ZBC Accounting

ZEGHA Business College Accounting Fundamentals I
Part IV
Accounting Cycle for a Merchandising Business Organization
Merchandising Enterprise is a profit making business organization, which acquires

merchandises for resale to customers. The selling of merchandise instead of service makes
the activities of merchandising enterprises to differ from the activities of service enterprises.
 Merchandises are goods bought for resale to customers.

 Merchandising is a process of buying and reselling goods without any
modifications.
4.1. Special Journals
Special journals have been designed to systematize the original recording of major
recurring transactions.
 The general journal is used for all transactions that cannot be entered readily in
one of the special journals.
 Each of the special journals is a record of original entry that contains the data
which will be posted to ledger accounts. Special journals used by merchandising
businesses include:
1] Purchases Journal-it is used to record all purchases made on account.
2] Sales Journal-it is used to record all sales of merchandise on account.
3] Cash Receipts Journal-it is used to record all receipts of cash including cash sales.
4] Cash Disbursements Journal-it is used to record all disbursements of cash
5] Combined Purchases and Cash Disbursements Journal-the purchases and cash
disbursements journal can be combined; however, this limits the number of people who
can work with the journals at any one time.
6] Combined Sales and Cash Receipts Journal-it is possible to combine the sales and
cash receipts journals. Total sales can then be posted as one amount rather than two; But
the number of persons who can work with the data is restricted
Advantages of Special Journals
 Time is saved in journalizing & posting.
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Wogayehu W. / Dec. 2006
 Detail is eliminated from the general journal.

 Division of labor is promoted & Management analysis is aided
Controlling Accounts and Subsidiary Ledgers
The method of initially recording and summarizing transaction data is influenced by the
nature of the transactions, the materiality of the amounts, the means available for
processing the data, and the reports desired.
 Sometimes a company needs general information and at other times it needs specific
information.
 In order to provide for both types of information, control accounts are maintained to
provide balance sheet data and subsidiary accounts are maintained to provide
specific information relating to customers and creditors.
1] Control Account -it is an account in the general ledger that shows the total balance of
all the subsidiary accounts related to it.
2] Subsidiary Ledger Accounts- they show the details supporting the related general
ledger control account balance.
3] Subsidiary Ledger-it is a group of related accounts showing the details of the balance of
the general ledger control account.
 It relieves the general ledger of a mass of detail and shortens the general ledger trial
balance.
 It promotes a division of labor.
4.2. Accounting for Purchases
a. Recording purchases
Purchases may be made for cash or on account .Purchases is normally recorded when the
goods are received from their supplier. Every purchase should be supported by business
documents that provide written evidence of the transaction.
 Cash purchases should be supported by canceled checks or cash register tapes
or receipts indicating the items purchased and amounts paid.
 Credit purchases should be supported by an invoice that indicates the items
purchased and the total purchase price.
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 An invoice is a document prepared by the seller that shows the relevant information
about a sale. From the seller’s perspective, this document is a sales invoice, and
from the buyer’s perspective, this document is a purchase invoice. The contents of
this invoice include: Seller, Invoice date, Purchaser, Sales person, Credit terms, Freight
terms, and goods sold, catalogue no. , description, quantity, price per unit & total
invoice amount.
 Credit terms are the arrangement agreed upon by the buyer and the seller as to
when payments for merchandise are to be made. They specify the amount and time
period for the cash discount .They also indicate the length of time in which the
purchaser is expected to pay the full invoice.
 If payment is required immediately upon delivery, the terms are said to be “cash” or
“net cash”, otherwise, the buyer is allowed a certain amount of time, known as the
credit period, in which to pay and the transaction is called credit transaction.
 Credit period is a certain amount of time allowed to the buyer to pay the debts. It is
usual for the credit period to begin with the date of sale as shown by the date of
invoice or bills. When the supplier elects not to offer a cash discount for prompt
payment, credit terms will specify only the maximum time period for paying the
balance due. E.g. n/30, n/60,n/10 eom .
 n/30: net 30 days( total amount before deduction) is paid with in 30 days.
 n/ eom : It means that Payment is due by the end of the month in which the
sale was made.
 1/10 n/ eom: It means that a 1% discount is available if the invoice is paid
with in 10 days, unless the net amount is paid at the end of the month.
 1/10 eom: It means that a 1% discount is available if the invoice is paid with in
the first 10 days of the next month.
 2/10, n/30: “two ten, net thirty”. This mans that a 2% cash discount may be
taken on the invoice price ( less any Purchase returns & allowances) if payment
is made with in 10 day of the invoice date ( the discount period); Otherwise ,the
invoice price less any Purchase returns & allowances is due 30 days from the
invoice date.
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b. Recording Purchase Discount

