactory goods are
kept) is shown by the entry where Accounts Payable is debited and Purchase Returns and
Allowance is credited to show that the purchases was reduced with a return or an allowance
● The Purchases Returns and Allowances account is a “contra purchases” account when
merchandise is returned to a supplier.

TO ILLUSTRATE:

One of the 20 computer units purchased last January 3, 2016, two found after inspection on the same day
that one unit was damaged during shipment. Magaling issued debit memorandum (DM 01) and informed
the supplier that it will return the one damaged item.

General Journal
Date Account Title and Explanation Ref Debit Credit
1/3/2016 Accounts Payable   10,000.00  
  Purchase Return and Allowance     10,000.00

To record return of 1 units of computer worth

PHP10,000 t from Delta, Inc. as per DM 01
       

ACCOUNTING FOR FREIGHT COSTS

The sales agreement should indicate whether the seller or the buyer is to pay the cost of transporting the
goods to the buyer's place of business. The trio most common arrangements for Height costs are FOB
SHIPPING POINT AND FOB DESTINATION

FOB Shipping Point:

⮚ Goods placed free on board (FOB) the carrier by seller

⮚ Buyer pays freight costs.
● Freight-In is debited if buyer pays freight.
● Cash is credited if the goods come on cash on delivery (COD), for example, and was paid
immediately. Accounts Payable would be credited if on account.
● Ownership over the goods is transferred to the buyer once it is out of the premises of the seller.

FOB Destination:

● Goods placed free on board (FOB) at buyer's business.

● Seller pays freight costs.
● Delivery Expense is debited if seller pays freight on outgoing merchandise to a buyer. This is an
operating expense to the seller.
● Ownership over the goods is transferred to the buyer once the goods are delivered and received by
the buyer.

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TO ILLUSTRATE:

Assume the supplier of Magaling is Based in Manila In order to bring the 20 computer units to Bicol, it will
cost PHP3,000 to deliver the goods

If the terms is Fob Shipping Point, the entry to record, assuming Magaling paid the common carrier in cash
on January 4, 2016:

General Journal
Date Account Title and Explanation Ref Debit Credit
1/4/2016 Freight-In   3,000.00  
  Cash     3,000.00
To record Freight costs for the purchases of 20 units of
  computers      

If the terms is FOB Destination, no entry is recorded in the books of Magaling. The PHP3,000 will be paid
by the seller, in this case Dalia, Inc.

PURCHASE DISCOUNTS:

● Credit terms (specify the amount of cash discount and time period during which a discount is
offered) may permit the buyer ta claim a cash (called the discount period); otherwise, the invoice is
due in 30 days.
● The buyer calls this discount a purchase ciscount
● A purchase discount is normally based on the invoice cost less returns and allowances, if any.

TO ILLUSTRATE

The credit terms for the purchase of 20 computer units (total cost PHP200,000) is 2/10, n/30. This means
that if Magaling pays on or before January 13, 2016, it is entitled to a 2% discount, otherwise Magaling will
have to pay the full amount on or before February 4, 2016 (30 days after purchase). On January 10, 2016,
Magaling paid the account in full with Delta.

Entry:

General Journal
Date Account Title and Explanation Ref Debit Credit
1/10/2016 Account Payable   200,000.00  
  Purchases Discount     4,000.00
  Cash     196,000.00
To record Full payment of Delta; Charge Invoice No.
145 with 2% discount computed as PHP200,000 x 2
  %      

Recording of sales and related transaction under the Periodic Inventory System

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SALES TRANSACTION: REVENUE ENTRIES FOR A MERCHANDISER

STRANSACTIONS: REVENUE ENTRIES FOR A MERCHANDISER

● Revenues are reported when earned in accordance with the revenue recognition principle, and in a
merchandising company revenues are earned when the goods are transferred from seller to buyer.
● All sales should be supported by a document such as a cash register tape (to provide evidence of
cash sales) or cash receipt or office receipt for cash sales, and charge invoice for credit sales, or
sales on account.
● One entry is made with each sale.
Debit – Accounts Receivable if a credit sale) or Cash (í a cash sale) which increases assets for the
sales amount
Credit - Sales which increases revenues
● The sales account is credited only for sales of goods held for resale Sales of assets not held for
resale (such as equipment, buildings, land, etc.) are credited directly to the asset account.

