Fundamentals of Accountancy Business and Management

INSTRUCTIONAL MATERIAL
FOR
ABM 2104 – Fundamentals of

Accountancy, Business and
Management 2
COMPILED BY:
Melinda S. Balbarino
Maria Teresa M. Corrales
Marietta M. Doquenia
Julieta G. Fonte
Leandro C. Fua
Editha A. Peralta
Andrea Rose E. Rimorin
Catherine D. Sotto
COURSE SYLLABUS
INTRODUCTION/OVERVIEW
This course provides an introduction to accounting for a merchandising business. Emphasis is
placed on understanding the reasons underlying basic accounting concepts and providing
students with an adequate background on the recording, classification, and summarization
functions of accounting for a merchandising business to enable students to appreciate the varied
uses of accounting data of a sole-proprietorship for merchandising type of business.
TABLE OF CONTENTS
I. Overview of Classroom Policies and Expectations
a. orientation and dry run on online learning platform Microsoft Teams
b. virtual classroom rules
c. course learning objectives, expectations/outcomes, and content
d. course requirements and grading system
II. Module 1 Review of The Accounting Process

a. Review of the Accounting Terms and Concepts
b. Review of the Recording, Classifying, and Summarizing Phase of Accounting
c. Review of the Adjustment Entries
d. Review of Value Added Tax
III. Module 2 Accounting for Merchandising Businesses

a. Nature of Merchandising Business
b. Financial Statements for a Merchandising Business
c. Merchandising Transactions
d. The Adjusting and Closing Process
e. The Periodic Inventory System
IV. Module 3 Special Journals

a. Recording transaction Using a Sales Journal
b. Recording transaction Using a Cash Receipts Journal
c. Recording transaction Using a Purchase Journal
d. Recording transaction Using a Cash Payment or Disbursement Journal
V. Module 4 The Use Of Bank Accounts

e. Bank Reconciliation
f. Petty Cash
COURSE OUTCOMES
By the end of this course, a student should be able to:
a. Develop and understand the nature and purpose of financial statements in relationship
to decision making.
b. Develop the ability to use the fundamental accounting equation to analyze the effect of
business transactions on an organization's accounting records and financial statements.
c. Develop the ability to use a basic accounting system to create (record, classify, and
summarize) the data for a sole proprietorship for merchandising business
d. Develop the ability to use accounting concepts, principles, and frameworks to analyze
and effectively communicate information to a variety of audiences.
e. Develop the competence and honesty in the performance of accounting service
LEARNING OUTCOMES
I. Module 1 Review Of The Accounting Process
At the end of this module, the students should be able to:
a. Understand the definition of accounting and identify the users of accounting information.
b. Identify and explain the steps in the accounting process
c. Prepare adjusting entries and understand the rationale for their preparation.
d. Prepares closing and reversing entries and understand the rationale for their preparation.
e. Prepare a financial statement for service.
II. Module 2 Accounting for Merchandising Businesses

a. Describe the activities of a merchandising business.
b. Prepare journal entries, adjusting entries, closing entries and reversing entries relating to
merchandising business.
c. Know the transportation costs, trade discount from cash discount.
d. Know the accounting using the perpetual inventory system and periodic inventory
system.
e. Prepare the financial statements for a merchandising business.
f. Complete the accounting cycle for a merchandising firm
III. Module 3 Special Journals
a. The different kind of special journals and their format.

b. Recording of the transactions in the Special Journals
IV. Module 4 The Use of Bank Accounts

After reading this module, the students should be able to:
a. Identify the bank reconciling items.
b. Know the preparation of the bank reconciliation statement.
c. Prepare the necessary journal entries to bring the cash balance to adjusted amount.
GRADING SYSTEM
First Semester
Written Work 25%
Performance Tasks 50%
Quarterly Assessment 25%
Total 100%
Second Semester
Written Work 25%
Performance Tasks 50%
Quarterly Assessment 25%
Total 100%
Total 200%
Divided by 2 ÷2
Final Grade 100%

COURSE MATERIALS AND ASSESSMENT/ACTIVITIES
MODULE 1: REVIEW OF THE ACCOUNTING PROCESS
Overview
The module gives us a review of the accounting process for single proprietorship both in
service and merchandising business.
Module Objectives

1. Understand the definition of accounting and identify the users of accounting information.
2. Identify and explain the steps in the accounting process
3. Prepare adjusting entries and understand the rationale for their preparation.
4. Prepares closing and reversing entries and understand the rationale for their preparation.
5. Prepare a financial statement for service.
Course Material: ACCOUNTING DEFINED
Accounting is a service activity. Its function is to provide quantitative information, primarily

financial in nature, about economic entities, that is intended to be useful in making economic
decisions, in making reasoned choices among alternative courses of action. This definition
stipulates the nature and purpose of accounting. An accountant provides services and furnishes
quantitative information expressed in terms of money that is useful to the users of the accounting
information. The information are outlined into reports called financial statements and served as a
basis for making important economic decisions.
The users of the accounting information are categorized as either internal or external
users. External users are decision makers who have no direct access to the information provided
by the operations of the company. Internal users represent the managers or the decision makers
of an entity and they need the accounting information for the continued operation of their business.
Examples of users and their need for accounting information as the basis for their decision
making are:
a. Investors are influenced with the returns from their investments and to decide whether
to make additional investments, hold or sell their shares of stocks.
b. Creditors/Suppliers/Lenders need accounting information to help in their decision

whether to extend credit or loans being applied by businesses.
c. Government and their agencies need to know if an entity is abiding the implemented
government rules and regulations.
d. Employees/Labor unions are interested in the stability and profitability of the company
they are working with and for the assurance of their security of tenure.
e. General Public and Customers need to know if the company would provide them
continuity of their services and updates on improvements of their products and
services.
BRANCHES OF ACCOUNTING
There are two main branches of accounting: Financial Accounting and Management
Accounting.
Financial Accounting is designed in providing accounting information for all parties

external to the operating responsibility of the company. It is the process of preparing accounting
reports known as financial statements that show the company’s financial performance and
position to people outside the company like creditors and customers.
Management or Managerial Accounting is designed in providing accounting information

and operational needs for use by the internal users, the management. It involves financial
analysis, budgeting and forecasting, cost analysis, and evaluation of business decisions.
AREAS OF ACCOUNTING
Accounting is commonly misinterpreted and understood as just the recording of business

transactions, known as bookkeeping. However, bookkeeping is only one of the functions of
accounting while accounting is a diversified profession. Accountants can be employed in four
broad or specialized areas:
Public Accounting
Public accounting offers accounting and related services to its clients on a fee basis.
Some of the services being offered include preparation, review and audit of the company’s
financial statements, tax services, and consultation involving accounting systems, mergers and
acquisitions. Accountants practicing public accounting are licensed professionals known as
Certified Public Accountants
Private Accounting
Private accounting offers accounting services for a specific company and is an important
part to the success of any organization. Private accountants offer a higher level of services
through familiarity with the full workings of the company’s business interests. They are concerned
with the collection and analysis of financial data within a specific company. They are also involved
with strategic planning and developing new products and services.
Government Accounting
Under Section 109, of the PD No. 1445, Government Accounting is defined as one that
encompasses the process of analyzing, classifying, summarizing and communicating all
transactions that are involved in the receipt and disbursement of all government funds and
properties, and interpreting the results thereof. Its objectives were set to include several areas in
government operations. The accounting data should show how government funds were used
and should indicate the outflow and inflow of funds and the need for a study of fund management
and control, if necessary.
Accounting Education
Accounting Education is an area of accounting that covers the upgrading, researching and
teaching accounting knowledge to students, aspiring accountants or accounting professionals
seeking continuous education and updates. This area is composed of accountants (Certified
Public Accountants) who are into teaching, training and development, including research.
Accountants in education pursue a career as a faculty member in a school, an author of an
accounting book, a researcher, a trainer, or a reviewer.
FORMS OF BUSINESS ORGANIZATION
Sole Proprietorship
Sole or Single Proprietorship is organized and owned by only one person. It is easy to
form and offers complete control to the owner. However, he is also personally liable for all
financial obligations and debts of his business.
Partnership
A partnership is formed by two or more individuals who agreed to carry on a trade or

business. Each individual contributes money, property, labor or skill, and expects to share in the
profits of the business.
Corporation
A Corporation is a more complex form of business organization as differentiated from a

sole proprietorship and a partnership. It is a separate legal entity whose ownership is divided
into shares of stocks. Its owners are known as shareholders. It is also subject to more legal
requirements and government regulations.
TYPES OF BUSINESS ACTIVITIES
A business is an organization that uses basic resources (inputs) like materials and labor
to provide goods or services to customers or clients. There are three major types of business:
Service Business
A service type of business provides services rather than products to customers or clients
for a fee. Examples are salons, repair shops, hotels and restaurants, and professional firms like
law and accounting.
Merchandising Business
This type of business is also called a trading business. Merchandising companies buy
goods in salable form and sell them to their customers at a higher cost to make a profit. Examples
are department stores, bookstores, appliance stores and other resellers.
Manufacturing Business
This type of business buys raw materials with the intention of using them in making a new
product. Manufacturing companies converts these raw materials into finished products before
selling them to their customers.
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP)
Generally accepted accounting principles are a common set of accounting principles,

standards and procedures that must be followed when preparing financial statements.
Because it is important that all who will receive accounting reports be able to interpret
them, a set of practices were developed that will provide guidelines for financial accounting. The
term used to describe these practices is generally accepted accounting principles (GAAP).
Generally accepted accounting principles encompass the conventions, rules, and

procedures necessary to define accepted accounting practice at a particular time. These
“principles” are not like the unchangeable laws of nature found in chemistry or physics. They are
developed by accountants and businesses to serve the needs of decision makers, and they can
be changed or altered as better methods are developed or as circumstances change.
1. Business Entity Concept
Under the business entity concept, the activities of a business are recorded separately
from the activities of the owner or owners. This concept is important because it limits the
economic data in the accounting system to data related directly to the activities of the business.
Thus, the accountant for a business with one owner (a proprietorship) would record the activities
of the business only, not the personal activities, property, or debts of the owner.
2. Going Concern or Continuity Assumption
To prepare financial statements for an accounting period, the accountant must make an
assumption about the ability of the business to continue. Specifically, the accountant assumes
that unless there is evidence to the contrary, the business entity will continue to operate for an
indefinite period. This method of dealing with the issue is called the going concern or continuity
assumption. The justification for all the techniques of income measurement rests on this
assumption of continuity.
3. Time Period Assumption
The operating results of any business cannot be known with certainty until the company
has completed its life span and ceased doing business. But financial reports covering shorter
time periods are needed because external decision makers require timely accounting information
to satisfy their analytical needs. Because of this, businesses have imposed the time-period
assumption, requiring that changes in a business’s financial position be reported over a series
of shorter time periods like annually, semi-annually, quarterly or monthly. An annual accounting
period is the most common which can be a calendar year or a fiscal year. Example: January 1,
2017 to December 31, 2017 is a calendar year; July 1, 2017 to June 30, 2018 is a fiscal year.
4. Unit-of-Measurement Assumption
The unit-of-measure assumption specifies that accounting should measure and report the
results of a business’s economic activities in terms of a monetary unit such as the Philippine peso.
The assumption recognizes that the use of a standard monetary unit throughout all financial
statements is an effective means for aggregating and communicating accounting information. It
is a standard practice to ignore changes in the purchasing power of a peso.
ACCRUAL BASIS AND CASH BASIS OF ACCOUNTING
The difference between accrual basis and cash basis of accounting lies in the timing of
when is revenues and expenses are recognized and incurred when recorded in the books.
Under the cash basis of accounting, revenues are recognized and recorded when cash is
received or collected and expenses when cash is paid. No adjusting entries are needed in this
method of accounting.
Under the accrual basis of accounting, revenues are recognized and recorded when
earned regardless of when cash is received or collected. Expenses incurred are recorded
whether or not cash is paid. Adjusting entries are needed under this method to update the account
balances at the end of the accounting period.
THE ACCOUNTING CYCLE
The accounting cycle, also known as the accounting process, refers to a series of steps
accountants perform during an accounting period for the orderly accumulation, reporting and
interpretation of data pertaining to the financial operations of the business. The functions of
accounting can be summarized as the recording, classifying, summarizing and interpreting of
business data.
The first three functions represent the process by which accounting information is
developed. These steps are applied in accordance with generally accepted accounting principles
and practices developed by the accounting profession. The interpreting function involves the use
of analytical techniques and procedures as a base for management decisions.
The steps in the accounting cycle include the following:
1. Documentation
2. Journalizing
3. Posting
4. Preparation of the trial balance
5. Compilation of data needed for adjustments
6. Preparation of the worksheet
7. Preparation of the Financial Statements
8. Adjusting entries are journalized and posted to the ledger
9. Closing entries are journalized and posted to the ledger
10. Preparation of the post-closing trial balance
11. Reversing entries are journalized and posted to the ledger
The first three steps constitute the recording phase of accounting. The summarizing
phase begins with the trial balance preparation up to the post-closing trial balance. Reversing
entries prepared on the first day of the next accounting period is considered to be an optional
step.
RECORDING PHASE
Accounting is based on a double entry system which means that a business transaction
has a dual effect when recorded. Business transactions are recorded in at least two accounts.
Documents are needed to serve as a basis for recording the transactions. The two books of
accounts where transactions are recorded are the journal and the ledger. The double-entry
accounting system has specific rules of debit and credit for recording the transactions in the
accounts. Debit is the left side of an account while credit is the right side.
To summarize the rules of debit and credit:
Debit: Credit:
Increases in assets • Decreases in assets

Decreases in liabilities • Increases in liabilities
Decreases in equity/capital • Increases in equity/capital
• drawings • investments
• decrease in revenue • increase in revenue
• increase in expense • decrease in expense
Applying the rules of debit and credit, transactions are first recorded in the book of original
entry called the general journal and the process is known as journalizing. The chart of accounts
should show the elements of the financial statements which shall be used in recording the
transactions. Special journals are sometimes used by businesses that are designed for recording
a single type of transaction that occurs frequently. The format and the number of special journals
used will depend on the nature of the business. The most common special journals include the
cash payments journal, cash receipts journal, revenue/sales journal and the purchases journal.
The general journal will be used for entries that cannot be recorded in the special journals such
as adjusting and closing entries.
The information from the journal is then transferred to the book of final entry called the
general ledger and the process is called posting. The ledger is a complete listing of all the
accounts as found in the chart of accounts of a business. The purpose of this process is to classify
the effects of transactions on the elements of the financial statements. Businesses may have
control accounts and subsidiary ledgers that will show their balances are the same. Subsidiary
ledger is a group of related accounts showing the details of the balance in the control account.
Examples of control accounts are Accounts receivable and Accounts payable accounts.
SUMMARIZING PHASE
After all the transactions are posted in the ledger, the account balances are then computed
and must show the normal balances of each individual account. The preparation of the trial
balance will mathematically prove the equality of the debit and credit balances of each account
but will not give the assurance that no errors have been made during the journalizing and posting
process in case the total debit and credit amounts are shown as equal. Inequality in the debit and
credit totals would automatically prove the presence of an error. The most common examples of
errors showing inequality of total debit and credit amounts are transposition and slide.
Transposition is the erroneous rearrangement of writing an amount like P 1,250 written as

