Acctg.

Ed 1 - Financial Accounting & Reporting

Unit 3

Completing Accounting Cycle

Module 10

Accounting Cycle of a Merchandising Business

Acctg. Ed 1 - Financial Accounting & Reporting

Unit 3 – Completing Accounting Cycle

Unit 3 discuss the what and how of the remaining steps in accounting cycle both in
service and merchandising businesses.

Module 10– Accounting Cycle-Merchandising Business

This module covers concepts and application in preparation of statement of Cost of

Goods Sold and Gross Profit and completing the accounting cycle of a merchandising business.

Objectives

At the end of the module, you should be able to:

1. Prepare the Statement of Cost of Goods Sold and Gross Profit.

2. Complete the accounting cycle of a merchandising business.

Introduction
A merchandising business is one that buys and sells goods without changing their physical
form.

Inventory
The main difference between a merchandising business and a service business is that a
merchandising business necessarily holds inventory of physical goods for sale.

Inventory refers to the goods that a merchandising business has purchased and primarily
intended for resale, normally in their original form and without any further processing.

Inventory Systems
Inventories are accounted for using either of the following inventory systems:
1. Perpetual inventory system; or
2. Periodic inventory system

Perpetual inventory system

In layman’s terms, the word “perpetual” means continuing forever (or “tuloy tuloy” or “walang
hanggan” in Filipino).

The perpetual inventory system is called as such because under this system, the “inventory”
account (or “Merchandise inventory” account) is updated each time a purchase or sale is made.
Thus, the “Inventory” account shows a continuing or running balance of the goods on hand.

Moreover, records called “stock cards” and “stock ledger cards” are maintained under this
system, from which the quantities and balances of goods on hand and goods sold can be
determined at any given point of time without the need of performing a physical count of
inventories.

All increase and decrease in inventory, such as purchases, freight-in, purchase returns,
purchase discounts, cost of goods sold, and sales returns are recorded in the “Inventory” (or
Acctg. Ed 1 - Financial Accounting & Reporting

“Merchandise inventory”) account. “Cost of goods sold” is also updated each time a sale or sale
return is made.

The perpetual inventory system is commonly used for inventories that are specifically
identifiable and are relatively high valued, such as cars, machineries, furniture and heavy
equipment.

Periodic inventory system

In layman’s terms, the word “periodic” means occurring or recurring at regular intervals (or
“pana-panahon” in Filipino).

The periodic inventory system is called as such because under this system, the “Inventory”
account (or “Merchandise inventory” account) is updated only when a physical count of
inventory is performed. Thus, the amounts of inventory and cost of goods sold are determined
only periodically.

Under this system, the business does not maintain records that show the running balances of
inventory on hand and cost of goods sold as at any given point of time. To determine this
information, a physical count of the quantity of goods on hand must be performed periodically
(e.g., on a daily, weekly, monthly, or annual basis). The quantity counted is then multiplied by
unit cost to get the balance of the “Inventory” account. This amount is then used to compute for
the “Cost of goods sold,” which is the residual amount in the formula below

Beginning inventory P xx
Add: Net purchases* xx
Total Goods Available for Sale xx
Less: Ending inventory (physical count) (xx)
Cost of Goods Sold P xx

* “Net purchases” is computed as follows

Purchases P xx
Add: Freight-in xx
Less: Purchase return (xx)
Less: Purchase discounts xx
Net Purchases P xx

“Freight-in” is an adjunct account (addition), while “Purchase returns” and “Purchase

discounts” are contra accounts (deductions), to “Purchases” when computing for “Net
purchases.”

• Purchases – the account used to record purchases of inventory under the periodic
system
• Freight-in (Transportation-in) – the account used to record the shipping costs incurred
on purchases of inventory under the periodic system.
Acctg. Ed 1 - Financial Accounting & Reporting

• Purchase returns – the account used to record returns of purchased goods to the
supplier.
• Purchase discounts – the account used to record cash discounts availed of on the
purchased goods.

Under the periodic inventory system, purchases of inventory are debited to the “Purchases”
account, shipping costs are debited to the “Freight-in” account, purchase returns are
credited to the “Purchase returns” account, and purchase discounts are credited to the
“Purchase discounts” account. No entry is made to recognize cost of goods sold when
inventory is sold.

Because the “Inventory” account is updated only after a physical count, prior to the count,
the balance of the inventory account represents the beginning balance or the balance from
the last physical count. Consequently, the balance of “Cost of goods sold” prior to a physical
count is zero.

The periodic inventory system is commonly used for inventories that are normally
interchangeable, relatively low valued, and have a fast turnover rate, such as grocery items,
medicines, electrical parts, and office supplies

Illustration: Perpetual vs. Periodic (Journal Entries)

Perpetual System Periodic System

1. You purchased goods worth P10,000 on account.
Inventory 10,000 Purchases 10,000
Accounts Payable 10,000 Accounts Payable 10,000

2. You paid shipping costs of P1,000 on the purchase above.

Inventory 1,000 Freight-in 1,000
Cash 1,000 Cash 1,000

3. You returned damaged goods worth of P2,000 to the supplier.

Accounts payable 2,000 Accounts payable 2,000
Inventory 2,000 Purchase returns 2,000

4. You sold goods costing P5,000 for P20,000 on account.

Accounts receivable 20,000 Accounts receivable 20,000
Sales 20,000 Sales 20,000

Cost of goods sold 5,000 No entry

Inventory 5,000

5. A customer returned goods with sale price of P800 and cost of P200.
Sales return 800 Sales return 800
Accounts receivable 800 Accounts receivable 800

Inventory 200 No entry

Cost of goods sold 200
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Notes:
• Under the perpetual inventory system, all increases and decreases in the goods on
hand are recorded through the “Inventory” account. Also, cost of goods sold is debited
when inventory is sold and credited when there is a sales return.
• Under the periodic inventory system, the increases and decreases in the goods on
hand are recorded through the purchases, freight-in, purchase returns, and purchases
discounts accounts. Cost of goods sold is not recorded.
Under the perpetual inventory system, the balances of inventory on hand and cost of goods
sold are readily determinable from the ledger.

Inventory
Beg. Bal.
(1) Purchases 10,000 2,000 (3) Purchase return
(2) Freight-in 1,000 5,000 (4) Cost of goods sold
(3) Sales return 200
End. Bal. 4,200

Cost of goods sold

(4) Cost of goods sold 5,000 200 (5) Cost of goods sold

End. Bal. 4,800

Under the periodic inventory system, the balances of inventory on hand and cost of goods
sold are not readily determinable without performing first a physical count of the quantity of
goods on hand.