The credit terms of a purchase on account may permit the purchaser to claim a cash
discount for the prompt payment of a balance due. The purchaser calls this cash discount
as a Purchase discount.
 The incentive offers advantage of both parties: The purchaser saves money and the
supplier is able to convert the A/R into cash earlier.
 If there are Purchase returns and allowances, the purchase discount must be
computed from net purchases.
Alternative ways of recording Purchase Discounts
1. As a reduction of cost when realized.
 Purchase discounts account is credited and usually viewed as a deduction from
the amount initially recorded in purchases .In this sense, the purchase discounts
account is a contra ( or off setting) account to purchases.
2. Net price method - as a reduction of cost on the date of purchase.
3. As other income - credit as revenue.
c. Recording Purchases Returns & Allowances
A purchaser may be dissatisfied with the merchandise received because the goods are
damaged or defective, or of inferior quality, or not in accord with the purchaser‘s
specifications. In such cases, the purchaser may return the goods to the supplier for credit
if the sale was made on account or cash refund if the purchase was originally for cash. This
transaction is known as a purchase return. Alternatively, the purchaser may choose to
keep the merchandise if the supplier is willing to grant an allowance (deduction) from the
purchase price. This transaction is known as a purchase allowance. The ledger account
used to record these transactions is called Purchase returns & allowances
 The purchaser initiates the request for a reduction of the balance due through the
issuance of debit memorandum. It is a document issued by a purchaser to inform a
supplier that a debit has been made to the supplier’s Account Payable on the
purchaser’s book. The original copy of the memo is sent to the supplier account on
the purchaser’s books. It also states the reasons for the return or request for a price
reduction.
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 The debtor may use the copy of the debit memo as the basis for an entry or may wait
for confirmation from the creditor, which is usually in the form of credit memo. It
can be viewed as a deduction from the amount initially recorded in purchases .In this
sense, it is a contra (or offsetting) account to purchases.
Alternative ways of recording Purchase Returns & Allowances
1. In separate Purchase returns & allowances account.
 It has a normal credit balance & most commonly used method.
2. As a reduction of purchase account. In this alternative, the balance of the purchase
account will be a net mount (the total purchases less the total returns & allowances for
the period).
4.3 Accounting for Sales
a. Recording Sales
Merchandise sales are usually identified in the Ledger as Sales. A more exact title, such as
sales of merchandise could be used. Typically Sales Revenue is earned when the goods
are transferred from the seller to the buyer. At this point, the sales transaction is completed
and the sales price is established.
 Sales may be made on credit or for cash .Every sales transaction should be
supported by a business document that provides written evidence of the sale.
 Cash register tapes provide evidence of cash sales.
 A Sales invoice, provides support for a credit sale. The original copy of the invoice
goes to the customer, and copy is kept by the seller for use in recording the sale. It
shows the date of sale, customer name, total sales price and other relevant
information.
 Sales to customers who use the bank credit cards (such as Master Card & VISA)
are generally treated as cash sales. The credit card invoices representing these
sales are deposited by the seller directly in to the bank , along with the currency
and checks received from customers .Periodically, the bank charges a service fee
for handling these credit card sales. The service fee should be debited to an
expense account.
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 Sales made by the use of non bank credit cards (such as American Express)
generally must be reported periodically to the card co. Before the card co. remits
cash, it normally deducts a service fee.
b. Recording Sales Discounts
The seller refers to the cash discounts taken by the buyer for prompt payment of an invoice
as sales discounts. They are recorded by debiting the Sales discounts account and are
considered to be a reduction in the amount initially recorded in sales. In this sense, the
balance of the sales discounts account is viewed as a contra (or offsetting) account to sales.
 Like a purchase discount, a sales discount is based on the invoice price less Sales
Returns and Allowances, if any.
c. Recording Sales Returns & Allowances
Merchandise sold may be returned by the buyer (Sales return), or because of defects or for
other reasons the buyer may be allowed a reduction from the original price at which the
goods were sold (Sales allowance).The ledger account used to record this transaction is
called Sales Returns & Allowances.
 To grant the customer sales return or allowance, the seller normally prepares a
credit memorandum .This document informs a customer that a credit has been
made to the customer’s Account receivable for a sales return or allowance. The
information contained in a credit memorandum is similar to the information found in
the debit memorandum. The original copy of the credit memorandum is sent to the
customer, and a copy is kept by the seller as evidence of the transaction.
 Sales returns & allowances is a contra – revenue account to sales with a normal debit
balance is used instead of debiting sales to disclose the amount of sales returns and
allowances in the accounts and in the Income statement because disclosure of this
information is important to management.
 It measures the efficiency of performance. Excessive amount suggests inferior
merchandise, in efficiencies in filling orders, errors in billing customers and mistakes
in delivering or shipment of the goods.
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4.4 Transportation Costs, Sales Tax & Trade discount

