USJ-R College of Commerce | Acctg 101 Rm 403 MWF 8:30 AM – 10:30 AM | NEF, CPA

Trading Business - An adjunct account (account added to another related account)

 Wholesaler/retailer as it is added to net purchases to compute for cost of goods
pruchased
Merchandising business – asset account representing goods bought
or acquired in saleable form and the intention of buying them is to Seller’s Books Buyer’s Books
sell it at a profit to the target customers
FOB SP, A/R xx Freight in xx
Freight Prepaid Cash xx A/P xx
Terms of Purchase
1. Cash on delivery FOB SP; Freight in xx
Purchases/Inventory/other asset account xx Freight Collect Cash xx
Cash xx
FOB Destination; Freight out xx
2. On Open Account No entry
Freight Prepaid Cash xx
Purchases/Inventory/other asset account xx
Accounts Payable xx Freight out xx A/P xx
3. With Promissory note issued on date of purchase A/R xx Cash xx
FOB Destination;
Purchases/Inventory/other asset account xx
Freight Collect First entry:
Notes payable xx
A/R xx
4. With down payment, balance on an open account
Sales xx
Purchases/Inventory/other asset account xx
Cash xx *FOB (Free on Board)
Accounts Payable xx
 FOB Shipping Point / FOB Seller – Buyer incurs freight charge
5. With down payment and a PN for the balance
 FOB Destination / FOB Buyer – Seller incurs freight charge
Purchases/Inventory/other asset account xx
 Freight Prepaid – Seller shoulders freight charge, pays in advance
Cash xx
 Freight Collect – Buyer shoulders/pays freight charge
Notes Payable xx
6. With down payment, balance partly covered by note and partly
Freight Out / Transportation Out
on account
- Operating expense  selling expense  Delivery expense
Purchases/Inventory/other asset account xx
Accounts Payable xx
Promissory Note
Notes Payable xx
- Document indicating written promise to pay a certain amount
of money to a payee upon demand or at a fixed future date
Returns and Allowances
signed by the maker
Return – involves transfer of goods back to the seller
- Interest-bearing or non-interest bearing
Allowances – does not require any transfer of goods at all
Credit memorandum – issued by seller to buyer as notice buyer’s liability
Terms to know:
is reduced
- Principal or face value
Debit memorandum – issued by seller to buyer as notice buyer’s liability
- Maker
is increased which may be due to erroneous price per invoice or
- Payee
erroneous charge of account to another customer
- Interest
- Maturity date
Returns & Allowances from Purchases on Account of Mdse. Invty,
- Maturity Value = Principal + Interest (if interest-bearing note)
Seller Buyer
Sales Return & Allowances xx Accounts Payable xx
Value-Added Tax (VAT) Entries
Accounts Receivable xx Purchase Ret & allowances xx

Returns & Allowances from Cash Purchases of Mdse. Inventory Input VAT / Input Tax – no impact on the cost of purchases but increases
Seller Buyer amount to be paid
Sales Return & Allowances xx Cash xx Output VAT / Output Tax – no effect on sales but increases amount to be
Cash xx Purchase Ret & allowances xx collected from customer

Discounts Purchases xx
 Trade discounts – granted for bulk/voluminous purchases; not Input Tax / Input VAT xx
recorded in books Cash xx
 when given in a series, apply in the order it is given #
 Cash discounts – incentive for early payment; recorded as either: Account Receivable xx
o Purchase Discount Sales xx
o Sales Discount Output Tax/Output VAT xx
#
To compute for cash discount: Output tax xx
List Price / Catalog Price xx Input tax xx
Trade Discount (xx) VAT Payable xx  Current Liability
Invoice Price Xx #
Freight in / Transportation In Xx VAT Payable xx
Gross Invoice Price Xx Cash xx
Returns & Allowances (xx)
Freight in / Transportation In* (xx) Credit Card Sales
Amount subject to Cash Discount Xx Service Charge / Credit Card Expense – reported by seller as a selling
x Cash Discount % % expense on its income statement
Cash Discount Xx

*insurance, freight, and similar items are not subject to cash discount.
Freight in / Transportation In

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 USJ-R College of Commerce | Acctg 101 Rm 403 MWF 8:30 AM – 10:30 AM | NEF, CPA