Assume that a physical count reveal inventory on hand of 105 units costing P40 per unit. Using
the formula above, the inventory on hand cost of goods sold under the periodic inventory system
are determined as follows:

Beginning inventory P 0
Add: Net Purchases:
Purchases (1) P10,000
Freight-in (2) 1,000
Purchase return (3) (2,000)
Purchase discounts - 9,000
Total Goods Available for Sale - 9,000
Less: Ending inventory (105 units x P40 per unit) - (4,200)
Cost of Goods Sold - P4,800
-
Acctg. Ed 1 - Financial Accounting & Reporting

Summary:

Perpetual system Periodic system

• All increases and decreases in inventory • Increases and decreases in inventory
are recorded in the “Inventory” account. during the period are recorded in the
“purchases,” “freight-in,” “purchase
returns,” and “purchase discounts”
accounts, as appropriate.
• “Cost of goods sold” is debited when • “Cost of goods sold” is not recorded.
inventory is sold and credited for sales
returns.
• Physical count is performed only to check • Physical count is necessary to determine
the accuracy of the ledger balances the balances of inventory on hand and
cost of goods sold.
• Physical count is performed only to check • Physical count is necessary to determine
the accuracy of the ledger balances the balances of inventory on hand and
cost of goods sold.
• Does not require the use of any formula to • Requires the use of the following formula
determine cost of goods sold because this when determining cost of goods sold:
information is readily available from the
BI xx
ledger.
Net Purchases xx
TGAS
EI (physical count) (xx)
COGS P xx

Gross Profit
Gross profit (gross income, gross margin, or sales profit) is simply “Net sales minus Cost of
Goods Sold”

Net Sales P xx
Less: Cost of Goods Sold ( xx)
Gross profit P xx

Gross profit represents the profit a business earns after deducting the cost of the goods sold or
services rendered, but before deducting other expenses.

Profit (or Net profit) is different from gross profit. Profit is the amount derived after deducting all
other expenses from the gross profit.

Net sales* P xx
Cost of Goods Sold (xx)
Gross profit xx
Rent expense (xx)
Depreciation expense (xx)
Salaries expense, etc. (xx)
Profit (Net profit) P xx
Acctg. Ed 1 - Financial Accounting & Reporting

• “Net sales” is Total sales minus Sale returns and discounts. This is shown in the formula
below

Sales xx
Less: Sales returns (xx)
Less: Sales discounts. (xx)
Net sales P xx

“Sales returns” and “Sales discounts” are contra accounts (deductions) to “Sales” when
computing for “Net sales.”

• Sales – include both cash sales and credit sales.

• Sales returns – the account used to record goods returned by customers
• Sales discounts – the account used to record cash discounts given to customers

Illustration 1: Perpetual inventory system

Account titles Dr. Cr.

Sales P70,000
Sales discounts P5,000
Sales returns 10,000
Cost of goods sold 30,000
Rent expense 5,000
Supplies expense 1,000
Depreciation expense 2,000
Salaries expense 7,000

Requirement: Prepare the income statement for the period.

Solution:
Your Business
Income Statement
For the period ended December 31, 20x1

Sales P70,000
Sales discounts (5,000)
Sales returns (10,000)
Net Sales 55,000
Cost of goods sold (30,000)
Gross profit 25,000
Rent expense (5,000)
Supplies expense (1,000)
Depreciation expense (2,000)
Salaries expense (7,000)
Profit P10,000
Acctg. Ed 1 - Financial Accounting & Reporting

Illustration 2: Periodic inventory system

(The cost of goods sold formula that we have discussed earlier under the periodic inventory
system is commonly used by bars and restaurants whose inventories have a fast turnover rate,
i.e., quickly sold.)

Fact pattern:
You have a bar. At opening time, you have 50 bottles of a beverage with a unit cost of P20
each. During business hours, you had your supplier deliver to you 10 cases of the beverage.
Each case contains 24 bottles with a unit cost of P20 each. At closing time, you have 2 cases
and 4 bottles with a unit cost of the beverage left. Your sale price for each bottle of a beverage
is P70.

Requirement: Prepare a “Statement of Cost of Goods Sold and Gross Profit.”

Solution:

A “Statement of Cost of Goods Sold and Gross Profit” is not a formal accounting report
that is prepared for external reporting. Nonetheless, the report can be prepared for internal
reporting purposes.

The “Statement of Cost of Goods Sold and Gross Profit” is similar to the “Income Statement.”
It is actually a part a part of an income statement. However, the Statement of Cost of Goods
Sold and Gross Profit ends with gross profit, meaning it does not show information about the
other expenses.

Using our previous formula, let us compute for the cost of goods sold:

In units (bottles) Unit Cost In pesos

Beginning inventory 50 P20 P1,000
Add: Net purchases 240* P20 4,800
Total goods available for sale 290 5,800
Less: Ending inventory (52)** P20 (1,040)
Cost of goods sold 238 P4,760

* (10 cases x 24 bottles) = 240

** [(2 cases x 24 bottles) + 4 bottles] = 52

After computing the amounts above, you should check your sales register to see if you have a
recorded sale of 238 bottles or P16,660 (238 bottles x P70 sale price per bottle).
Acctg. Ed 1 - Financial Accounting & Reporting

Statement of Cost of Goods Sold and Gross Profit

Your Bar
Statement of Cost of good sold and Gross profit
For the period ended December 31, 20x1

Sales P16,600
Cost of goods sold:
Beginning inventory P1,000
Add: Net purchases 4,800
Total goods available for sale 5,800
Less: Ending inventory (1,040) (4,760)
P11,900

Recall the following:

• Gross profit = Net sales – Cost of goods sold
• Net sales = Total sales – Sales returns & discounts
• Cost of goods sold = Beginning inventory + Net purchases – Ending inventory
• Net purchases = Purchases + Freight-in – Purchase returns & discounts

T-account analysis
Most accounting problems can be solved much easier using T-account analysis than formulas.

