Ba 1 Module 5 Leson 1

Module 5 – Merchandising Operations
The previous modules illustrated the accounting cycle of entities that

earned revenues by providing services. A service business sells knowledge
or expertise while a merchandising business sells a particular or a group
of products. These products will be sold either wholesale or retail in the
same form that they were bought. The manufacturing business produces the
goods that merchandisers sell. These entities convert raw materials into
finished products through the utilization of skilled labor and machines. In
this module, the merchandising business will be discussed.
In the previous modules, the discussions were limited to processing of

transactions recorded in a general journal and posted to the general
ledger. This type of accounting system is satisfactory for introducing
basic accounting procedures. However, this system would be inadequate for a
business having even a moderate volume of transactions for some reasons:
➢ Only a limited number of transactions can be processed daily because

only one person at any one time can introduce entries into the
general journal.
➢ Transactions recorded in the general journal must be posted

individually in the general ledger, resulting to a great deal of
posting labor.
To overcome these limitations, entities adopt an accounting system that

incorporates either the use of the usual special journals (non-voucher) or
the voucher system.
Also, the illustrations have utilized only one account for accounts
receivable and another one for accounts payable. Entities that maintain
accounts with numerous customers and creditors will find it burdensome to
work with a general ledger containing a large number of customer and
creditor accounts. Therefore, entities adopt an accounting system that uses
control accounts in the general ledger and separate subsidiary ledgers to
record and control the accounts of individual customers and creditors.
Learning Objectives:
After studying this module, the student learners should be able to:
1. identify the differences between a service and merchandising
companies;
2. explain the recording of purchases under periodic and perpetual
inventory systems;
3. explain the recording of sales revenues under periodic and perpetual
inventory systems;
4. explain the steps in the accounting cycle for a merchandising
company;
5. distinguish between a function of expense and nature of expense
methods of the statement of income;
6. recognize the need for a physical count and analyze the effects of
omitting the procedure; and
7. discuss the advantage of using special journals and the voucher
system in comparison to the conventional recording process of
accounting.
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Lesson 1
Merchandising Business Basics and Preparation of Journal
Entries
The lesson will discuss the basics for a Trading/Merchandising Business’.

The accounting cycles 1 to 4 are also discussed here.
I. Learning Objectives
At the end of this lesson, the student learners should be able to:
1. describe merchandising activities;
2. distinguish between income statements of service and merchandising
entities;
3. illustrate the operating cycle of a merchandising entity;
4. compare and solve problems on cash discounts and trade discounts;
5. summarize the treatment of transportation costs considering the
freight terms FOB Destination, FOB Shipping Point, Freight Prepaid
and Freight Collect;
6. explain the inventory systems of merchandising entities;
7. analyze and record transactions for merchandise sales under a
periodic inventory system;
8. analyze and record transactions for merchandise purchases under a
periodic inventory system;
9. solve and prepare the entries on value-added merchandising
transactions;
10. Compare and contrast the entries needed for the periodic and
perpetual inventory system; and
11. recognize the need for a physical count.
II. Pre-Assessment
Name: ________________________________________ Time: ______________________
Instruction: After each statement, encircle TRUE if the statement is

correct or FALSE if the statement is incorrect:
1. The difference between revenues from sales and cost of sales is

operating income. TRUE FALSE
2. For cash sales, the operating cycle is from cash to inventory to
accounts receivable and back to cash. TRUE FALSE
3. Discounts offered to the buyer to encourage early payment are trade
discounts. TRUE FALSE
4. A credit term of “2/10,n/30” means that the buyer may deduct 2% from
the invoice if payment is made within 10 days from the end of the
month. TRUE FALSE
5. The purchase of equipment not for resale should be debited to the
purchases account. TRUE FALSE
6. If the seller is to shoulder the cost of delivery, the term is stated
as F.O.B. Shipping Point. TRUE FALSE
7. When the periodic inventory system is used, a physical inventory count
is not necessary to be made at the end of the period. TRUE FALSE
8. Under the periodic inventory system, cost of goods sold is treated as
an account. TRUE FALSE
9. The perpetual inventory system does requires recording the cost of
sales as it occurs. TRUE FALSE
10. Summing ending merchandise inventory and cost of goods sold gives the
amount of purchases for the period. TRUE FALSE
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11. Transportation Out is included in the cost of goods sold calculation.
TRUE FALSE
12. Terms of 2/10,n/30 is an example of a trade discount. TRUE FALSE
13. F.O.B. Shipping Point means that the seller incurs the shipping costs.
TRUE FALSE
14. The calculation of cost of goods available for sale during the year is
not affected by the previous year’s ending inventory. TRUE FALSE
15. Transportation In is treated as a deduction in the cost of goods sold
section of the statement of income. TRUE FALSE
III. Lesson Map

Statement of Income
Sales
minus
Cost of Sales
equals
Gross Profit
In the preparation of the Statement of Income of a merchandising firm, new

account titles are introduced to record the sale of merchandise sold and
its corresponding costs of purchase. But, the common items shown for both
service and merchandising business are the operating expenses that are
applicable to these business type.
IV. Core Content
ENGAGE
Name: _________________________________________ Time: _____________________
List the Statement of Income account titles that are unique in

merchandising entities and are not used in service entities: (2pts each)
1. ______________________
2. ______________________
3. ______________________
4. ______________________
5. ______________________
6. ______________________
7. ______________________
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8. ______________________
9. ______________________
10. ___________________
EXPLORE
Name: _________________________________________ Time: _____________________
What are the documentary requirements to secure the following: (3pts each)
1. Municipal/Mayor’s Permit
__________________________________
__________________________________
__________________________________
2. Bureau of Internal Revenue (BIR)
For a sole proprietorship:

__________________________________
__________________________________
__________________________________
For a corporation:
__________________________________
__________________________________
__________________________________
EXPLAIN
COMPARISON OF INCOME STATEMENTS
Service entities perform services for a fee. In ascertaining profit, a

basic income statement is all that is needed. In Figure 7-1, profit is
measured as the difference between revenues from services and expenses. In
contrast, merchandising entities earn profit by buying and selling goods.
These entities use the same basic accounting methods as service entities,
but the process of buying and selling merchandise requires some additional
accounts and concepts. This process results in a more complex income. To
provide a better measure of performance, the income statement of a
merchandising business is presented with additional items:
Service Merchandising
Statement of Income Statement of Income
Revenues from Services Net Sales

mi
nus
Cost of Sales
mi
nus equal
s
Gross Profit
add (m i
nus)
Expenses Other Income (Expenses)
equal
s equal
s
Profit Profit
Figure 7-1 Components of Statements of Income for Service and Merchandising

Entities
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In a merchandising business, net sales arise from the sale of goods while
cost of sales or cost of goods sold represents the cost of inventory the
entity has sold to customers. The difference between net sales and cost of
sales is called gross profit. Then, other operating income is added and
operating expenses (like distribution costs, administrative expenses and
other operating expenses) are deducted from gross profit to arrive at
operating profit. Investment revenues, other gains and losses, and finance
costs (e.g. interest expense) are considered to arrive at profit before tax
then income tax expense is deducted to have profit from continuing
operations. Finally, profit from discontinued operations (net of tax) is
taken to account to get profit for the period.
Gloria Detoya Traders

Statement of Income
For the Year Ended December 31, 2018
Net Sales P 2,393,250

Cost of Sales 1,313,600
Gross Profit 1,079,650
Operating Expenses 586,040
Operating Profit 493,610
Finance Costs 38,400
Profit P 455,210
Exhibit 7-1 Parts of an Income Statement for a Merchandising Entity
OPERATING CYCLE OF A MERCHANDISING BUSINESS
The merchandising entity purchases inventory, sells the inventory and uses
the cash to purchase more inventory-and the cycle continues. For cash
sales, the cycle is from cash to inventory and back to cash. For sales on
account, the cycle is from cash to inventory to accounts receivable and
back to cash. In any industry, the manager strives to shorten the cycle.
The faster the sale of inventory and the collection of cash, the higher the
profits. The following illustrates the operating cycle of a merchandiser:
Cash
Cash Purchases
Sales
Inventory
Cash Sales
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Cash
Accounts Receivable
Inventory
Sales on Account
Figure 7-2 Operating Cycle of a Merchandiser
SOURCE DOCUMENTS
The topic was discussed in details in Module 3, Lesson 1.
Merchandising businesses use various business forms and documents to help

identify the transactions that should be recorded in the books. These
source documents contain vital information about the nature and amount of
the transactions. The more common source documents along with their
descriptions are shown next page. Also, samples of some of these source
documents are to be found on the succeeding pages.
1. Sales invoice is prepared by the seller of goods and sent to the

buyer. This document contains the name and address of the buyer,
the date of sale and information-quantity, description and price-
about the goods sold. It also specifies the amount of sales, and
the transportation and payment terms.
2. The bill of lading is a document issued by the carrier-a trucking,

shipping or airline-that specifies contractual conditions and
terms of delivery such as freight terms, time, place, and the
person named to receive the goods.
3. The statement of account is a formal notice to the debtor

detailing the accounts already due.
4. The official receipt evidences the receipt of cash by the seller

or the authorized representative. It notes the invoices paid and
other details of payment.
5. Deposit slip is a printed form with depositor's name, account

number and space for details of the deposit. A validated deposit
slip indicates that cash and checks with the supplied details were
actually deposited or credited to the account holder.
6. A check is a written order to a bank by a depositor to pay the

amount specified in the check from his checking account to the
person named in the check. The entity issuing the check is the
payor while the receiver is the payee.
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7. The purchase requisition is a written request to the purchaser of
an entity from an employee or user department of the same entity
that goods be purchased.
8. The purchase order is an authorization made by the buyer to the

seller to deliver the merchandise as detailed in the form.
9. Receiving report is a document containing information about goods

received from a vendor. It formally records the quantities and
description of the goods delivered.
10. A credit memorandum is a form used by the seller to notify the

buyer that his account is being decreased due to errors or other
factors requiring adjustments.
STEPS IN A PURCHASE TRANSACTION
Whenever a purchase or sale of merchandise occurs, the buyer and the seller
should agree on the price of the merchandise, the payment terms and the
party to shoulder the transportation costs. Owners of small merchandising
firms may settle these terms informally by phone or by discussion with the
vendor's representative. Most large businesses, however, follow certain
procedures when purchasing merchandise.
The procedures are as follows:
1. When certain items are needed, the user department fills in a

purchase requisition form and sends it to the purchasing department.
2. The purchasing department then prepares a purchase order after

checking with the price lists, quotations, or catalogues of approved
vendors. The purchase order, addressed to the selected vendor,
indicates the quantity, description, and price of the merchandise
ordered. It also indicates expected payment terms and transportation
arrangements.
3. After receiving the purchase order, the seller forwards an invoice to

the purchaser upon shipment of the merchandise. The invoice-called a
sales invoice by the seller and a purchase invoice by the buyer-
defines the terms of the transaction.
4. Upon receiving the shipment of merchandise, the purchaser's receiving

department sees to it that the terms in the purchase order are
complied with, and prepares a receiving report.
5. Before approving the invoice for payment, the accounts payable