Inventory System
Transaction Periodic – expense method Perpetual – asset method
Purchases xx Mdse. Invty. Xx
Cash Purchases
Cash xx Cash xx
Purchases xx Mdse. Invty. Xx
Purchases of Mdse. On account
Accounts Payable xx Accounts Payable xx
Freight in xx Mdse. Invty. Xx
Freight on Mdse. bought and paid
Cash xx Cash xx
Account Payable xx Account Payable xx
Payment within the discount period Cash xx Cash xx
Purchase Discount xx Mdse. Invty. xx
Cash xx Cash xx
Sales xx Sales xx
Cash Sales
Cost of Goods Sold xx
Mdse. Invty. Xx
Accounts Receivable xx Accounts Receivable xx
Sales xx Sales xx
Sold Mdse. On Account on credit
Cost of Goods Sold xx
Mdse. Invty. xx
Sales Ret. & Allowances xx
Accounts Receivable xx
Receipt of mdse. Returned by customer Sales Ret. & Allowances xx
previously sold on account Accounts Receivable xx
Mdse. Invty. Xx
Cost of Goods Sold xx
Cash xx Cash xx
Collection within the discount period Sales Discount xx Sales Discount xx
Accounts Receivable xx Accounts Receivable xx

Completing the Accounting Cycle (Trading Business) Sales P xx

Inventory Adjustment
To close beginning inventory:
Income Summary xx
Merchandise Invty. Xx

To set up inventory end

Merchandise Invty. Xx
Income Summary xx

Inventory shrinkage or shortage

- In a perpetual system; the difference
- when inventory per records > inventory per physical count
AJE:
Cost of Goods Sold xx  when considered normal loss
Merchandise Invty. Xx

Worksheet
- merely discretionary and optional
- similar to preparation of worksheet for a service business
except there are new account titles introduced

2 alternative ways of presenting merchandise inventory:

1. Adjusting Method
o ^^ Refer to the entries under inventory adjustment above ^^
2. Closing Method / Direct Extension Method
- Extend merchandise inventory beginning to adjusted trial
balance column debit and income statement column debit
- merchandise inventory end is set up in income statement
column credit and SFP column debit.

Financial Statements
Forms of Income Statement
1. Functional Presentation
- Traditional and common form of I/S
- Aka Cost of Sales method
- Classified expenses acc. to their function (COGS, selling,
administrative and etc.)

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 USJ-R College of Commerce | Acctg 101 Rm 403 MWF 8:30 AM – 10:30 AM | NEF, CPA

Less Sales Discount P xx Cash paid for operating expenses (xx)

Sales Ret & All. xx Xx Cash generated from operations P xx
Net Sales xx Interest Paid (xx)
Less COGS Income Taxes Paid (xx)
Invty, beg. Xx Net Cash provided (used) by operating activities P xx
Net Purch.
2. Indirect Method
Gross Purch. P Xx
- Adjusts accrual basis net profit income (loss) for the effects of
Freight-in Xx
non-cash transactions and non-cash items such as depreciation
Pur Ret & All. P Xx
expense
Pur. Discount xx (xx)
- Adv: highlights factors that cause net income and cash from
TGAS Xx operations to differ
Less: Invty, end (Xx) (xx)
Gross Profit / Gross Margin / Gross Income P xx
Add Other Revenue & Gains
:
Interest Revenue P xx
Rent Revenue Xx
Commission Revenue Xx xx
Total Income P xx
Less Expenses
Selling Expense P xx
General & Adm. Exp Xx
Other expenses & losses Xx
Finance Cost Xx xx
Pre-tax Income or Taxable Income P Xx
Less: Income Tax Xx
Net Income after Tax (Net loss) P xx

2. Natural Presentation
- Nature of Expense method
- Expenses are aggregated according to their nature and not
allocated among the various functions within the entity

Gross Sales P xx
Less Sales Discount P xx
Sales Return & Allowances xx Xx
Net Sales P Xx
Other Income & Gains Xx
Investment Income Xx
Total Income P xx
Less Expenses
(Increase)/Decrease in Inventory P xx
Net Purchases:
Gross Purchases Xx
Purchase Ret. & Allowance (xx)
Purchase Discount (xx)
Freight in xx
Total Xx
Sales Commission xx
Advertising expense Xx
Supplies expense Xx
Depreciation expense Xx
Other expenses and losses Xx
Finance cost Xx xx
Pre-tax Income or Taxable Income P xx
Income Tax (xx)
Net Income After tax (Net Loss) P xx

Statement of Cash Flows

Ways of reporting cash flows from operating activities

1. Direct Method
- Entities are encouraged to use this method

Cash flows from Operating Activities

Cash receipts from customers P xx
Cash paid to suppliers (xx)
Cash paid to employees (xx)

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