The beg. balance is placed on the Cost of goods sold is placed on the
debit side because “Inventory” is credit side because the goods sold
an asset, and assets have a decrease the balance of inventory;
normal debit balance i.e., debit and credit means minus

Inventory
Dr. Cr.
Beg. Balance xx
Net purchases xx xx COGS
xx

Net purchases is placed on the The ending balance is placed on the

debit side because purchases
increase the balance of inventory,
i.e., debit and debit means add
credit side (opposite of the beg.
balance) in order to facilitate the
“squeezing” of amounts. The sum of
the amount on the debit side of the
T-account must be equal to the sum
of the amounts on the credit side.
Acctg. Ed 1 - Financial Accounting & Reporting

Case #1: Ending inventory

Inventory, beg. P40,000; Net purchases, P180,000; Cost of goods sold, P200,000. How much
is the ending inventory?

Solution:

Step 1: Place the given information on the T-account.

Inventory

Beginning balance 40,000

Net Purchases 180,000 200,000 Cost of goods sold
? Ending balance

Step 2: Squeeze for the missing amount.

Inventory

Beginning balance 40,000

Net Purchases 180,000 200,000 Cost of goods sold
20,000 Ending balance

*40,000 Dr. + 180,000 Dr. – 200,000 Cr. = 20,000

Notice that the sum of the amounts on the debit side of the T-account is equal to the sum of
the amounts on the credit side (40,000 + 180,000 = 200,000 + 20,000).

Case #2: Cost of goods sold

Inventory, beg. P60,000; Net purchases, P270,000; Inventory, end, P90,000. How much is the
cost of goods sold?

Solution:
Inventory

Beginning balance 60,000

Net Purchases 270,000 240,000 Cost of goods sold (squeeze)
90,000 Ending balance

*60,000 Dr. + 270,000 Dr. – 90,000 Cr. = 240,000

Acctg. Ed 1 - Financial Accounting & Reporting

Case #3: Net purchases

Inventory, beg. P40,000; Cost of goods sold, P200,000; Inventory, end, P20,000. How much is
the net purchases?

Solution:
Inventory

Beginning balance 40,000

Net Purchases (squeeze) 180,000 200,000 Cost of goods sold
20,000 Ending balance

Case #4: Inventory, beg.

Net purchases, P270,000; Cost of goods sold, P240,000; Inventory, end., P90,000. How much
is the beginning inventory?

Solution:
Inventory

Beg. balance (squeeze) 60,000

Net Purchases 270,000 240,000 Cost of goods sold
90,000 Ending balance

Case #5: Total goods available for sale.

Net purchases, P270,000; Cost of goods sold, P240,000; Inventory, end., P90,000. How much
is the total goods available for sale?

Solution:
Inventory

Beg. balance (squeeze) Irrelevant*

Net Purchases 270,000 240,000 Cost of goods sold
90,000 Ending balance

*Beginning inventory is irrelevant in solving the requirement of the problem. Recall from the
previous formula that “Inventory, beg. + Net purchases = TGAS.” However, we know from the
T-account that “Inventory, beg. + Net purchases “equals” COGS + Inventory, end,” Thus, we
can solve for the total goods available for sale as follows:

P240,000 COGS + 90,000 Inventory, end. = P330,000 TGAS

Case #6: Increase in inventory - COGS

Net purchases, P270,000; Increase in inventory during the year, P90,000. How much is the
cost of goods sold?
Acctg. Ed 1 - Financial Accounting & Reporting

Solution:

Step 1: Place the given information on the T-account.

Inventory

Beginning balance 0
Net Purchases 270,000 ? Cost of goods sold
90,000 Ending balance

• The beginning inventory is assigned a value of zero and the ending inventory is assigned
the increase of P90,000 to reflect the net increase of P90,000 in inventory during the period,
i.e., P90,000 end. – P0 beg = P90,000 net increase.

Step 2: Squeeze for the missing amount.

Inventory

Beginning balance 0
Net Purchases 270,000 180,000 Cost of goods sold
90,000 Ending balance

Case #7: Decrease in inventory - COGS

Net purchases, P270,000; Decrease in inventory during the year, P90,000. How much is the
cost of goods sold?

Solution:

Step 1: Place the given information on the T-account.

Inventory

Beginning balance 90,000

Net Purchases 270,000 ? Cost of goods sold
0 Ending balance

• The beginning inventory is assigned the decrease of P90,000 and the ending inventory is
assigned a value of zero to reflect the net decrease of P90,000 in inventory during the
period, i.e., P90,000 beg. – P0 end. = P90,000 net decrease.
Acctg. Ed 1 - Financial Accounting & Reporting

Step 2: Squeeze for the missing amount.

Inventory

Beginning balance 90,000

Net Purchases 270,000 360,000 Cost of goods sold
0 Ending balance

Recording in the General and Special Journals

Recall the following concepts:
1. Special journal – is used to record transactions of a similar nature. Examples:
a. Sales journal – used to record sales on account.
b. Purchases journal – used to record purchases of inventory on account.
c. Cash receipts journal – used to record all transactions involving receipts of cash
d. Cash disbursements journal – used to record all transactions involving payments of
cash.

2. General Journal – All other transactions that cannot be recorded in the special journals
are recorded in the general journal.

Illustration: General vs. Special Journal

A business had the following transaction during a period:
1. Sold goods for P30,000 cash.
2. Sold goods for P50,000 on account.
3. Purchased goods worth P10,000 for cash.
4. Purchased goods worth P20,000 on account.
5. Received P8,000 rent income from a tenant.
6. Acquired equipment worth P100,000 in exchange for a one-year note payable.
7. Collected P25,000 accounts receivable

Requirements:
a. Identify the type of journal each of the transactions above shall be recorded
b. Record the transactions in the Special journals or General journal.

Solutions:

Requirement (a): Type of journal

Transaction Nature of transaction Type of Journal

1 Cash collection Cash receipts journal
2 Sale on account Sales journal
3 Cash disbursement Cash disbursement journal
4 Purchases on account Purchases journal
5 Cash collection Cash receipts journal
Acctg. Ed 1 - Financial Accounting & Reporting

Requirement (b): Recording in the Special journals and General journal

A summary of the journal entries is provided below so you can check how they are recorded in
the journals:

Cash 30,000
1
Sales 30,000
Accounts receivable 50,000
2
Sales 50,000
Purchases (periodic system assumed) 10,000
3
Cash 10,000
Purchases 20,000
4
Accounts payable 20,000
Cash 8,000
5
Rent income 8,000
Equipment 100,000
6
Note payable 100,000
Cash 25,000
7
Accounts receivable 25,000

Special journals

CASH RECEIPTS JOURNAL

Accounts
receivable Sales Sundry Cash
Date Description (Credit) (Credit) (Credits) Amount (Debit)
1 Collection on sale 30,000 30,000
5 Collection on rent Rent Income 8,000 8,000
7 Collection on account 25,000 25,000
receivable

CASH DISBURSEMENT JOURNAL

Accounts
payable Purchases Sundry Cash
Date Description (Debit) (Debit) (Debits) Amount (Credit)
3 Payment for cash 10,000 10,000
purchase

SALES JOURNAL
Accounts Receivable Invoice No. Sales tax Sales
Date (Debit) Customer (Credit) (Credit)
2 50,000 11001 Yu Tang Corp. xx* 50,000

PURCHASE JOURNAL
Accounts Payable Purchase Purchase tax Purchases
Date (Credit) No. Supplier (Debit) (Debit)
4 20,000 345 Lah Kuh Co. xx* 20,000

*Taxes are ignored to simplify the illustration.