department compares copies of the purchase requisition, purchase
order, receiving report and invoice to ensure that quantities,
descriptions, and prices agree.
All of the above forms-purchase requisition, purchase order, invoice, and

receiving report-are source documents. When the goods are received or when
title has passed, the entity should record purchases and a liability (or a
cash disbursement). Generally, the seller recognizes the sales transaction
in the records when the goods have been shipped.
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TERMS OF TRANSACTIONS
Merchandise may be purchased and sold either on credit terms or for cash on
delivery. When goods are sold on account, a period of time called the
credit period is allowed for payment. The length of the credit period
varies across industries and may even vary within an entity, depending on
the product.
When goods are sold on credit, both parties should have an understanding as
to the amount and time of payment. These terms are usually printed on the
sales invoice and constitute part of the sales agreement. If the credit
period is 30 days, then payment is expected within 30 days from the invoice
date. The credit period is usually described as the net credit period or
net terms. The credit period of 30 days is noted as "n/30". If the invoice
is due ten days after the end of the month, it may be marked "n/10 eom."
Credit Term: 2/10, n/30
Credit Period
2 / 10 , n / 30
Discount Rate
Discount Period
Credit Term is a term that indicate when payment is due for sales that are
made on credit, possible discounts, and any applicable interest or late
payment fees.
Discount Rate is the rate given by sellers to buyers to encourage them to

pay their account promptly.
Discount Period the length of time the discount rate can be enjoyed by the
buyer.
Credit Period the length of time the account (credit) should be paid by the
buyer with no penalties charged on the account. Beyond this period, there
will be interest and penalties to be charged to the buyer.
Cash Discounts
Some businesses give discounts for prompt payment called cash discounts. If
a trade discount is also offered, cash discount is computed on the net
amount after the trade discount. This practice improves the seller's cash
position by reducing the amount of money in accounts receivable. Cash
discount is designated by such notation as "2/10" which means the buyer may
avail of a two percent discount if the invoice is paid within ten days from
the invoice date. The period covered by the discount, in this case-ten
days, is called the discount period.
Cash discounts are recorded as Purchase Discounts from the buyer's

viewpoint and Sales Discounts from the seller's point of view.
It is usually worthwhile for the buyer to take a discount if offered

although it may be necessary to borrow the money to make the payment.
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Illustration. Assume that an invoice for P150,000 with terms 2/10, n/30, is
to be paid within the discount period with money borrowed for the remaining
20 days of the credit period. If an annual interest rate of 18 percent is
assumed, the net savings to the buyer is P1,530 which is determined as
follows:
Cash Discount of 2% on P150,000 P 3,000

Interest for 20 days at an annual rate of 18% on
the amount due within the discount period:
P147,000* x 18% x 20/360 1,470
Savings Effected by Borrowing P 1,530
*Amount Due = P150,000 Invoice Price - P3,000 Cash Discounts
Trade Discounts
Suppliers furnish smaller wholesalers or retailers with price lists and

catalogues showing suggested retail prices for their products. These firms,
however, also include a schedule of trade discounts from the listed prices
to enable the customer to determine the invoice price to be paid. Trade
discounts encourage the buyers to purchase products because of markdowns
from the list price. Trade discounts should not be confused with cash
discounts. This type of discount enables the suppliers to vary prices
periodically without the inconvenience of revising price lists and
catalogs.
There is no trade discount account and there is no special accounting entry

for this discount. Instead, all accounting entries are based on the invoice
price which is obtained by subtracting the trade discount from the list
price.
Illustration. Pinnacle Technologies quoted a list price of P2,500 for each

64 gigabyte flash drive, less a trade discount of 20%. If Video Fantastic
ordered seven units, the invoice price would be as follows:
List Price P 17,500

Less: 20% Trade Discount 3,500
Invocie Price P 14,000
Trade discounts may be stated in a series. Assume instead that the trade
discount given by Pinnacle to Video Fantastic is 20% and 10%, the invoice
price will be:
List Price P 17,500

Sales Price 14,000
Invoice Price P 12,600
In the first example, both the buyer and the seller would record only the
P14,000 invoice price while in the second example, the invoice price will
be P12,600.
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Example: On June 1, 2018, Elena Buray Jr. Forest Products sold merchandise
with a P120,000 list price.
Trade Discount Credit Terms Date Paid

a 30% 2/10, n/30 June 8
b 40% 1/10, n/30 June 15
c 2/10, n/30 June 11
d 20% 1/15, n/30 June 14
e 40% n/30 June 28
Solutions:
a b c d e
List Price 120,000 120,000 120,000 120,000 120,000
Less: Trade Discount 36,000 48,000 24,000 48,000
Sales Price 84,000 72,000 120,000 96,000 72,000
Less: Cash Discount 1,680 2,400 960
Invoice Price 82,320 72,000 117,600 95,040 72,000
Explanations:
➢ On letter b, no cash discount since the account was paid on June 15

which is 14 days from the date of purchase, the discount period for
this case is only for 10 days.
➢ On letter c, the buyer still enjoys the discount because June 11 is

the exact 10th day from the date of purchase. The rule is: EXCLUDE
THE FIRST, INCLUDE THE LAST.
Transportation Costs
When merchandise is shipped by a common carrier--a trucking entity or an

airline-the carrier prepares a freight bill in accordance with the
instructions of the party making the shipping arrangements. The freight
bill designates which party shoulders the costs, and whether the shipment
is freight prepaid or freight collect.
Freight bills usually show whether the shipping terms are FOB shipping
point or FOB destination. F.O.B. is an abbreviation for "free on board".
When the freight terms are FOB shipping point, the buyer shoulders the
shipping costs; ownership over the goods passes from seller to the buyer
when the inventory leaves the seller's place of Merchandising Operations |
317 business-the shipping point. The buyer already owns the goods while
still in transit and therefore, shoulders the transportation costs.
If the terms are FOB destination, the seller bears the shipping costs.
Title passes only when the goods are received by the buyer at the point of
destination; while in transit, the seller is still the owner of the goods
so the seller shoulders the transportation costs.
In freight prepaid, the seller pays the transportation costs before

shipping the goods sold; while in freight collect, the freight entity
collects from the buyer. Payment by either party will not dictate who
should ultimately shoulder the costs.
Normally, the party bearing the freight cost pays the carrier. Thus, goods
are typically shipped freight collect when the terms are FOB shipping
point; and freight prepaid when the terms are FOB destination.
10
Sometimes, as a matter of convenience, the firm not bearing the freight
cost pays the carrier. When this situation occurs, the seller and buyer
simply adjust the amount of the payment for the merchandise. Figure 7-3
shows which party-the buyer or the seller- shoulders the transportation
costs and pays the shipper for various freight terms:
Freight Terms Who Should Pay the Who Paid the Shipper?
Transportation Costs?
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
Figure 7-3 Treatment of Transportation Costs
The shipping costs borne by the buyer using the periodic inventory system
are debited to transportation in account. In accounting, the cost of an
asset-the merchandise inventory-includes all costs (e.g. shipping costs)
incurred to bring the asset to its intended use. In the cost of sales
section of the income statement, the balance in this account is added to
purchases in computing for the net cost of purchases for the period.
Shipping costs borne by the seller are debited to transportation out

account. This account which is also called delivery expense, is an
operating expense in the income statement.
INVENTORY SYSTEMS
Merchandise inventory is the key factor in determining cost of sales.

Because merchandise inventory represents goods available for sale, there
must be a method of determining both the quantity and the cost of these
goods. There are two systems available to merchandising entities to record
events related to merchandise inventory: the perpetual inventory system and
the periodic inventory system. Refer to the appendix of this lesson for the
comparative illustrations.
Perpetual Inventory System
The perpetual inventory system is an alternative to the periodic inventory

system. Under the perpetual inventory system, the inventory account is
continuously updated. Perpetually updating the inventory account requires
that at the time of purchase, merchandise acquisitions be recorded as
debits to the inventory account. At the time of sale, the cost of sales is
determined and recorded by a debit to the cost of sales account and a
credit to the inventory account. With a perpetual inventory system, both
the inventory and cost of sales accounts receive entries throughout the
accounting period.
Many merchandising entities are now using the perpetual inventory system
with point- of-sale equipment. Computers have decreased in prices. These
powerful machines have dramatically reduced the time required to manage
inventory. Supermarkets and department stores use point-of-sale scanners
built into checkout counters to collect transactional data for the cash
register and to update their perpetual inventory system. In the absence of
point-of-sale scanners, the perpetual inventory system is more advisable
for firms that sell low-volume, high-priced goods such as motor vehicles,
jewelry and furniture.
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When an entity uses the perpetual inventory system, the ending inventory
should reconcile with the actual physical count at the end of the period
assuming that no theft, spoilage, or error has occurred. Even if there is a
little chance for or suspicion of inventory discrepancy, most entities make
a physical count. At that time, the account is adjusted for any
inaccuracies discovered. The count provides an independent check on the
amount of inventory that should be reported at the end of the period.
Periodic Inventory System
The periodic inventory system is primarily used by businesses that sell

relatively inexpensive goods and that are not yet using computerized
scanning systems to analyze goods sold. A characteristic of the periodic
inventory system is that no entries are made to the inventory account as
the merchandise is bought and sold. When goods are purchased, a separate
set of accounts-purchases, purchases discounts, purchases returns and
allowances, and transportation in-is used to accumulate information on the
net cost of the purchases. Only at the end of the period, when the
inventory is counted, will entries be made to the inventory account to
establish its proper balance. The periodic inventory system will be used in
the succeeding discussions. To illustrate Merchandising Operations | 319
the major parts of the merchandising income statement, selected
transactions made by G. Detoya Traders will be used unless otherwise
stated.
NET SALES
Net sales is the first part of the merchandising income statement as

presented below:

Partial Statement of Income
Net Sales
Gross Sales P 2,463,500
Less: Sales Returns and Allowances P 27,500
Sales Discounts 42,750 70,250
Exhibit 7-2 Partial Income Statement-Net Sales
Gross Sales
Under accrual accounting, revenues from the sale of merchandise are

considered to be earned in the accounting period in which the title of
goods passes-usually at the point of delivery-from the seller to the buyer.
Gross sales consist of total sales for cash and on credit during an
accounting period. Although cash for the sale is uncollected, the revenue
is recognized as earned at the time of the sale. For this reason, there is
likely to be a difference between net sales and cash collected from those
sales in a given period.
As an income account, the sales account is credited whenever sales on

account or cash sales are made. Only sales of merchandise held for resale
are recorded in the sales account. If a merchandising firm sold one of its
delivery trucks, the credit would be made to the delivery equipment
account, not to sales account.
The journal entry to record the sale of merchandise for cash is as follows:
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Sept 16 Cash 2 5 0 0 0
Sales 2 5 0 0 0
To record sale of merchandise for
cash.
If the sale of merchandise is made on credit, the entry will be:
Sept 16 Accounts Receivable 2 5 0 0 0