TO ILLUSTRATE

For the month of January, Magaling made the following sale:

1/10/2016 Official Receipt (OR) No. 001 Sold two units for cash to Mare Cruz for PHP36 000
(PHP18,000 per unit), FOB Destination

1/15/2016 Charge Invoice (Chl) No 001 Sold five units on account to Rafael Reyes for PHP97,500
(PHP19,500 per unit) with terms 3/10,n/ FOB Shipping Point

Entry:

General Journal
Date Account Title and Explanation Ref Debit Credit
1/10/2016 Cash   36,000.00  
  Sales     36,000.00
  To record OR No. 001 cash sale – marie Cruz    

General Journal
Date Account Title and Explanation Ref Debit Credit
1/15/2016 Account Receivable   36,000.00  
  Sales     36,000.00
To record Charge Invoice No. 001 Rafael Reyes on
  account with terms 3/10, n/30    

FREIGHT TERMS: FOB DESTINATION – SELLER PAYS FREIGHT

● An entry is made when seller pays the freight to deliver goods to a costumer or buyer. If the buyer
will pay for the freight, no entry is made.
● Debit – Delivery Expense and credit – Cash or Accounts Payable

TO ILLUSTRATE:

On January 10, 2016 Magaling paid MM Express, PHP 500 to deliver the two units to Marie Cruz.

General Journal
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 Date Account Title and Explanation Ref Debit Credit
1/10/2016 Delivery Expense   500  
  Cash     500
To record full payment of Delta Charge Invoice No.
  145    
Take note that no entry will be made regarding the sale to Rafael Reyes since the term is FOB Shipping
Point

SALES RETURNS AND ALLOWANCES

● Sales Returns result when customers are dissatisfied with merchandise and are allowed to return
the goods to the seller for credit or a refund.
● Sales Allowances result when customers are dissatisfied, and the seller allows a deduction from
the selling price.
● To grant the return or allowance, the seller prepares a credit memorandum to inform the customer
that a credit has been made to the customer's account receivable.
● Sales Returns and Allowances is a contra revenue account to the Sales account. A contra
account is a reduction to a particular account.
● A contra account is used, instead of debiting sales, to disclose the amount of sales returns and
allowances in the accounts.
● This information is important to management as excessive returns and allowances suggest inferior
merchandise, inefficiencies in filling orders, errors in billing customers, and mistakes in delivery or
shipment of goods.
● The normal balance of Sales Returns and Allowances is a debit.
● One entry is made with each sales return and allowance.

The entry to record the sales return or allowance:

● Debit - Sales Return and Allowances which decreases revenues for the amount of the sale
● Credit - Accounts Receivable (if a credit sale) or Cash (if a cash salo) which decreases assets

TO ILLUSTRATE:

On January 16, 2016, Rafael Reyes returned one unit of the computers purchased last January 15, 2016
under Charge Invoice 001 The unit returned was in good condition. However, Rafael Reyes returned the
unit because it is one unit more than what they need. The return was approved and accepted by Magaling.
The price will be deducted from the account of Rafael Reyes

Entry:

General Journal
Date Account Title and Explanation Ref Debit Credit
1/10/2016 Sales Return & Allowance   19,500  
  Account Receivable     19,500
To record return of one unit of computers from
  Rafael Reyes under Charge Invoice 001    
SALES DISCOUNTS

1. A sales discount is the offer of discount to encourage customers to pay the balance at an earlier
date
2. An example of a discount term is commonly expressed as 2/10, 1/30, which means that the
customer is given 25. discount payment is made within 10 days. After 10 days there is no discount,
and the balance is due in 30 days
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 3. Sales Discounts is a contra revenue account with a normal debit balance

TO ILLUSTRATE

Assume that Magaling purchased on cash, five units of computers at PHP10,000 per unit from a supplier
on January 17, 2016. These units were subsequently sold to Jun Cruz on January 18, 2016 under Charge
Invoice (Chi No. 002 amounting to PHP90,000 (PHP18,000 per unit with terms 2/10, 1/30, FOB Shipping
Point On January 23, 2016. Cruz paid the said account in full.