Acctg. Ed 1 - Financial Accounting & Reporting

General journal

GENERAL JOURNAL
Account Title Acct.
Date Nos. Debit Credit
6 Equipment 190 100,000 100

Notes payable 220 100,000

To record the
acquisition of equipment in
exchange for note payable

Posting to the General and Subsidiary Ledgers

Recall the following concepts:
a. General ledger – contains all the accounts appearing in the trial balance.
b. Subsidiary ledger – provides a breakdown of the balances of controlling accounts.

Illustration: General Ledger vs. Subsidiary Ledgers

A business had the following credit sale transactions during a period:
1. Sold goods to Uh Tang Co. for P50,000 on account
2. Sold goods to Lieze Tah Corp. for P30,000 on account.
3. Collected P 10,000 from Uh Tang Co. as partial payment for its account receivable.

Requirements: Post the transactions to the General Subsidiary Ledgers.

Solution:

A summary of the journal entries is provided below:

Accounts receivable 50,000
1
Sales 50,000
Accounts receivable 30,000
2
Sales 30,000
Cash 10,000
3
Accounts receivable 10,000

Subsidiary Ledger

SUBSIDIARY LEDGER
Uh Tang Co.
Date Ref. Debit Credit Balance
Bal. forwarded 0
1 50,000 50,000
10,000 40,000

Lieze Tah Co.

Date Ref. Debit Credit Balance
Bal. forwarded 0
2 30,000 30,000
Acctg. Ed 1 - Financial Accounting & Reporting

GENERAL LEDGER

ACCOUNTS RECEIVABLE No. 120

Date Ref. Debit Credit Balance
Bal. forwarded 0
1 50,000 50,000
2 30,000 80,000
3 10,000 70,000

The Accounting Cycle of a Merchandising Business

Review of steps in the accounting cycle:
1. Identifying and analyzing
2. Journalizing
3. Posting
4. Unadjusted trial balance
5. Adjusting entries
6. Adjusted trial balance (and/or Worksheet)
7. Financial statements
8. Closing entries
9. Post-closing trial balance
10. Reversing entries

Applying the accounting cycle under a Perpetual inventory system and Periodic inventory
system.

Illustration 1: Perpetual inventory system

You opened a souvenir store called “My Souvenir” on November 1, 20x1. The following were
the transactions during the period.

Nov. Transactions
1 Provided P50,000 cash as initial investment to the business.
1 Acquired equipment for P36,000 cash. The equipment has a useful life of 4 years.
1 Paid a one-year insurance premium of P12,000. (Use ‘asset method’).
12 Purchased inventory costing P15,000 for cash.
14 Sold goods for P15,000 cash. The cost of sales is P2,000.

Dec. Transactions
1 Sold goods with sale price of P12,000 in exchange for a P12,000, 10%, one-year note
receivable. Principal and interest are due at maturity. The cost of sales is P1,500.
5 Purchased inventory for P2,000 on account.
26 Sold goods for P17,000 on account. The cost of sales is P3,000.
27 Paid P1,000 account payable.
29 Collected P10,000 account receivable.

Requirement: Complete the accounting cycle.

Solutions:
Acctg. Ed 1 - Financial Accounting & Reporting

Steps 1 & 2: Identifying and analyzing & Journalizing

The transactions are recorded in the journal as follows:
November transactions:

Nov. Cash 50,000

1, Owner’s equity 50,000
20x1 To record the owner’s investment to the
business
Nov. Equipment 36,000
1, Cash 36,000
20x1 To record the acquisition of equipment for
cash
Nov. Prepaid insurance 12,000
1, Cash 12,000
20x1 To record the prepayment of insurance
Nov. Inventory 15,000
1, Cash 15,000
20x1 To record the acquisition of inventory for
cash
Nov. Cash 15,000
1, Sales 15,000
20x1 To record cash sales

Cost of goods sold 2,000

Inventory 2,000
To record the cost of inventory sold as
expense

December transactions:
Dec. Notes receivable 12,000
1, Sales 12,000
20x1 To record sale in exchange for note

Cost of goods sold 1,500

Inventory 1,500
To record the cost of inventory sold as
expense
Dec. Inventory 2,000
5, Accounts payable 2,000
20x1 To record the acquisition of inventory on
account
Dec. Accounts receivable 17,000
26, Sales 17,000
20x1 To record sale on account

Cost of goods sold 3,000

Inventory 3,000
To record the cost of inventory sold as
expense
Acctg. Ed 1 - Financial Accounting & Reporting

Dec. Accounts payable 1,000

27, Cash 1,000
20x1 To record the payment of account payable
Dec. Cash 10,000
29, Accounts receivable 10,000
20x1 To record the collection of account
receivable

Step 3: Posting
The journal entries are posted to the ledger as follows:

ASSETS
Cash Inventory
Nov. 1 50,000
36,000 Nov. 1 Nov. 12 15,000 2,000 Nov. 14
12,000 Nov. 1 1,500 Dec. 1
Nov.14 15,000 15,000 Nov. 12 Dec. 5 2,000 3,000 Dec. 26
Dec. 29 10,000 1,000 Dec. 27
Bal. 11,000 Bal. 10,500

Accounts Receivable Notes Receivable

Dec. 26 17,000 10,000 Dec. 29 Dec. 1 12,000
Bal. 7,000 Bal. 12,000

Prepaid Insurance Equipment

Nov. 1 12,000 Nov. 1 36,000
Bal. 12,000 Bal. 36,000

LIABILITIES
Accounts payable
Dec. 27 1,000 2,000 Dec. 5
1,000 Bal.