Sales 2 5 0 0 0
To record sale of merchandise on
credit.
Sales Discounts
Assume that G Detoya Traders sold merchandise on Sept. 20 for P3,000; terms
2/10, n/60. At the time of sale, the entry is:
Sept 20 Accounts Receivable 3 0 0 0

Sales 3 0 0 0
To record sale of merchandise on
credit, terms 2/10,n/60.
The customer may take advantage of the sales discount any time on or before
Sept. 30, which is 10 days after the date of the invoice. If the client
paid on Sept. 30, the entry is:
Sept 30 Cash 2 9 4 0
Sales Disocunts 6 0
Accounts Receivable 3 0 0 0
To record collection on the Sept. 20
sale, discounts taken.
At the end of the accounting period, the sales discounts account has
accumulated all the sales discounts for the period. The account is
considered a contra-income account and deducted from gross sales in the
income statement (see Exhibit 7-2),
Sales Returns and Allowances
Buyers may be dissatisfied with the merchandise received either because the
goods are damaged or defective, of inferior quality or not in accordance
with their specifications. In such cases, the buyer may return the goods to
the seller for credit if the sale was made on account or for cash refund if
the sale was for cash.
Alternatively, the seller may just grant an allowance or deduction from the
selling price. A high sales returns and allowances figure is not
commendable because it may signal poor quality of goods and thus may result
to dissatisfied customers.
Each return or allowance is recorded as a debit to an account called sales

returns and allowances. An example of such transaction follows:
Sept 17 Sales Returns and Allowances 7 6 0

Accounts Receivable (or Cash) 7 6 0
To record return or allowance on
unsatisfactory merchandise.
The seller usually issues the customer a credit memorandum (i.e. Accounts
Receivable or Cash is credited), which is a formal acknowledgment that the
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seller has reduced the amount owed by the customer. Sales returns and
allowances is a contra-income account and is accordingly deducted from
gross sales in the income statement (see Exhibit 7-2).
Transportation Out
When the freight term is FOB destination, the seller shoulders the
transportation costs; when the term is FOB shipping point, the buyer bears
the shipping costs.
Case No. 1. Assume that G. Detoya Traders sold merchandise totalling

P17,000 FOB destination, freight prepaid; terms 2/10, n/30. The
transportation costs amounted to P1,900. The entry to record this
transaction would be:
Nov 25 Accounts Receivable 1 7 0 0 0

Transportation Out 1 9 0 0
Sales 1 7 0 0 0
Cash 1 9 0 0
Sales on account; terms 2/10,n/30,
FOB destination, freight prepaid,
P1,900.
If this invoice is collected on Dec. 5, the sales discount will be P340

(P17,000 x 2%). Transportation out is an operating expense.
Dec 5 Cash 1 6 6 6 0
Sales Discounts 3 4 0
Accounts Receivable 1 7 0 0 0
Case No. 2. Assume that G. Detoya Traders sold merchandise totalling

P17,000 FOB shipping point, freight collect; terms 2/10, n/30. The

Sales 1 7 0 0 0
Sold merchandise on account; terms
2/10,n/30, FOB Shipping Point,
freight collect.
There is no debit to transportation out account since the shipping term

provided that the buyer should shoulder the transportation costs. If this
invoice is collected on Dec. 5, the sales discount will be P340 (P17,000 x
2%). The entry would be:
Dec 5 Cash 1 6 6 6 0
Case No. 3. Now, assume that G. Detoya Traders sold merchandise totalling
P17,000 FOB destination, freight collect; terms 2/10, n/30. The
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Transportation Out 1 9 0 0
Sales 1 7 0 0 0
Sold merchandise on account; terms
2/10,n/30, FOB destination, freight
collect, P1,900.
Accounts receivable is decreased by the transportation charges paid by the

buyer for the benefit of the seller. If this invoice is collected on Dec.
5, the sales discount will be P340 (P17,000 x 2%) since the discount
applies to total sales.
Dec 5 Cash 1 4 7 6 0
Case No. 4. Assume further that G. Detoya Traders sold merchandise totaling
P17,000 FOB shipping point, freight prepaid; terms 2/10, n/30. The
Sept 20 Accounts Receivable 3 0 0 0

Sales 3 0 0 0
To record sales on credit; terms,
2/10, n/60.
If this invoice is collected on Dec. 5, the sales discount will be P340

(P17,000 x 2%). The discount only applies to total sales.
Sept 30 Cash 2 9 4 0
Sales Discounts 6 0
Accounts Receivable 3 0 0 0
COST OF SALES
Cost of sales or cost of goods sold is the largest single expense of the
merchandising business. It is the cost of inventory that the entity has
sold to customers. Every merchandising business has goods available for
sale to customers. The goods available for sale during the year is the sum
of two factors-merchandise inventory at the beginning of the year and net
cost of purchases during the period.
If an entity is able to sell all the goods available for sale during a
given accounting period, the cost of sales would then equal goods that had
been available for sale. In most cases, however, the business will have
goods still unsold at the end of the year. To find the actual cost of
sales, the merchandise inventory at the end of the period is subtracted
from the goods available for sale.
Exhibit 7-3 showed goods costing P1,796,600 as available for sale-G. Detoya
started with P528,000 in beginning merchandise inventory and net cost of
purchases (or cost of goods purchased) of P1,268,600 during the year. At
the end of the year, P483,000 of goods were left unsold; this amount should
appear as the merchandise inventory in the balance sheet. When this ending
merchandise inventory is subtracted from goods available for sale, the
resulting cost of sales is P1,313,600.
15
Partial Income Statement
For the Year Ended Dec. 31, 2018
Cost of Sales
Merchandise Inventory, 1/1/2018 P 528,000
Add Net Purchases:
Purchases P 1,264,000
Transportation In 82,360
Total Cost of Purchases 1,346,360
Less: Purchases Returns and Allowances P 56,400
Purchases Discounts 21,360 77,760
Net Purchases 1,268,600
Cost of Goods Available for Sale 1,796,600
Less: Merchandise Inventory, 12/31, 2018 483,000
Cost of Sales or Cost of Goods Sold P 1,313,600
Exhibit 7-3 Partial Income Statement-Cost of sales
Beginning Net Cost of

Inventory Purchases
Cost of Goods Available for Sale
Ending Cost of Sales or

Inventory Cost of Goods
Sold
Figure 7-4 Cost of Goods Available for Sale
Figure 7-4 showed a pictorial diagram of the cost of sales section. In

summary, goods available for sale during a period come from beginning
inventory and net cost of purchases. The goods are either sold during the
period or remain unsold at the end of the period. Goods available for sale
will eventually turn to expense for the period -as cost of sales or to
asset-as merchandise inventory.
To understand fully the concept of cost of sales, it is necessary to

examine the details affecting merchandise inventory and net cost of
purchases.
Merchandise Inventory
The inventory of a merchandising entity consists of goods purchased for

resale. For a grocery store, inventory would be made up of meats,
vegetables, canned goods, and other items. For a lumber and hardware, it
would be plywood, nails, paints, iron sheets, cement, tools, and other
items. Merchandising entities purchase their inventories from
manufacturers, wholesalers and other suppliers.
16
The merchandise inventory at the beginning of the accounting period is
called the beginning inventory. Conversely, the merchandise inventory at
the end of the accounting period is called the ending inventory. As
presented in Exhibit 7-3, beginning and ending inventories are used in
calculating cost of sales in the income statement. The ending inventory
shown in the income statement will be the merchandise inventory to be
reported in the balance sheet. Effectively, the ending Inventory of the
current period will be the beginning inventory of the next period.
Net Cost of Purchases
Under the periodic inventory method, net cost of purchases consist of gross
purchases minus purchases discounts and purchases returns and allowances
equals net purchases; plus transportation costs.
Purchases
When the periodic inventory method is used, all purchases of merchandise

are debited to the purchases account as shown below:
Nov 12 Purchases 1 5 0 0 0
Accounts Payable 1 5 0 0 0
Purchased of merchandise on account;
terms, 2/10, n/30
The purchases account, a temporary account, is used only for merchandise

purchased for resale. Its sole purpose is to accumulate the total cost of
merchandise purchased during an accounting period. Purchases of other
assets such as equipment should be recorded in the appropriate asset
accounts. Recording merchandise purchases at invoice price is known as the
gross price method of recording purchases.
Purchases Returns and Allowances
Sales returns and allowances in the seller's books are recorded as

purchases returns and allowances in the books of the buyer. This should be
recorded as follows:
Nov 14 Accounts Payable 2 0 0 0

Purchases Returns and Allowances 2 0 0 0
Return of damaged merchandise
purchased on Nov. 12.
Purchases returns and allowances is a contra account and is accordingly

deducted from purchases in the income statement (see Exhibit 7-3). It is
important that a separate account be used to record purchases returns and
allowances because management needs the information for decision making.
It may be very costly to return merchandise: There are costs that cannot be
recovered such as ordering accounting costs, transportation costs, and
interest on the money invested in the goods. There may also be lost sales
resulting from poor ordering or unsaleable goods. Frequent returns may call
for new purchasing procedures or suppliers.
Purchases Discounts
Merchandise purchases are usually made on credit and commonly involve

purchases discounts for early payment. In relation to the Nov. 12 and 14
transactions, the payment is recorded as follows:
17
Nov 12 Accounts Payable 1 3 0 0 0
Purchases Discounts 2 6 0
Cash 1 2 7 4 0
Explanation:
The balance of accounts payable at this point is now P13,000 because out of the initial
purchase on Nov. 12 for P15,000, the P2,000 was return on Nov. 14. The discount should be
computed on the net amount payable or after the return if any.
Like purchases returns and allowances, purchases discounts is a contra

account that is deducted from purchases on the income statement. If the
entity makes a partial payment on an invoice, most creditors will allow the
entity to take the discount applicable to the partial payment. The discount
does not apply to transportation or other charges that might appear on the
invoice.
Transportation In
Case No. 1. Assume that G. Detoya Traders made purchases totalling P17,000
FOB destination, freight prepaid; terms 2/10, n/30. Transportation costs
amounted to P1,900. The entry would be:
Purchased merchandise on account;
terms, 2/10, n/30, FOB Destination,
freight prepaid.
There is no debit to transportation in account since the shipping term

provided that the seller should shoulder the transportation costs. In
addition, the seller prepaid the freight. If this invoice is paid on Dec.
5, the purchases discount will be P340 (P17,000 2%). The entry would be:
Dec 5 Accounts Payable 1 7 0 0 0

Cash 1 6 6 6 0
Case No. 2. Assume that G. Detoya made purchases totalling P17,000 FOB
shipping point, freight collect; terms 2/10, n/30. The transportation costs
amounted to P1,900. The entry to record this transaction would be:
Transportation In 1 9 0 0
Cash 1 9 0 0
Purchased merchandise on account;
terms, 2/10, n/30, FOB Shipping Point,
freight collect, P1,900.
If this invoice is paid on Dec. 5, the purchases discount will be P340

(P17,000 x 2%). Transportation in will form part of the net cost of
purchases.