General Journal
Date Account Title and Explanation Ref Debit Credit
1/10/201
6 Purchases   50,000.00  
  Cash     50,000.00
  To record purchased on cash five units of computer      
         
1/18/201
Account Receivable
6   90,000.00  
  Sales     90,000.00
To record sales on account under Charge Invoice No. 002
  to Jun Cruz with terms 2/10      
         
1/23/201
6 Cash   88,200.00  
  Sales Discount   1,800.00  
  Account Receivable     90,000.00
To record collection of accounts receivable from Jun Cruz
  net of 2% sales discount      
         

Notice in the entry on January 23, 2016 that the cash received from Jun Cruz was net of the 2% discount
because he made the payment within the discount period. Take note that the discount period. Take note
that the discount period in this case was from January 19, 2016 to January 28, 2016 (10 days).

What if Jun Cruz paid the account on January 30, 2016 instead of January 23, 2016? The entry would be:

General Journal
Date Account Title and Explanation Ref Debit Credit
1/10/201
6 Cash   90,000.00  
  Account Receivable     90,000.00
  To record collection of accounts receivable from Jun      

Determining Cost of Goods Sold under Periodic Inventory System

The Cost of Goods Sold under Periodic Inventory System is determined at the period (monthly or yearly) by
a short computation, as follows:

Cost of Good sold:        

Merchandise Inventory, Beginning     100,000.00  
Purchases   250,000.00    
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 Less: Purchases returns and
allowances 5,000.00      
Purchases discount 2,000.00 7,000.00    
Net Purchases   243,000.00    
Add: Freight In   6,000.00    
cost of Goods purchased     249,000.00  
Cost of good available for sale     349,000.00  
Merchandise Inventory, Ending     118,570.00  
Cost of goods sold       230,250.00

In a periodic inventory system, separate ledger accounts are maintained for various items composing the
cost of goods sold (Purchases, Purchases returns & Allowance, Freight-In, Purchases Discount). At the
end of accounting period, a physical count of inventory is necessary to establish the ending balance of the
inventory.

COMPLETE ACCOUNTING CYCLE FO A MERCHANDISE BUSINESS

Agila Merchandising owned by Lito Agila, sells ready-to-wear shirt and dresses to its costumer. It started its
operations on January 1, 2016.

The company issues the following documents:

● Official Receipts – for all cash collection

● Charge sales Invoice – for all sales on account
● Check Voucher – for all c ash disbursement

Step 1 & 2 – Understanding and Journalizing the transaction

For the month of January 2016, the special journals of Agila are shown below:

Debit Credit
DESCRIPTION Charge Invoice or
DATE Accounts
(COSTUMER NAME) Sales Invoice No.
Receivable Sales
1/5/2016 Dax 1 2,102.00 2,102.00
1/7/2016 Marie 2 3,060.00 3,060.00
1/9/2016 Astro 3 1,475.00 1,475.00
  CANCELLED 4    
1/11/2016 PNSC 5 8,960.00 8,960.00
1/15/2016 PECO 6 7,125.00 7,125.00
1/16/2016 Ipedcare 7 4,560.00 4,560.00
1/19/2016 Te 8 1,250.00 1,250.00
1/21/2016 Joshua 9 3,125.00 3,125.00
1/22/2016 Joseph 10 4,510.00 4,510.00
1/24/2016 Jesper 11 2,080.00 2,080.00
1/28/2016 Nelcie 12 1,180.00 1,180.00
1/29/2016 Ryan 13 900.00 900.00
1/30/2016 Arlen 14 3,450.00 3,450.00
1/30/2016 Art 15 1,478.00 1,478.00
 Total for January
  2016   45,255.00 45,255.00

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 CASH RECEIPTS JOURNAL
Official Debit Credit Credit Debit
DESCRIPTION
DATE Receipt Account Sales
(PARTICULARS)
No. Cash Sales Receivable Discount
1/2/2016 Ana 1 1,000.00 1,000.00    
1/4/2016 Maria 2 1,890.00 1,890.00    
1/6/2016 Peter 3 1,289.00 1,289.00    
1/7/2016 Jun 4 3,456.00 3,456.00    
1/7/2016 Karen 5 1,290.00 1,290.00    
1/8/2016 Jane 6 3,876.00 3,876.00    
1/8/2016 May 7 4,561.00 4,561.00    
1/10/2016 April 8 5,600.00 5,600.00    
1/15/2016 PNSC 9 8,060.00   8,960.00 900.00
1/16/2016 Ana 10 4,235.00 4,235.00    
1/17/2016 Juan 11 2,010.00 2,010.00    
1/21/2016 Rafael 12 3,410.00 3,410.00    
1/22/2016 Ray 13 893.00 893.00    
1/23/2016 Te 14 1,250.00   1,250.00  
1/24/2016 Geo 15 3,452.00 3,452.00    
1/24/2016 Dax 16 2,102.00   2,102.00  
1/25/2016 Angela 17 1,000.00 1,000.00    
1/29/2016 Clyde 18 345.00 345.00    
1/30/2016 Joseph 19 4,000.00   4,510.00 510.00
  Total   53,719.00 38,307.00 16,822.00 1,410.00