P 1,520. Slide is an error in which the whole amount is moved one or more spaces to the right or
the left, like P 1,000 written as P 100 or P 10,000.
At the end of the accounting period, some of the account balances presented in the trial
balance are not yet updated and may require adjustments before financial statements are
prepared. Data for adjustments are then compiled for such updating. The types of accounts
that require adjustment are as follows:
1. Prepaid Expenses – These are expenses paid by the business in advance; or these are
expenses already paid in cash by the business but the expenses are not yet incurred or
only a portion of the amount paid was used up as expense. Prepaid expenses are also
termed as deferred expenses.
There are two methods of accounting for prepaid expenses:
a. Asset method – if at the date of payment, the business debited an asset account.
The pro-forma adjustment is:
Expense Account xxx Compute used or expense

Asset Account xxx portion
b. Expense method – if at the date of payment, the business debited an expense
account.
Asset Account xxx Compute unused or asset

Expense Account xxx portion
To illustrate, assume that Lakers Company is using a monthly accounting period. On

January 1, 2019, the company paid P 30,000 representing 3-month rent beginning January 1,
2020. The company adjusts and closes its books every month. The entry to record the
prepayment and the adjusting entry at the end of the month will be:
Asset Method Expense Method
2019
Jan 1 Prepaid Rent 30,000 Rent Expense 30,000
Cash 30,000 Cash 30,000
31 Rent Expense 10,000 Prepaid Rent 20,000

Prepaid Rent 10,000 Rent Expense 20,000
Since P 30,000 is for 3 months, the monthly rent is P 10,000. For January, the used or
expense portion is one month or P 10,000; therefore, the unused or asset portion will be two
months or P 20,000 as of January 31.
Regardless of which method a business used in any particular case, the amount reported
as expense in the income statement and the amount reported as asset in the balance sheet will
be the same.
Both methods of accounting for prepayment are acceptable although most companies
employ the expense method due to its simplicity. A business must also use a method consistently
for a particular type of prepayment, say asset method for rent while expense method for supplies.
2. Unearned Revenues – These are revenues collected or received by the business in

advance; or these are revenues already collected in cash by the business but the revenues
are not yet earned or only a portion of the amount received was earned or became revenue.
Unearned revenues are also termed as deferred revenues.
There are two methods of accounting for unearned revenues:
Liability method – if at the date of collection, the business credited a liability
a. account.
Liability Account xxx Compute earned or income

Revenue Account xxx portion
b. Revenue method – if at the date of collection, the business credited a revenue
account.
Revenue Account xxx Compute unearned or liability

Liability Account xxx portion
To illustrate, assume that Miami Company is using a monthly accounting period. On

January 1, 2019, the company collected or received P 30,000 representing 3-month rent
beginning January 1, 2019. The company adjusts and closes its books every month. The entry
to record the advance collection and the adjusting entry at the end of the month will be:
Liability Method Revenue Method
2019
Jan 1 Cash 30,000 Cash 30,000
Unearned Rent 30,000 Rent Income 30,000
31 Unearned Rent 10,000 Rent Income 20,000

Rent Income 10,000 Unearned Rent 20,000
Since P 30,000 is for 3 months, the monthly rent is P 10,000. For January, the earned or
income portion is one month or P 10,000; therefore the unearned or liability portion will be two
months or P 20,000 as of January 31.
Regardless of which method a business used in any particular case, the amount reported
as income in the income statement and the amount reported as liability in the balance sheet will
be the same.
Both methods of accounting for unearned or deferred revenues are acceptable although
most companies employ the revenue or income method due to its simplicity. A business must
also use a method consistently for a particular type of unearned or deferred revenue, say liability
method for rent while income or revenue method for subscription.
3. Accrued Expenses – These are expenses incurred in one period but remain unrecorded
and unpaid as of the end of the period. They are also called accrued liabilities or
unrecorded expenses.

Expense account xxx
Liability account xxx
For example: A company’s accounting period is monthly, January 1-31, 2017. All
expenses incurred during the month of January must be recorded in January. Let us say,
telephone bill for the month of January amounting to P 5,000 will be paid on February 5, 2017,
the adjusting entry will be:
2019
Jan 31 Utilities Expense 5,000
Utilities Payable 5,000
So, since we are using the accrual basis of accounting, the question is when did the
company incur the expense? The answer of course is for the month of January, therefore we will
record the expense in January. And since this will still be paid in February, we will record a liability
in January.
Another example is, assume a small business is paying a total of P 10,000 for the wages
of its employees for a 5-day work week. Payday is every Friday. Accounting period is monthly.
The Wages Expense during the month of March is shown below:
Wages Expense
Mar. 5 10,000
12 10,000
19 10,000
26 10,000
40,000
If March 26 is a Friday, then the last day of the month (March 31) falls on a Wednesday.
Therefore the adjusting entry to be made will be:
Mar. 31 Wages Expense 6,000

Wages Payable 6,000
If financial statements are prepared on March 31, the Wages Expense to be shown in the
income statement totaled P 46,000 and the balance sheet will show Wages Payable amounting
to P 6,000.
4. Accrued Revenues – These are revenues earned in one period but remain unrecorded
and not received as of the end of the period. They are also called accrued assets or
unrecorded revenues.
Asset account xxx

Revenue account xxx
For example: ABC Company’s accounting period is monthly, August 1-31, 2020. All
revenues earned during the month of August must be recorded in August. If the company is in
the business of renting apartments and one of its tenants has not paid the August rent for P
8,000, then the adjusting entry of ABC Company will be:
2019
Aug. 31 Rent Receivable 8,000
Rent Revenue 8,000
5. Depreciation of Property, Plant and Equipment
Physical resources that are owned and used by a business which are permanent in nature
or have a long useful life are called fixed assets or plant assets. Examples are land, building,
equipment, trucks, automobiles, a computer, store fixtures, or office furniture. These assets help
generate income for the business. Therefore it is important and proper that a portion of the asset
be recorded as expense in each accounting period.
Fixed assets, with the exception of land have limited useful lives and as such are subject
to depreciation.
Depreciation is the systematic allocation of the cost of the fixed asset over its useful life.
Depreciation is not a process of asset valuation.
The pro-forma adjustment for depreciation is:
Depreciation Expense – Name of asset xxx

Accumulated Depreciation – Name of asset xxx
There are different methods of computing depreciation. We will discuss here only the
simplest and the most commonly used method which is the straight-line method. This method
will result into equal periodic charges for depreciation. Also take note that in the adjusting entry
for depreciation, the account credited is the account Accumulated Depreciation. This is a contra-
asset account which will be deducted from the related fixed asset account in the balance sheet.
The credit is not made directly to the fixed asset account in order to preserve the original cost of
the fixed asset in the balance sheet.
To illustrate, assume that on January 1, 2019, Knicks Company bought a delivery truck
for a total cost of P 500,000. Its estimated life is 10 years and the estimated residual value is
P 50,000. The company is using the straight-line method of computing depreciation and it is
using an annual accounting period. The entries of Knicks Company for the above transactions
are:
2019
Jan 1 Delivery Truck 500,000
Cash 500,000
To record the purchase of delivery truck
The adjusting entry on December 31, 2017:
2019
Dec 31 Depreciation Expense-Delivery Truck 45,000
Accumulated Depreciation-Delivery Truck 45,000
Computations will be:
Annual depreciation = Cost – Residual Value

Estimated Life
= P 500,000 – 50,000
10
= P 45,000
===========
Other computation for straight-line method is:
Annual depreciation = (Cost – Residual Value) x Depreciation Rate
= (P 500,000 – 50,000) x 10%
= P 45,000
==========
The depreciation rate can be computed by getting the reciprocal of the life. Example: 10
years is equal to 1/10 or 10%.
The balance of the Depreciation Expense account is shown in the income statement. In
the balance sheet as of December 31, 2019, the carrying amount or the book value of the asset
is P 455,000, as shown below:
Delivery Truck P 500,000

Less Accumulated Depreciation 45,000
Carrying amount or Book value P 455,000
The depreciation of the fixed asset will be recorded at the end of each year (for ten years).
The same adjusting entry will be recorded for 10 years. Assuming a balance sheet will be made
on December 31, 2022:
Delivery Truck P 500,000
Less Accumulated Depreciation 270,000
Carrying amount or Book value P 230,000
At the end of ten years, the Accumulated Depreciation account will have a balance of P
450,000. At this point, the book value of the asset will be equal to the residual value of P
50,000.
6. Uncollectible accounts – these are estimated amounts due from customers that may no
longer be collected and are considered to be as bad debts. The allowance method
estimates the amount of uncollectible accounts receivable and will be recorded as an
adjusting entry at the end of the accounting period and follows the matching principle.
Doubtful Accounts Expense xxx

Allowance for Doubtful Accounts xxx
Since the loss is an estimate only and the specific customer cannot be identified at this
point, the Accounts Receivable may not be credited. Instead a contra asset account, Allowance
for Doubtful Accounts, is credited. The Doubtful Accounts Expense is also called Bad Debts
Expense or Uncollectible Accounts Expense. The Allowance for Doubtful Accounts is also called
Allowance for Bad Debts or Allowance for Uncollectible Accounts.
The estimate of uncollectible amount at the end of the accounting period is based on past
experience and forecasts of the future. This is computed based on the Accounts Receivable
balance wherein:
a. Single rate is applied to outstanding accounts receivable or

b. Aging of accounts receivable where accounts are classified according to how long they
remain outstanding
The computation for the estimated Doubtful Accounts Expense is shown as:
Required ending balance of Allowance for Doubtful P xxx

Accounts
Allowance for Doubtful Accounts before adjustment
*add if debit balance/deduct if credit balance) xxx
Doubtful Accounts Expense for the period P xxx
==========
As an example, the following accounts were found in the ledger of Cavs Red Enterprises
on December 31 of the current year:
Debit Credit
Accounts Receivable 187,520
Allowance for Doubtful Accounts 10,680
Net Sales 4,272,000
The estimated doubtful accounts at the end of the current year is 10% of the outstanding
Accounts Receivable. The adjusting entry on December 31 is as follows:
Doubtful Accounts Expense 8,072

Allowance for Doubtful Accounts 8,072
Required ending balance of Allowance for Doubtful Accounts P18,752

(10% x P 187,520)
Less credit balance of allowance before adjustment 10,680
Doubtful Accounts Expense for the period P 8,072
==============
After all the adjustments are compiled, the next step is the preparation of the worksheet.
This is an optional step in the accounting cycle. However, it is useful in showing the flow of the
accounting information from the unadjusted trial balance to the adjusted trial balance and in
analyzing the impact of such adjustments on the financial statements. A worksheet is a working
paper prepared by an accountant to facilitate the preparation of the financial statements.
After the completion of the worksheet, financial statements are prepared and serve as
the primary means of communicating important accounting information to users. These are
accounting reports that quantify the financial strength, performance and liquidity of a business.
Financial statements represent the final output in the work of an accountant. They include
Statement of Comprehensive Income, Statement of Changes in Equity, Statement of Financial
Position, the Cash Flow Statement and Notes to the Financial Statements.
The Statement of Comprehensive Income, also known as the Profit and Loss Statement,
presents the income, expenses and the operating result (profit or loss) during an accounting
period.
The Statement of Changes in Equity shows the summary of changes (increases or
decreases) affecting the equity of the owner/s during an accounting period.
The Statement of Financial Position, also known as the Balance Sheet, shows the financial
condition of the business as of a specific date. It helps the users in assessing the financial
soundness of business in terms of liquidity risk, financial risk, credit risk and business risk.
The Cash flow Statement presents the movement of cash (input and output) over a period
and is classified as either under operating, financing or investing activities.
The Notes to the Financial Statements are an integral part of an entity’s financial
statements. They are for complying with the full disclosure principle.
The adjusting and closing entries are entries prepared and posted in the ledger at the
end of the accounting period. The adjusting entries are prepared after the data for adjustments
are compiled and presented in the worksheet. Accounts in the ledger are classified as nominal
or temporary accounts and real or permanent accounts. Nominal accounts include revenue,
expense, owner’s drawing and income summary accounts. Real or permanent accounts include
the assets, liability and the owner’s equity (capital) accounts.
Closing entries are prepared to reduce the nominal account balances to zero on the
general ledger. The revenue and expense account balances are transferred to the Income
Summary account. The Income Summary balance is then transferred to the owner’s equity or
capital account. A credit balance in the Income Summary indicates the profit while a debit balance
indicates a net loss. The owner’s drawing account is also transferred in the owner’s capital
account. The following entries show how the closing process is made:
1. Revenue xxx
Income Summary xxx
To close revenue accounts
2. Income Summary xxx

Expenses xxx
To close expense accounts
*3. Income Summary with a credit balance:
Income Summary xxx

Owner’s Capital xxx
To close income summary account
*Income Summary with a debit balance:

Owner’s Capital xxx
Income Summary xxx
To close income summary
account
4. Owner’s Capital xxx

Owner’s Drawing xxx
To close drawing account
The post-closing trial balance is a list of accounts and their balances after the closing
entries have been journalized and posted to the ledger. It includes all the real accounts since the
nominal account balances have been reduced to zero. The purpose of the post-closing trial
balance is to verify that all nominal accounts have been closed properly and the total debits and
credits in the accounting system are equal after the closing process.
Reversing entries are journal entries prepared on the first day of the next accounting
period which reverses certain types of adjusting entries immediately made in the preceding
period. The adjusting entries that may be reversed include the accruals, prepaid expense using
the expense method and unearned revenue using the revenue method. This step is an optional
procedure and is useful to simplify record keeping in the next accounting period. The rule to follow
is all adjusting entries that increase an asset or liability will be reversed. Whether reversing entries
are made or not, the same result is achieved. The following show reversing entries that are made
on the first day of the next accounting period:
1. Prepaid expense using expense method