Cash 1 6 6 6 0
18
Case No. 3. Now, assume that G. Detoya Traders made purchases totalling
P17,000 FOB destination, freight collect; terms 2/10, 1/30. The
Cash 1 9 0 0
terms, 2/10, n/30; FOB Destination,
freight collect, P1,900.00
Explanation:
Under FOB destination, the seller should pay the freight cost, but since, the term is freight
collect, it is the buyer who paid the freight cost but the amount of freight must be deducted to
the amount payable to the seller.
Accounts payable is decreased by the transportation charges paid by the

buyer for the benefit of the seller. If this invoice is paid on Dec. 5, the
purchases discount will be P340 (P17,000 x 2%) because the discount applies
to total purchases.

Cash 1 4 7 6 0
Case No. 4. Assume further that G. Detoya Traders made purchases totalling
P17,000 FOB shipping point freight prepaid; terms 2/10, n/30. The
Transportation In 1 9 0 0
terms, 2/10, n/30; FOB Shipping Point,
freight prepaid, P1,900.00
If this invoice is paid on Dec. 5, the purchases discount will be P340

(P17,000 x 2%). The buyer is not entitled to discounts on the
transportation costs. Discounts apply only to total purchases.

Cash 1 8 5 6 0
It will be useful to contrast these Transportation In' entries to the

Transportation Out' entries discussed earlier.
VALUE-ADDED TAX
Value-Added Tax (VAT) is a form of sales tax. It is a tax on consumption

levied on the sale, barter, exchange or lease of goods or properties and
services in the Philippines and on importation of goods into the
Philippines. It is an indirect tax, which may be shifted or passed on to
the buyer, transferee or lessee of goods, properties or services.
19
To simplify, it means that a certain tax rate (0% to 12%) is added up to
the selling price of a goods or services sold. It is also imposed on
imported goods from abroad.
Businesses not subjected to VAT are classified as Non-VAT business to be

subjected to Quarterly Percentage Tax (BIR Form No. 2551Q).
What are the Types of VAT and Tax Rate?
1. VATable- 12%
➢ On sale of goods and properties – twelve percent (12%) of the gross
selling price or gross value in money of the goods or properties
sold, bartered or exchanged
➢ On sale of services and use or lease of properties – twelve percent
(12%) of gross receipts derived from the sale or exchange of
services, including the use or lease of properties
➢ On importation of goods – twelve percent (12%) based on the total
value used by the Bureau of Customs in determining tariff and customs
duties, plus customs duties, excise taxes, if any, and other charges,
such as tax to be paid by the importer prior to the release of such
goods from customs custody; provided, that where the customs duties
are determined on the basis of quantity or volume of the goods, the
VAT shall be based on the landed cost plus excise taxes, if any.
2. VAT Zero-Rated – 0%
➢ Zero-rated is a sale, barter or exchange of goods, properties and/or
services subject to 0% VAT pursuant to Sections 106 (A) (2) and 108
(B) of the Tax Code.
➢ Zero-rated is usually pertaining to export sale of service or those
zero-rated as approved by special laws such as PEZA or Economic Zone
registered companies.
3. VAT Exempt – 0%
➢ A sale of goods or transactions is considered VAT Exempt if it falls
under SEC 109 – Exempt Transactions.
➢ Normally VAT Exempt transactions are basic necessities such as
agricultural products, tuition fees, lending activities, real
properties, books, transportation, etc.
Who are Required to File VAT Returns?

➢ Any person or entity who, in the course of his trade or business,
sells, barters, exchanges, leases goods or properties and renders
services subject to VAT, if the aggregate amount of actual gross sales
or receipts exceed Three Million Pesos (Php3,000,000.00)
➢ A person required to register as VAT taxpayer but failed to register
➢ Any person, whether or not made in the course of his trade or business,
who imports goods
Monthly VAT Declarations
BIR Form 2550M - Monthly Value-Added Tax Declaration
Documentary Requirements:
1. Duly issued Certificate of Creditable VAT Withheld at Source (BIR

Form No. 2307), if applicable
2. Summary Alphalist of Withholding Agents of Income Payments Subjected

to Withholding Tax at Source (SAWT), if applicable
3. Duly approved Tax Debit Memo, if applicable
20
4. Duly approved Tax Credit Certificate, if applicable
5. Authorization letter, if return is filed by authorized

representative.
Procedures
1. Fill-up BIR Form No. 2550M in triplicate copies (two copies for the
BIR and one copy for the taxpayer).
2. If there is payment:
➢ File the Monthly VAT declaration, together with the required
attachments, and pay the VAT due thereon with any Authorized
Agent Bank (AAB) under the jurisdiction of the Revenue District
Office (RDO)/Large Taxpayers District Office (LTDO) where the
taxpayer (head office of the business establishment) is
registered.
➢ Accomplish and submit BIR-prescribed deposit slip, which the bank

teller shall machine validate as evidence that payment was
received by the AAB. The AAB receiving the tax return shall stamp
mark the word "Received" on the return and machine validate the
return as proof of filing the return and payment of the tax.
➢ In places where there are no AAB, file the Monthly VAT

declaration, together with the required attachments and pay the
VAT due with the Revenue Collection Officer (RCO)
➢ The RCO shall issue a Revenue Official Receipt upon payment of

the tax.
3. If there is no payment:
➢ File the Monthly VAT Declaration, together with the required

attachments, with the RDO/LTDO/Large Taxpayers Assistance
Division, Collection Agent having jurisdiction over the
registered address of the taxpayer (head office of the business
establishment).
➢ Deadline: Manual Filing - Not later than the 20th day following
the end of each month and for eFPS user – depends on the
business industry groupings the said business belongs.
Quarterly Value-Added Tax Return
BIR Form No. 2550Q - Quarterly Value-Added Tax Return (February 2007 ENCS)
Documentary Requirements
1. Duly issued Certificate of Creditable VAT Withheld at Source (BIR
Form 2307), if applicable
2. Summary Alphalist of Withholding Agents of Income Payments Subjected
to Withholding Tax at Source (SAWT), if applicable
3. Duly approved Tax Debit Memo, if applicable
4. Duly approved Tax Credit Certificate, if applicable
5. Previously filed return and proof of payment, for amended return
6. Authorization letter, if return is filed by authorized representative
Procedures
Fill-up BIR Form 2550Q in triplicate copies (two copies for the BIR and one
copy for the taxpayer)
21
1. If there is payment:
➢ File the Monthly VAT declaration, together with the required
attachments, and pay the VAT due thereon with any Authorized
Agent Bank (AAB) under the jurisdiction of the Revenue District
Office (RDO)/Large Taxpayers District Office (LTDO) where the
taxpayer (head office of the business establishment) is
registered.
➢ Accomplish and submit BIR-prescribed deposit slip, which the bank
teller shall machine validate as evidence that payment was
received by the AAB. The AAB receiving the tax return shall stamp
mark the word "Received" on the return and machine validate the
return as proof of filing the return and payment of the tax.
➢ In places where there are no AAB, file the Monthly VAT
declaration, together with the required attachments and pay the
VAT due with the Revenue Collection Officer (RCO)
➢ The RCO shall issue a Revenue Official Receipt upon payment of
the tax.
2. If there is no payment:
➢ File the Quarterly VAT Return, together with the required
attachments with the RDO/LTDO/Large Taxpayers Assistance
Division, Collection Agent having jurisdiction over the
registered address of the taxpayer (head office of the business
establishment).
Reminders:
➢ Only one consolidated Monthly VAT Declaration/Quarterly VAT Return
shall be filed covering the results of operation of the head office as
well as the branches for all lines of business subject to VAT.
➢ The Quarterly Summary Lists of Sales and Purchases shall be submitted
in Compact Disk-Recordable (CDR) following the format provided under
Section 4.114-3(g) of RR No. 16-2005, as amended by RR No. 1-2012.
➢ The Quarterly Summary Lists of Sales and Purchases shall be submitted
through electronic filing facility for taxpayers under the jurisdiction
of the Large Taxpayers Service (LTS) and those enrolled under the eFPS.
➢ Deadline: Within twenty-five (25) days following the close of the
taxable quarter.
What is VAT RELIEF?

Reconciliation of Listing for Enforcement (RELIEF) is a BIR program or
software used to submit Quarterly Summary Lists of Sales and Purchases
(SLSP) which is a required attachment to BIR Form 2550Q – Quarterly VAT.
VAT Has Two Components:

1. Output VAT – are VAT levied on your revenues/sales transactions.
2. Input VAT – are VAT levied on your purchases/disbursements
transaction.
If you will take a look at any receipt, say, from your nearest store. You
will see a breakdown at the bottom. It would look something like this photo
below.
22
Notice how the VAT (12%) is separated from the Vatable Amount? In this
case, the shop earned Php 1,694.00 and the Php 181.50 (Gross Sales
Exclusive of VAT is equal to Php 1,694.00/1.12=Php1,512.50, this is the
amount to be reported to the BIR for the amount of sales, subtract Php
1,694.00 and Php1,512.50 is equal to Php181.50) goes directly to the BIR as
payment for VAT.
The Computation of VAT
VAT Payable is equivalent to Output VAT minus Input VAT. I included sample
spreadsheet computation here to provide more details. Of course this does
not represent the business world because there are other things to consider
(like valid expenses, withholding taxes, etc.).
Sales 1,694.00
Vatable Sales 1,512.50
Output VAT 181.50
Expenses 1,200.00
Actual Expenses 1,071.43
Input VAT 128.57
VAT Payable 52.93
VALUE ADDED TAX ENTRIES
Based on the above sample computation, the journal entries are as follows:
23
Seller's Point of View
1. Cash Sales:
Dr. Cash 1,694.00

Cr. Sales 1,512.50
Cr. Output VAT 181.50
2. Sales on Account:
Dr. Accounts Receivable 1,694.00

Cr. Sales 1,512.50
Cr. Output VAT 181.50
Buyer's Point of View
1. Cash Purchases/Expenses:
Dr. Purchases or Expenses 1,512.50

Dr. Input VAT 181.50
Cr. Cash 1,694.00
2. Purchases/Expenses on Account:
Dr. Purchases or Expenses 1,512.50

Dr. Input VAT 181.50
Cr. Accounts Payable 1,694.00
Another Illustration. Remedios Palaganas Feeds based in Pangasinan trades

specialty feeds for race horses, fighting cocks, aquarium fish, zoo animals
and other animals generally considered as pets. On May 13, 2018, Remedios
Palaganas Feeds purchased on account specialty feeds with a total amount
payable of P784,000. A wholesaler operating in the region bought for cash
all of the available feeds on May 25, 2018; amount of cash received was
P1,120,000. Remedios Palaganas Feeds paid the value-added tax due by month
end not minding the actual deadline.
The entries related to value-added tax are as follows:
May 13 Purchases 7 0 0 0 0 0
Input VAT 8 4 0 0 0
Accounts Payable 7 8 4 0 0 0
May 25 Cash 1 1 2 0 0 0 0
Sales 1 0 0 0 0 0 0
Output VAT 1 2 0 0 0 0
May 31 Output Tax 1 2 0 0 0 0