PURCHASE JOURNAL
Charge
Account Invoive
Title and or Sales
Date Ref Debit Credit
Explanati Invoice
on No. (from
supplier)
228,560.0
1/2/2016 XYS   SI102 0 228,560.00
RTW
Super 133,070.0
1/10/2016 Store   SI611 0 133,070.00
Dresses
Unlimete
1/29/2016 d   SI341 9,812.00 9,812.00
371,442.0
  Total     0 371,442.00
CASH DISBURSMENTS JOURNAL
Check CREDIT DEBIT DEBIT DEBIT DEBIT DEBIT CREDIT
DISCRIPTION Or
DATE Accounts Supplies Advertisin Rental Purch
(PARTICULARS) Voucher Cash Salaries
No. Payable Exp g Exp Exp Disct

St Realy Rental
1/2/2016 for Jan-feb 2016 CV01 10,000         10,000  
Del supplies-
1/5/2016 office suooly CV02 3,500     3,500      
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 XYS Clothing-
1/15/201 payment of
6 account CV03 220,000 228,560         8,560
Jean Guzman-
1/16/201 salary Jan 1-15,
6 2016 CV04 7,500   7,500        
1/16/201 sonic Promo-
6 advertising CV05 4,800       4,800    
1/25/201
6 Goldmic Supply CV06 1,990     1,990      
  TOTAL   247,790 228,560 7,500 5,490 4,800 10,000 8,560
                   

In addition to the above special journals, the company maintains a general journal. The General Journal
had the following entries for January.

General Journal
Date Account Title and Explanation Ref Debit Credit
1/2/2016 Cash   500,000.00  
  Agila, Capital     500,000.00
  To record Initial Investment of Agila    

1/2/2016 Transporatation equipment 150,000.00

Additional Information:

● The delivery vehicle purchased in January 2, 2016 is estimated to be useful for 10 years with no
residual or salvage value.
● A physical count of merchandise inventory was conducted on January 30, 2016. The cost of
inventory on hand was PHP 438,700.
● On January 30, 2016, Agila received a statement of account from Gus Oil Center reflecting a total
bill of PHP 2,180, representing furl Purchase on January 2016 that were still unpaid as of the date.

Step 2 – Posting to the General Ledger. From the summary of transactions in the special journals and
general journals, the entries will now be posted in each general ledger account:

General Ledger
Account: Cash Account No.: 1000
Re
Date Item
f Debit Credit Balance
500,000.0 500,000.0
1/2/2016 Investment of Owner   0   0
150,000.0 350,000.0
  Purchase of Computer     0 0
403,719.0
  From the cash receipts Journal   53,719.00   0
254,290.0 149,429.0
  From the cash disbursement Journal     0 0

General Ledger

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Account: Account Receivable Account No.: 1200
Re
Date Item
f Debit Credit Balance
45,255.0 45,255.0
  From the sales Journal   0   0
16,822.0 28,433.0
  From the Cash Receipts Journal     0 0

General Ledger
Account: Transportation Equipment Account No.: 1680
Re Credi
Date Item
f Debit t Balance
150,000.0
  General journal – Purchase Journal   0   150,000.00

General Ledger
Account: Account Receivable Account No.: 1000
Re
Date Item
f Debit Credit Balance
  From the sales Journal   45,255.00   45,255.00
  From the Cash Receipts Journal     16,822.00 28,433.00

General Ledger
Account: Transportation Equipment Account No.: 1680
Re
Date Item
f Debit Credit Balance
150,000.0 150,000.0
  From the sales Journal   0   0

General Ledger
Account: Accounts Receivable Account No.: 2000
Re
Date Item
f Debit Credit Balance
459,750.0
  From the purchased Journal     0 (459,750)
228,560.0
  From the Cash Disbursement Journal   0   (231,190)

General Ledger
Account: Agila, Capital Account No.: 2000
Re
Date Item
f Debit Credit Balance
500,000.0
  Initial Investment - Gen Journal     0 (500,000)