Expense xxx
Prepaid xxx
Expense/Asset
2. Unearned revenue using revenue method

Unearned revenue xxx
Revenue xxx
3. Accrued expense
Payable xxx
Expense xxx
4. Accrued Revenue
Revenue xxx
Receivable xxx
VALUE ADDED TAX
Value Added Tax (VAT) is a type of sales tax which is levied on the consumption on the
sale of goods, services or properties, as well as goods imported in the Philippines.
A 12% value added tax rate is levied on sales of services and goods and is recorded as a
separate account in recording the sale and purchase transactions. It is an indirect tax that is
passed on to the buyer and is added to the selling price. The amount paid by the customer,
known as the invoice price, will include the selling price and the 12% value added tax.
Output Vat refers to the value added tax the seller passed on to the buyer and is classified
as a liability account. Input Vat refers to the value added tax the buyer paid on the purchase
services or goods. The excess of output tax over input tax is the Value added tax due and payable
to the Bureau of Internal Revenue and is to be remitted by the company within 25 days of the
following month. The excess in-put tax may be claimed as tax credit, tax refund or can be applied
as tax payment for the subsequent return.
The following transactions illustrate the accounting for value added tax using the periodic
system:
Mar 5 A Company sold merchandise to B Company for cash, P 22,400 vat inclusive.
A Company B Company
Cash 22,400 Purchases 20,000
Sales 20,000 Input tax 2,400
Output tax 2,400 Cash 22,400
Mar 6 A Company sold merchandise on account to X Company, P 28,000 vat inclusive.
A Company X Company
Accounts Receivable 28,000 Purchases 25,000
Sales 25,000 Input tax 3,000
Output tax 3,000 Accounts Payable 28,000
Mar 9 A Company issued a credit memorandum to X Company for defective merchandise

returned sold on March 6, invoice price P 2,800
A Company X Company
Sales returns and 2,500 Accounts Payable 2,800
allowances
Output tax 300 Purchase ret. and 2,500
allow.
Accounts 2,800 Input tax 300
Receivable
Mar 15 A Company collected amount due from X Company
A Company X Company
Cash 25,200 Accounts Payable 25,200
Accounts 25,200 Cash 25,200
Receivable
MODULE 2
ACCOUNTING FOR MERCHANDISING BUSINESS
Overview
A merchandising business is the trading of goods. The goods such as meats, vegetables, canned
goods and other items are purchased and are intended for sale. Merchandising firms purchased
their merchandise or goods from wholesalers, manufactures, and other suppliers and sell them
in retail to its customers.
Learning Objectives
After studying this Module, the students should be able to:
a. Describe the activities of a merchandising business.
b. Prepare journal entries, adjusting entries, closing entries and reversing
entries relating to merchandising business.
c. Know the transportation costs, trade discount from cash discount.
d. Know the accounting using the perpetual inventory system and periodic
inventory system.
e. Prepare the financial statements for a merchandising business.
f. Complete the accounting cycle for a merchandising firm
Course Material: Introduction to Merchandising Business
A merchandising business is the trading of goods. The goods such as meats, vegetables, canned
goods and other items are purchased and are intended for sale. Merchandising firms purchased
their merchandise or goods from wholesalers, manufactures, and other suppliers and sell them
in retail to its customers.
A merchandising business differs from a service company. Accounting for a merchandising

business is more complex than a service business. For example, the accounting system for a
merchandiser must be designed to record the receipt of goods for resale, keep tract of the goods
available for sale, and record the sale and cost of the merchandise sold.
In this module, the accounting cycle in merchandising will be discussed as well as the two other
adjustments, namely: Merchandise Inventory and Uncollectible Accounts.
The merchandising business will highlight the basic difference between the activities of a service
business which involves providing service to customers and merchandising activities of a buy and
sell concept for a profit. The revenue activities of a merchandising business involve the buying
and selling merchandise for sale. When this merchandise is sold, the revenue is reported as sales.
The differences between service and merchandising type of business are best illustrated in the
following condensed income statement.
Statement of a Comprehensive Income for a Merchandising Concern
The statement of a comprehensive income of a service business differs from that of a merchandising
concern as illustrated:
Service Company Merchandising Concern
Revenues Sales
| |
Minus Minus
Expenses Cost of Goods Sold

| |
Equals Equals
Net Income (Loss) Gross Profit Margin

|
Minus
Operating Expenses
|
Equals
Net Income (Loss)
As described, the statement of comprehensive income of a merchandising business is more

complex than a service business. It has three parts, namely: Sales, Cost of goods sold, and
Operating expenses where the gross profit margin must be computed first before operating
expenses are deducted in order to arrive at net income or net loss. While a service business has
only 2 parts, namely: revenue and expenses where the net income is computed by deducting
expenses from revenues.
Sales arise from sales of goods or merchandise by the merchandising business. The normal
journal entry of Sales is always on the credit side. The debit entry would always be Cash if the
merchandise is sold on cash basis, Accounts Receivable if the merchandise is sold on account
without a promissory note, and Notes Receivable if the merchandise is sold on account with a
promissory note. The cost of goods tells how much the merchandiser paid for the goods or
merchandise sold. The difference between revenue from sales and cost of goods sold is known
as gross profit margin.
Operating Expenses are those expenses other than cost of goods sold, that are incurred in
running the business. In a merchandising company, operating expenses are similar to the
expenses we have seen in a service business. Net Income for a merchandising company is what
is left after deducting operating expenses from gross margin. In some instances, if the operating
expenses are greater than the gross margin, the differences represent net loss.
Under accrual accounting, sale of merchandise is considered to be earned in the accounting

period in which title for the goods passes from seller to buyer. Gross sales consist of total sales
for cash and total sales on credit during an accounting period.
An Invoice is a document prepared by the seller of the merchandise. The seller calls it sales
involve. A copy is given to the buyer of merchandise and he calls it purchase involve. The sales
account is used for recording sales of merchandise whether the sale is made for cash or on
account.
Examples:
1. Mr. Santos sold merchandise for cash to Mr. Bonifacio worth P10,000
Journal Entry (Mr. Santos’ Book)
Cash 10,000
Sales 10,000
To record sale of merchandise
for cash
2. Mr. Santos sold merchandise on account to Mr. Bonifacio worth P15,000 terms 2/10, n/30.
Journal Entry (Mr. Santos’ Book)
Accounts receivable – B Company 15,000
Sales 15,000
To record sale of merchandise
on account. 2/10, n/30
Kinds of Discount
1. Trade Discount
2. Cash Discount
Trade Discount
Merchandisers offer their goods to customers using a catalog where the goods are listed with
their prices. The prices are called catalog or list prices. A trade discount, which is a percentage
reduction from published list price, may be granted to certain customers such as dealers or
wholesalers for buying for buying frequently and in large quantities. Since a trade discount is
granted at the point of sale, this is immediately deducted from the list price and the difference
which is called the invoice price will be the basis for involving and recording.
Both the buyer and seller do not record the list prices and the trade discount in their books of
account. The buyer records purchases and the seller records sales at invoice price.
Assume that Mr. Santos sold merchandise with a list price of P50,000 subject to trade discount
of 5% and 10%.
The sales price or invoice price is computed as follows:
List price P 50,000

Less: 1st trade discount
(5% x P 50,000) 2,500
Balance after 1st discount P 47,500
Less: 2nd trade discount
(10% x P 85,000) 4,750
Invoice Price P 42,750
An alternative way of computing the invoice price is to multiply the list price by the complements
of the trade discounts allowed, as follows:
List price P 100,000

Multiply by complements of trade discounts 95% x 90%
Invoice Price P 42,750
The complement 95% is (100% - 5%), and the complement 90% is (100% - 10%). The journal
entries for both the seller and the buyer are as follow:
Journal Entries
Mr. Santos (Seller’s Book) Mr. Bonifacio (Buyer’s Book)
Accounts Receivable 42,750 Purchase 42,750

Sales 42,750 Accounts Payable 42,750
To record sales on account To record purchases on account
Sales Return and Allowances
A customer may return merchandise if it is defective, of poor quality, or erroneous merchandise

had merchandise has been delivered. This is known as sales returns. The customer may also be
willing to accept the goods despite of some defects provided a reduction in the invoice price will
be granted to the customer. This known as sales allowances. Whether the transaction is a sales
returns or a sales allowances, the title used to describe both situations is the account Sales
Returns and allowances is a contra account to the sales of a merchandising firm. The seller issues
a document, credit memorandum to evidence sales return. Credit memo informs the customer
that a credit has been made to his/her account for a sales returns and allowances granted.
1. Mr. Santos issued a credit memorandum to Mr. Bonifacio for defective merchandise returned
previously purchased goods. The merchandise returned is worth P 1,000.
Journal Entry (Mr. Santos’ book)

Sales Return and Allowances 1,000
To record the returned merchandise.
2. Mr. Santos gave a cash refund to Mr. Bonifacio for defective merchandise return previously
bought for cash. The merchandise returned is worth P500.
Journal Entry (Mr. Santos’ book)

Sales Returns and Allowances 500
Cash 500
To record cash refunded to customer for the
merchandise return
The Sales Return and Allowances account is used in recording returns of customer instead for
directly debiting the Sales account. This is returns is important because it will disclose the extent
and the total amount of sales returns. The management will be able to investigate the cause
especially if the amount of returns in excessive. The proper measures will then be taken and if
needed must be implemented to be able to address the problem.
Sales Discount
When goods are sold on credit, both parties should have an understanding also the amount, mode
and date of payment. These terms are usually printed on the sales invoice and constitute part of
the sales agreement.
To encourage customers to pay their accounts promptly, seller offers a cash discount. This
account, is usually given if payments are received within a certain number of days from the date
of sale. From the seller’s viewpoint, cash discount is called Sales Discount.
Same common examples of cash discount terms are:
3/10, n/30 This means that the buyer my deduct 3% from the amount due if he pays in
full within 10 days from the date of the sales invoice. If the buyer does not
pay within 10 days, then the full amount must be paid within 30 days from
the date of the sales invoice. No cash discount if paid after 10 days from date
of sale.
3/10, 2/15, n/30 This means that the buyer may deduct 3% from the amount due if full
payment Is made within 10 days from the date of the sales invoice, 2% if full
payment Is made within 11-15 days from the date of the sales invoice, or the
full amount will be due if payment is made within 16 to 30 days from the date
of the sales invoice. No cash discount if paid after 15 days from date of sale.
1/EOM, n/60 This means that the buyer may deduct 1% from the amount due if full
payment is made by the end of the month. Otherwise, full payment is due 60
days from the date of the invoice. No cash discount if paid after the end of
the month from date of sale.
1/15/EOM, n/60 This means that the buyer may deduct 1% from the amount due if full
payment is made by the 15th day of the month following the date of sale.
Otherwise, full payment is due 60 days from the date of the invoice. No cash
discount if paid after the 15th day of the following month from date of sale.
When no offer of cash discount is made by the seller, the credit terms will just give the maximum
time period of payment., the credit term would be n/30 or n/60 or n/10/EOM.
The Sales Discount account is debited by the seller when a customer avails of the cash discount.
Sales discount are both deducted from Sales to arrive at Net Sales in the Income Statement.
Assuming that on July 1, 2020, ABC Company sold to XYZ Company merchandise, P40,000. Terms:
1/15, n/30.
Journal Entry (ABC Company)
Date Particular P/R DR CR

July 1, 2020 Accounts Receivable 40,000
Sales 40,000
To record sales on account.
Terms: 1/15, n/30.
Assuming that on July 5, 2020, XYZ Company returned defective merchandise to ABC Company,
P10,000. Terms: 1/15, n/30.

July 5, 2020 Sales returns and Allowances 10,000
To record returned merchandise.
Assuming that on July 15, 2020, XYZ Company paid to ABC Company the merchandise
purchased on July 1, 2020.
July 15, 2020 Cash 29,700

Sales Discount 300
Collection within the discount period
Computation:
Accounts Receivable, July1, sales P 40,000

Less: Returns on July 5 10,000
Balance P 30,000
Lest: 1% cash discounted (P30,000 x 1%) 300
Amount due P 29,700
Statement of Comprehensive Income Presentation – Revenue from sales
Sales P xx
Less: Sales Returns and Allowances P xx
Sales Discounts xx xx
Net Sales P xx
Purchases
Under the periodic inventory system, when a merchandising business buys goods or merchandise
for sale, the Purchases accounts is debited for the cost of the goods purchased. The Purchases
account is used only for merchandise purchased for sale. Purchase account should always be
recorded in the debit s ide of the journal entry.
Purchases of merchandise, can be made both for cash and on credit. A document called invoice
is prepared by the seller. The seller calls at a sales invoice. A copy is given to the buyer who calls
it a purchase invoice.
Purchase Returns and Allowances
From the buyer’s viewpoint, the returns and allowances on goods purchased is called Purchase
Returns and Allowances. This is a contra account whose normal balance is credit. The purchaser
may issue a document called debit memorandum to evidence the purchase returns. The debit
memorandum will inform the seller that a debit has been made to the purchaser’s accounts
payable for a purchase return or allowance.
The Purchase Returns and Allowances account is used is recording returns of merchandise to
the seller instead of directly crediting the Purchases account. This will enable the management to
determine the extent and the total amount of purchase returns. Proper measures then may be
taken to know the causes of returns.
Purchase Discount
To encourage buyers to pay their accounts promptly, a cash discount is usually given if payments are
made within a certain number of days from the date of purchase. From the buyer’s viewpoint, cash
discount is called Purchase Discount.
The Purchase Discount account is credited by the buyer when he avails of the cash discount. Purchase
Discount is a contra account similar to Purchase Returns and Allowances. Both have a normal credit
balance and are not deducted from the account Purchases in the income statement.
Assuming that on July 1, 2020, ABC Company sold to XYZ Company merchandise, P40,000. Terms:
1/15, n/30.
Journal Entry (XYZ Company)

July 1, 2020 Purchases 40,000
Account payable 40,000
To record sales on account.
Terms: 1/15, n/30.
Assuming that on July 5, 2020, XYZ Company returned defective merchandise to ABC Company,
P10,000. Terms: 1/15, n/30.
July 5, 2020 Accounts Payable 10,000
Purchase returns and Allowance 10,000
To record returned merchandise.
Assuming that on July 15, 2020, XYZ Company paid to ABC Company the merchandise
purchased on July 1, 2020.
July 15, 2020 Accounts payable 30,000
Purchase Discount 300
Cash 29,700
Payment within the discount
period
Computation:
Accounts payable, July 1, purchase P 40,000

Less: Returns on July 5 10,000
Balance P 30,000
Lest: 1% cash discounted (P30,000 x 1%) 300
Amount due P 29,700
Transportation Costs on Merchandise Purchased or Sold
The buyer and the seller must agree on who is responsible for paying any freight costs on
merchandise brought or sold. In computing cost of goods sold, transportation costs play a very
important part. Failure to include transportation costs will affect the cost of goods sold and
ultimately affect the net income. The following terms are important in understanding transportation
costs on merchandise.
1. FOB shipping point - the terms means free on board at shipping point. The buyer agreed to
shoulder all the transportation cost from the point of shipment up to the point of destination.
The buyer receives title to the goods at shipping point.
2. FOB Destination - the term means free on board at destination. The seller agreed to shoulder
all the transportation cost from the point of shipment up to the point of destination. The buyer
receives title to the goods at point of destination.
3. Freight prepaid - when the seller pays the transportation cost at the time of shipment.
4. Freight collect - the buyer pays the transportation costs upon receipt of the goods at the place
of destination.
Freight In account is an adjunct account to purchases. It is the cost of the transportation that is
shouldered by the buyer.
Freight Out account or Transportation Expense account is an operation expense. It is the cost of
transportation that is shouldered by the seller and will not be paid by the buyer.
Example: On July 1, 2020, BLT Company located in Manila purchased merchandise worth
P200,000 from STC Company located in Davao. Freight or transportation costs amounted to
P20,000. Terms: 1/10, n/30. Assume the following shipping terms:
a. FOB shipping point, freight collect

b. FOB shipping point, freight collect
c. FOB destination, freight prepaid
d. FOB destination, freight collect
The following are the journal entries on both the books of BLT Company (buyer) and STC Company
(seller). Assume in all cases, BLT Company paid in full on July 10, 2020.
a) Terms of shipment: FOB shipping point, freight collect.