a. Recording Transportation cots
The terms of the agreement between the buyer and seller include provisions concerning:
a. when the ownership (title) of the merchandise passes to the buyer and
b. which party is to bear the cost of delivering the merchandise to the buyer.
When a common carrier such as a railroad, trucking company, or airline is used, the
transportation co. prepares freight bill (of ten a bill of lading) in accordance with the
sales agreement.
a] If the ownership passes to the buyer when the seller delivers the merchandise to the
shipper, the buyer is to absorb the transportation costs and the terms are said to be FOB
shipping point.
 It means that the seller places the merchandise” free on board” at the shipping point
and the buyer is responsible for the transportation costs beyond that point.
 When merchandise is purchased on terms of FOB shipping point, the transportation
costs paid by the buyer should be debited to Transportation in or Freight in and
credited to cash.
 The balance of the transportation in or freight in account should be added to net
purchases in determining the total cost merchandise purchased.
 If the seller prepays the transportation charge as an accommodation or courtesy to
the buyer and adds them to the invoice, the buyer will debit Transportation
(Freight in) for the transportation costs & adds it to A/P until a later payment.
b] If the owner ship passes to the buyer when the buyer receives the merchandise, the
seller is to assume he costs of transportation and the terms are said to be FOB
destination.
 It means that the seller places the merchandise” free on board” to its destination by
paying the delivery costs.
 When the agreement states that the seller is to bear the delivery costs ( FOB
destination), the amount is paid by the seller for delivery are debited to
Transportation Out, freight out or Delivery expense , or similarity titled account.
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The total of such costs incurred during a period is reported on the seller’s income
statement as a selling expense.
 When the seller prepays the transportation costs & the terms are FOB Shipping
point, the seller adds these costs to the invoice that is sent to the buyer. Therefore,
the seller records the payment of the transportation costs by debiting Account
Receivable.
Alternative ways of recording Transportation costs
1] Addition to a purchase account.
 The balance of purchase account will include the transportation costs borne by
the buyer in Fob shipping point. When the terms provide for a discount for early
payment, the discount is based on the amount of the sale rather than the invoice
total.
2] A separate account called Freight In or Transportation In.
b. Recording Sales tax
Almost all states and many other taxing units levy a tax on retail sales of merchandise.
 The liability for the sales tax is ordinarily incurred at the time the sale is made,
regard less of the terms of the sale.
 At this time of a cash sale, the seller collects the sales tax. When a sale is made on
account, the buyer is charged for the tax. The seller credits the sales account for the
amount of the sale, and credits the tax to sales tax payable.
 It is levied & earned by the government, collected by the seller (liability) and paid by
the purchaser (added to cost of purchase).
 Typically a sales tax is imposed on the consumer, but the seller must collect the tax,
file tax returns at times specified by law, and remit a percentage of the reported
sales.
c. Measuring Trade discount
It is a reduction from list price (catalogue price) & is part of negotiation.
 It is non accounting discount & is not recorded in accounting records.
 It is called a chain discount. E.g. List price of Br.20, 000; 1/10 n/30 subject to
trade discount of 20%.
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4.5 Merchandise Inventory Systems