General Ledger
Account: Sales Account No.: 4100
Re
Date Item
f Debit Credit Balance
  From the Sales Journal     45,255.00 (45,255)
  From the Cash Receipts Journal     38,307.00 (83,562)
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 General Ledger
Account: Sales Discounts Account No.: 4102
Re
Date Item
f Debit Credit Balance
  From the Cash Receipts Journal   1,410.00   1,410.00

General Ledger
Account: Purchases Account No.: 5100
Re
Date Item
f Debit Credit Balance
459,750.0 459,750.0
  From the Cash Receipts Journal   0   0

General Ledger
Account: Purchases Discount Account No.: 5102
Re
Date Item
f Debit Credit Balance
  From the Cash Disbursement Journal     8,560.00 (8,560)

General Ledger
Account: Salaries Expense Account No.: 6100
Re
Date Item
f Debit Credit Balance
  From the Cash Disbursement Journal   14,000.00   14,000.00

General Ledger
Account: Supplies Expense Account No.: 6150
Re
Date Item
f Debit Credit Balance
  From the Cash Disbursement Journal   5,490.00   5,490.00

General Ledger
Account: Advertising Expense Account No.: 6400
Re
Date Item
f Debit Credit Balance
  From the Cash Disbursement Journal   4,800.00   4,800.00

General Ledger
Account: Rental Expense Account No.: 6300
Re
Date Item
f Debit Credit Balance
  From the Cash Disbursement Journal   10,000.00   10,000.00

Step 4 & 5 Prepare the unadjustment trial balance, and preparation of worksheet. The balance in the
general ledger for each account will be extended to the first two money columns of the worksheet. The
unadjusted trial of Agila is:

AGILA MERCHANDISING
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Worksheet

For the month ending January 30, 2016

  Udjusted Trial Balance

Account Title and
Explanation Debit Credit
Cash 149,429.00  
Accounts Receivable 28,433.00  
Merchandise Inventory 0.00  
TransaportionEquipment 150,000.00  
Accum. Deprn-Off Eqpt. 0.00  
Accounts Payable   231,190.00
Agila, Capital   500,000.00
     
Income Statement
Accounts    
Sales   83,562.00
Sales Discount 1,410.00  
Purchases 459,750.00  
Purchases Discount   8,560.00
Salaries Expense 14,000.00  
Supplies Expense 5,490.00  
Advertising Expense 4,800.00  
Rental Expense 10,000.00  
Depreciation Expense 0.00  
  823,312.00 823,312.00

Step 6 – Prepare adjusting entries. Recall in Chapter 11 the five basic sources of adjusting entries:

1. Depreciation expense
2. Deferred expenses or prepaid expenses
3. Deferred income or accrued income
4. Accrued expenses or accrued liabilities
5. Accrued income or accrued assets

Identify transactions in the books of Agila that will require adjustments:

● Depreciation of transportation equipment purchased on January 2, 2016

Monthly Depreciation = Cost - Salvage or Residual Value) / 120 months

= (150,000-0) / 120

= 1,250

Adjusting entry: Depreciation Expense 1,250

Accum. Deprn-Transpo Eqpt 1,250

.
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 ● Deferred or Prepaid Expenses

In the cash disbursement journal the rental payment made on January 2, 2016 is for the month of
January and February 2016 amounting to PHP10 000 The entire amount was charged to rental
expense which is not proper because one half (1/2) of the said payment is considered as in
advance payment of rental. Thus, an asset should be recognized. The adjusting entry is:

Prepaid Expense 5,000

Accrued Expense 5,000

Note: With this entry, the correct rental expense of PHP5,000 and a prepaid expense of PHP5,000
(an asset account)are recognized.

