Financial accounting and reporting

APDS; BSA

MODULE 2: RECORDING BUSINESS TRANSACTIONS

The Accounting Cycle • Shows all the effects of a business

transaction in terms of debits and credits.
• Each transaction is initially recorded in a journal
ACCOUNTING CYCLE rather than directly in the ledger.
refers to the series of sequential steps or
• The nature and volume of transactions of
procedures performed to accomplish the
the business determine the number and
accounting process.
type of the journals needed.
• The general journal is the simplest journal.
STEPS IN THE ACCOUNTING CYCLE
Identification of Events to
be Recorded
DURING Transactions are recorded in
THE PERIOD the Journal
Journal Entries are posted to
the Ledger
Preparation of the Trial
Balance
Preparation of the
Worksheet including the
Adjusting Entries The sample general journal above shows the standard contents of a
general journal. The date shows the month, year and the day the
Preparation of the Financial transactions occurred. The Account titles and explanation shows the
END OF THE Statements account debited (entered at the extreme left) while the amount credited is
indented. An explanation follows stating as in the example the transaction
PERIOD is an investment of the owner hence the account Debit Cash and Credit A.
Adjusting Entries are Capital can be observed. The third item is the peso amounts of debits and
Journalized and Posted credits. You will notice that the total debits equal total credits for each
transaction. The fourth item in the general journal is the PR or Posting
Reference. After posting the journal entries to the ledgers, the account
Closing Journal Entries are code where it is posted will be written here to inform the readers that this
Journalized and Posted entry has been posted.

Preparation of a Post- SIMPLE ENTRY

Closing Trial Balance Only two accounts are affected-one account is
debited and the other account is credited.
BEGINNING
OF THE Reversing Entries are COMPOUND ENTRY
NEXT Journalized and Posted When there are more than two accounts as
PERIOD required in the transactions.

Recording Business Transactions for ACCOUNT FOR MERCHANDISING BUSINESS

Service and Merchandising Entities

JOURNALIZING
JOURNAL
• BOOK OF ORIGINAL ENTRY
• A chronological record of the entity's
transactions.

Life is like accounting. Everything must be balanced.

 Financial accounting and reporting
APDS; BSA
TERMS OF TRANSACTIONS
1. CASH DISCOUNTS
⎯ Prompt discounts.
⎯ These are discounts given by seller to
induce buyers to pay early.
⎯ Cash discount is designated by notation
such as "2/10" or "3/15". 2/10 denotes
that customers can have 2% discount if
paid within 10 days and 3/15 denotes
3% discount if paid within 15 days. n/30
means no discount and can be made
within 30 days.
⎯ the Transportation Cost
⎯ Cash discounts are purchase discounts
for the buyer and sales discounts for the
seller.
2. TRADE DISCOUNTS
⎯ It encourages buyers to purchase in
bulk. The invoice price is the list price
less any trade discounts, hence this is
not reflected in the entry as trade
discounts are already deducted to arrive
at the invoice price.
3. TRANSPORTATION IN
⎯ This is the cost of shipping the
merchandise by a common carrier-
Life is like accounting. Everything must be balanced.
either by a trucking company or by an
airline.
• FOB SHIPPING POINT - Buyer
shoulders the cost
✓ ownership passes to buyer when
the shipment leaves the seller's
place.
• FOB DESTINATION - Seller shoulders
the cost
✓ Ownership passes to buyer when
the shipment /goods arrive at the
point of destination.
• FREIGHT PREPAID - The seller pays
• FREIGHT COLLECT - The buyer pays
the Transportation Cost
INVENTORY SYSTEMS
PERIODIC INVENTORY SYSTEM
⎯ The inventory account is not continuously
updated, instead account titles such as
Purchases, Purchase Returns and
Allowances, Purchase Discounts,
Transportation in or Freight In are being
used to accumulate the transactions
pertaining to Inventory.
⎯ At the end of the accounting period, a
physical count will be conducted to
determine the ending inventory.
⎯ The value of the ending inventory shall then
be deducted from the Cost of Goods
Available for Sale (CGAS) to arrive at Cost of
Sales.
⎯ This inventory method is usually applied by
entities selling high volume but of low value
products.
PERPETUAL INVENTORY SYSTEM
⎯ Under the perpetual inventory system, the
inventory account is continuously updated.
⎯ Unlike the periodic inventory systems,
Inventory account is updated every time
there is a purchase or sale transaction.
 Financial accounting and reporting
APDS; BSA
To compute for the COST OF GOODS SOLD we add the Merchandise
Inventory beginning (Inventory that was unsold last month -note that the
ending inventory last month becomes the beginning inventory this month)
and the net purchases this month including the transportation in or freight
in. The resulting amount is known as the Cost of Goods Available for Sale
(CGAS). From CGAS, we deduct the merchandise inventory end (the value
of the unsold units this month) to arrive at Cost of Goods Sold.

NET COST OF PURCHASES

a. NET COST OF PURCHASES.

⎯ We normally record purchases using the periodic inventory
method.
⎯ Under the periodic inventory method, we debit purchases when
we purchase merchandise and we either credit cash if we pay cash
and we credit accounts payable if we purchase on account.
⎯ When we record purchases at the invoice price, we are using the
gross method of recording purchases meaning purchases
discounts are accounted for during payments and not on the date
of purchase.
⎯ Trade or volume discounts are discounts granted to buyers to
induce them to buy he products or merchandise in large quantities
or in bulk.
⎯ Purchase discounts is given when a customer/ buyer who
purchases on account pays within the discount period.
⎯ Purchase discounts are given to encourage early payments of
accounts. In the case of purchases, we are the buyer of the
merchandise, and it is best to take advantage of purchase
discounts to lower the cost of sales and have better profits.
⎯ As a rule, trade discounts are already deducted from the cost of
our purchases hence purchases is net of trade or volume discounts
but gross of purchase discounts.
⎯ Purchase discounts and purchase returns and allowances are
deducted from Purchases to arrive at Net Purchases while
Transportation In is added to get the Net Cost of Purchases.

b. TRANSPORTATION IN
⎯ It forms part of the Net Cost of Purchases.

c. NET SALES
⎯ Using the Accrual basis, we record sales when goods have been
delivered not when cash are collected. A merchandising firm use
the account title sales when ownership and title to the goods
passes to the buyer. However, sale of old truck will not result to
recording sales unless the company's nature of business is to buy
and sell used trucks. Net sales are computed as Gross Sales-Sales
Returns and Allowances-Sales Discounts. Transportation Out does
not affect the computation of Net Sales.

d. TRANSPORTATION OUT

RECORDING BUSINESS TRANSACTIONS WITH VAT

VALUE-ADDED TAX (VAT)

⎯ Is a form of sales tax.
⎯ It is a tax on consumption levied on the sale,
barter, exchange or lease of goods or properties
and services in the Philippines and on importation
of goods into the Philippines.
⎯ When we purchase goods there is a
corresponding entry to Input Tax (normal balance
is DEBIT) and when we sell goods, we credit
Output Tax (normal balance is CREDIT).
⎯ The input tax or output tax is 12% of the amount
of purchases or sales.
⎯ The total invoice price already includes the input
or output tax.

Life is like accounting. Everything must be balanced.