BLT Company (Buyer’s Book) STC Company (Seller’s Book)
July 1 Purchases 200,000 Account Receivable 200,000
Accounts Payable 200,000 Sales 200,000
6 Freight In 20,000 No entry
Cash 20,000
To record freight
10 Accounts Payable 200,000 Cash 198,000
Purchase Discount 2,000 Sales Discount 2,000
Cash 198,000 Accounts Receivable 200,000
Note: The Shipping term is FOB shipping point, so transportation cost is to be shouldered by the
buyer. The seller prepaid the freight but it is charged to the buyer.
Computation:
Accounts Payable – STC Co. P 200,000 Account Receivable – BLT Co. P 200,000
Less: Cash discount Less: Cash discount
(1% x 200,000) 2,000_ (1% x 200,000) 2,000_
Net amount due to STC Co. P_198,000_ Net amount due from BLT Co. P 198,000_
b) Terms of shipment: FOB shipping point, freight prepaid

6 Freight In 20,000 Accounts Receivable 20,000
Accounts Payable 20,000 Cash 20,000

To record Freight To record freight
Note: The Shipping term is FOB shipping point, so transportation cost is to be shouldered by the
buyer. The seller prepaid the freight but it is charged to the buyer.
Computation:
Add: Accounts payable – freight 20,000 Add: Accounts Receivable-freight 20,000
(1% x 200,000) 2,000_ (1% x 200,000) 2,000_
c. Terms of shipment: FOB destination, freight prepaid

6 Freight out 20,000
Cash 20,000
To record freight
Note: The shipping term is FOB destination, so transportation cost is to be shouldered by the
seller. The seller paid the freight and will not be collected from the buyer because the goods in
transit are still owned by the seller.
Computation:
(1% x 200,000) 2,000_ (1% x 200,000) 2,000_
d) Terms of shipment: FOB destination, freight collect

6 Accounts payable 20,000 Freight out 20,000
To record freight
Note: The shipping term is FOB destination, so transportation cost is to be shouldered by the
seller but the buyer advanced the payment of the freight. The buyer paid the freight and will be
collected from the seller because the goods in transit are still owned by the seller.
Computation:
Less: Accounts payable – freight 20,000 Less: Accounts Receivable-freight 20,000
(1% x 200,000) 2,000_ (1% x 200,000) 2,000_
Cost of Goods Sold
The cost of goods sold refers to the cost of merchandise sold to customers during an
accounting period. Oftentimes, cost of goods sold represents the largest single deduction in a
company’s income statement.
The format of the cost of ' goods sold section of the income statement is shown as follows:
Merchandise Inventory, Beginning P xx

Add: Purchases P xx
Transportation – in xx
Total P xx
Less: Purchase Returns and allowances P xx
Purchase Discounts xx xx
Net Purchases xx
Total Cost of Goods Available For Sale P xx
Less: Merchandise Inventory, end P xx
Cost of Goods Sold or Cost of Sales P xx
Merchandise Inventory
Most businesses rely on the actual counts of goods on hand at the end of an accounting period
to determine ending inventory and, indirectly, the cost of goods sold. The procedure for
determining the merchandise inventory under the periodic inventory method can be summarized
as follows:
1. Make a physical count of merchandise on hand at the end of the accounting period.
2. Multiply the quantity of each type of merchandise by its unit cost.
3. Add the resulting costs of each type of merchandise to obtain a total. This amount is the ending
merchandise inventory.
The cost of ending merchandise inventory is deducted from the cost goods available for sale to
determine cost of goods sold or cost of sales. The ending inventory of one period is the beginning
inventory of the next accounting period. Adjusting entries are made at the end of the accounting
period to remove the balance of the beginning inventory and to enter the balance of the ending
inventory of the current period. This is accomplished by the following two adjusting entries:
Income Summary xxx

Merchandise Inventory xxx
To close the beginning inventory
Merchandise Inventory xxx

Income Summary xxx
To record the ending inventory
Accounting for Inventories
The cost of inventory is a significant item in many businesses’ financial statements. Thus, good
internal control over inventory must be maintained. The primary objectives of internal control over
inventory are safeguarding the inventory and properly reporting it in the financial statements. At
the end of a period, some of the merchandise will be in inventory and some will have been sold.
But which costs relate to the sold merchandise and which costs relate to the merchandise in
inventory? An accurate merchandise inventory system is needed to determine the cost of
merchandise in the inventory and the cost of merchandise sold.
The two accounting systems used for inventories are:

1. Perpetual Inventory System
2. Periodic Inventory System
Both systems can be used to record information about the cost of beginning and ending
inventory and the cost of goods sold.
Perpetual Inventory System
The perpetual inventory system provides detailed records of the quantity and cost of each item of
inventory and continuously shows the cost of goods on hand. This inventory system has
traditionally been used by companies that sell high-unit value items such as automobiles,
computers, stereo, television sets, furniture and other large home appliances since this system
also provides an effective means of control over inventory.
Under the perpetual inventory method, the cost of each item is debited to the Merchandise
Inventory account as it is purchased. As items are sold, the Merchandise Inventory account is
credited and the Cost of Goods Sold is debited for the cost of the items sold. At the end of the
accounting period, a physical inventory is taken by actually counting the number of units on hand
which is then compared with the records showing the number of units remaining.
The records for a perpetual inventory system may be maintained manually. However, such a
system is costly and time consuming for businesses with a large number of inventory items with
many purchase and sales transactions. In most cases, the record keeping for perpetual
inventory system is computerized.
Period Inventory System
Under the periodic inventory system, the count of the physical inventory takes place periodically,
usually at the end of the accounting period, and no detailed records of the physical inventory on
hand are maintained during the period. The Purchases account is used to record the cost of
merchandise bought by the business. When merchandise is sold, revenue is recorded but not the
cost of merchandise sold. When financial statements are prepared, the company takes a physical
count of the ending merchandise inventory which is then used in computing the cost of goods
sold.
The periodic inventory system is used by merchandising companies with low value items of
inventory. This is used for its simplicity, but it provides little control over inventory. Physical count
of inventory is done at the end of the accounting period and are assumed to have been sold:
Thus, even the items have been stolen, they are assumed to have been sold and their costs are
included m the cost of goods sold. The Periodic Inventory System is more likely to be used by the
in this module.
Below is the comparison of journal entries under the Periodic Inventory System and Perpetual
Inventory System:
Transaction Periodic Inventory System Perpetual Inventory System
a. Purchased merchandise on account, Purchases 150,000 Merchandise Inventory 150,000

P150,000. Terms 1/10,n/30 Accounts payable 150,000 Accounts payable 150,000
b. Paid transportation cost of merchandise Freight – In 10,000 Merchandise Inventory 10,000

purchased, P 10,000 Cash 10,000 Cash 10,000
Freights within the discount period
c. Returned P 5,000 worth of goods Accounts payable 5,000 Account Payable 5,000
Purchased in (a). Purchase return & allow. 5,000 Merchandise Inventory 5,000
d. Paid within the discount period the Account payable 145,000 Accounts Payable 145,000
Purchases made in (a) . Purchase discount 1,450 Merchandise Inventory 1,450
Cash 143,550 Cash 143,550
Payment within the discount period
e. Merchandise costing P 40,000 were sold Account Receivable 50,000 Account receivable 50,000
on account for P50,000. Terms: 1/10, n/30
Sales 50,000 Sales 50,000
Sales on account
Cost of goods sold 40,000
Merchandise Inventory 40,000
To record of goods sold
f. Merchandise costing P 4,000 were Sales Ret. And allow 5,000 Sales Ret. And Allow. 5,000
returned which was originally sold at
P5,000 Accounts Receivable 5,000 Accounts Receivable 5,000
Merchandise returned by customer.
Cost of goods sold 4,000
Merchandise returned by customer
g. Collected within the discount period the Cash 44,550 Cash 44,550
sales made in (e). less the return made in (f). Sales discount 450 Sales Discount 450
Account receivable 45,000 Accounts Receivable 45,000
Received payment from customer
Within the discount period
Below are pro-forma journal entries prepared for merchandising transactions (under the Periodic
Inventory System):
a. To record purchase of merchandise for cash.

Purchases xx
Cash Xx
b. To record merchandise purchase on account.

Purchases xx
Accounts Payable Xx
c. To record transportation cost paid on merchandise purchased.

Freight-In xx
Cash Xx
d. Merchandise returned that was purchased for cash receiving a refund

Cash xx
Purchase returns and allowances xx
e. Merchandise returned that was purchased on account. (the account has not been paid
yet).
Accounts Payable Xx
f. Payment within the discount period.

Accounts payable xx
Cash xx
g. Payment of an account after the discount period.

Accounts Payable xx
Cash xx
Summary of pro-forma journal entries prepared for merchandising transactions relating to sales
a. Sales for cash
Cash xx
Sales Xx
b. Sales on account
Accounts receivable xx
Sales Xx
c. Return by customer of merchandise that was sold for cash paying a refund.
Sales returns and allowances xx
Cash Xx
d. Issuance of credit memo to & customer for merchandise returned

Sales return and allowances xx
e. Receipt of payment from customer within the discount period.

Cash xx
Sales discount xx
f. Receipt of payment from customer after the discount period.

Cash xx
g. Transportation costs of merchandise sold.

Freight-out xx
Cash xx
The new accounts introduced their classification and normal balances.

Accounts Classification Normal Balance
a. Merchandise Inventory Asset Debit
b. Purchases Expense Debit
c. Freight – in Adjunct account Debit
d. Purchase discount Contra account Debit
e. Purchase returns and allowances Contra account Debit
f. Sales Revenue Debit
g. Sales return & allowances Contra account Debit
e. Sales discount Contra account Debit
Accounting for Uncollectible Accounts
When a company sells merchandise and services on account, a portion of the claims against
customers may become uncollectible. This normally happens in granting credit and the efficiency
of the collection procedures should be employed. The account being used is Uncollectible
Accounts expense, doubtful account's expense, or bad debts expense and considered as an
operating expense as a provision for the failure to collect receivables.
Some reasons why an account or a note becomes uncollectible are bankruptcy of the debtor,
discontinuance of the debtor’s business; disappearance of the debtor, failure of repeated attempts
to collect and the barring collection by the statute of worthlessness of the receivables.
The two methods of accounting for receivable thought to be uncollectible are the direct write-off
method, and (2) the allowance or reserve method. Both conform to acceptable accounting
practice, when used in appropriate circumstances. However, for income tax purposes, only the
direct write-off method is permissible. Whichever method the company adopts should be used
consistently from year to year unless, circumstances indicate the desirability of a change of
method.
Direct Write-Off Method
The direct write-off method is used by small businesses where the amount of its receivable is
small in relation to its total current assets, the credit period is short, and the credit and collection
procedures are adequate. The provision for uncollectible account is low in relation to its sales.
In such situations, it is satisfactory to defer recognition of loss from uncollectible account until the
period in which a receivable is actually written-off. Illustrated below is the entry to write-off an
account believed to be uncollectible under the direct write-off method:
Uncollectible Account Expense (Debtor’s name) I,000

The uncollectible account is the responsibility of the credit and collection department within the
general administrative framework. It is usually reported in the statement of comprehensive income
as operating expenses under the general or administrative expense.
Accounts that have been written-off may be collected later. If the recovery is in the same fiscal
year as the write-off, the earlier entry is reversed to reinstate the account. The receipt of cash and
the credit to the receivable account are then recorded in the usual manner. Illustrated below the
entries to reinstate that account and to record the collection:
Accounts Receivable (Debtor’s name) I, 000
Uncollectible Account Expense I, 000
To reinstate account written-off during the year.
Cash l ,000
Accounts Receivable ( Debtor’s name) 1,000
To record the collection.
When an account that has been written-off in prior year and is collected in subsequent year, it
may be reinstated by an entry crediting some other appropriately titled account, such a “Recovery
of Uncollectible Accounts Written-off” The credit balance in such an account at the end of the year
is reported on the statement of comprehensive income as a deduction from Uncollectible
Accounts Expense. The amount is relatively small and have little effect net income.
Allowance or Reserve Method
While the direct write-off method is simple and convenient, this does not provide for the matching
of current revenues with related expenses as it does not report receivables at their net realizable
value. The allowance method of recording bad debts adheres to these principles by making
provision for bad debts, expense in advance of the time when the debts are identified as being
uncollectible. The allowance for doubtful accounts also reduces the accounts receivable to its net
realizable value.
The estimated expense from uncollectible accounts is recorded as an adjusting entry at the end
of an accounting period as follows:
Doubtful Account Expense XXX

Allowances for Doubtful Account XXX
To take up provision for Uncollectible accounts
The Allowance for Doubtful Accounts is a contra asset account deducted from the balance of the
accounts receivable at the end of the period. This reduction cannot be allocated among the
individual accounts in the subsidiary ledger and, therefore should; not be credited to the
controlling accounts in the general ledger.
When the allowance account includes provision for doubtful account and notes, the allowance is
deducted from the total of Notes Receivable and Accounts Receivable.
Write-off the Uncollectible Account Under the Allowance Method

When positive evidence is available concerning the partial or complete worthlessness of an
account, the account is written off as follows:
Allowances for Doubtful Accounts XXX

Accounts Receivable XXX
To write-off uncollectible account.
Under the allowance method, the debit is to a contra asset account rather than to the expense
account The reason is that, bad debts expenses is already recorded by the adjusting entry when
the allowance was established, The expense was recorded in the period when the sale was made,
and it is necessarily in the period when the account becomes uncollectible that the direct write-off
method.
When an account that has been charged to the allowance account subsequently collectible the
account should be reinstated by an entry that is just the reverse of the entry. As was pointed out
earlier, the purpose the reinstatement is to provide information that will be useful in re-establishing
the customer’s credit. The following entries would be made at the time of collection.
Accounts Receivable XX
Allowances for Doubtful Accounts XX
To reinstate accounts previously written-off.
Cash XX
Accounts Receivable XX
To record the collection.
Estimating Uncollectible Accounts Based on Trade Receivables
Instead of using sales data, many businesses base their estimate analysis of trade receivable
accounts at the end of the period. The estimate of uncollectible accounts at the end of an
accounting period is based on the past experience and forecasts of the future.
The estimated bad debts may be based on the Accounts Receivable balance wherein:
a. Single rate is applied to outstanding accounts receivable; or
b. Analysis of Accounts Receivable is made where accounts are classified according to how
long they remain outstanding and this known as the Percent of Accounts Receivable Method.
Percent of Accounts Receivable Method
Under this method, a single rate is multiplied by the total outstanding accounts receivable and the
product represents the estimated uncollectible accounts.
Example: On December 31, 2019, the BDR Company has Р100,000 outstanding accounts
receivable. The Allowance for Bad Debts shows a credit balance of P2,000 before adjustment.
The company estimates that 5% of the outstanding accounts receivable will be uncollectible. The
adjusting entry is:
Uncollectible Accounts Expense 3,000

Allowance for Uncollectible Accounts 3,000
To record the estimated uncollectible accounts.
Computation:
Required ending balance of allowance for uncollectible accounts

at Dec. 3l, 2019 ( 5% of P 100,000) Р 5‚000
Less: Credit balance of allowance before adjustment 2,000
Uncollectible Accounts Expense to be recorded to be recorded P 3,000
The P3,000 shall be presented as Uncollectible Accounts Expense in the Statement of

Comprehensive Income while the Allowance for Uncollectible Accounts of P5,000 will be
presented in the Statement of Financial Position. as follows:
Accounts Receivable P100,000

Less: Allowance for Uncollectible Accounts 5,000
Net Realizable Value P 95,000
Assume that the Allowance for Uncollectible Accounts has a P 3,000 debit balance before
adjustment, the adjusting entry would be:
Uncollectible Accounts Expense 8, 000

Computation:
Required ending balance of Allowance
for Uncollectible Accounts (5% x P100,000) P 5,000
Add: debit balance of allowance before adjustment 3,000
Uncollectible accounts expense to be recorded P 8,000
Aging of Accounts Receivable Method
The aging of accounts receivable is the process of listing each account receivable according to
the due date of the account. An aging schedule is prepared by classifying each receivable by its
due date. The number of days an account is past due is determined from the due date of the
account to the date the aging schedule is prepared. Assuming that a company prepares an aging
schedule at year end. The accounts receivable of a customer was due on Oct. 5, 2019. As of
December 31, 2019, its account is 87 days past due, as shown below:
Number of days past due in October 26 days