● Accrued Expense
On January 30, 2016, fuel expenses incurred amounting to PHP2,180 should be recorded as an
expense and liability. The entry to adjust is:
Fuel Expense 2,180
Accrued Expense 2,180

AGILA MERCHANDISING

Worksheet

For the month ending January 30, 2016

Unadjusted trial
Adjustment Adjusted Trial Balance
ACCOUNT TITLE Balance
DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
Balance Sheet Accounts            
Cash 149,429.00       149,429.00 -
Accounts Receivable 28,433.00       28,433.00 -
merchandise Inventory         - -
Prepaid Expense     5,000.00   5,000.00 -
Transportation
Equipment 150,000.00       150,000.00 -
Accum. Deprn-Off Eqpt       1,250.00 - 1,250.00
Accounts Payable         - 231,190.00
Accured Expenses   231,190.00   2,180.00 - 2,180.00
Agila, Capital 500,000.00     - 500,000.00
          - -
Income Statement
Accounts         - -
Sales 83,562.00     - 83,562.00
Sales Discount 1,410.00       1,410.00 -
Purchases 459,750.00       459,750.00 -
Purchases Discount   8,560.00   - 8,560.00
Salaries Expense 14,000.00       14,000.00 -
Supplies Expense 5,490.00       5,490.00 -
Advertising Expense 4,800.00       4,800.00 -
Rental Expense 10,000.00     5,000.00 5,000.00 -
Depreciation Expense     1,250.00   1,250.00 -

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 Fuel Expense     2,180.00   2,180.00 -
  823,312.00 823,312.00 8,430.00 8,430.00 826,742.00 826,742.00

Step 7 - Preparation of Financial Statements. The first statement prepared is the income statement All
income statement accounts are extended to the appropriate column. Using the periodic inventory system,
the beginning balance of merchandise inventory account is also debit and total credit are determined and it
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:

AGILA MERCHANDISING

Worksheet

For the month ending January 30, 2016

Statement of Financial
Adjusted trial Balance Income Statement
ACCOUNT TITLE Position
DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
Balance Sheet Accounts          
Cash 149,429.00 -     149,429.00 -
Accounts Receivable 28,433.00 -     28,433.00 -
Merchandise Inventory - -   438,700.00 438,700.00 -
Prepaid Expense 5,000.00 -     5,000.00 -
Transportation
Equipment 150,000.00 -     150,000.00 -
Accum. Deprn-Off Eqpt   1,250.00     - 1,250.00
Accounts Payable   231,190.00     - 231,190.00
Accured Expenses   2,180.00     - 2,180.00
Agila, Capital 500,000.00     - 500,000.00
    -        
Income Statement
Accounts   -        
Sales 83,562.00   83,562.00    
Sales Discount 1,410.00 - 1,410.00      
Purchases 459,750.00 - 459,750.00      
Purchases Discount   8,560.00   8,560.00    
Salaries Expense 14,000.00 - 14,000.00 -    
Supplies Expense 5,490.00 - 5,490.00 -    
Advertising Expense 4,800.00 - 4,800.00 -    
Rental Expense 5,000.00 - 5,000.00 -    
Depreciation Expense 1,250.00 - 1,250.00 -    
Fuel Expense 2,180.00 - 2,180.00 -    
      493,880.00 530,822.00    

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Net Income 36,942.00   36,942.00
       
  826,742.00 826,742.00 530,822.00 530,822.00 771,562.00 771,562.00

The proper format of the income statement and the schedule of cost goods sold of Agila for January 2016
are presented below:

AGILA MERCHANDISING
Schedule of Cost of Goods Sold
for the month ended January 30, 2016

Merchandise Iventory, Beginning -0-

Add: Purchases 459,970.00
Less: Purchases Discount 8,560.00

Cost of Goods Available for Sale 451,190.00

Lss: Merchandise Inventory, Ending (438,700)

cost of Goos Sold 12,490.00

AGILA MERCHANDISING
Income Statement
for the month ended January 30, 2016

GROSS SALE 83,562.00

Less: Sales Discounts (1,410)

NET SALES 81,152.00

Less: Cost of Goods Sold (See above schedule) (12,490)

GROSS PROFIT 69,662.00

LESS: EXPENSE
Salaries Expense 14,000.00
Salaries Expense 5,490.00
Advertising Expense 4,800.00
rental Expense 5,000.00
Depreciation Expense 1,250.00
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 Fuel Expense 2,180.00

Total Expense 32,270.00

NET INCOME 36,842.00

● 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

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 Ledger
Re
Date Account Title and Explanation f Debit Credit
1/30/2020 Sales   83,562.00  
  Sales Discount     1,410.00
  Income Summary     82,152.00
  To close nomina revenue accounts      
         