Input VAT 8 4 0 0 0
Vat Payable 3 6 0 0 0
May 31 VAT Payable 3 6 0 0 0

Cash in Bank/Cash 3 6 0 0 0
24
Input tax increased the amount to be paid but has no effect on the cost of
the purchases. Output tax also increased the amount collected but not
necessarily, the sales figure. The value of goods or properties sold and
subsequently returned or for which allowances were granted by a VAT-
registered person may be deducted from the gross sales or receipts for the
quarter in which the refund is made or a credit memorandum is issued. Sales
discounts granted or indicated in the invoice at the time of sale may be
excluded from the gross sales within the same quarter it was given.
Illustration. Assume that the wholesaler purchased the feeds from Dela Cruz
on account and that a 2% sales discount is available if the account is
settled within 10 days from invoice date. Dela Cruz was able to collect the
account on May 30. The related entry follows:
May 30 Cash 1 0 9 7 6 0 0
Output VAT 2 4 0 0
Sales Discounts 2 0 0 0 0
Accounts Receivable 1 1 2 0 0 0 0
Remedios Palaganas, because of the sales discounts granted, will pay value-
added tax due of P33,600 only.
OPERATING EXPENSES
Operating expenses make up the third major part of the income statement for
a merchandising entity. These are expenses, other than the cost of sales,
which are incurred to generate profit from the entity's major line of
business-merchandising. It customary to group operating expenses into
useful categories.
Distribution costs, administrative expenses and other operating expenses

are the categories. Distribution costs or selling expenses are those
expenses related directly to the entity's efforts to generate sales. These
include sales salaries and commissions, and the related employer payroll
expenses; advertising and store displays, traveling expenses; store
supplies used; depreciation of store property and equipment; and
transportation out.
Administrative expenses are those expenses related to the general

administration of the business. These include officers and office salaries,
and the related employer payroll expenses; office supplies used;
depreciation of office property and equipment; business taxes; professional
services; uncollectible accounts expense and other general office expenses.
Other operating expenses are those expenses that are not related to the
central operations of the business. These are expenses and losses from
peripheral or incidental transactions of the enterprise; for example, loss
on sale of investments or loss on sale of property and equipment.
APPENDIX
PERIODIC and PERPETUAL INVENTORY SYSTEMS COMPARED
This appendix will demonstrate the entries typically used with the periodic
inventory system, contrasted to the entries used with the perpetual
inventory system. Assume that the beginning inventory for the year is
P250,000. Assuming the transactions (nos. 1 to 7) were the only
transactions for the entire year, the balance in the inventory account at
year-end under the periodic inventory system is P250,000 (beginning
25
inventory). The year-end balance in the inventory account under the
perpetual inventory system is P231,860.
Under the perpetual inventory system, the inventory account is increased by

purchases, transportation in, and sales returns and is decreased by the
cost of sales, purchases returns and allowances, and purchases discounts.
At year-end, the physical inventory is taken, and it revealed that the

actual inventory on hand is P231,500. The year-end journal entries (nos. 8
to 10) are then made to bring the inventory account balance into agreement
with the amount of the physical inventory. When posted to the general
ledger, both the periodic and perpetual inventory systems result in the
same ending inventory amount, P231,500.
Video References:
https://www.youtube.com/watch?v=SARq3mfhS_k
https://www.youtube.com/watch?v=v0uC7WP3PCA
https://www.youtube.com/watch?v=fWi7YOumBKg
https://www.youtube.com/watch?v=ExzzYj1iSrw
https://www.youtube.com/watch?v=I_14-WonXa0
https://www.youtube.com/watch?v=lCG8j7lFACU
26
Exhibit 7-4
PERIODIC INVENTORY SYSTEM PERPETUAL INVENTORY SYSTEM
1 Sold merchandise on account costing P8,000 for P10,000 terms were 2/10,n/30.
Accounts Receivable 10,000 Accounts Receivable 10,000

Sales 10,000 Sales 10,000
Cost of Sales 8,000

Merchandise Inventory 8,000
2 Customer returned merchandise costing P400 that has been sold on account for P500 (part
of the P10,000 sale).
Sales Returns and Allowances 500 Sales Returns and Allowances 500
Accounts Receivable 500 Accounts Receivable 500
Merchandise Inventory 400

Cost of Sales 400
3 Received payment from customer for merchandise sold above [cash discount taken:(P10,000 sale-P500 return)
x 2% discount =P190]
Cash 9,310 Cash 9,310

Sales Discounts 190 Sales Discounts 190
Accounts Receivable 9,500 Accounts Receivable 9,500
4 Purchased merchandise on account for resale for P6,000; terms were 2/10,n30 (purchases recorded at
invoice price)
Purchases 6,000 Merchandise Inventory 6,000

Accounts Payable 6,000 Accounts Payable 6,000
27
PERIODIC INVENTORY SYSTEM PERPETUAL INVENTORY SYSTEM
5 Paid P200 freight on the P6,000 purchase; terms were FOB shipping point, freight collect:
Transportation In 200 Merchandise Inventory 200

Cash 200 Cash 200
6 Returned merchandise costing P300 (part of the P6,000 purchase):
Accounts Payable 300 Accounts Payable 300

Purchases Returns and Allowances 300 Merchandise Inventory 300
7 Paid for merchandise purchased, refer to no. 4 [cash discount taken: (P6,000 purchase - P300 return)
x 2% discount =P114]:
Accounts Payable 5,700 Accounts Payable 5,700

Purchases Discounts 114 Merchandise Inventory 114
Cash 5,586 Cash 5,586
8 To transfer the beginning inventory balance to Income Summary account (party of the closing entries
under the periodic inventory system)
Income Summary 250,000 No Entry Required

9 To record the ending inventory balance (part of the closing entries under the periodic inventory system):
Merchandise Inventory 231,500 No Entry Required

Income Summary 231,500
10 To adjust the ending perpetual inventory balance for the shrinkage during the year:
Shrinkage already effected in No. 9 entry Cost of Sales 360

Merchandise Inventory 360
28
EXTEND
Name: _________________________________________ Time: _____________________
Renz Aguhob Fireworks engaged in the following purchase transactions during

the month. The entity observes the policy that all returns are made one
day after the goods are received. (1pt each)
Date of Freight Purchases Date of

Purchase List Price FOB Terms Charges Returns and Credit Terms Trade Discount Payment
Allowances
1 Dec. 1 250,000 Shipping Pt 4,000 21,000 2/10,n/30 25% Dec. 11
2 Dec. 5 150,000 Destination 9,000 - 1/10,n/30 15% Dec. 16
3 Dec. 12 100,000 Shipping Pt 2,000 7,000 2/10,n/30 5% Dec. 15
4 Dec. 15 50,000 Shipping Pt 1,000 9,000 n/30 20% Dec. 23
5 Dec. 21 360,000 Destination 14,000 24,000 3/10,n/30 18% Dec. 23
Required: Using the table above, calculate the amount of the; (a)trade
discount, (b) cash discount, (c) invoice price, and the (d) payable to the
seller.
Amount 1 2 3 4 5
a Trade Discount
b Invoice Price
c Cash Discount
d Amount Payable
EVALUATE
Name: _________________________________________ Time: _____________________
I. Essay. (5pts each)
A. Describe merchandising activities.

B. Explain the operating cycle of a merchandising entity (cash sales and
sales on account).
C. Explain the differences between periodic and perpetual inventory
systems.
D. Is there really a need for a physical count under the periodic inventory
system? Why?
II. Problem Solving.
On January 12, Nelson Daganta bought merchandise from Jahara Ibrahim on

credit, P100,000. Term: 2/10,n/30. P20,000 cost of merchandise was later
returned. The credit memo was dated January 15. Payment date was January
20. Required: Journalize the above transactions.
Journal Entries if both parties are NonVAT registered businesses:
29
BOOK OF NELSON DAGANTA BOOK OF JAHARA IBRAHIM
Jan. 12 Jan. 12
Jan. 15 Jan. 15
Jan. 20 Jan. 20
Journal Entries if both parties are VAT registered businesses:
BOOK OF NELSON DAGANTA BOOK OF JAHARA IBRAHIM
Jan. 12 Jan. 12
Jan. 15 Jan. 15
Jan. 20 Jan. 20
V. Topic Summary
➢ In Merchandising concern, the business is engaged in buying of goods or
commodities in raw or finished form and directly selling them for a
profit. These goods or commodities are being termed as “Merchandise”.
The business, therefore may be a “Buyer” or at one hand and a seller on
the other hand. Basically, there are two major activities that the
business is involved in. These are the buying or purchasing and selling
activities.
➢ When the merchandise purchases have some defects or do not conform with
the orders, the buyer has two options to do: 1) return the merchandise
and ask for a refund or credit memo; and 2) retain the merchandise and
request for a reduction of the price the seller has already charged. The
account title used to record these return is Sales Returns and
Allowances on the books of the seller and Purchases Returns and
Allowances on the books of the buyer.
➢ When the buyer is given by the seller an inducement by letting him pay
the price lower than what should have been, the amount which has been
deducted from the list price is called a “Discount”. This is recorded
by the buyer as Purchases Discounts and by the seller as Sales
Discounts.
30
➢ There are two types of Purchase Discounts that may be availed by the
buyer: Cash Discount and Trade Discount.
➢ Cash discount is given to the buyer to encourage him to pay his account
within the stated discount period.
➢ Trade discount is a spot discount or outright discount from a list
price. This encourages the buyer to purchase merchandise in volume.
➢ Input VAT is presented in the Current Assets section of the Statement of
Financial Position while the Output VAT is in the Current Liability
section.
➢ All VAT registered business establishment are required to declare their
monthly sales and purchases corresponding output and input tax using BIR
Form No. 2550M for monthly declarations and BIR Form No. 2550Q for
quarterly declarations. The rate of tax is 12%.
➢ Businesses that does not qualify for the VAT threshold of P3M sales or
receipts in a year, will file with the Bureau of Internal Revenue the
BIR Form No. 2551Q, the Quarterly Percentage Tax. The rate of tax is 3%
of gross sales.
➢ Merchandise inventory is cost of goods at the end of an accounting
period which are still on hand or unsold.
➢ F.O.B. stands for “free on board”.
➢ F.O.B. Shipping Point, the ownership of merchandise is transferred from
the seller to the buyer at the moment the merchandise is loaded to the
vessel or courier company at “the shipping point” or “point of origin”
regardless of the invoice date of the seller. Here, the buyer should pay
for the transportation cost. The freight cost if recorded by the buyer
as Transportation In.
➢ F.O.B. Destination, the ownership of merchandise is transferred from the
seller to the buyer at the moment the merchandise is unloaded from the
vessel or delivered by the courier company upon reaching its
destination. This time, it’s the seller who should pay for the
transportation cost. The transportation cost paid by the seller is
recorded as Transportation Out.
VI. Post-Assessment
Name: _________________________________________ Time: _____________________
Ramos Distributors and Cammayo Retailers engaged in the following

transactions during the month of May. Assume both are NonVAT registered.
May 4 Ramos sold merchandise on account to Cammayo, P162,000. Terms:

FOB destination; 2/10,n/30. Freight charges amounted to
P2,000. Cost price is 60% of sales price.
5 Ramos sold merchandise on account to Cammayo, P710,000. Terms:
FOB shipping point; 2/10,n/30. Freight charges amounted to
P8,000. Cost price is P426,000.
6 Cammayo paid freight charges on the purchase on May 5.
7 Ramos received returned merchandise from Cammayo in the amount
Of P12,000 from the May 4 sale.
9 Ramos received payment from Cammayo for the May 4 transaction
Less returns and discounts.
10 Ramos paid the transportation charges on the May 4 shipment.
12 Ramos received payment from Cammayo for the May 5 transaction.
18 Ramos sold merchandise on account to Cammayo, P250,000. Terms:
40% trade discount; FOB shipping point; 2/10,n/30. Cost price
is P90,000.
21 Cammayo paid freight charges on the May 18 transaction, P3,000.
23 Ramos received payment from Cammayo for the amount due from
The transaction on May 18.
31
Required: Prepare journal entries on the books of Ramos Distributors and Cammayo Retailers using the (1) periodic
inventory system and the (2) perpetual inventory system. Use the form below to answer. (1pt each)
PERIODIC INVENTORY SYSTEM

Books of Ramos Distributors (SELLER) Books of Cammayo Retailers (BUYER)
May 4 May 4
5 5
6 6
7 7
9 9
10 10
12 12
18 18
21 21
23 23
32
PERPETUAL INVENTORY SYSTEM
Books of Ramos Distributors (SELLER) Books of Cammayo Retailers (BUYER)
May 4 May 4
5 5
6 6
7 7
9 9
10 10
12 12
18 18
21 21
23 23
33
VII. References
Ballada, Win and Susan Ballada. (2018). Basic Accounting Made Easy 21st Edition.
Manila: Domdane Publishers and Made Easy Books.
Ballada, Win and Susan Ballada. (2019). Accounting Fundamentals Made East 2019
Issue- 5th Edition. Manila: Domdane Publishers and Made Easy Books.
Lopez, Rafael M. Jr. (2008). Fundamentals of Accounting Millennial Edition. Davao City:
MS Lopez Printing and Publishing.
Ledesma, Ester L. (2014). Financial Accounting Theory Review Booklets. Manila: CRC-Ace
The Professional CPA Review School.
Rante, Gloria Aradaniel. (2013). Accounting for Service Entities. Mandaluyong City:
Millenium Books, Inc.
Ferrer, Rodiel C. and Millan, Zeus Vernon B. (2017). Fundamentals of Accountancy,
Business and Management Part 1. Baguio City: Bandolin Enterprise.
34
Lesson 2
Completing the Cycle for Merchandising Business
The lesson discusses about the Steps Number 5 to 10 of the accounting cycle in
application to trading or merchandising operations.
At the end of the lesson, the student learners should be able to:
1. determine the entries for merchandise inventory using either the
adjusting entry method and the closing entry method;
2. prepare the adjusting entries for a merchandising entity;
3. recognize the need for a worksheet and summarize how the new accounts
related to merchandising transactions are handled in the worksheet;
4. prepare accurately and in good form an eight-column worksheet;
5. understand and appreciate the usefulness of financial statements;
6. develop skills in the preparation of financial statements;
7. compare income statements prepared under the nature of expense and
function of expense methods;
8. understand the relationship between sales, cost of sales, gross profit
and net income;
9. explain why temporary accounts are closed each period;
10. recognize the need for a post-closing trial balance and reversing
entries in particular instances;
11. prepare closing entries, post-closing trial balance and reversing
entries; and
12. explain how the worksheet under a perpetual inventory system differs
from that prepared under a periodic inventory system;
II. Pre-Assessment
Name: _________________________________________ Time: _____________________
Instruction: After each statement, encircle TRUE if the statement is correct

or FALSE if the statement is incorrect: (1pt each)
1. The determination of net cost of purchases would include addition of

transportation out. TRUE FALSE
2. The traditional statement of financial position arrangement of assets on
the left-hand side with the liabilities and owner’s equity on the right-
hand side is called the report form. TRUE FALSE
3. The closing entry for Transportation In debits purchases and credits
income summary. TRUE FALSE
4. On the worksheet of a merchandising entity that uses the perpetual
inventory system will have a Transportation In account. TRUE FALSE
5. The purchases account is closed to the Merchandise Inventory account. TRUE
FALSE
6. Under the periodic inventory system, the Merchandise Inventory account
appears in the closing entries made at the end of the period. TRUE FALSE
7. When preparing closing entries under the periodic inventory system, Sales
and Purchases Returns and Allowances are both not closed at the end of the
period. TRUE FALSE
8. Sales Discounts is a contra-revenue account with a normal credit balance.
TRUE FALSE
9. Purchases Discounts would be recorded as a debit entry. TRUE FALSE
10. The inventory account will appear on the statement of financial position
as a current asset and recorded on its sales price value. TRUE FALSE
35
III. Lesson Map
Step 10-
Reversing Step 1-
Journal Identification
Entries
Step 9-
Post- Step 2-
Closing Journalizin
Trial g
Balance
Step 8-
Closing Step 3-
Journal Posting
Entries
Step 7-
Step 4-
Adjusting
Trial
Journal
Balance
Entries
Step 6-
Step 5-
Financial
Worksheet
Statements
The map shows the 10 Accounting Cycle which defines the work leg to be done by
an accounting staff for every accounting period or calendar year/fiscal year.
The cycle is repeated every year for all types of businesses be it a sole
proprietorship, partnership, corporation or a cooperative across the different
nature of business.
36
IV. Core Content
ENGAGE
Name: _________________________________________ Time: _____________________
To test your knowledge of the relationships of these items, insert the missing
figure in the following statement of income. Note that gross profit is 40% of
net sales and profit is 10% of net sales.
Net Sales
Gross Sales
Less: Sales Returns and Allowances 45,000
Sales Discounts 15,000
Net Sales
Cost of Goods Sold
Merchandise Inventory, January 1, 2018 220,000
Add Net Purchases
Purchases 985,000
Total
Less: Purchases Returns and Allowances 31,000
Purchases Discounts 20,000
Net Purchases
Cost of Goods Available for Sale
Less: Merchandise Inventory, December 31, 2018 260,000
Cost of Goods Sold
Gross Profit or Gross Margin from Sales 620,000
Operating Expenses
Profit or Net Income
Legend: - are the missing items
EXPLORE
Name: _________________________________________ Time: _____________________
Inquire from at least five (5) existing sole proprietorship businesses engaged
in trading or merchandising in Surigao or in your area on the following:
1. what type of inventory system they are using (perpetual or periodic)?
2. The reasons why they chose such inventory?
Note: write your answers in a yellow paper using the format below.
Name of Business Establishment Reason(s) for the Choice of system

1
2
3
4
5
37
EXPLAIN
NEED FOR A PHYSICAL COUNT
In the periodic inventory system, purchases of merchandise are accumulated in

the purchases account. During the accounting period, no entry is made to the
merchandise inventory account such that its balance at the end of the period,
before adjusting and closing entries, is the same as the beginning inventory.
With no perpetual record of the cost of sales during the period, the only way
to obtain the cost of the ending inventory is to make a physical count.
It should be noted that the ending inventory amount is needed in the

computation of the cost of sales. To recapitulate, ending inventory is
deducted from goods available for sale to obtain cost of sales. The steps
involved in the physical count follows:
a. All merchandise owned by the entity is counted;
b. The quantity counted is multiplied by the cost per unit for each
inventory item;
c. The costs of various items are added to determine the total cost of
inventory.
The resulting total cost of inventory is the ending inventory; this amount
will appear as a deduction in the cost of sales section of the income
statement, and as a current asset in the balance sheet The physical count is
made at or near the balance sheet date.
A reliable physical count is very significant because the ending inventory

amount affects both the income statement and the balance sheet For example, an
understatement of ending inventory in the 2018 income statement will cause an
overstatement of cost of sales. in effect, gross profit and profit will be
understated. The understatement of ending inventory in the current period
means that the beginning inventory of the next period will also be
understated. As a result of this error or omission, the current assets and the
owner's equity in the 2018 balance sheet would be understated. In summary an
error in valuing ending inventory will translate into one inaccurate balance
sheet and two incorrect income statements.
MERCHANDISE INVENTORY AT THE END OF THE PERIOD
At the end of the period, entries are made to reflect in the inventory account
the ending balance. The objectives of these entries are as follows:
a. to remove the beginning balance from the merchandise inventory account

and to transfer it to income summary;
b. to enter the ending balance in the merchandise inventory account and to

establish it in the income summary.
The attainment of the objectives is illustrated using the figures from G.

Detoya Traders:
38
Jan 1 Beginning Balance 528,000 Dec 31 Effect A (Beginning Balance) 528,000
Dec 31 Effect A (Ending Balance) 483,000
Income Summary
Dec 31 Effect A 528,000 Dec 31 Effect B 483,000
In this example, merchandise inventory was P528,000 at the beginning of the

year and P483,000 at the end of the year. Effect A removed the P528,000 from
the merchandise inventory account and transferred it to income summary. In
income summary, the P528,000 is in effect added to net cost of purchases
because, like expenses, the balance of the purchases account debited to income
summary by a closing entry.
Effect B established the ending balance of merchandise inventory of P483,000

and entered it as a credit in the income summary account. The credit entry in
income summary has the effect of deducting the ending inventory from goods
available for sale because both purchases and beginning inventory are entered
on the debit side. To summarize, beginning merchandise inventory and purchases
are debits to income summary; while ending merchandise inventory is a credit
to income summary.
Thus, the objectives stated above are accomplished if effects A and B

concurred. The question then arises as to how to achieve these effects. Two
acceptable methods are available adjusting entry method and the closing entry
method. Each method produces exactly the same result.
The Adjusting Entry Method
Using the adjusting entry method, the two entries indicated by effects A and B
which are prepared at the time the other adjusting entries are made follow:
Dec 31 Income Summary 528,000

Merchandise Inventory, Beginning 528,000
To remove beginning balance of merchandise
inventory and transafer it to income summary.
Dec 31 Merchandise Inventory, End 483,000

Income Summary 483,000
To establish ending balance of merchandise
inventory and deduct it from goods available
for sale in income summary.
The Closing Entry Method
The closing entry method makes the debit and the credit to merchandise
inventory by including them among the closing entries as follows:
39
Dec 31 Income Summary XXXX
Temporary Accounts with Debit Balances XXXX
To close temporary accounts with debit
balances and to remove beginning inventory.