Number of days past due in November 30 days
Number of days past due in December 31 days
Total number of days past due 87 days
After the number of days of past due has been determined for each account, an aging schedule
is prepared:
Customer Account Not yet 1-30 31 – 60 61-90

Balance due days days days
A P20,000 P20,000
B 60,000 P 60,000
C 20,000 P10,000 P 10,000
Total P100,000 P 60,000 P 10,000 P 10,000 P 20,000
The aging schedule is completed by adding the columns to determine the total amount of
receivables in each age class. Each age class is multiplied by the percentage uncollectible
assigned to each age class and then the sum is added to get the total estimated uncollectible
account.
Estimated Uncollectible
Accounts
Age Interval Balance Percent Amount
Not yet due P 60,000 1% Р 600
1—30 days past due 10,000 3% 300
31—60 days past due 10,000 5% 500
61-90 days past due 20,000 2% 400
91-180 days past due - - -
181—365 days past due - - -
Over 365 days past due - - -
Total P 100,000 P1,800
The adjusting entry to record the estimated uncollectible accounts is:

Uncollectible Accounts Expense 1,800
The aging method provides the most satisfactory approach to the valuation of the receivables at
their net realizable amounts. Furthermore, the data developed through aging of receivables will
be useful to management for purposes of credit analysis and control.
Statement of Comprehensive Income illustrating 2 formats:

• Function of Expense or the Multiple-Step Income Statement
Net Sales Р xxx

Cost of Sales ( xxx)
Gross Profit P xxx
Other Income xx
Administrative Expenses ( xx)
Other Expenses ( xx)
Finance Costs (interest Expense) ( xx)
Net Income P xxx
Nature of Expense method:
Net Sales P ххх

Other Income xxx
Total P xxx
Changes in merchandise inventories ( xxx)
Net Purchases ( xxx)
Operating Expenses ( xxx)
Finance Costs ( xxx)
Net Income P xxx
Work Sheet for a Merchandising Business
All the steps in the preparation of a work sheet in a service business are basically the same steps
in a merchandising concern. Both the debit and credit amounts for the account Income Summary
are extended to the Adjusted Trial Balance columns or if an eight-column work sheet is prepared,
Extension will be directly to the Income Statement columns. Extending both amounts aids in the
preparation of the income statement because the debit and credit adjustments representing
beginning and ending inventories are reported as part of the cost of merchandise sold.
The Purchases, Purchase Returns and Allowances, Purchase Discounts, and Freight-in
accounts are extended to the Income Statement columns of the work sheet since they will also
become part of the computation of the cost of goods sold. After all adjusted balances of the items
have been extended, then the net income or loss can now he determined in the same manner as
in a service business.
An illustration of GMRC Company on December 31, 2019:
A) Trial Balance
GMRC Company
Trial Balance
December 31, 2019
Debit Credit
Cash 39,000
Prepaid Insurance 4,850
Store Supplies 2,125
Office Supplies 1,050
Store Equipment 66,000
Accumulated Depreciation-Store equipment 20,150
Office Equipment 25,000
Accumulated Depreciation -office equipment 8,600
Accounts Payable 33,325
Unearned Rent 20,600
Notes Payable (due December 31, 2019) 52,500
G. Cruz, Capital 77,300
G. Cruz, Drawing 20,000
Sales 457,500
Sales Returns and Allowances 5,950
Sales Discount 3,550
Purchases 270,000
Purchase Returns and Allowances 5,050
Purchase Discount 2,450
Transportation In 3,100
Sales Salaries Expense 35,700
Advertising Expense 12,500
Miscellaneous Selling Expense 800
Office Salaries Expense 22,000
Rent Expense 13,000
Miscellaneous Administrative Expense 825
Interest Expense 5,800
Total 677,500 677,500
During the year are the following adjustments:

a) Merchandise inventory on December 31 P 98,000
b) Unexpired insurance at the end of the year 2,150
c) Supplies on hand on December 31:
Store Supplies 650
Office Supplies 375
d) Depreciation for the year:
Office Equipment 1,900
e) Salaries Payable on December 31:
Sales Salaries 1,925
Office Salaries 575
f) Rent earned during the period 10,400
g) 10% of the outstanding Accounts receivable is doubtful of being collected.
B) 8-column worksheet:
GMRC Company
Work Sheet
For the Year Ended December 31, 2019
Trial Balance Adjustments Income Statement Balance Sheet

Account Title
Debit Credit Debit Credit Debit Credit Debit Credit
Cash 39,000 39,000
Accounts Receivable 58,250 56,250
Allowance for bad depts. - g)5,625 5,625
Merchandise inventory 90,000 b)98,000 a)90,000 98,000
Prepaid Insurance 4,850 c)2,700 2,150
Store supplies 2,050 (d)1,475 650
Office supplies 1,050 (e)850 375
Store equipment 66,000 66,000
Accumulated Depreciation – Store 20,150 (d)3,750 23,900
Equip.
Office equipment 25,000 25,000
Accumulated Depreciation – Office 8,600 (g)1,900 10,500
Equip.
Accounts payable 33,350 33,350
Salaries payable - h)2,500 2,500
Unearned rent 20,600 i) 10,400 10,200
Notes payable (Final payment 2018) 52,500 52,500
G. Cruz, Capital 73,000 77,300
G. Cruz, Drawing 20,000 20,000
Income Summary - a)90,000 (b)98,000 90,000 98,000
Sales 457,500 457,500
Sales return and allowances 5,950 5,950
Sales discount 3,550 3,550
Purchase 270,000 270,000
Purchase returns and allowances 5,050 5,050
Purchase discount 2,450 2,450
Transportation – in 3,100 3,100
Sales salaries Expense 35,700 h)1,925 37,625
Advertising Expense 12,500 12,500
Depreciation Expenses – Store Equip. - f)3,570 3,750
Store Supplies Expense - d)1,475 1,475
Uncollectible Accounts Expense - g)5,625 5,625
Miscellaneous Selling Expense 800 800
Office Salaries Expense 22,000 h)575 22,575
Rent Expense 13,000 13,000
Insurance Expense - c)2,700 2,700
Depreciation Expanse – office - g)1,900 1,900
supplies
Office supplies expenses - e)675 675
Miscellaneous Administrative 825 875
Expense
Rent revenue - i)10,400
Interest Expense 5,800 5,800
Total 677,500 677,500 212,025 212,025 481,850 573,400 307,425 215,875
NET INCOME 91,550 91,500
Total 573,400 573,400 307,425 307,425
C) Statement of Comprehensive Income (Function of Expense or Multiple Step Method):

GMRC Company
Statement of Comprehensive Income
Sales P 457,500
Less: Sales Returns and Allowance P 5,950
Sales Discounts
3,550 9,500
Net Sales P448,000
Less: Cost of Goods Sold P 90,000
Merchandise Inventory January 1 P 270,000
Add: Purchases 3,100
Transportation – in P 273,000
Total P 5,050
Less: Purchase Ret. & Allow. 2,450 7,500
Purchase Discount
Net Purchases 265,600
Total Cost of Goods Available Sale P 355,600
Less: Merchandise Inventory Dec. 31 98,000
Cost of Goods Sold 257,600
Gross Profit P 190,400
Add: Other Income – Rent Revenue 10,400
Total: Revenue P 200,800
Less: Operating Expenses
Selling Expenses:
Sales Salaries Expenses P 37,625
Uncollectible Account Expenses 5,625
Advertising Expenses 12,500
Depreciation expenses – store 800
equipment
Store Supplies Expenses P 61,775
Miscellaneous Selling Expenses
Total Selling Expenses
General and Administrative Expenses
Office Salaries Expense P 22,575
Rent Expense 13,000
Insurance Expense 2,700
Depreciation Expense – office 1,800
equipment
Office Supplies Expenses 675
Miscellaneous Administrative 825
Exp.
Total administrative Exp. 41,675
Other expense – Interest expense 5,800
Total expenses (109,250)
Net Income P 91,550
Statement of Comprehensive Income (Nature of Expense Method):

GMRC Company
Statement of Comprehensive Income
Revenue from Sales, Net P 448,000
Add: Other Income - Rent Revenue 10,400
Total Revenue P 458,400
Add(less):
Increase in Merchandise Inventory 8,000
Net Purchases (265,600)
Operating Expenses (103,450)
Finance Costs ( 5,800)
Net Income P 91,550
D) Statement of Owner’s Equity
The Statement of Owner’s Equity is a. summary of all the changes that occurred of the equity of
the owner during a specific period of time, such as a month or a year. It shows the beginning
balance of owner’s equity, any additional investment made by the owner during the period, the
net income or loss for the period, the withdrawals made by the owner during the period and the
ending balance of owner’s equity. Another name is capital statement.
GMRC Company
Statement of Owner's Equity
Capital, January 1 P 77,300

Add: Net Income for the year 91,550
Total P 168,850
Less: Drawing 20,000
Capital, December 31, 2019 Р 148,850
E) Statement of Financial Position
Statement of Financial Position or balance sheet is a list of the assets, liabilities, and owner’s
equity as of a specific date, usually at the close of the last day of a month or a year. It shows the
financial position of a business as of a given date. It could be prepared using any of the 2 formats:
report form and account form. Illustrated below is the Report Form:
GMRC Company
Statement of Financial Position
December 31, 2019
Assets
Current Assets:
Cash P 39,000
Accounts Receivable P 6,250
Less: Allowance for bad debts 5,625 50,625
Store Supplies 650
Office Supplies 375
Total Current Assets P 190,800
Non- Current Assets:

Store Equipment P 66,000
Less: Accumulated Depreciation 23,900 Р 42,100
Office Equipment P 25,000
Less: Accumulated Depreciation 10,500 14,500
Total Non-Current Assets 56,600
Total Assets P 247,400
Liabilities
Current Liabilities:
Accounts Payable P 33,350
Salaries Payable 2,500
Total Current Liabilities P 46,050
Non-Current Liabilities
Notes Payable (due 2019) 52,500
Total Liabilities P 98, 550

Capital
G. Cruz, Capital (December 31, 2019) 143,850
Total Liabilities and Capital P 247,400
F) Journalizing and Posting Adjusting Entries
After the financial statements are prepared, the adjusting entries are journalized and posted. The
adjusting entries are taken from the adjustment columns of the work sheet. After the adjusting
entries posted to the accounts in the ledger, all the ledger account balances will have the same
balances as shown in financial statements.
Past
Date Description Ref. Debit Credit
2019 Adjusting Entries
Dec. 31 Income Summary 303 90,000
Merchandise Inventory 103 90,000
To close the balance of the beginning
inventory
31 Merchandise Inventory 103 98,000

Income Summary 303 98,000
To record the balance of ending
inventory
31 Insurance Expense 608 2,700

Prepaid Insurance 104 2,700
To take up the expired portion of prepaid
insurance
31 Store Supplies Expenses 604 1,475

Store Supplies 105 1,475
To take up office supplies used
31 Office Supplies Expenses 610 675
Office Supplies 106 675
To take up office supplies used.
31 Depreciation Expense – Store Equipment 603 3,750

Accumulated Depreciation – Store 103 3,750
Equipment
To take up depreciation of store
equipment
31 Depreciation Expenses – Office Equipment 609 1,900

Accumulated depreciation – office 110 1,900
Equipment
To take up depreciation of office
equipment
31 Sales Salaries Expense 601 1,925

Office Salaries Expense 610 575
Salaries Payable 202 2,500
To make up unpaid salaries of Dec. 31
31 Unearned Rent 203 10,400

Rent Revenue 701 10,400
To make up the earned portion of
Unearned rent
31 Uncollectible Account Expense 613 5,625

Allowance for uncollectible accounts 102 5,625
To take up provision for the estimated
Uncollectible accounts
G) Journalizing and Posting Closing Entries
Closing entries are entries made at the end of the accounting period immediately following the
adjusting entries. They are prepared to bring all the balances of temporary or nominal accounts
to zero.
General Journal Page

Past
Date Description Ref. Debit Credit
2019 Closing Entries
Dec. 31 Sales 401 457,500
Purchase Returns and Allowances 502 5,050
Purchase Discount 503 2,450
Rent Revenue 404 10,400
Income Summary 303 475,400
To close income and expense accounts
with credit balances
31 Income Summary 303 319,850
Sales Returns and Allowances 402 5,950
Sales Discounts 403 3,550
Purchases 501 270,000
Transportation – in 504 3,100
Sales Salaries Expenses 601 37,625
Advertising Expense 602 12,500
Uncollectible Accounts Expense 613 5,625
Depreciation Expenses – store equip. 603 3,750
Store Supplies Expenses 604 1,475
Miscellaneous Selling Expense 605 800
Office Salaries Expense 606 22,575
Rent Expense 607 13,000
Insurance Expense 608 2,700
Depreciation Expense – office Eqpt. 609 1,900
Miscellaneous Administrative Expense 611 825
Interest Expense 612 5,800
To close income and expense
accounts debit balances
31 Income Summary 303 91,550

G. Cruz, Capital 301 91,550
To close the net income to capitol
31 G. Cruz, Capital 301 20,000

G. Cruz, Drawing 302 20,000
To close the owner’s drawing account
H) Post-Closing Trial Balance
After the adjusting and closing entries have been posted to the ledger, a post-closing trial balance
is prepared. Since all the temporary or nominal accounts are closed or became zero balances,
only balance sheet accounts will have balances at the end of the accounting period. The post-
closing trial balance will only consist of real or permanent accounts (balance sheet accounts).
GMRC Company
Post-Closing Trial Balance
December 31, 2019
Debit Credit
Cash 39,000
Prepaid insurance 2,150
Store Supplies 650
Office Supplies 375
Accumulated Depreciation-Store Equipment 23,900
Office Equipment 25,000
Accumulated Depreciation-Office Equipment 10,500
Salaries Payable 2,500
Notes Payable (due 2019) 52,500
G. Cruz, Capital 148,850
Total 287, 425 287,425
H) Reversing Entries
Some adjusting entries related to the previous period are reversed at the beginning of the new
accounting period. These entries are called reversing entries, and they are the exact opposite of
the adjusting entries made in the previous period. This is optional but many companies prefer to
make reversing entries because they help simplify the regarding of records of regular transactions
in the next accounting period and also help to bring back the accounts to their normal status.
Not all adjusting entries are to be reversed. The following entries may be reversed:
1. Adjustment for accrued expenses;

2. Adjustment for accrued revenue;
3. Adjustment for prepaid expense when the expense method was used; and
4. Adjustment for deferred revenue when the revenue method was used.
P/R
Date Description Debit Credit
2020 Reversing Entries
Jan. 1 Salaries 202 2,500
Sales Salaries Expense 601 1,925
To remove the Dec. 31 adjusting entry
for the accrued salaries
References:
https://studyfinance.com/journal-entries/
https://studyfinance.com/t-accounts/
https://studyfinance.com/unadjusted-trial-balance/
https://studyfinance.com/adjusting-entries/
https://studyfinance.com/preparing-financial-statements/
https://studyfinance.com/accounting-worksheet/
https://studyfinance.com/closing-entries/
https://studyfinance.com/post-closing-trial-balance/
https://studyfinance.com/reversing-entries/
Ballada, Win and S. Ballada. Accounting Fundamentals, 5th edition. Manila: DomDane
Publishers. 2019
HF 5635 P75 2013 Baguino, Armando D. et al (2013) Principles of Accounting
ASSESSMENT
Name:
Date:
Professor:
QUIZ 1
IDENTIFICATION (I point each). Write your answer after each statement.
1. It is a business activity of buying and selling products.