EQUITY
Owner’s equity
50,000 Nov. 1
50,000 Bal.

INCOME EXPENSES
Sales Cost of goods sold
15,000 Nov. 14 Nov. 14 2,000
12,000 Dec. 1 Dec. 1 1,500
17,000 Dec. 26 Dec. 26 3,000
44,000 Bal. Bal. 6,500
Acctg. Ed 1 - Financial Accounting & Reporting

Step 4: Unadjusted trial balance

The unadjusted trial balance is prepared as follows

My Souvenir
Unadjusted Trial Balance
December 31, 20x1

Accounts Debit Credit

Cash P11,000
Accounts receivable 7,000
Notes receivable 12,000
Inventory 10,500
Prepaid insurance 12,000
Equipment 36,000
Accounts payable P1,000
Owner’s equity 50,000
Sales 44,000
Cost of sales 6,500
P95,000 P95,000

Step 5: Adjusting entries

Additional information:
The following information was identified on December 31, 20x1:
a. Of the total accounts receivable, P1,000 is doubtful of collection.
b. Salaries earned by employees during the period but were not yet paid amounted to P10,000.

Recall the following concepts:

Common adjusting entries:
1. Accruals of income and expenses
2. Recognition of depreciation expense and bad debts expense
3. Deferrals of income and expenses (splitting of ‘mixed accounts’).

Guide Analyses
1. Accruals of income and expenses • You have notes receivable. Therefore,
interest income shall be recognized for
the period.
• There are unpaid salaries [see ‘additional
information (b)’]. Salaries expense shall
be accrued.
2. Recognition of depreciation expense and • You have equipment, Depreciation
bad debts expense expense shall be recognized for the
period.
Acctg. Ed 1 - Financial Accounting & Reporting

• A P1,000 account receivable is doubtful of

3. Deferrals of income and expenses •
(splitting of ‘mixed accounts’).
collection [see ‘additional information (a)’].
Bad debt expense shall be recognized.
You have prepaid insurance. A portion
of this must have already been used up.
The used portion shall be recognized as
insurance expense. The remaining
unused portion shall remain in prepaid
insurance.

From our analyses above, we have identified adjustments for the following:
1. Interest income
2. Salaries expense
3. Depreciation expense
4. Bad debts expense
5. Recognition of the expired portion of the prepayment as insurance expense and deferral of
the unexpired portion as prepaid insurance.

AJE #1: Interest income

i = Prt
P = P12,000
r = 10%
t = 1 month (Dec. 1 - Dec. 31, 20x1) over 12 months in a year or (1/12)

interest = (12,000 x 10% x 1/12) = 100

The adjusting entry for the accrued interest income is as follows:

Dec. 31, Interest receivable 100

20x1
(AJE 1) Interest income 100
To accrue interest income earned but
not yet collected

AJE #2: Salaries expense

The P10,000 unpaid salaries are accrued as follows:
Dec. 31, Salaries expense 10,000
20x1
(AJE 2) Salaries payable 10,000
To accrue salaries expense incurred but
not yet paid

AJE #3: Depreciation expense

The annual depreciation expense is computed as follows:

Cost P36,000
Divide by: Useful life 4
Annual depreciation expense P9,000
Acctg. Ed 1 - Financial Accounting & Reporting

However, because the equipment has only been used for 2 months in 20x1 (Nov. 1 to Dec.
31, 20x1), only a 2-month depreciation expense shall be recognized. This computed as follows:

Annual depreciation P9,000

Multiply by: 2/12
Depreciation expense P1,500

Shortcut: (36,000 x 1/4 x 2/12 = 1,500)

The adjusting entry is as follows:

Dec. 31, Depreciation expense 1,500
20x1
(AJE 3) Accumulation depreciation 1,500
To record depreciation expense for the
period

The carrying amount of the equipment on December 31, 20x1 is determined as follows:

Equipment P36,000
Accumulated depreciation (1,500)
Equipment - net P34,500

AJE #4: Bad debts expense

The adjusting entry to recognize the P1,000 uncollectible account is as follows:
Dec. 31, Bad debts expense 1,000
20x1
(AJE 4) Allowance for bad debts 1,000
To record bad debts expense for the
period

The carrying amount of accounts receivable on December 31, 20x1 is determined as follows:

Accounts receivable P7,000

Allowance for bad debts (1,000)
Accounts receivable - net P6,000

AJE #5: Prepaid insurance/Insurance expense

Previous transaction:
1 Paid a one-year insurance premium of P12,000. (Use ‘asset method’).

Year-end analysis: Expired portion (Insurance expense):

2 mos. – Nov. 1 – Dec. 31, 20x1
(12,000 x 2/12) = P2,000
P12,000
1-year insurance prepaid
on Nov. 1, 20x1 Unexpired portion (Prepaid insurance):
10 mos. – Jan. 1 – Oct. 31, 20x2
(12,000 x 10/12) = P10,000
Acctg. Ed 1 - Financial Accounting & Reporting

The adjusting entry to record the used up portion of the prepaid insurance as expense is as
follows:

Dec. 31, Insurance expense 2,000

20x1
(AJE 5) Prepaid insurance 2,000
To record insurance expense

Step 6: Adjusted trial balance (Worksheet)

The adjustments are placed on the worksheets as follows:
s
My Souvenir
Worksheet
For the two monts ended December 31, 20x1
Accounts Unadjusted Trial Balance Adjustments Adjustments Trial Balance
Debit Credit Debit Credit Debit Credit
Cash 11,000 11,000
Accounts Receeivable 7,000 7,000
Notes receivable 12,000 12,000
Inventory 10,500 10,500
Prepaid insurance 12,000 2,000 10,000
Equipment 36,000 36,000
Accounts payable 1,000 1,000
Owner's equity 50,000 50,000
Sales 44,000 44,000
Cost of goods sold 6,500 6,500

Adjustments:
Interest receivable 100 100
Interest income 100 100
Salaries expense 10,000 10,000
Salaries payable 10,000 10,000
Depreciation expense 1,500 1,500
Accumulated depreciation 1,500 1,500
Bad debts expense 1,000 1,000
Allowance for bad debts 1,000 1,000
Insurance expense 2,000 2,000

95,000 95,000 14,600 14,600 107,600 107,600

A summary of the adjusting entries is provided below to facilitate your understanding of the
partial worksheet above:

Interest receivable 100

AJE 1
Interest income 100
Salaries expense 10,000
AJE 2
Salaries payable 10,000
Acctg. Ed 1 - Financial Accounting & Reporting

Depreciation expense 1,500

AJE 3
Accumulated depreciation 1,500
Bad debts expense 1,000
AJE 4
Allowance for bad debts 1,000
Insurance expense 2,000
AJE 5
Prepaid insurance 2,000

Step 7: Financial statements

The income statement and balance sheet columns of the worksheet are completed as follows:

My Souvenir
Worksheet
For the two monts ended December 31, 20x1
Accounts Unadjusted Trial Balance Adjustments Adjustments Trial Balance Income Statement Balance Sheet
Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit
Cash 11,000 11,000 11,000
Accounts Receeivable 7,000 7,000 7,000
Notes receivable 12,000 12,000 12,000
Inventory 10,500 10,500 10,500
Prepaid insurance 12,000 2,000 10,000 10,000
Equipment 36,000 36,000 36,000
Accounts payable 1,000 1,000 1,000
Owner's equity 50,000 50,000 50,000
Sales 44,000 44,000 44,000
Cost of goods sold 6,500 6,500 6,500

Adjustments:
Interest receivable 100 100 100
Interest income 100 100 100
Salaries expense 10,000 10,000 10,000
Salaries payable 10,000 10,000 10,000
Depreciation expense 1,500 1,500 1,500
Accumulated depreciation 1,500 1,500 1,500
Bad debts expense 1,000 1,000 1,000
Allowance for bad debts 1,000 1,000 1,000
Insurance expense 2,000 2,000 2,000

95,000 95,000 14,600 14,600 107,600 107,600 21,000 44,100 86,600 63,500
23,100 23,100
44,100 44,100 86,600 86,600

Step 8: Closing entries

Recall the following concepts:

Closing entries are prepared as follows:
1. All income accounts are debited and all expense accounts are credited. The resulting
balance is recorded in a clearing account called the “Income summary.”
2. The balance of “Income summary” is closed to the “Owner’s equity” account.
3. Any balance in the “Owner’s drawings” account is closed to the “Owner’s equity”
account.
Acctg. Ed 1 - Financial Accounting & Reporting

The closing entries are prepared as follows:

Closing entry #1: Income summary

Dec Sales 44,000
31, Interest income 100
20x1 Cost of goods sold 6,500
Salaries expense 10,000
Depreciation expense 1,500
Bad debts expense 1,000
Insurance expense 2,000
Income summary (‘squeeze’) 23,100
To close income and expense accounts to
income summary

Closing entry #2: Income summary closed to Equity

Dec Income summary 23,100
31, Owner’s equity 23,100
20x1 To close income summary to equity

Step 9: Post-Closing trial balance

The Balance sheet and Income statement are prepared as follows:

My Souvenir
Balance Sheet
As of December 31, 20x1
ASSETS
Cash P11,000
Accounts receivable 7,000
Allowance for bad debts (1,000)
Interest receivable 100
Notes receivable 12,000
Inventory 10,500
Prepaid insurance 10,000
Equipment 36,000
Accumulated depreciation (1,500)
Total Assets P84,100
LIABILITIES
Accounts payable P1,000
Salaries payable 10,000
Total Liabilities 11,000
EQUITY
Owner’s equity 73,100
Total Liabilities & Equity P84,100
Acctg. Ed 1 - Financial Accounting & Reporting

My Souvenir
Income Statement
For the two months ended December 31, 20x1

Sales P44,000
Cost of goods sold (6,500)
GROSS PROFIT 37,500

Interest income 100

Salaries expense (10,000)
Depreciation expense (1,500)
Bad debts expense (1,000)
Insurance expense (2,000)

PROFIT P23,100

Illustration 2: Periodic inventory system

The accounts of Jim Boy Trading Co. have the following balances on January 1, 20x1:

Jim Boy Trading Co.

Trial Balance
January 1, 20x1

Accounts Debit Credit

Cash P50,000
Accounts receivable 120,000
Inventory 30,000
Equipment 200,000
Accumulated depreciation P80,000
Accounts payable 20,000
Jim Boy, Capital 300,000
P400,000 P400,000

The following were the transactions during the year.

1. Sales on cash basis amounted to P80,000.
2. Sales on account amounted to P130,000.
3. Purchases on account amounted to P70,000.
4. Freight paid on purchases amounted to P5,000.
5. Purchase returns amounted to P10,000.
6. Salaries paid amounted to P60,000.
7. Utility bills paid amounted to P20,000.
8. Collections of accounts receivable amounted to P200,000.
9. Payments of accounts payable amounted to P60,000.
10. Owner drawings during the year totaled P80,000.
Acctg. Ed 1 - Financial Accounting & Reporting

Additional information:
a. The annual depreciation on the equipment is P20,000.
b. The physical count of inventory on December 20x1 revealed a P60,000 balance of goods
on hand.

Requirement: Complete the accounting cycle.

Solution:

Step 1 & 2: Identifying and analyzing & journalizing

The transactions are recorded in the journal as follows:

1 Cash 80,000
Sales 80,000
To record sales
2 Accounts receivable 130,000
Sales 130,000
To record sales on account
3 Purchase 70,000
Accounts payable 70,000
To record purchase on account
4 Freight-in 5,000
Cash 5,000
To record freight costs incurred on
purchases
5 Accounts payable 10,000
Purchase returns 10,000
To record purchase returns
6 Salaries expense 60,000
Cash 60,000
To record payment of salaries
7 Utilities expense 20,000
Cash 20,000
To record payment of utilities
8 Cash 200,000
Accounts receivable 200,000
To record collection of accounts
receivable
9 Accounts payable 60,000
Cash 60,000
To record payment of accounts payable
10 Jim Boy, Drawings 80,000
Cash 80,000
To record withdrawals of owner from the
business
Acctg. Ed 1 - Financial Accounting & Reporting

Step 3: Posting
The transactions are posted to the ledger as follows:

ASSETS
Cash Accounts receivable
Beg. 50,000 Beg. 120,000
1 80,000 5,000 4 2 130,000 200,000 8
60,000 6
8 200,000 20,000 7
60,000 9
80,000 10
Bal. 105,000 Bal. 50,000

Inventory Equipment
Beg. 30,000 Beg. 200,000
Bal. 30,000 Bal. 200,000

Accumulated depr’n
80,000 Beg
80,000

Notice that that balance of the “Inventory” account represents the beginning balance. This is
because, under the periodic inventory system, purchases, freight-in and purchase returns
and discounts during the period are not recorded in the “Inventory” account.

