IGCAS PEER TUTORIAL

December 6, 2019
Merchandising - the entity purchases inventory, sells the inventory, and uses cash to
purchase more inventory.

Source Documents:
1. Sales Invoice 6. Check
2. Bill of Lading 7. Purchase Requisition
3. Statement of Account 8. Purchase Order
4. Official Receipt 9. Receiving Report
5. Deposit Slips 10. Credit Memorandum

TERMS OF TRANSACTIONS
1. Cash Discount – discounts for prompt payment. Given when goods sold on account is
paid within the credit period. Purchase discount from the buyer’s viewpoint and sales
discount from the seller’s viewpoint. Example: 2/10, n/30.
2. Trade Discount – encourages buyers to purchase products because of markdowns from
the list price. There is no accounting entry for trade discounts. Entries are based on
invoice price which is obtained by subtracting the trade discount from the list price.
3. Transportation Costs – F.O.B. means free on board
Who shoulders the Who pays the
Freight Terms
transportation costs? shipper?
FOB Destination, Freight Prepaid Seller Seller
FOB Shipping Point, Freight Collect Buyer Buyer
FOB Destination, Freight Collect Seller Buyer
FOB Shipping Point, Freight Prepaid Buyer Seller

INVENTORY SYSTEMS
1. Perpetual Inventory System – inventory is continuously updated. Both of cost of sales
account and inventory accounts has entries throughout the accounting period. Note:
Purchase returns and allowances and purchase discount is charged directly to inventory.
Freight In is recorded as inventory.
2. Periodic Inventory System – no entries are made to the inventory account as the
merchandise is bought and sold.

ADJUSTING ENTRIES
December 31 Income Summary xxx
Merchandise Inventory, beginning xxx

December 31 Merchandise Inventory, end xxx

Income Summary xxx
CLOSING ENTRIES
December 31 Income Summary xxx
Merchandise Inventory, beginning xxx
Temporary Accounts (Debit) xxx

December 31 Merchandise Inventory, end xxx

Temporary Accounts (Credit) xxx
Income Summary xxx

INCOME STATEMENT
IGCAS Traders
Income Statement
For the year-ended December 31, 2019
Net Sales:
Gross Sales xxx
Less: Sales Returns and Allowances xxx
Sales Discount xxx xxx
Net Sales xxx
 IGCAS PEER TUTORIAL
December 6, 2019
Cost of Sales:
Merchandise Inventory, 1/1/2019 xxx
Purchases xxx
Less: Purchase Returns and Allowances xxx
Purchase Discounts xxx xxx
Net Purchases xxx
Transportation In xxx
Net Cost of Purchase xxx
Goods Available for Sale xxx
Less: Merchandise Inventory, 12/31/19 xxx
Cost of Sales xxx
Gross Profit xxx
Operating Expenses xxx
Operating Profit xxx
Finance Costs xxx
Net Income xxx

SPECIAL JOURNALS
1. Sales Journal – lists all the credit sales from sales invoice.
2. Cash Receipts Journal – all transactions that involve receipt of cash.
3. Purchases Journal – all purchases on account.
4. Cash Disbursement Journal – all transactions that involve the disbursement of cash.
GENERAL JOURNALS – lists all the transactions that cannot be recorded appropriately in the
special journals.

MANUFACTURING – the manufacturer buys raw materials and processes them into finished
goods that its sells to customers.
ELEMENTS OF MANUFACTURING COSTS
1. Direct Materials – materials become physical part of a finished product. The costs can
be economically traceable to the finished product.
2. Direct Labor – compensation of employees or workers who physically convert raw
materials into finished goods.
3. Manufacturing Overhead – manufacturing costs that cannot be classified as direct
materials or direct labor (e.g. indirect materials, indirect labor, other indirect
manufacturing costs).
Prime costs = Direct Materials + Direct Labor
Conversion Costs = Direct Labor + Manufacturing Overhead

INVENTORY ACCOUNTS
1. Finished Goods Inventory – the cost of completed goods that have remained unsold at
the end of accounting period.
2. Work in Process Inventory – costs of goods that are in the manufacturing process.
3. Raw Materials Inventory – costs of direct materials on hand.
4. Factory Supplies Inventory – costs of unused indirect materials.

IGCAS Manufacturing
Statement of Cost of Goods Sold
For the year-ended December 31, 2019
Direct Materials Used:
Raw Materials Inventory, beg. xxx
Add: Net Cost of Purchases
Purchases – Raw Materials xxx
Less: Purchase Returns and Allowances xxx
Purchase Discount xxx xxx
Net Purchases xxx
Add: Transportation In xxx xxx
Raw Materials Available for Use xxx
 IGCAS PEER TUTORIAL
December 6, 2019
Less: Raw Materials Inventory, end xxx xxx
Direct Labor xxx
Manufacturing Overhead xxx
Total Manufacturing Costs xxx
Add: Work in Process, beg. xxx
Total Cost of Goods Placed in Process xxx
Less: Work in Process, end xxx
Cost of Goods Manufactured xxx
Add: Finished Goods, beg. xxx
Cost of Goods Available for Sale xxx
Less: Finished Goods, end xxx
Cost of Goods Sold xxx