2. A document prepared by the seller of merchandise and sent to the buyer that contain the
details of the sale, such as the number of units, amount due and the credit terms.
3. It is a deduction from the gross invoice price that the buyer can take only if the invoice is
paid within a specified period of time
4. The term of shipment wherein the seller ships the goods to their destination without charge
to the buyer.
5. It is an account whose normal balance is opposite the balance of the account it reduces.
6. Freight terms Where in the seller pays the freight at the time of shipment.
7. It is the cost to the seller of the goods sold to customer.
8. It is the quantity of goods on hand and are available for sale.
9. When the buyer pays the freight bill upon the arrival of the goods
10. The account debited under perpetual inventory system to record the cost of goods
purchased.
11. The account used to record freight costs incurred in the acquisition of goods.
12. The inventory system that uses the account Purchases to record the cost of merchandise
purchased.
13. The inventory system that requires the maintenance of stock card.
14. The inventory system that is suitable for companies selling high-priced goods.
15. A note issued by the seller to the buyer indicating the amount and the reason for which the
customer’s account is to be credited.
16. Discounts from the list prices in published catalogs or special discounts offered to certain
classes of buyers.
17. From the buyer’s perspective, returned merchandise or an adjustment for defective
merchandise.
18. An account that is added to the balance of a related account.
19. The inventory system which provides a continuous record of inventory inflows and outflows.
20. Discount taken by the buyer for early payment of account.
21. The major expense of merchandising business.
22. Sales minus the cost of goods sold
23. Merchandise on hand at the end of an accounting period.
24. A form income statement that contains several sections, subsections, and subtotal.
25. Expenses that are incurred directly in the selling of merchandise.
26. Expenses incurred in the administration or general operations of the business.
27. The excess of gross profit over total operating expenses.
28. Revenue from sources other than the primary operating activity of a business
29. Expenses that cannot be traced directly to operations
30. A note issued by the buyer who is returning the merchandise to the seller indicating the
amount debited to the seller’s account.
Name:
Date:
Professor:
QUIZ 2
Multiple Choice. Encircle the letter of your choice corresponding to the following problems
(2 points each)
1. CTH recorded the following events involving a recent purchase of merchandise: received goods
for P30,000, terms 2/10, n/30; returned P600 of the shipment on credit; paid P150 freight on
shipment; paid the invoice within the discount period. As a result of these events, the
company’s inventory
A. increased by P28,812 C. increased by P28,959
B. increased by P29,550 D. increased by P28,962
2. BGH Company purchased goods worth P7,500. Term: n/30, FOB Shipping point, freight
collect. The entry of Halo-Halo if freight amounted to P500 is
A. debit Purchases P7,500 and credit Accounts Payable P7,500
B. debit Purchases P7,500, debit Freight-in P500 and credit Accounts payable P8,000
C. debit Purchases P7,000, debit Freight-in P500 and credit Accounts payable P7,500
D. debit Purchases P7,500, debit Freight-in P500, credit Cash P500 and credit Accounts
payable P7,500
3. Regarding one purchase of merchandise, the following entries were made by FTI Company”
Purchases 25,000
Transportation-in 5,000
Accounts payable 30,000
What are the shipping terms regarding this transaction?
A. FOB destination, freight prepaid C. FOB destination, freight collect
B. FOB shipping point, freight prepaid D. FOB destination, freight prepaid
4. Assume that VFA Co. uses periodic inventory system and has the following balances:
Inventory, Jan. 1 750,000
Purchases 400,000
Purchases returns and allowances 11,000
Purchase discounts 2% of purchases
Freight in 16,000
How much is the cost of goods available for sale?
A. P1,131,000 B. P1,139,000 C. P1,147,000 D. P1,200,000
5. ZTW Co. purchased shoes from Nike amounting to P17,800 list price with trade discounts of
2% and 5%, 1/10, n/30. How much is the Purchases to be debited upon purchase?
A. P16,571.80 B. P15,000 C. P15,484.39 D. P15,640.80
6. WTR Company reported a net loss of P30,000. Its net sales was P300,000 and gross profit
was 30% of net sales. The operating expenses amounted to
A. P160,000 B. P120,000 C. P60,000 D. P40,000
7. Assume that JTY Co. uses periodic inventory system and has the following balances:
Inventory, Jan. 1 750,000
Purchases 400,000
Purchases returns and allowances 11,000
Purchase discounts 2% of purchases
Freight in 16,000
Sales of P1,200,000 is 20% above cost, how much is the gross profit?
A. P1,000,000 B. P960,000 C. P250,000 D. P200,000
8. LJY Company keeps its inventory records using a perpetual system. At December 31, 2019,
the unadjusted balance in the inventory account is P64,000. Through a physical count on
December 31, 2019, the company determines that its actual inventory at year-end is P62,500.
Which of the following is true regarding the statement of financial position and the income
statement at December 31, 2019?
A. Inventory is increased and cost of goods sold is decreased by P1,500
B. Inventory is decreased and cost of goods sold is increased by P1,500
C. Inventory is increased and cost of goods sold is increased by P1,500
D. Inventory is decreased and cost of goods sold is decreased by P1,500
9. Below are selected items from OPM Co. for the year ended December 31, 2019.
Account Title Debit Credit
Sales P 974,250
Sales returns and allowances P 12,750
Sales discount 8,050
Purchases 528,700
Purchase returns and allowances 7,450
Purchase discount 3,550
Freight in 7,400
Selling expense 120,125
General and administrative expense 95,300
Beginning and ending merchandise inventories are P56,500 and P45,500, respectively. How
much is the Net Loss to be closed to the capital account?
A. P952,450 B. P417,350 C. P201,925 D. P-0-
10. JTF Co. sold merchandise on account FOB shipping point, 2/10, net 30 for P10,000. It prepaid
the P200 shipping charge. Using the perpetual inventory system, which of the following
entries will the buyer make if it pays within the discount period?
A. Dr. Accounts payable- P10,000; Cr. Transportation In- P200; Cr. Cash- P9,800
B. Dr. Account payable- P10,200; Cr. Merchandise inventory, P200; Cr. Cash P10,000
C. Dr. Accounts payable- P10,000; Dr. Transportation In- P200; Cr. Cash P10,200
D. Dr. Accounts payable- P10,200; Dr Merchandise inventory- P200; Cr. Cash- P10,400
11. ABM Company sells laundry parts. On December 10, 2019, it sold P1,020,000 of goods on
account for P1,320,000. Terms of sale were 2/10, n/30. On December 18, 2019, the buyer
paid its account in full. Using the perpetual inventory system, which of the following is true
regarding the impact on the statement of financial position of the buyer when the payment is
made on December 18, 2019?
A. Cash decreased by P999,600 C. Accounts payable decreases by P1,020,000
B. Inventory decreased by P20,400 D. Inventory decreased by P26,400
12. In 2019, BFF Company purchased goods worth P150,000. There were P40,000 unsold goods
at the end of the year but old stock brought forward from last year’s purchases was P10,000.
Cost of sales was
A. P140,000 B. P120,000 C. P110,000 D. P180,000
13. On October 1, 2019, FXT Company purchased P6,000 worth of goods on terms of 2/15,n/30.
Freight of P500 was prepaid by the seller under the term FOB shipping point. Goods worth
P1,000 were returned on October 2 and the account was paid on October 3. The discount
received from the seller was
A. P100 B. P110 C. P90 D. 120
14. On May 1, 2019 TXT Company purchased P6,000 worth of goods on terms of 2/15,n/30.
Freight of P500 was prepaid by the seller under the term FOB shipping point. Goods worth
P1,000 were returned on May 2 and the account was paid on May 10. How much is the net
cost of purchases?
A. P4,900 B. P5,400 C. P5,900 D. P4,880
15. SSS Company purchased goods worth P200,000 and got a trade discount of P4,000. The
accountant should
A. debit to Purchase discount for P4,000 and debit to Purchases for P196,000
B. debit to Purchase discount for P4,000 and debut to Accounts payable for P196,000
C. debit to Purchases for P200,000
D. debit to Purchases for P196,000
ASSIGNMENT
1. What is a merchandising business?

2. What distinguishes a merchandising business from a service business?
3. What is merchandise? Give examples.
4. Differentiate the income statement of a service from that of a merchandising one.
5. What is the meaning of (a) 2/ 10, n/30; (b) 1/EOM, n/60.
6. What are trade discounts? Cash discounts? Which is not reflected in the accounting records.
7. What are the two inventory systems? Explain each
8. Which inventory system is suitable for companies selling high-priced commodities?
9. What account is debited to record the cost of merchandise purchased under the Periodic
inventory System? Under the Perpetual Inventory System?
10. Give examples of cash discount terms. Explain each.
11. Name at least three accounts that would normally appear in the chart of accounts of a
merchandising business but would not appear in the chart of accounts of a service business.
12. If the term is FOB destination-collect, who shoulders the freight charges? Who pays the
shipper?
13. If the term is FOB destination-collect, who shoulders the freight charges? Who pays the
shipper?
14. If the term is FOB shipping point- prepaid, who shoulders the freight charges? Who pays the
shipper?
15. If the term is FOB shipping point- collect, who shoulders the freight charges? Who pays the
shipper?
EXERCISES
1. On May 5, 2020, MST Company purchased merchandise with list price of P 150,000. The
merchandise is subject to a trade discount of 20%, 10%, 2%, with credit terms of 1/10,
п/ЗО.
Tittle of account Column Column Column

1 2 3
Example: Cash Asset Debit Balance sheet
1. Merchandise Inventory
2. Purchases
3. Freight – in
4. Purchase Returns &
Allowances
5. Purchase Discount
6. Sales
7. Sales Return & Allowances
8. Sales Discounts
9. Account Payable
10. Accounts Receivable
Required: Answer the following questions based from the above data.
1. How much is the invoice ргісе?
2. At what amount should be debited to Purchases?
3. How much is the trade discount?
4. How much is the cash discount?
5. Up to what date is the discount period?
6. If it pays on May 15, how much should it pay in full settlement of its account?
7. If payment is made on May 20, how much should it pay in full settlement of its account?
2. On December 1, 2019, XYZ Company bought merchandise from YZP Company costing
P50,000, terms 2/10, n/30, FOB shipping point. YZP Co. prepaid the freight of P 6,000 on
December 2, 2019. On December 4, 2019, YZP Со. issued a credit memorandum for
damaged merchandise returned by XYZ Co; amounting P10,000. XYZ Co. paid in full the
balance due on December 11, 2019.
Required: Journalize the above transactions on the books of XYZ Company and YZP Company,
Book of XYZ Company
Genera Journal Page 1

Date Description Past Debit Credit
Ref.
Book of YZP Company
General Journal Page 1
Date Description Post Debit Credit
Ref.
Problem Solving
A. The following are transactions of JC Company for the month of June 2020. The company
uses Periodic Inventory System. (20 points)
1. Juan Castro invested the following assets in his business: P 300,000 Cash; P 50,000 worth
of desks and chairs and a store equipment valued at P20,000.
2. Mr. Castro bought a computer for his business worth P 60,000 giving a P 10,000 down
payment and the balance payable at the end of the year.
3. Purchased merchandise for cash, P 18,000.
4. Purchased merchandise from SMC, 12,000. Terms 2/10, n/30.
5. Purchased office supplies on account, P 5,000.
6. Sold merchandise on account, 40,000, terms, 2/10, n/30, FOB destination,
7. Paid advertising for the month, 5,000.
8. Purchased merchandise, P 40,000, terms 2/15, n/30.
9. Cash sales, 10,000,
10. Received a. credit memorandum for P 2,000 from SMC as an allowance for a slight defect
on merchandise purchased.
11. Sold merchandise on account, P 60,000, teams, 2/10, 11/30, FOB destination.
12. Paid freight on sale 3,000.
13. Issued check, to SM in full payment for the June 4, account.
14. Sold merchandise P 25,000, terms (60-day, a 6% note)
15. Collected the amount due for June 6, account,
16. Received full payment from June 11 account.
17. Paid the amount due from June 14 account.
18. Purchased merchandise for cash, P45,000.
Required: Journalize the transactions on the books of JC Company. Show supporting

computations.
B. The following transactions were completed by VVV Company during the month of July, 2020.
(20 points)
July 1 Bought merchandise from City Trading, P20,160, terms 3/20, n/40.
2 Paid freight cost of merchandise purchased from City Trading, P 1,000
4 Sold merchandise on account to Arrow Co. for P17,355, terms 2/20, n/40.
6 Returned P1,255 worth of defective merchandise to City Trading.
8 Arrow Co. returned P 1,400 worth of defective merchandise.
10 Sold merchandise for cash, P 8,263.
13 Purchased supplies on account from NB Co., P5,800,
14 Returned P 2,250 worth of defective supplies to NB Co.
16 Sold merchandise for cash to Ina, P 15,000.
18 Ina returned P 800 worth of defective merchandise. A cash refund was given to her.
21 Paid City Trading in full.
22 Sold merchandise on account to BF Co for Р19,500, terms 2/10, 11/30.
23 Paid in fill National Bookstore.
24 Arrow Co. paid in full it’s July 4, account less the returned made on July 8.
26 Purchased office equipment for cash from San Pedro Company, P12,500.
27 Received an allowance for P 2,500 for a slight defect on equipment bought from San
Pedro Company.
31 Received cash from BF Co. in full payment of its July 22 account.
Required: Journalize the transactions on the books of VVV Company assuming the company
uses periodic inventory system, Show computations.
C. The following trial balance was taken from the ledger of ABS Company at the end of the
yearly accounting period. (50 points)
ABS Company
Trial Balance
December 31, 2019
Debit Credit
Cash 237,520
Merchandise inventory 70,950
Store Supplies 23,411
Accumulated Depreciation-Store Equipment 1 7,100
A. Santos, Capital 394,644
A. Santos, Drawing 13,500
Sales 578,750
Sales Returns and Allowances 2,487
Sales Discount 3,500
Purchases 163,200
Purchases Returns and Allowances 11,650
Purchase Discount 2,856
Freight In 8,761
Sales Salaries Expense 112,500
Other Selling Expenses 34,114
Utilities Expense 32,000
Rent Expense 55,100
Miscellaneous General Expenses 3,177
Total 1,050,800 1,050,800
Required: 1) Prepare an eight—column worksheet using the following data for adjustments:
a) Merchandise inventory at Dec. 31, 2019, P 34,727.
b) Unused store supplies at Dec. 31, 2019, P 2,804.
c) Expired insurance for the year 2019, P 10,700.
d) Estimated depreciation on store equipment, P 5,800.
e) Unpaid sales salaries at Dec. 31, 2019, P 11,580
f) 5% of outstanding accounts receivable is doubtful of collection.
2) Prepare the following financial statements:

a) Income Statement (multiple-step)
b) Statement of Owner’s Equity
c) Statement of Financial Position (report form)
3) Journalize the adjusting entries.