1. Periodic Inventory System
It is used by many merchandising enterprises that usually purchase & sell low priced small
items. E.g. Drug stores, Retail stores, etc.
 It accumulates the cost of merchandise or goods purchased on suspense or
temporary ledger account called Purchase.
 The revenue from sales is recoded when the sales are made but no attempt is made
on the sales date to record the cost of merchandise sold.
 It is only by a detailed listing of the merchandise on hand called a physical
Inventory the end of the accounting period that a determination is made of :
a. The cost of merchandise sold during the period &
b. The cost of inventory at the end of the period.
2. Perpetual Inventory System
It is used by some Merchandising enterprises that usually purchase & sell high priced large
items. E.g. TV, Vehicle, Equipment, etc
 It accumulates goods purchased for resale to customers on real account called
Merchandising Inventory.
 It records both the sales amount and the cost of merchandises sold amount when
each item of merchandise is sold.
 It records both the cost of each inventory purchases and sales and continuously
(perpetually) shows the inventory that should be on hand for every item.
 It keeps track of both quantities and cost of inventories.
 The cost of goods sold is determined and recorded each time a sale occurs.
4.7 & 8 Adjustments for Deferrals & Accruals
The use of adjusting entries at the end of the accounting period is to match properly the
revenues & expenses for the period.
I. Accounting for Deferrals
Deferral is a delay of the recognition of an expense already paid or revenue already
received. They are the cost of goods and services that have been purchased but not yet
used at the end of the accounting period.
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 It is divided in to Deferred expenses & Deferred revenues.