Temporary Accounts with Credit Balances XXXX
Income Summary XXXX
To close temporary accounts with credit
balances and to establish ending inventory.
Notice that in both methods, merchandise inventory is credited for the

beginning balance and debited for the ending balance and that the opposite
entries are made to income summary.
PREPARING THE WORKSHEET
The worksheet of a merchandising business is the same as that of a service

business except that it has to deal with the new accounts related to
merchandising transactions These accounts include sales, sales returns and
allowances, sales discounts, purchases, purchases returns and allowances,
purchases discounts, transportation in, merchandise Inventory and
transportation out. The worksheet for G Detoya Traders using the closing entry
method is shown in Exhibit 8-1. Each pair of columns in the worksheet, and the
adjusting and closing entries are discussed as follows:
Trial Balance Columns. The first step in the preparation of the worksheet is
to enter the balances from the ledger accounts into the trial balance columns.
The merchandise inventory account balance of P528,000 is the cost of beginning
inventory.
Adjustment Columns. Under the closing entry method of handling merchandise

inventory, the adjusting entries for G. Detoya Traders are entered in the
adjustments columns in the same way that they were for service entities. These
involve insurance expired during the period (adjustment a), store and office
supplies used (adjs. b & c), depreciation of building and office equipment
(adjs. d & e); accrual of interest expense (adj. f). No adjusting entry is
made for merchandise inventory because the closing entry method was used.
After the adjusting entries are entered in the worksheet, the trial balance
columns and adjustment columns are totaled to prove the equality of the debits
and credits.
Omission of Adjusted Trial Balance Columns. These two columns are used when
there are many adjusting entries to be considered. When only a few adjusting
entries are required, as in this case, these columns are not necessary and may
be omitted.
Income Statement and Balance Sheet Columns. After the trial balance columns
have been totaled, the adjustments entered, and the equality of the columns
proved, the balances are extended to the statement columns. Each account
balance is entered in the proper column of the income statement or balance
sheet.
The extension of the beginning and ending inventory balances requires some new
procedures. First, the beginning inventory balance of P528,000 is extended to
the debit column of the income statement as illustrated in Exhibit 8-1. This
procedure has the effect of adding beginning inventory to net cost of
40
purchases, observe that the purchases account is also in the debit column of
the income statement.
Second, the ending inventory balance of P483,000 which is not in the trial
balance is entered in the credit column of the income statement. This
procedure has the effect of subtracting the ending inventory from goods
available for sale. Note that two inventory amounts appeared in the income
statement columns This is because both the beginning inventory and the ending
inventory are needed in the computation of cost of sales.
Finally, the ending inventory is also entered in the debit column of the
balance sheet. After all the items have been extended to the proper statement
columns, the four columns are totaled. The profit or loss is determined as the
difference between the debit and credit columns of the income statement. In
this case, G. Detoya Traders earned a profit of P455,210, which is extended to
the credit column of the balance sheet. The four columns are then added to
prove the equality of the debits and credits.
The worksheet in a perpetual inventory system is described at the end of this

chapter.
Video Reference:
https://www.youtube.com/watch?v=ZYj6-pDXeKo
https://www.youtube.com/watch?v=6GZPGRw4lG0
https://www.youtube.com/watch?v=5r0yp2IydCA
https://www.youtube.com/watch?v=gFv2iYtcgGA
https://www.youtube.com/watch?v=op-NejHskys
41
Worksheet
Acct Statement of Financial

Trial Balance Adjustments Statement of Income
Code Account Title Position
Debit Credit Debit Credit Debit Credit Debit Credit
Cash 304,500 304,500
Accounts Receivable 484,200 484,200
Merchandise Inventory 528,000 528,000 483,000 483,000
Store Supplies 26,000 b 15,400 10,600
Office Supplies 18,400 c 12,040 6,360
Prepaid Insurance 13,800 a 9,200 4,600
Land 145,000 145,000
Building 202,600 202,600
Accumulated Depreciation-Building 56,500 d 26,000 82,500
Office Equipment 86,000 86,000
Accumulated Depreciation-Office Equipment 28,000 e 22,000 50,000
Accounts Payable 206,830 206,830
Salaries Payable 20,000 20,000
Interest Payable f 38,400 38,400
Long-term Notes Payable 480,000 480,000
Detoya, Capital 593,920 593,920
Detoya, Withdrawals 200,000 200,000
Income Summary 455,210 455,210
Sales 2,463,500 2,463,500
Sales Returns and Allowances 27,500 27,500
Purchases 1,264,000 1,264,000
Purchases Returns and Allowances 56,400 56,400
Transportation In 82,360 82,360
Sales Salaries Expense 225,000 225,000
Office Salaries Expense 171,000 171,000
Store Supplies Expense b 15,400 15,400
Office Supplies Expense c 12,040 12,040
Insurance Expense-Selling a 5,600 5,600
Insurance Expense-General a 3,600 3,600
Transportation Out 57,400 57,400
Utilities Expense 48,000 48,000
Depreciation Expense-Building d 26,000 26,000
Depreciation Expense-Office Equipment e 22,000 22,000
Interest Expense f 38,400 38,400
Totals 3,926,510 3,926,510 123,040 123,040 3,024,260 3,024,260 1,926,860 1,926,860
Exhibit 8-1 Worksheet for Gloria Detoya Traders (Closing Entry Method)
42
PREPARING THE FINANCIAL STATEMENTS
Statement of Income or Income Statement
The discussion on the major parts of the income statement for a

merchandising entity has been made in the previous chapter. The statement
may be prepared by referring to the income statement columns of the
worksheet. Per revised PAS No. 1, an enterprise should present an analysis
of expenses using a classification based on either the nature of expenses
or their function within the entity, whichever provides information that is
reliable and more relevant. Entities are encouraged to present the analysis
of expenses on the face of the income statement.
Nature of Expense Method
Expenses are aggregated or combined in the income statement according to

their nature and are not reallocated among various functions within the
entity. This method is simple to apply in many smaller enterprises because
no allocation of operating expenses between functional classifications is
necessary. Examples include raw materials and consumables used, employee
benefits expense, depreciation and amortization expense, transportation
costs, advertising costs and other operating expenses.
Function of Expense Method
This method, also referred to as the "cost of sales" method, classifies

expenses according to their function as part of cost of sales,
distribution/selling, administrative and other operating activities. This
presentation often provides information that is more relevant to users than
the nature of expense method but the allocation of costs to functions can
be arbitrary and involves considerable judgment. This method provides
multiple classifications and intermediate differences to highlight
significant relationships.
In a merchandising business, net sales arise from the sale of goods while
cost of sales or cost of goods sold represents the cost of inventory the
entity has sold to customers. The difference between net sales and cost of
sales is called gross profit.
Then, other operating income is added and operating expenses (like

distribution costs, administrative expenses and other operating expenses)
are deducted from gross profit to arrive at operating profit.
Investment revenues, other gains and losses, and finance costs (e.g.
interest expense) are considered to arrive at profit before tax then income
tax expense is deducted to arrive at profit from continuing operations.
Finally, profit from discontinued operations (net of tax) is taken to
account to get profit for the period.
43
Net Sales P XXXXX
Cost of Sales (XXXXX)
Gross Profit XXXXX
Other Operating Income XXXXX
Total XXXXX
Operating Expenses
Distibution Costs P XXXXX
Administrative Expenses XXXXX
Other Operating Expenses XXXXX (XXXXX)
Operating Profit XXXXX
Finance Costs (XXXXX)
Investment Revenues XXXXX
Profit from Continuing Operations XXXXX
Profit from Discontinued Operations XXXXX
Profit P XXXXX
The difference between the two methods lies in the items above operating
profit. The standard does not prescribe any format. The choice between the
two methods depends on historical and industry factors and the nature of
the entity.
Exhibit 8-2 shows the statement of income or income statement for G Detoya
Traders using expense method:
44
Statement of Income
Net Sales
Less: Sales Returns and Allowances P 27,500
Net Sales 2,393,250
Cost of Sales
Merchandise Inventory, 1/1/2018 528,000
Add Net Purchases:
Purchases P 1,264,000
Total 1,346,360
Less: Purchases Returns and Allowances P 56,400
Net Purchases 1,268,600
Cost of Goods Available for Sale 1,796,600
Less: Merchandise Inventory, 12/31/2018 483,000
Gross Profit 1,079,650
Operating Expenses
Selling Expenses
Sales Salaries 225,000
Transportation Out 57,400
store Supplies Expense 15,400
Insurance Expense-Selling 5,600
Total Selling Expenses 303,400
Administrative Expenses
Office Salaries Expense 171,000
Utilities Expense 48,000
Depreciation Expense-Building 26,000
Depreciation Expense-Office Equipment 22,000
Office Supplies Expense 12,040
Insurance Expense-General 3,600
Total Administrative Expenses 282,640
Total Operating Expenses 586,040
Operating Profit 493,610
Finance Costs (Interest Expense) 38,400
Profit P 455,210
Exhibit 8-2 Statement of Income (Using the Function of Expense Method)
Statement of Changes in Equity or Statement of Equity

Statement of Changes in Equity
Detoya, Capital, 1/1/2018 P 593,920

Add: Initial/ Additional Investment P -
Profit 455,210 455,210
Total 1,049,130
Less: Withdrawals 200,000
Detoya, Capital, 12/31/2018 P 849,130
Exhibit 8-3 Statement of Changes in Equity or Statement of Equity
45
Statement of Financial Position or Balance Sheet
The statement of financial position or balance sheet dated "December 31,

2018" is implicitly understood to mean "at the close of business on
December 31, 2018."

Statement of Financial Position
As of December 31, 2018
ASSETS
Current Assets
Cash P 304,500
Accounts Receivable 484,200
Store Supplies 10,600
Office Supplies 6,360
Prepaid Insurance 4,600
Total Current Assets P 1,293,260
Noncurrent Assets
Land 145,000
Building P 202,600
Less: Accumulated Depreciation 82,500 120,100
Office Equipment 86,000
Less: Accumulated Depreciation 50,000 36,000
Total Noncurrent Assets 301,100
TOTAL ASSETS P 1,594,360
LIABILITIES AND EQUITY
Current Liabilities
Accounts Payable P 206,830
Salaries Payable 20,000
Interest Payable 38,400
Total Current Liabilities P 265,230
Noncurrent Liabilities
16% Notes Payable, Due on June 30, 2020 480,000
Total Noncurrent Liabilities 480,000
Owner's Equity
Detoya, Capital, December 31 849,130
Total Owner's Equity 849,130
TOTAL LIABILITIES AND EQUITY P 1,594,360
Exhibit 8-4 Classified Statement of Financial Position or Balance Sheet
ADJUSTING AND CLOSING ENTRIES
The adjusting entries are journalized and posted to the ledger as they
would be in a service entity. The closing entries for G. Detoya Traders
under the closing entry method appear in Exhibit 8-5.
Note that merchandise inventory is credited in the 1st entry for the amount
of the beginning inventory, P528,000; and debited in the 2nd entry for the
ending inventory, P483,000. Except for the closing of the temporary
accounts typical of a merchandising business, the closing procedures are
the same with that of a service business.
46
Exhibit 8-5
Closing Entries for G. Detoya Traders: Closing Entry Method

Sales 2,463,500
Purchases Returns and Allowances 56,400
Income Summary 3,024,260
To close temporary accounts with
credit balances and to establish
the ending merchandise inventory.
31 Income Summary 2,569,050