After the physical count, we will update this account through adjusting entry.

LIABILITIES
Accounts payable
20,000 Beg.
5 10,000 70,000 3
9 60,000
20,000 Bal.

EQUITY
Jim Boy, Capital Jim Boy, Drawings
300,000 Beg.
10 80,000
300,000 Bal. Bal. 80,000
Acctg. Ed 1 - Financial Accounting & Reporting

INCOME
Sales
80,000 1
130,000 2
210,000 Bal.

EXPENSES
Purchases Freight-in
3 70,000 4 5,000
Bal. 70,000 Bal. 5,000

Purchase returns Salaries expense

10,000 5 6 60,000
10,000 Bal. Bal. 60,000

Utilities expense
7 20,000
Bal. 20,000

Step 4: Unadjusted trial balance

The unadjusted trial balance on December 31, 20x1 is prepared as follows:

Jim Boy Trading Co.

Unadjusted Trial Balance
December 31, 20x1

Accounts Debit Credit

Cash P105,000
Accounts receivable 50,000
Inventory 30,000
Equipment 200,000
Accumulated depreciation P80,000
Accounts payable 20,000
Jim Boy, Capital 300,000
Jim Boy, Drawings 80,000
Sales 210,000
Purchases 70,000
Freight-in 5,000
Purchase returns 10,000
Salaries expense 60,000
Utilities expense 20,000
P620,000 P620,000
Acctg. Ed 1 - Financial Accounting & Reporting

Step 5: Adjusting entries

Guide Analysis
1. Accruals of income and expenses • None.
2. Recognition of depreciation expense and • Depreciation expense on the equipment.
bad debts expense
3. Deferrals of income and expenses • See discussion below.
(splitting of ‘mixed accounts’)

Under the periodic inventory system, changes in goods on hand during the period are recorded
in the “Purchases,” “Freight-in,” “Purchase returns,” and “Purchase discounts” accounts, as
appropriate. These are nominal accounts that are closed at the end of the period.

At the end of the period, a physical count is conducted to determine any unsold goods which
are recognized as asset, i.e., “Inventory-end.” through an adjusting entry.

Periodic Inventory System

Unsold portion:
a. Inventory, beg.
Recognized as asset – “Inventory, end.”
b. Purchases
c. Freight-in
d. Purchase return &
discounts Sold portion:
Recognized as expense

From our analyses above, we have identified adjustments for the following:
1. Depreciation expenses
2. Ending inventory

AJE #1: Depreciation expense

The problem states that the annual depreciation is P20,000. The adjusting entry is as follows:
Dec 31, Depreciation expense 20,000
20x1 Accumulated depreciation 20,000
(AJE 1)
To record the depreciation expense for
the year

AJE #2: Ending inventory

The problem states that the physical count of inventory on December 31, 20x1 revealed a
P60,000 balance of goods on hand. The adjusting entry is as follows:
Dec 31, Inventory, end 60,000
20x1 Income summary 60,000
(AJE 2)
To record the ending inventory
Acctg. Ed 1 - Financial Accounting & Reporting

Notes:
• The account “Inventory, end.” is debited in order to segregate the ending inventory from the
beginning inventory. The credit is recorded in the “Income summary” account.
• In the worksheet, we will label the beginning inventory as “Inventory, beg.” This will be
closed later in the closing entries, also to the “Income summary” account.
• This manner of recording simplifies the adjusting and closing entries for the ending inventory
and beginning inventory.

Step 6: Adjusting trial balance (Worksheet)

A partial worksheet is prepared as follows:
s
Jim Boy Trading Co.
Worksheet
For the two monts ended December 31, 20x1
Accounts Unadjusted Trial Balance Adjustments Adjustments Trial Balance
Debit Credit Debit Credit Debit Credit
Cash 105,000 105,000
Accounts Receeivable 50,000 50,000
Inventory 30,000 30,000
Equipment 200,000 200,000
Accumulated depreciation 80,000 20,000 100,000
Accounts payable 20,000 20,000
Jim Boy, Capital 300,000 300,000
Jim Boy, Drawings 80,000 80,000
Sales 210,000 210,000
Purchases 70,000 70,000 -
Freight-in 5,000 5,000
Purchase returns 10,000 10,000
Salaries expense 60,000 60,000
Utilities expense 20,000 20,000

Adjustments:
Depreciation expense 20,000 20,000
Inventory, end 60,000 60,000 -
Income summary 60,000 - 60,000

620,000 620,000 80,000 80,000 700,000 700,000

Notice that the worksheet prepared under the periodic inventory system includes the following
accounts: “Inventory, beg.,” “Inventory, end,” and “Income summary.” These accounts are
not used under the perpetual inventory system.
Acctg. Ed 1 - Financial Accounting & Reporting

Step 7: Financial Statements

The
s income statement and balance sheet columns of the worksheet are completed as follows:
Jim Boy Trading Co.
Worksheet
For the two monts ended December 31, 20x1
Accounts Unadjusted Trial Balance Adjustments Adjustments Trial Balance Income Statement Balance Sheet
Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit
Cash 105,000 105,000 105,000
Accounts Receeivable 50,000 50,000 50,000
Inventory 30,000 30,000 30,000
Equipment 200,000 200,000 200,000
Accumulated depreciation 80,000 20,000 100,000 100,000
Accounts payable 20,000 20,000 20,000
Jim Boy, Capital 300,000 300,000 300,000
Jim Boy, Drawings 80,000 80,000 80,000
Sales 210,000 210,000 210,000
Purchases 70,000 70,000 - 70,000 -
Freight-in 5,000 5,000 5,000
Purchase returns 10,000 10,000 10,000
Salaries expense 60,000 60,000 60,000
Utilities expense 20,000 20,000 20,000

Adjustments:
Depreciation expense 20,000 20,000 20,000
Inventory, end 60,000 60,000 - - 60,000
Income summary 60,000 - 60,000 - 60,000

620,000 620,000 80,000 80,000 700,000 700,000 205,000 280,000 495,000 420,000
75,000 75,000
280,000 280,000 495,000 495,000

Notice that “Inventory, beg.” and “Income summary” The “Inventory, end.” is extended
are extended to the Income statement. This is to the Balance sheet.
necessary so that the amount of cost of goods sold is
properly reflected in the income statement