1. Deferred Expenses expected to benefit a short period of time are listed on the balance
sheet among the current assets, where they are called Prepaid Expense .e.g. Prepaid
insurance, prepaid rent, etc.
 Long term prepayments that can be charged to the operations of several years are
presented on the balance sheet in section called deferred charges.
2. Deferred Revenues may be listed on the balance sheet as a current liability, where
they are called unearned revenues or revenues received in advance. E.g. Unearned
rent, Unearned advertising, etc.
 If a long period of time is involved, they are presented on the balance sheet in a
section called deferred credits.
Alternative methods of recording Deferrals
a. Prepaid Expenses
1. Prepaid Expenses initially recorded as Assets
This method records the prepaid expenses (prepayments) initially as an asset account and
transfers the expired or consumed portion from asset account to appropriate expense
account through adjusting entries.
 It does not require reversing entries.
2. Prepaid Expenses initially recorded as Expenses
This method records the prepaid expenses (prepayments) initially as an expense account
and transfers unused or unexpired portion from expense account to the corresponding
asset account through adjusting entries.
 In this case, reversing entry is needed to transfer the entire balance of the asset
account or amount unused back to the expense account immediately after the
temporary accounts have been closed for the period.
Example 1: On Jan.1, 2004, Atlas Hotel acquired Property & Causality Insurance Policies
during the first year of operation for Br.10, 170.During the year, Br.4, 530 of the premiums
had been expired .
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Required
Journalize the necessary entries required in the two alternative methods of recording
Prepaid Expenses during the year assuming that the fiscal year ends on Dec.31, 2004.
b. Unearned Revenues
1. Unearned Revenues initially recorded as Liabilities
This method records the receipt of cash (advance collection) initially as a liability &
adjusting transfers the earned portion from a liability account (unearned revenues) to
appropriate revenue accounts.
 It does not require reversing entries.
2. Unearned Revenues initially recorded as Revenues.
This method records the receipt of cash (advance collection) initially as a revenue &
adjusting entry transfers the unearned portion from the revenue account to the proper
liability account.
 Reversing entry is required to transfer the entire balance of the liabilty account to
transfer the entire balance of the liabilty account to the revenue account
immediately after the temporary accounts have been closed for the period.
Example 2: On Oct.1, 2004, Dashen Bank rented a portion of Tana Retail Store for a
period of one year, receiving Br.36, 000 in payment for the entire term of the lease. On
Dec.31, 2004, one fourth of the receipt had been earned.
Required
Journalize the necessary entries required in the two alternative methods of recording
Unearned Revenues assuming that the fiscal year ends on Dec.31, 2004.
II. Accounting for Accruals
Accrual is an expense that has not been paid or revenue that has not been received.
 Any unrecorded accruals must be recorded before financial statements are prepared.
1. Accrued expenses are described on the balance sheet as accrued liabilities.
 The liabilities for accrued expenses are ordinarily due with in a year and are listed as
current liabilities. E.g. Salary expense, Interest expense, etc
2. Accrued Revenues may be described on the balance sheet as accrued assets.
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 The amounts receivable for accrued revenues are usually due with in a short time
and are classified as current assets. E.g. Interest Receivable, Fees Receivable, etc.
Example 1: Assume the following data for ABC Co. for the year 2003.
 Salaries are paid on Friday for the five day week ending on Friday.
 The balance in salary expense as of Friday, Dec.27 is $ 62,500.
 Salaries accrued for Monday & Tuesday, Dec.30 & 31 total $ 500.
 Salaries accrued on Friday, Jan.3, of the following year total $1,250.
 The fiscal year ends on Dec.31, 2003.
Required
Journalize the necessary entries required to complete the year end procedures assuming:
a. Reversing entry is made.
b. No reversing entry
Example 2: Assume that CBE has a promissory note of CILALO Construction Company
with a face amount of Br.10, 000 on which Br.6000 of interest is due every six months &
Br. 4000 of interest income has been earned on Dec.31, 2003.
Required
Journalize the necessary entries required in the accounting records of both the lender &
the borrower assuming:
a. Reversing entry is made.
b. No reversing entry
4.9 Worksheet & Financial Statements for Merchandising Enterprises
The work sheet for a merchandising enterprise is completed in a similar fashion to that of a
service enterprise. The primary difference is that the beginning and ending merchandise
inventories which are shown in the Income Summary account, appear in both the debit
and credit Income statement columns of the work sheet.
Completion of the accounting cycle or Year-end procedures
The year end accounting procedures that are necessary for a merchandising enterprise
include the preparation of financial statements, adjusting entries & closing entries.
 These items are prepared from the data in the adjustment & the statement section of
the work sheet.
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Financial Statements for Merchandising Enterprises