4) Journalize the closing entries
5) Prepare a post-closing trial balance
E. Trial Balance of David Company at June 30, 2020. (30 points)
David Company
Trial Balance
June 30, 2020
Account Title DR CR
Cash 57,680
Store supplies 15,610
Prepaid insurance 14,248
Prepaid rent 40,290
Store equipment 60,400
Accumulated depreciation – store equip. 11,880
Accounts payable 59,390
A. David, Capital 280,258
Sales 770,592
Sales returns and allowances 4,485
Purchase 328,065
Purchase returns and allowances 3,735
Freight- in 5290
Sales salaries expense 103,420
Advertising expense 42,650
Office salaries expense 160,540
Transportation expense 9,750
Utilities expense 5,240
Miscellaneous general expense 4,258
Interest income 1,675
Interest expense 2,416
Total 1,127,530 1,127,530
Additional data as of June 30, 2020, are as follows:
a. Merchandise inventory, June 30, Р230,350.

b. Insurance expired, P 1,200.
c. Store supplies consumed, P 4,450.
d. Rent expired during the month, P 4,500
e. Depreciation expense on store equipment, P2,250.
f. Accrued sales salaries, P2,700.
g. Accrued office salaries, 150,900,
Required: Prepare the following:

1. Worksheet for the month ended June 30, 2020
2. Adjusting Entries
3. Statement of Comprehensive Income (2 forms)
4. Statement of Financial Position (2 forms)
5. Closing Entries
6. Post-Closing Trial Balance
MODULE 3
SPECIAL JOURNALS
OVERVIEW
In this module, we will discuss the different kinds of special journals and its uses.
LEARNING OBJECTIVES
After discussing this module, the learner should be able to learn, explain, and understand the:
1. The different kind of special journals and their format.

2. Recording of the transactions in the Special Journals
COURSE MATERIAL: SPECIAL JOURNALS
Special journals are multicolumn journals hat have columns reserved for the recording specific
type of transactions of similar nature. Special journals simply the journalizing and posting process. For a
business having many transactions, a more efficient accounting system involves the use of special
journals.
The four common special journals are the Sales Journal, the Cash Receipts Journal, the Purchases
Journal, and the Cash Payments Journal.
1. The Sales Journal is used to record sales of merchandise on account.

2. The Cash Receipts Journal is used to record all cash received.
3. The Purchases Journal is used to record the purchase of merchandise on account.
4. The Cash Payments Journal is used to record all payments of cash.
The use of the special journals does not eliminate the use of the general journal. Any other
transactions, which cannot be recorded in the special journals, will be recorded in this journal.
SALES JOURNAL
A special journal used to record only the sale of merchandise on account. Cash sales of
merchandise are recorded in a special journal called Cash Receipts Journal
Recording Sales on Account
Sales transactions on credit can be recorded more efficiently using the Sales Journal. To illustrate,
assume the following August sales transactions (all subject to value added tax of 12% already included):
August 2 - Sales on account to Hanna for P2,800 as per Sales Invoice # 2021.
4 - Sale on account to Jorja for P5,040 as per Sales Invoice # 2022.
5 - Sales on account to Heart for P3,920 as per Sales Invoice # 2023.
SALES JOURNAL Page
1
Accounts Receivable VAT Output Sales
Date Invoice No. Sold to PR
Debit Credit Credit
Aug 2 2021 Hanna ✓ P2,800 P300 P2,500
4 2022 Jorja ✓ 5,040 540 4,500
5 2023 Heart ✓ 3,920 420 3,500
The VAT Output tax is 12% of sales, which is already included in the bill. To compute the VAT
Output, the gross invoice amount is divided by 1.12, and then multiplied by .12. Posting reference the
✓ mark means that this transaction has been posted to the accounts receivable subsidiary ledger. If the
business is selling Non-VAT products, there will be no VAT Output tax and Accounts Receivable will be
equal to Sales.
CASH RECEIPTS JOURNAL
A special journal used to record all transactions in which cash is received. The exact format and
number of special amount columns will vary depending upon the company’s need.
Recording Cash Receipts Transactions
The regular transactions affecting cash receipts are cash sales and collections from customers.
Other receipts include collection of other income like rental or sale of a used fixed asset. To illustrate,
assume the following August cash receipts transactions (all the cash sales are VAT inclusive):
August 3 Cash sales to Emma for P560 per Invoice # 3001 and OR # 4001
6 Sold office equipment costing P1,500 not used in business per OR # 4002.
12 Received P1,100 per OR # 4003 from Lorma in payment for Invoice # 3005 for
P 1,120 less P20 cash discount.
13 Collected P3,360 from Rose Video as rental payment OR # 4004.
16 Received P2,420 per OR # 4005 from James in payment for Invoice # 3007 for
P 2,464 less cash discount.
CASH RECEIPTS JOURNAL Page 1

Date Received OR # Cash Sales PR Accounts Sales VAT Sundry CR
From Discount Receivable Output
DR DR CR CR CR Account PR Amount
Aug 3 Emma 4001 P560 ✓ P500 P60
6 Cash 4002 1,500 Office 106 P1,500
Equipment
12 Lorma 4003 1,100 20 ✓ 1,120
13 Rose 4004 3,360 360 Rent 401 3,360
Video Income
16 James 4005 2,420 44 ✓ 2464
Accounts that have no money columns are recorded in the Sundry CR column. Special money
columns may be provided for accounts, which are frequently used. Posting reference with ✓ mark means
that this transaction has been posted to the individual subsidiary ledger accounts. Posting reference with
account number that this transaction has been posted to respective ledger account.
PURCHASE JOURNAL
A special journal used to record all purchases of merchandise on credit. The amount recorded in
the purchase column (DR) of the purchase journal. VAT on all purchases are debited to VAT Input column
and the gross invoice amount is credited to Accounts Payable column. Cash Purchases of merchandise
are recorded in a special journal called cash payments journal.
Recording Purchase of Items on Account
Purchases of merchandise on credit can be recorded more conveniently by using the purchase
journal. To illustrate, assume the following August Purchases transactions (all purchases are VAT
inclusive):
August 4 Received Invoice No. 8897 form NG Company for merchandise purchased on
account, P5,040; terms 2/10, n/20
10 Received Invoice No. 4335 from AR Marketing for supplies bought on Account,
P3,080.
14 Received Invoice No. 7551 from AP Company for merchandise purchased on
account, P10, 080; terms 2/10, n/30
22 Purchased merchandise on account from Old Company for P11,200 per Invoice
No. 3033
PURCHASE JOURNAL Page 1

Accounts
Invoice Purchased Purchases VAT Input
Date PR Payable
No. From
Debit Credit Credit
Aug 4 8897 NG Company ✓ P 4,500 P540 P 5,040
10 4335 AR Marketing ✓ 2,750 230 3,080
14 7551 AP Company ✓ 9,000 1,080 10,080
22 3033 Old Company ✓ 10,000 1,200 11,200
CASH PAYMENTS JOURNAL
This a special journal used to record all transactions in which cash is paid out. The exact format
and number of special amount columns will vary depending upon the company’s needs.
Recording Cash Payments Transactions
The normal transactions affecting cash payments are cash purchased of merchandise and other
assets, payment for various expense, payment of dividend, and payment of accounts payable. To
illustrate, assume the following August cash payments.
August 4 Paid P5,000 to Big Realty Company for the August rent, check # 13551
10 Paid P6,496 to Pentagon Company for merchandise purchased for cash
inclusive of 12% VAT, check # 13552
14 Issued check # 13553 for P3,850 to LH Company in full payment of Invoice #
5002, net of cash discount of P80.
22 Paid P1,400 to Raul Delivery Co for transportation charges on merchandise
bought, check # 13554.
28 Issued check # 13555 for P 2,750 to Region Supply in full payment of invoice #
5321.
CASH PAYMENTS JOURNAL Page 1

Date Paid To Check Cash Purchase PR Accounts Purchases VAT Sundry CR
No. Discount Payable Input
CR DR DR DR DR Account PR Amount
Aug 4 Cash 13551 P5,000 Rent 506 P5,000
Expense
10 Cash 13552 6,496 P5,800 P696
14 LH Company 13553 3,850 P80 ✓ 3,930
22 Cash 13554 1,400 150 Freight - 509 1250
In
28 Region 13555 3,080 330 Supplies 301 2,750
Supply
Other accounts represent a general column. Additional special account columns may be provided
depending on the frequency of the transaction affecting the account. Posting reference with ✓ means
that this transaction has been posted to the individual subsidiary ledger accounts. Posting reference with
account number means that this transaction has been posted to the respective ledger account.
READINGS/REFERENCES
• Manual for Certified Accounting Technician Level 1, 2008

• Chapter 10, Basic Accounting, Ballada
ASSESSMENT
Activity 1 – Identify in which of the five journals each transaction must be recorded. The Letter of your
answer before the number:
A. General
B. Cash Payments
C. Purchases
D. Cash Receipts
E. Sales
1. Receipt of a note in settlement of a customer’s account.

2. Payment of interest of a mortgage.
3. Note payable set to a creditor in settlement of an account.
4. Payment of salaries.
5. Purchase of merchandise on account.
6. Purchase of merchandise for cash.
7. Receipt of cash form a customer in settlement of an account.
8. Cash refund to a customer.
9. Sale of merchandise on account.
10. Sale of merchandise for cash.
Activity 2.
Lorraine Company completed the following transactions during the month of August 2020. All credit sales
have terms of 3/10, n/30, and all invoices are dated as at the transaction date.
August 1 Lorraine invested P104,000 of her funds in the business.

1 Sold merchandise on account to J. De Claro, P64,000, Invoice No. 477.
3 Sold merchandise on account to A. Espinosa, P108,000. Invoice no. 478
4 Sold P96,000 of merchandise for cash.
7 Received payment from J. De Claro less discounts.
9 Received payment form A. Espinosa less discounts.
13 Sold merchandise to C. Labro on account, P124,000. Invoice No. 479.
15 Borrowed P60,000 from the BDO by issuing a 10% note payable due in 3
months.
15 C. Labro returned P22,000 merchandise from August 13 sale.
16 Sold merchandise to B. Manlangit on account, P 34,000. Invoice no. 480
21 Collected amount due form C. Labro less returns and discounts.
29 Received P12,000 from B. Manlangit
30 Sold goods on account to S. Lego, P68,000. Invoice No. 481.
Requirement: Record the transactions in the appropriate journals.
SALES JOURNAL
Debit Credit Credit
SALES JOURNAL
Debit Credit Credit
CASH RECEIPTS JOURNAL

Date Received OR # Cash Sales PR Accounts Sales VAT Sundry CR
From Discount Receivable Output
DR DR CR CR CR Account PR Amount
PURCHASE JOURNAL
Accounts
Date PR Payable
No. From
Debit Credit Credit
PURCHASE JOURNAL
Accounts
Date PR Payable
No. From
Debit Credit Credit
CASH PAYMENTS JOURNAL

Date Paid To Check Cash Purchase PR Accounts Purchases VAT Sundry CR
No. Discount Payable Input
CR DR DR DR DR Account PR Amount
GENERAL JOURNAL
DATE PARTICULARS PR DEBIT CREDIT
GENERAL JOURNAL
DATE PARTICULARS PR DEBIT CREDIT
MODULE 4
THE USE OF BANK ACCOUNTS
OVERVIEW
The major reason that companies use bank accounts is for internal control. Some of the
control advantages using bank accounts are as follows:
1. Bank accounts reduce the amount of cash on hand.
2. Bank accounts provide an independent recording of cash transactions. Reconciling the
balance of the cash account in the company’s records with the cash balance per bank is
an important control.
MODULE OBJECTIVES
After reading this module, the students should be able to:
a.) Identify the bank reconciling items.

b.) Know the preparation of the bank reconciliation statement.
c.) Prepare the necessary journal entries to bring the cash balance to adjusted amount.
COURSE MATERIALS
BANK STATEMENTS
Banks usually maintains a record of all checking account transactions. A summary of all
transactions, called bank statement, is mailed to the company (depositor) or made available
online, usually each month. The bank statement shows the beginning balance, additions,
deductions, and the ending balance of the depositor’s account. A sample Bank Statement is
presented as follows:
Bank of Philippine Islands, Member PDIC

Period Covered: July 1, 2020 to July 31, 2020
Checking Account: 00013579-3
Period Covered: July 1, 2020 to July 31, 2020 Checking Account: 00013579-3
Date Description Ref Details Debit Credit Balance

BALANCE LAST 4,828.74
2020 STATEMENT
July 2 0314 Local Cash Deposit 315 1, 720.00 6,548.74
3 6454 Cleared Check 317 CK#0005321 1,165.00 5,383.74
10 0314 Local Cash Deposit 315 2, 540.00 7,923.74
11 6454 Cleared Check 317 CK#0005322 1,360.00 6,563.74
12 4434 Check Book Order 316 200.00 6,383.74
14 6454 Cleared Check 317 CK#0005324 1,225.00 5,138.74
15 0314 Local Cash Deposit 315 2, 300.00 7,438.74
16 0314 Local Cash Deposit 317 CK#0005323 2, 450.00 9,888.74
16 6454 Cleared Check 317 CK#0005326 1, 175.00 8,713.74
19 6454 Cleared Check 317 CK#0005328 1, 600.00 7,113.74
23 Note Collection less fee 315 3,455.00 10,568.74
23 6454 Cleared Check 317 CK#0005325 1, 130.00 9,438.74
25 NSF Check 317 1, 190.00 8,248.74
26 6454 Cleared Check 317 CK#0005327 1, 150.00 7,098.74
29 6454 Cleared Check 318 CK#0005330 1, 405.00 5,693.74
31 Interest 317 231.58 5,925.32
31 Withholding Tax 316 46.32 5,879.00
Balance this statement 5,879.00

Total Debit 11,646.32
Total Credit 12,696.58
***Negotiated checks not included in the statement are still in transit at the time of statement
processing.
The monthly bank statement is being send to the depositor every end of the month.
Enclosed with it are cleared checks duly stamped “paid” by the bank with the date of payment.
The company’s checking account on the point of view of the bank is a liability, thus, per bank’s
records, the company’s account has a credit balance. A credit entry on the bank statement
indicates an increase to the company’s account while a debit entry on the bank statement
indicates a decrease in the company’s account. This relationship is shown as follows:
Company Bank
Assets Liability
Cash in Bank Company’s Accounts
Beg. Balance xx Beg. Balance xx
Increases Asset Decreases Asset
Decreases in Liability Increases in Liability
Debit Memo Credit Memo

Check Payments Deposits
Service charges Notes receivable
NSF Checks Collections
Bank Errors Loan proceeds
Interest Earned
Bank errors
Following are the transactions made by the bank:

1. The bank makes credit entries for the following:
a. Deposits made by the depositor.
b. Collections of note receivable for the company and issues credit memo
c. Proceeds of loan made by the company from the bank.
d. Interest on the company’s account.
e. Correction (if any) of bank errors.
2. The bank makes debit entries for the following:
1. Payments made by the depositor thru check issuances.
2. Service charges. (bank issues debit memos)
3. Customer checks returned for not sufficient funds. (bank issues debit memos)
4. Correction (if any) of bank errors.
In preparing the Bank Reconciliation Statement using the Adjusted Balance Method, we consider
the following bank reconciling items.
A. Reconciling items under Balance Per Bank column
1. Deposit in transit – are cash receipts recorded in the depositor’s books in one period but
recorded as a deposit by the bank in the next accounting period. This happened when the
company would record a deposit made on the last banking day (after the bank’s cut-off period),
example on June 30, but the bank will record the deposit on the next banking day of July 1.
Thus, the deposit will not appear on the bank statement for the month ended June 30. The
depositor adds the deposit in transit in the balance per bank.
2. Outstanding checks- are checks issued by the depositor that has not been presented to the
bank for payment. The party receiving the check may not deposit it immediately. As a result,
sometimes it takes several days or even weeks for checks written to clear the banking system.
Hence, the depositor has to deduct the outstanding checks amount from the balance per bank.
3. Bank error – Although it seldom happens, the bank also makes mistake in writing the amounts
of deposits and withdrawals. For example, the bank recorded a deposit of P1,750 as P1,570.
This error, once discovered, must be reported immediately to the bank by the depositor. In
the example given, the depositor adds the difference of P180 (1,750 – 1,570) to the balance
per bank.
B. Reconciling items under the Balance Per Book column