Cost of goods sold Analysis

Formula:
Beginning inventory 30,000
Purchases 70,000
Freight-in 5,000
Purchase returns (10,000)
Total goods available for sale 95,000
Ending inventory (60,000)
Cost of goods sold 35,000

Income statement columns of Worksheet:

Accounts Income statement
Dr. Cr.
Inventory, beg. 30,000
Purchases 70,000
Freight-in 5,000
Purchase returns 10,000
Income summary 60,000
Totals 105,000 70,000
Difference – Cost of Goods Sold 35,000
Acctg. Ed 1 - Financial Accounting & Reporting

Step 8: Closing entries

Closing entry #1: Beginning inventory

The beginning inventory is closed to income summary:
Dec 31, Income summary 30,000
20x1 Inventory, beg. 30,000
(CLE 1)
To record beginning inventory to income
summary

Notice that the above closing entry is peculiar to the periodic inventory system. The closing
entry is not needed under the perpetual inventory system.

Closing entry #2: Income summary

The income and expense accounts are closed to the “Income summary” account as follows:
Dec 31, Sales 210,000
20x1 Purchase returns 10,000
(CLE 2)
Purchases 70,000
Freight-in 5,000
Salaries expense 60,000
Utilities expense 20,000
Depreciation expense 20,000
Income summary (‘squeeze’) 45,000
To close income and expense accounts
to income summary

Closing entry #3: Income summary closed to Equity

Let us first determine the balance of the “Income summary” account before closing it to owner’s
equity:
Income summary
60,000 AJE 2
CLE 1 30,000 45,000 3

75,000 Bal.

The income summary is closed to the “Owner’s capital” account as follows:

Dec 31, Income summary 75,000
20x1 Jim Boy, Capital 75,000
(CLE 3)
To record beginning inventory to income
summary

Closing entry #4: Drawings account closed to Equity

The “Owner’s drawings” account is closed to the “Owner’s equity” account as follows:

Dec 31, Jim Boy, Capital 80,000

20x1 Jim Boy, Drawings 80,000
(CLE 4)
To record beginning inventory to income
summary
Acctg. Ed 1 - Financial Accounting & Reporting

Step 9: Post-closing trial balance

Formal reports:

Jim Boy Trading Co.

Balance Sheet
As of December 31, 20x1
ASSETS
Cash P105,000
Accounts receivable 50,000
Inventory 60,000
Equipment 200,000
Accumulated depreciation (100,000)
Total Assets P315,000
LIABILITIES
Accounts payable P20,000

EQUITY
Jim Boy, Capital 295,000

Total Liabilities & Equity P315,000

Jim Boy Trading Co.

Income Statement
For the year ended December 31, 20x1

Sales P210,000
Cost of goods sold:
Inventory, beg. P30,000
Purchases 70,000
Freight-in 5,000
Purchase returns (10,000)
Total goods available for sale 95,000
Inventory, end. (65,000) (35,000)
GROSS PROFIT 175,000
Salaries expense (60,000)
Utilities expense (20,000)
Depreciation expense (20,000)

PROFIT FOR THE YEAR P75,000

Acctg. Ed 1 - Financial Accounting & Reporting

Activity No. 1
Inventory systems
Fact pattern:
On January 1, 20x1, Entity A had an inventory balance of P9,000. The following transactions
affected Entity A’s inventory during the year:
i. Purchased goods worth P130,000 on account.
ii. Paid freight of P5,000 on the purchase above.
iii. Returned damaged goods worth P3,000 to the supplier.
iv. Sold goods costing P128,000 for P320,000, on credit.
v. A customer returned goods with sale price of P2,500 and cost of P1,000.

Requirements:
1. Prepare the journal entries under (a) perpetual inventory system and (b) period inventory
system.
2. Compute for the cost of goods sold under (a) perpetual inventory system and (b) periodic
inventory system. The ending inventory per physical count if P14,000.
3. Prepare a statement of cost of goods sold and gross profit.

T-account analysis
4. Inventory, beg. P20,000; Net purchases, P210,000; Cost of goods sold, P190,000. How
much is the ending inventory?
5. Inventory, beg. P40,000; Net purchase, P270,000; Inventory, end., P80,000. How much is
the cost of goods sold?
6. Inventory, beg. P30,000; Cost of goods sold, P270,000; Inventory, end., P20,000. How
much is the net purchases?
7. Net purchases, P170,000; Cost of goods sold, P140,000; Inventory, end., P60,000. How
much is the beginning inventory?
8. Net purchases, P130,000; Cost of goods sold, P140,000; Inventory, end., P70,000. How
much is the total goods available for sale?
9. Net purchases, P130,000; Increase in inventory during the year, P70,000. How much is the
cost of goods sold?
10. Cost of goods sold, P170,000; Decrease in inventory during the year, P10,000. How much
is the net purchases?
11. Inventory, beg., P50,000; Total goods available for sale, P210,000; Cost of goods sold,
P170,000. How much is the change in inventory during the year? Increase (decrease)
12. Total goods available for sale, P170,000; Net purchases, P150,000; Inventory, end.,
P50,000; How much is the change in inventory during the year? Increase (decrease)
Acctg. Ed 1 - Financial Accounting & Reporting

Worksheet – Perpetual & Periodic

Entity B’s trial balance as of January 1, 20x1 is shown below:

Entity B
Trial Balance
January 1, 20x1
Accounts Dr. Cr.
Cash 60,000
Inventory, beg. 40,000
Equipment 200,000
Accumulated depreciation 20,000
Accounts payable 30,000
Owner’s equity (Capital) 250,000
Totals 300,000 300,000

The following were the transactions during 20x1:

a. Purchase of inventory worth P160,000 on account.
b. Paid freight of P3,000 on the purchase above.
c. Returned damaged goods worth P2,000.
d. Sold inventory costing P180,000 for P270,000 cash.
e. Customers returned goods with sale price of P6,000 and cost of P4,000.
f. Paid P180,000 accounts payable.
g. Paid utilities expense of P20,000.

Additional information: Year-end adjustment

- Annual depreciation is P20,000
- Ending inventory per physical account is P25,000.

Requirements:
13. Complete the worksheet up to the balance sheet columns (but prepare the closing
entries) assuming Entity B uses the perpetual inventory system.

14. Complete the worksheet up to the balance sheet columns (but prepare the closing
entries) assuming Entity B uses the periodic inventory system.