The basic financial statements for a merchandising enterprise, including the Income
statement, Statement of Owner’s equity, and balance sheet are similar to those of a service
enterprise.
 For a corporate enterprise, the financial statement would include the retained
earnings statement rather than the statement of owner’s equity.
 The basic differences between the financial statements of a merchandising enterprise
and a service enterprise include the COMS section of the Income Statement, and the
inclusion of Merchandise Inventory on the balance sheet as a current asset.
a. Income Statement
There are two widely used forms of the Income statement
1. Multiple –Step Income statement .It is called because of its many sections, sub-
sections & intermediate balances. It has the following parts:
a. Revenue from Sales - reports both cash and credit sales and their contra accounts.
b. Cost of Merchandise Sold-other descriptive terms frequently employed are Cost of
Goods Sold & Cost of sales.
c. Gross profit- the excess of net sales over Cost of Merchandise sold.
d. Operating Expenses - divided in to two categories: Selling & Administrative expenses.
 Selling expenses are incurred in connection with the sale of merchandise. E.g.
Salaries of sales force, store supplies used, depreciation of store equipment &
advertising, etc.
 Administrative expenses are incurred in the administration or general operations of
the business. E.g. Office salaries, Depreciation of office equipment and office
supplies used, etc.
e. Income from operation/Operating Income – the excess of gross profit over total
operating expenses.
f. Other Income / None Operating Income – revenues from sources other than the
principal activity of a business. E.g. Income from interest, rent, dividends & gains
resulting from the sale of plant assets, etc.
g. Other expenses-expenses that can not be associated definitely with operations. E.g.
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Interest expense, Losses incurred in the disposal of plant assets.

h. Net Income/Net loss- the final figure on the Income Statement.
2. Single step Income Statement .It derives its name from the fact that the total of all
expenses is deducted from the total of all revenues.
b.. Retained Earnings Statement
It summarizes the changes which have occurred in Retained earnings during the fiscal
period. It serves as a connecting link between the Income statement and the balance sheet
 The analysis of retained earnings may be added at the bottom of the Income
statement to form a combined Income & Retained earnings statement.
 Net income is a connecting link of the two statements.
 Criticism of the combined statement is that the net income figure is buried in the
body of the statement.
c. Balance sheet
It is a list of the Assets, Liabilities & Owner Equity of a business enterprise at a specific
date. It can be prepared in two forms:
1. Account Form –the traditional arrangement of assets on the left hand side of the
balance sheet with liabilities & owner’s equity on the right hand side .
2. Report form- the vertical arrangement of assets, liabilities & owner’s equity on the
balance sheet.
4.10 Journalizing & Posting Adjusting entries
The adjusting entries are prepared for a merchandising enterprise from the adjustment
columns of the worksheet. After the adjusting entries have been posted, the balance of all
assets, liability, capital, revenue, and expense accounts correspond exactly to the
amounts reported in the financial statements.
4.11 Journalizing & Posting Closing Entries
The closing entries are recorded in the journal immediately following the adjusting
entries. All of the temporary owner’s equity accounts are cleared of their balances,
reducing them to zero. The final effect of closing out such balances is a net decrease
or increase in the retained earning account.
1. Close all the Income statement accounts with Cr. balances to Income Summary.
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2. Close all the Income statement accounts with Dr balances to Income summary.
3. Close Income summary to Capital or Retained Earnings account.
4. Close Dividends/Drawings to Retained earnings or Capital account.
4.12 Post closing trial balance
After the closing entries are posted, the post closing trial balance is prepared. The only
new account from that of service enterprise is that Merchandise Inventory.
4.13 Reversing Entries
The year end procedures for merchandising enterprises are completed by journalizing &
posting the reversing entries for accrued expenses and accrued revenues.
 As the term implies, they are the exact reverse of the adjusting entries; the debits and
credits are merely reversed but does not change the basic nature of the amount
reversed.
 It simplifies the analysis of transaction and reduces the likelihood of errors in the
subsequent recording of transactions.
 It is required to keep consistency principle & to simplify the analysis of transactions.
4.14 Interim Statements
Financial statements issued for periods covering less than a fiscal year are called interim
statements. When interim financial statements are to be prepared, the adjustment data
are assembled & a work sheet is completed as of the interim date but the interim adjusting
& closing entries are not recorded in the accounts. E g. Monthly, Quarterly & Semiannual
reports.
 The analysis and recording of transactions is performed on a continuous basis
through out the fiscal year regardless of when financial statements are to be
prepared.
4.15 Correction of Errors
Occasional errors in journalizing & posting transactions are unavoidable. Procedures
used to correct errors in the journal & ledger varies according to the nature of the error &
the phase of the accounting cycle in which it is discovered.
Procedures for Correcting Errors
Nature of Error Correction Procedures
Journal entry is incorrect but not Draw a line through the error & insert
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posted. correct title or amount.