4 Service charges- are amounts deducted by bank to cover the cost of handling the checking
account, such as check clearing charges, safe deposit box rentals, and checks printing fees.
The depositor has to deduct the amount from the balance per book.
5. NSF checks- are a customer’s check returned by the bank because the customer’s checking
account balance was insufficient to cover the amount of the check. As a result, the bank
returns the check and debits the depositor’s account. Since the customer still owes the
depositor’s money, the depositor will revert back the amount of the NSF check to the accounts
receivable account of that customer. Like bank service charges, NSF checks are deducted
from the depositor’s balance per book.
6. Notes collected by bank- represents proceeds of a note collected by the bank for the
depositor. Since the bank had added the note to the depositor’s account, the depositor must
also add this in the balance per book.
7. Book errors – Sometimes, the depositor made errors in writing amounts in his cash book. A
common error that occurs is when the depositor records a check in the accounting records at
an amount that differs from the actual amount on the check. For example, a depositor may
record a P680 check as P860. The check will clear the bank at the amount written on the
check, (P680), but the depositor frequently does not catch the error until he reviews the bank
statement with the cancelled checks. Any error in the depositor’s books will require an
adjusting entries on the depositor’s books.
Deposits in transit, outstanding checks, and bank service charges usually account for the
difference between the company’s cash account and the balance per bank. Remember that all
items shown on the bank reconciliation as adjustments of the balance per book (ledger) will
require journal entries by the depositor. The depositor should call the attention of the bank for
any bank errors discovered.
BANK RECONCILIATION
A bank reconciliation statement is an analysis of the difference of the depositor’s cash
balance (per ledger) as compared to balance per bank statement. The adjusted cash balance as
a result of the bank reconciliation is reported on the balance sheet.
A bank reconciliation is usually divided into two sections as follows:
1. The bank section begins with the cash balance per bank statement and ends with the
adjusted bank balance.
2. The company section begins with the cash balance per company’s ledger and ends with
the adjusted book balance.
The adjusted balance per bank and the adjusted balance per company must be equal. Bank
reconciliation must be done monthly to take up the adjustments in the company’s record on
time and to discover possible irregularity in the cash account. The format of the bank
reconciliation is shown below.
Name of the Company

Bank Reconciliation Statement
December 31, 2020
Balance Per Book xx Balance per Bank xx

Add (Deduct): Reconciling items Add (Deduct): Reconciling items
Notes collected by bank xx Deposit in transit xx
Bank service charges (xx) Outstanding checks (xx)
NSF checks (xx)
Adjusted balance per book xx Adjusted balance per bank xx
Notes collected by bank is also called unrecorded bank credits. While NSF checks and bank
service charges are unrecorded bank debits. The adjusted balance per book and the adjusted
balance per bank should have equal amount.
Bank Reconciliation is prepared using the following steps:
A. Bank Section of Reconciliation
1. Enter the ending cash balance according to the bank statement.

2. Add deposits not recorded by the bank (deposits in transit).
Identify deposits not recorded by the bank. Compare each deposit listed on the bank
statement with unrecorded deposits appearing in the preceding period’s reconciliation and
with current period’s deposits.
3. Deduct outstanding checks that have not been paid by the bank
Identify outstanding checks appearing on the preceding period’s reconciliation and with
recorded checks on the current month.
4. Determine the adjusted balance per bank by adding Step 2 and deducting Step 3.
B. Company Section of Reconciliation
5. Enter the cash balance according to company ending cash balance in the ledger.
6. Add credit memos that have not been recorded in the books.
Identify bank credit memos that have not been recorded by comparing the bank statement
credit memos to entries in the journal. Examples: A note receivable and interest that the
bank has collected for the company.
7. Deduct debit memos that have not been recorded in the books.
Identify the bank debit memos that have not been recorded by comparing the bank
statement debit memos to entries in the journal. Examples: Customer’s no sufficient funds
(NSF) checks and bank service charges.
8. Determine the Adjusted balance by adding Steps 6 and deducting Step 7.

Verify that the Adjusted balances determined in Steps 4 and 8 are equal.
Using the Bank Statement as a Control Over Cash
The bank statement is a primary control of a company that uses cash. A company uses
the bank’s statement as a control by comparing the company’s recording of cash transactions to
those recorded by the bank.
The cash balance shown by a bank statement is usually different from the company’s cash
balance as shown below:
Bank Records
Beginning Balance P 4, 828.74

Additions:
Deposits 12, 465.00
Interest 23.58
Total P 17, 525.32
Deductions:
Checks P 10, 210.00
NSF Check 1, 190.00
Service charge 246.32
(11,646.32)
Ending Balance P 5,879.00
Cardona Service
(Company Records)
Beginning Balance P 1,473.74

Deposits 14, 965.00
Checks (11, 510.00)
Ending Balance P4, 928.74
What are the causes of the differences?

1. The ending balance per bank’s record may and always differ from the balance per
company records (Ledger). The difference between the company and bank balance may
arise because of a timing difference due to delay either by the company or by the bank in
recording the transactions. For example, there is normally a time lag of one or more days
between the date a check is written and the date it is paid by the bank. Likewise, there is
normally a time lag between when the company mails a deposit to the bank (or uses the
night depository) and when the bank receives and records the deposit. (Deposit in transit
and outstanding checks).
2. Differences may also arise because the bank has debited or credited the company’s
account for transactions that the company will not know about until the bank statement is
received. This refers to notes collections made by the bank, NSF deposits, and bank
service charges.
3. Errors made by either the company or the bank may also cause a difference in the reported
ending cash balance per books and per bank. For example, the company may incorrectly
post to Cash a check written for P4,500 as P450. Likewise, a bank may have incorrectly
recorded the amount of a check. (Bank errors and book errors).
The adjusted balances in the bank and company sections of the reconciliation must be
equal. If the balances are not equal, an item has been overlooked and must be located.
The adjusted balances may not be equal because either the company or the bank has
made an error. In such cases, the error has to be located by comparing the amount of each item
(the deposits and checks) on the bank statement with that of the company’s records.
Any bank or company errors discovered should be added or deducted from the bank or company
section of the reconciliation depending on the nature of the error. For example, assume that the
bank incorrectly recorded a company check for P50 as P500. This bank error of P450 (P500-
P50) would be added to the bank balance in the bank section of reconciliation. In addition, the
bank would be notified of the error so that it would be corrected. On the other hand, assume that
the company recorded a deposit of P1, 200 as P2, 100. The company error of P900 (P2100-
P1,200) would be deducted from the cash balance in the company section of the bank
reconciliation. The company would later correct the error using a journal entry.
To illustrate, we will use the bank statement for Cardona Service Company, this bank
statement shows a balance of P 5,879.00 as of July 31, the cash balance in Cardona Service
Company’s ledger on the same date is P 4,928.74. The following reconciling items were
identified.
1. Deposit of July 31, not recorded on bank statement P2,500.00

2. Outstanding check at July 31.
Check No. 005333 P 700.00
Check No. 005335 P 500.00
Total P 1,200.00
3. Note receivable of Bankers for P3,455.00 collected by the bank for the company not
yet recorded by Cardona.
4. Check from customer for P1,190.00 returned by bank because of insufficient funds
(NSF) as indicated by a debit memo of P1,190.00
5. Bank service charges of P246.32, not recorded in the journal as indicated by a debit
memo.
The Bank Reconciliation Statement for Cardona Service Company is presented as follows:
Cardona Service Company

Bank Reconciliation Statement
July 31, 2020
Cash: Balance according to bank statement P 5,879.00

Add: Deposit of July 31, not recorded by bank 2,500.00
Total P 4,175.98
Less: Outstanding checks:
Check No. 005333 P 700.00
Check No. 005335 500.00 1,200.00
Adjusted Balance P 7,179.00
Cash Balance per books (Cardona Service Co) P 4,928.74

Add: Note collected by bank P 3,455.00
Interest Earned 231.58 P 3,686.58
Total P 8,615.32
Less: NSF check P 1,190.00

Bank service charge 246.32 1,436.32
Adjusted balance P 7,179.00
The company’s records do not need to be updated for any items in the bank section of the
reconciliation. This section begins with the cash balance according to the bank statement.
However, the bank should be notified of any errors that need to be corrected.
The company’s records are updated by preparing the following adjusting entries:
Date Descriptions P.R Debit Credit

July 31 Cash 3,686.58
Notes Receivable 3,455.00
Interest Income 231.58
To take up note collected by
bank for the company
31 Accounts Receivable 1,190.00

Bank Service Charge Expense 246.32
Cash 1,436.32
To take up NSF check
Returned by bank and bank charges.
After preceding journal entries are recorded and posted, the cash account will have a debit
balance of P7,179.00. This cash balance agrees with the adjusted balance shown on the bank
reconciliation. This is the amount of cash on July 31 and the amount that is reported on Cardona
Service Company’s July 31 balance sheet.
To enhance internal control, the bank reconciliation should be prepared by an employee

who does not take part or record cash transactions. Otherwise, mistakes may occur. And it is
more likely that cash will be stolen or misapplied. For example, an employee who handles cash
and also reconciles the bank statement could steal a cash deposit, omit the deposit from the
accounts, and omit it from the reconciliation.
CERTIFIED AND CASHIER’S CHECKS

To make sure a check will not “bounce” and become and NSF check, the payee may
demand that the maker’s check be certified for cashier’s check. Both certified checks and
cashier’s checks are liabilities of the bank rather than the depositor’s account at the time the bank
certifies it.
A cashier’s check is a check drawn by a bank made out to either the depositor or a third
party after deducting the amount of the check from the depositor’s account or receiving cash from
the depositor.
Exercises
1. Following is a bank reconciliation statement for the Resilient Company as of September 30,
of the year: Prepare the journal entries to adjust the balance of cash in the book.
Balance per bank P 11,200

Add: Deposit in transit 8,515
Total P 19,715
Less: Outstanding checks 7,536
Adjusted bank balance P 12,179
Balance per books P 12,329

Add: Error in debiting Accounts Payable and Crediting
Cash for P539, instead of the correct of P359. 180
Total P 12,509
Less: NSF check P 285

Bank service charge 45 330
Adjusted book balance P 12,179
2. Agile Company’s check book lists the following:
Items
Date Check Items Check Deposit Balance
no
July 1 7875
4 5622 Cherry Bee Gift Shop 285 7590
9 Dividends 1740 9330
13 5623 PLDT Co 675 8655
14 5624 Pilipinas Shell 870 7785
18 5625 Cash 780 7005
26 5626 St Peter Church 478 6527
28 5627 Bel Air Apartment 4200 2327
30 Paycheck 15000 17327
The July bank statement shows:

Balance P7,875
Add: Deposits 1,740
Deducted checks No. Amount
5622 P 285
5623 675
5624 970*
5625 780 (2,710)
Other charges:
Printed checks P 120
Service charge 90 (210)
Balance P6,695
*This is the correct amount of check number 5624.
Instruction: Prepare Agile Company’s bank reconciliation at July 31.
3. Integrity Company deposits all receipts intact on the day received and makes all payments
by check: and on August 31, after all posting was completed, its Cash account showed only
P6,578 debit balance. However, its August 31 bank statement showed only P5,805 on
deposit in bank on that day. The following information are available.
a. Outstanding checks, P1,105.

b. Included with the August cancelled checks returned by the bank was a P25 debit
memorandum for bank services.
c. Check No. 3456, returned with cancelled checks, was correctly drawn for P58 in
payment of the telephone bill and was paid by the bank August 9, but it had been
recorded with a debit to Telephone Expense had a credit to Cash as though it were
for P95.
d. The August 31 cash receipts, P1,890 were placed in the bank’s night depository after
banking hours on that date and were unrecorded by the bank at the time the August
bank statement as prepared.
Instructions: Prepare a bank reconciliation for Integrity Company at August 31, and give the
journal needed as a result of having prepared the bank reconciliation.
References
Baguino, Armand D.; Balbarino, Melinda S.; Dela Cruz, Emma S.; Doquenia, Marietta M.; Espino, Ligaya
M.; Fonte, Julieta G.; Hernane, Milagros R.; Orfiano, Mercedes M.; Pilapil, Lutgardo R.; Vedasto,
Concepcion M. (June 2013). Principles of Accounting Volume 2. Allen Adrian Books, Inc.
Rante, G. A. (2013). Fundamentals of Accounting.

Fundamentals of Accountancy Business and Management

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Fundamentals of Accountancy Business and Management

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INSTRUCTIONAL MATERIAL

ABM 2104 – Fundamentals of

II. Module 1 Review of The Accounting Process

III. Module 2 Accounting for Merchandising Businesses

IV. Module 3 Special Journals

V. Module 4 The Use Of Bank Accounts

II. Module 2 Accounting for Merchandising Businesses

III. Module 3 Special Journals

At the end of this module, the students should be able to:

a. The different kind of special journals and their format.

IV. Module 4 The Use of Bank Accounts

Final Grade 100%

At the end of this module, the students should be able to:

Course Material: ACCOUNTING DEFINED

Accounting is a service activity. Its function is to provide quantitative information, primarily

b. Creditors/Suppliers/Lenders need accounting information to help in their decision

Financial Accounting is designed in providing accounting information for all parties

Management or Managerial Accounting is designed in providing accounting information

Accounting is commonly misinterpreted and understood as just the recording of business

FORMS OF BUSINESS ORGANIZATION

A partnership is formed by two or more individuals who agreed to carry on a trade or

A Corporation is a more complex form of business organization as differentiated from a

TYPES OF BUSINESS ACTIVITIES

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP)

Generally accepted accounting principles are a common set of accounting principles,

Generally accepted accounting principles encompass the conventions, rules, and

1. Business Entity Concept

2. Going Concern or Continuity Assumption

3. Time Period Assumption

ACCRUAL BASIS AND CASH BASIS OF ACCOUNTING

THE ACCOUNTING CYCLE

The steps in the accounting cycle include the following:

To summarize the rules of debit and credit:

Increases in assets • Decreases in assets

Transposition is the erroneous rearrangement of writing an amount like P 1,250 written as

There are two methods of accounting for prepaid expenses:

The pro-forma adjustment is:

Expense Account xxx Compute used or expense

The pro-forma adjustment is:

Asset Account xxx Compute unused or asset

To illustrate, assume that Lakers Company is using a monthly accounting period. On

31 Rent Expense 10,000 Prepaid Rent 20,000

2. Unearned Revenues – These are revenues collected or received by the business in

The pro-forma adjustment is:

Liability Account xxx Compute earned or income

The pro-forma adjustment is:

Revenue Account xxx Compute unearned or liability

To illustrate, assume that Miami Company is using a monthly accounting period. On

31 Unearned Rent 10,000 Rent Income 20,000

The pro-forma adjustment is:

Mar. 31 Wages Expense 6,000

The pro-forma adjustment is:

Asset account xxx

5. Depreciation of Property, Plant and Equipment

Depreciation Expense – Name of asset xxx

The adjusting entry on December 31, 2017:

Computations will be:

Annual depreciation = Cost – Residual Value

Other computation for straight-line method is:

Annual depreciation = (Cost – Residual Value) x Depreciation Rate

= (P 500,000 – 50,000) x 10%

Delivery Truck P 500,000

Carrying amount or Book value P 455,000