  Income Summary   483,910.00  
  Purchase Discount   8,560.00  
  Purchase     459,750.00
  Salaries Expense     14,000.00
  Supplies Expenses     5,490.00
  Advertising Expense     4,800.00
  Rental Expense     5,000.00
  Depreciation Expense     1,250.00
  Fuel Expense     2,180.00
To close nominal expense and of goods sold
  account accounts      
      438,700.00  
  Merchandise Inventory, Ending     438,700.00
  Income Summary      
  To set up merchandise inventory ending      

After these entries, the income summary account has a balance of

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 Total Credits (82,152 +
438,700) = 520,852
Total Debit = 83,910
Net (credit balance) 36,942

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

General Ledger
Re
Date Account Title and Explanation f Debit Credit
1/30/2020 Income Summary   36,942.00  
  Agila, Capital     36,942.00

PERFROMANCE TASK A

1. A Family had the following transaction during December.

● Purchased merchandise on credit for PHP2 600 terms 1/20, 30.
● Issued a credit memorandum for PHP300 to a customer who returned merchandise purchased on
November 29 The returned items had a cost of FHP210.
● Received payment for merchandise sold on December 1
● Received a credit memorandum for the return of faulty merchandise purchased on December 4 for
PHP600.
● Paid freight charges of PHP200 for merchandise ordered last month (FOB shipping point).
● Paid for the merchandise purchased on December 4 less the portion that was returned
● Sold merchandise on credit for PHP7,000, terms 2/10, n/30. The items had a cost of PHP4.900.
● Received payment for merchandise sold on December 24

Required:

Prepare the general journal entries to record these transactions using a perpetual inventory system
(Record all purchases initially at the gross invoice amount)

2. The following data was taken from ledger account balance and supplementary data for the XYZ
Company.

Merchandise Inventory, beginning PHP 20,000.00

Merchandise inventory, ending 23,000.00
Purchases 215,000.00
Purchases discounts 6,000.00
Purchase returns and allowances 3,000.00
Sales 400,000.00
Sales discounts 3,200.00
Sales returns and allowances 1,800.00
Freight-In 10,000.00
Required:

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Show the computation, in proper format, of net sales, cost of goods sold, and gross profit for the year
ended December 31, 2016.

PERFROMANCE TASK B

Listed below are some of the accounts relating to the income of Leather Plus (owned by Abner Bravo) for
the three month period ended March 31, 2016

Sales 500,000.00 Merchandise Inventory, Beginning 170,100.00

Sales Returns and Allowances 15,000.00 Merchandise Inventory, Ending 165,000.00
Sales Discount 7,800.00 Purchase Discount 1,800.00
Purchases 302,000.00 Freight-In 5,000.00
Purchases Return and Allowances 4,900.00 Rental Expense 5,000.00
Supplies Expense 1,200.00 Delivery Expense 2,100.00
Salaries Expense 18,000.00 Utilities Expense 8,000.00

Instruction:

1. Prepare a schedule of Costs of goods sold for the three-month period ended March 31,2016.
2. Prepare a statement of income for the period ended March 31, 2016
3. Prepare closing entries.

PERFROMANCE TASK C

Canto Merchandise sells facsimile, copies and other types of office equipment. Transaction during the
month of September 2016 are as follows:

Purchased five units of copiers on account from Machina Corp at a cost of PHP8,000 per unit
Sept. 1 Payment is due 30 days after.
Borrowed from Nation Bank, PHP50,000 at 10% interest per annum due in three months.
Canto issued a promissory note for this borrowing.

Paid one-year insurance covering the period Sept 1, 2016 - August 31, 2017 for PHP24,000.
Purchased 10 units of facsimile machines on cash from Tiktac Corp for a total price of
Sept. 2 PHP20,000.
Sold three units of copiers to Jane Nay on account for a total amount PHP45,000. The terms of
Sept. 7 the sale is 2/10,n30

Sept. 10 Paid PHP5.600 for office supplies

Sept. 14 Collected from Jane Nay the full amount relating to September 7 sales.

Sept. 15 Paid PHP10,000 salaries of office staff.

Sept. 20 Sold on cash, two units of facsimile machines to Juan for PHP5,000.
Purchased delivery truck worth PHP300,000 with an estimated useful life of 10 years with no
Sept. 30 residual value Canto paid PHP200,000 cash and balance payable 30 days after.

Instructions:

1. Prepare journal entries to record the above transactions, assuming Canto uses periodic inventory
system
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2. Prepare necessary adjusting entries on September 30, 2016.

Prepared By:

CESAR Y. ALCANTARA, DBA

Accounting Teacher

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