Journal entry is correct but posted Draw a line through the error & post
incorrectly. correctly.
Journal entry is incorrect & posted. Journalize & post a correcting entry.
Exercises
I. Recording Transactions of Merchandising Enterprise
1. Blue top Mercantile sells merchandise to Sunlight company on account for Br.42,
500, trade discount 10%, sales tax 2% terms 1/10, n/30 Fob Shipping point. Blue top pays
transportation charges of Br.1250 as an accommodation and adds it to the invoice. Then,
Blue top issues a credit memo for Br.2500 for merchandise returned and subsequently
receives the amount with in the discount period.
Required
I. Present Blue top Mercantile entries to record:
[a]the sale and transportation costs
[b]credit memorandum
[c]The receipt of the check for the amount due.
II. Present Sunlight company entries to record:
(a) The purchase, including the transportation charges
(b) The return of merchandise for credit
(c) The payment of the invoice with in the discount period
II. Periodic vs. Perpetual Inventory System
Record the following transactions of Zola Co for the month of Sep., 2005 assuming that the
company uses: (a) Periodic inventory system (b) perpetual inventory system
2005
Sep.1. Purchased goods from a vendor for Br.20, 000, FOB shipping point, 2/10, n/30.
2. Returned damaged merchandise costing Br.2500.
5. Paid freight costs of Br.800.
10. Paid amount due to the vendor in full.
15. Sold merchandise to its customers Br.15, 000, FOB destination, 2/10, n/30.
The merchandise was acquired for Br.14, 000.
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20.Received credit from customers for merchandise with a cost of Br.2, 000 &
retail price of Br.2,500.
23. Paid transportation cost of Br.600.
25. Received the amount due from customers.
III. Accounting Cycle of Merchandising Enterprises
Cox Co.
Work sheet
For the Year ended, 1990.
Account Trial Balance Adjustments Adjusted Trial Income Statement Balance Sheet
Title Balance
DR CR DR CR DR CR DR CR DR CR
Cash 62,950 62,950 62,950
Notes 40,000 40,000 40,000
Receivable
Account 60,880 60,880 60,880
Receivable
Interest (a)200 200 200
Receivable
Merchandis 59,700 (c)62,150 (b)59,700 62,150 62,150
e inventory
Office 1,090 (d)610 480 480
supplies
Prepaid 4,560 (e)1,910 2,650 2,650
insurance
Store 27,100 27,100 27,100
equipment
A/D-Store 2,600 (f)3,100 5,700 5,700
equip.
Office 15,570 15,570 15,570
equipment
A/D-office 2230 (g)2,490 4,720 4,720
Equip.
Accounts 22,420 22,420 22,420
payable
Salaries (h)1140 1,140 1,140
payable
Unearned 2,400 (i)600 1,800 1,800
rent
Notes 25,000 25,000 25,000
payable
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Capital 100,000 100,000 100000

stock
Retained 53,800 53,800 53800
earnings
Dividends 18,000 18,000
Income (b)59,700 © 62150 59,700 62150 59700
summary
Sales 720,185 720185
Sales R&A 6140 6140 6140
Sales 5790 5990 5790
discounts
Purchases 521980 521980 521980
Purchases 9100 9100
R&A
Purchases 2525 2525
discounts
Transportati 17400 17400 17400
on in
Sales 59250 (h)780 60030 60030
salaries
expense
Advertising 10860 10860 10860
expense
Dep. exp.- (f)3100 3100 3100
store equip.
Misc. selling 630 630 630
expense
Office 20660 (h)360 21020 21020
salaries
expense
Rent 8100 8100 8100
expense
Dep.exp.- (g)2490 2490 2490
off. equip
Insurance (e)1910 1910 1910
expense
Office (d)610 610 610
supplies
expense
Misc .Adm. 760 760 760
expense
Rent income (l)600 600 600
Interest 3600 (a)200 3800 3800
18
income
Interest 2440 2440 2440

expense
943860 943860 131900 131900 1012940 1012940 722960 798360 214580
===== ===== ===== ====== ======= =======
Net income 75400 75400
Total 798360 798360 289980 289980
====== ====== ===== ======
Adjustment Data:
a. Interest earned but not received on N/R --------------------$200
b. Beginning Merchandise Inventory -------------------------59,700
c. Ending Merchandise Inventory -----------------------------62,150
d. Office supplies used ----------------------------------------------610
e. Insurance expired -----------------------------------------------1,910
f. Depreciation of store equipment -------------------------------8,100
g. Depreciation of office equipment ------------------------------2,490
h. Salaries accrued but not paid:
Sales salaries -----------------------------------780
Office salaries ------------------------------------360------1,140
i. Rent earned from amount received in advanced in advance--600
Instructions:
1. Complete the worksheet for Cox Co.
2. Prepare a Multiple step Income statement.
3. Prepare a Retained earnings statement
4. Prepare a report form balance sheet.
5. Journalize the adjusting entries.
6. Journalize the closing entries.
7. Prepare a Post –closing trial balance.
8. Journalize any reversing entries as of Jan1. 1991
Answers to Selected Instructions
5. Adjusting Entries
19
Date Description Debit Credit

1990 Interest Receivable 200
Dec 31 Interest Income 200

31 Income summary 59,700
Merchandise Inventory 59,700
31 Merchandise Inventory 62,150
Income summary 62,150
31 Office supplies expense 610
Office supplies 610
31 Insurance expense 1,910
Prepaid insurance 1,910
31 Depreciation expense 3,100
Accumulated Depreciation-Store Equipment 3,100
31 Depreciation expense-office Equipment 2,490 2,490
Accumulated Depreciation-office Equipment
31 Sales salaries expense 780
Office salaries expense 360
Salaries payable 1140
31 Unearned Rent 600
Rent Income 600
6. Closing Entries
Date Description Debit Credit
1990 31 Sales 720,185
Dec. Purchases Returns & Allowances 9,100

Purchases Discounts 2,525
Interest Income 3,800
Rent Income 600
Income summary 736,210
Sales Returns & Allowances 6,140
Sales Discounts 5,790
20
Purchases 521,980
Transportation in 17,400
Sales salary expense 60,030
Advertising expense 10,860
Depreciation expense-store Equipment 3,100
Misc. selling expense 630
Office salaries expense 21,020
Rent expense 610
Depreciation exp.-office Equipment 2,490
Insurance expense 1,910
Office supplies expense 610
Misc. Adm. expense 760
Interest expense 2440
Retained Earnings 75,400
8. Reversing Entries
Description Debit Credit
Date
1991 Salaries payable 1,140
Jan. 1 Sales salaries expense 780
Office salaries expense 360
1 Interest Income 200
Interest Receivable 200
21
22

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ZEGHA Business College Accounting Fundamentals I

Merchandising Enterprise is a profit making business organization, which acquires

 Merchandises are goods bought for resale to customers.

 Detail is eliminated from the general journal.

b. Recording Purchase Discount

4.4 Transportation Costs, Sales Tax & Trade discount

4.5 Merchandise Inventory Systems

 It is divided in to Deferred expenses & Deferred revenues.

Financial Statements for Merchandising Enterprises

Interest expense, Losses incurred in the disposal of plant assets.

posted. correct title or amount.

Capital 100,000 100,000 100000

Interest 2440 2440 2440

Date Description Debit Credit

Dec 31 Interest Income 200

1990 31 Sales 720,185

Dec. Purchases Returns & Allowances 9,100

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