Sales Returns and Allowances 27,500
Purchases 1,264,000
Sales Salaries Expense 225,000
Office Salaries Expense 171,000
Store Supplies Expense 15,400
Office Supplies Expense 12,040
Insurance Expense-Selling 5,600
Insurance Expense-General 3,600
Utilities Expense 48,000
Depreciation Expense-Store Equipment 26,000
Depreciation Expense-Office Equipment 22,000
Interest Expense 38,400
To close temporary accounts with
debit balances and to remove
beginning inventory.
31 Income Summary 455,210

Detoya, Capital 455,210
To close the income summary account.
31 Detoya, Capital 200,000

Detoya, Withdrawals 200,000
To close the withdrawal account.
POST-CLOSING TRIAL BALANCE
A final trial balance is prepared to test the equality of the accounts

after posting the adjusting and closing entries. This trial balance is
similar to the one discussed in the service business except for the
addition of the merchandise inventory account.
47
Post-Closing Trial Balance
Cash P 304,500
Store Supplies 10,600
Land 145,000
Building 202,600
Accumulated Depreciation-Building P 82,500
Accumulated Depreciation-Office Equipment 50,000
Accounts Payable 206,830
Interest Payable 38,400
16% Notes Payable 480,000
Detoya, Capital 849,130
Totals P 1,726,860 P 1,726,860
Exhibit 8-6 Post-Closing Trial Balance
APPENDIX
WORKSHEET IN A PERPETUAL INVENTORY SYSTEM
The worksheet is prepared after all transactions for the year have been
journalized and posted as shown in Exhibit 8-7. However, the following
should be noted:
3. The inventory amount in the trial balance is the year-end balance since
the inventory account is perpetually updated. There will be no
merchandise inventory adjusting or closing entry unlike when the
periodic inventory system is used. The year-end inventory balance will
simply be extended to the debit column of the balance sheet.
4. The cost of sales account is a ledger account in the perpetual system.

There will be no accounts for purchases, purchases returns and
allowances, purchases discounts and transportation in because related to
these items is recorded directly to the inventory account. When the
closing entries are made, cost of sales will be closed with the
temporary accounts with debit balances.
5. The adjustments are handled in exactly the same was as they are handled
in the periodic worksheet.
6. An adjusting entry is necessary when the year-end inventory account

balance does not tally with the physical inventory account.
48
Worksheet
Acct Statement of Financial

Code Account Title Position
Cash 304,500 304,500
Accounts Receivable 484,200 484,200
Merchandise Inventory 483,000 483,000
Store Supplies 26,000 b 15,400 10,600
Office Supplies 18,400 c 12,040 6,360
Prepaid Insurance 13,800 a 9,200 4,600
Land 145,000 145,000
Building 202,600 202,600
Accumulated Depreciation-Building 56,500 d 26,000 82,500
Office Equipment 86,000 86,000
Accumulated Depreciation-Office Equipment 28,000 e 22,000 50,000
Accounts Payable 206,830 206,830
Salaries Payable 20,000 20,000
Interest Payable f 38,400 38,400
Long-term Notes Payable 480,000 480,000
Detoya, Capital 593,920 593,920
Detoya, Withdrawals 200,000 200,000
Income Summary 455,210 455,210
Sales 2,463,500 2,463,500
Sales Returns and Allowances 27,500 27,500
Cost of Sales 1,313,600 1,313,600
Sales Salaries Expense 225,000 225,000
Office Salaries Expense 171,000 171,000
Store Supplies Expense b 15,400 15,400
Office Supplies Expense c 12,040 12,040
Insurance Expense-Selling a 5,600 5,600
Insurance Expense-General a 3,600 3,600
Transportation Out 57,400 57,400
Utilities Expense 48,000 48,000
Depreciation Expense-Building d 26,000 26,000
Depreciation Expense-Office Equipment e 22,000 22,000
Interest Expense f 38,400 38,400
Totals 3,848,750 3,848,750 123,040 123,040 2,463,500 2,463,500 1,926,860 1,926,860
Exhibit 8-7 Worksheet for Gloria Detoya Traders under Perpetual Inventory System
49
Comprehensive Sample for Merchandising Operations for a VATable business:
Listed below are the Feb. 1, 2015 account balances of the Teresita Buenaflor
Shoes:
110 Cash 33,000

120 Accounts Receivable 192,000
125 Input VAT
130 Merchandise Inventory 413,000
140 Supplies 51,000
150 Prepaid Insurance 48,000
160 Land 460,000
170 Building 1,750,000
175 Accumulated Depreciation-Building 350,000
180 Equipment 2,310,000
185 Accumulated Depreciation-Equipment 630,000
210 Accounts Payable 108,000
220 Salaries Payable
230 Mortgage Payable 2,600,000
310 Buenaflor, Capital 1,569,000
320 Buenaflor, Withdrawals
330 Income Summary
410 Sales
420 Sales Returns and Allowances
430 Sales Discounts
440 Output VAT
510 Purchases
520 Purchases Returns and Allowances
530 Purchases Discounts
540 Transportation In
610 Salaries Expense
620 Supplies Expense
630 Insurance Expense
640 Depreciation Expense-Building
650 Depreciation Expense-Equipment
660 Transportation Out
670 Advertising Expense
680 Interest Expense
690 Miscellaneous Expense
Totals 5,257,000 5,257,000
During the month of February 2015, the following transactions occurred:
Feb 1 Collected P113,000 from customers on account.

2 Paid P64,000 of accounts die less discounts of 3%.
4 Purchased merchandise, P170,000. Terms: FOB Shipping Point;
3/10,n/30.
5 Sold merchandise on account to Gonzales Inc., P270,000. Terms:
FOB Shipping Point; 2/10,n/30.
7 Paid for advertising for the month of February, P6,000.
7 Sold merchandise for cash, P250,000.
8 Paid the amount due from the Feb. 4 transaction.
9 Paid Iloilo Freight P4,000 for delivering merchandise last
Feb. 4.
10 Received returns from Gonzales Inc., P70,000.
50
12 Received payment from the Gonzales Inc. less returns and
Discounts.
14 Paid P26,000 interest on the mortgage payable.
15 Paid salaries, P51,000.
16 Sold merchandise on account to Ronzales Corp., P392,000.
Terms: FOB destination; 2/10,n/30.
18 Paid P4,000 freight charges on the sale of Feb.16.
19 Acquired supplies for cash, P21,000.
20 Purchased P125,000 of merchandise from Lozada Imports on account.
Terms: FOB Destination; 3/10,n/30.
22 Paid P7,000 miscellaneous expenses.
23 Received payment from Rozales Corp. less discounts.
24 Purchased P373,000 of merchandise on account from Agustin
Enterprises. Terms: FOB Shipping Point; 3/10,n/30.
24 Paid La Paz Express P9,000 freight for delivering merchandise
acquired from Agustin.
25 Sold merchandise to Ronzales Corp. on account, P420,000. Terms:
FOB Shipping Point; 2/10,n/30.
26 Received returns from Ronzales Corp., P71,000.
28 Buenaflor withdrew P400,000 from the business.
28 Returned merchandise purchased from Agustin on June 24, P25,000.
Required:
1. Post the Feb. 1, 2015 account balances to the ledger accounts.
2. Record the transactions for the month of February in a journal and

post the transactions to the ledger. Do not create your own account
title, use the account tiles shown in the trial balance above.
3. Prepare the worksheet using the following information: (Note: The

worksheet must be exactly the same as shown above. The adjusting
entries accounts are already inserted in the above trial balance, which
means nothing to add, the net income amount must be reflected in the
account titled, Income Summary)
a) Salaries in the amount of P51,000 have accrued on Feb.28.

b) Insurance coverage with premiums of P2,000 has expired at month-
end.
c) Depreciation on the building and on the equipment for the month
amounted to P9,000 and P12,000, respectively.
d) Supplies on hand at month-end amounted to P14,000.
e) A count of the merchandise inventory on Feb. 28, 2015 amounted
to P397,000.
4. Prepare a statement of income and a statement of changes in equity for

the month ended Feb. 28, 2015, and a statement of financial position
as at Feb. 28, 2015.
5. Prepare the adjusting and closing entries for the month.
6. Post the adjusting and closing entries to the ledger accounts.
7. Prepare the post-closing trial balance.
8. Prepare the reversing entries.
51
Solution:
Requirement No. 2:
Journal Entries
Date Account Titles Debit Credit
Feb 1 Cash 113,000

Cash 62,080
4 Purchases 151,786
Input VAT 18,214
5 Accounts Receivable-Gonzales Inc. 270,000

Sales 241,071
Output VAT 28,929
7 Advertising Expense 5,357

Input VAT 643
Cash 6,000
7 Cash 250,000
Sales 223,214
Output VAT 26,786

Cash 164,900
9 Transportation In 3,571
Input VAT 429
Cash 4,000
10 Sales Returns and Allowances 62,500

Output VAT 7,500
Accounts Receivable-Gonzales Inc. 70,000
12 Cash 196,000
Accounts Receivable-Gonzales Inc. 200,000
14 Interest Expense 23,214

Input VAT 2,786
Cash 26,000
15 Salaries Expense 51,000

Cash 51,000
52
16 Accounts Receivable-Ronzales Corp 392,000
Sales 350,000
Output VAT 42,000
18 Transportation Out 3,571

Input VAT 429
Cash 4,000
19 Supplies 18,750
Input VAT 2,250
Cash 21,000
20 Purchases 111,607
Input VAT 13,393
Accounts Payable-Lozada Imports 125,000
22 Miscellaneous Expenses 6,250

Input VAT 750
Cash 7,000
23 Cash 384,160
Accounts Receivable-Ronzales Corp 392,000
24 Purchases 333,036
Input VAT 39,964
Accounts Payable-Agustin Enterprises 373,000
24 Transportation In 8,036
Input VAT 964
Cash 9,000
25 Accounts Receivable-Ronzales Corp 420,000

Sales 375,000
Output VAT 45,000
26 Sales Returns and Allowances 63,393

Output VAT 7,607
Accounts Receivable-Ronzales Corp 71,000
28 Buenaflor, Withdrawals 400,000

Cash 400,000
28 Accounts Payable-Agustin Enterprises 25,000

Input VAT 2,679
53
110 Cash
Date Description Debit Credit Balance
Balance Forwarded 33,000
Feb 1 113,000 146,000
2 62,080 83,920
7 6,000 77,920
7 250,000 327,920
8 164,900 163,020
9 4,000 159,020
12 196,000 355,020
14 26,000 329,020
15 51,000 278,020
18 4,000 274,020
19 21,000 253,020
22 7,000 246,020
23 384,160 630,180
24 9,000 621,180
28 400,000 221,180
120 Accounts Receivable

Feb 1 113,000 79,000
5 270,000 349,000
10 70,000 279,000
12 200,000 79,000
16 392,000 471,000
23 392,000 79,000
25 420,000 499,000
26 71,000 428,000
130 Merchandise Inventory

413,000
413,000
Input VAT
Balance Forwarded -
Feb 4 18,214 18,214
7 643 18,857
9 429 19,286
14 2,786 22,071
18 429 22,500
19 2,250 24,750
20 13,393 38,143
22 750 38,893
24 39,964 78,857
24 964 79,821
28 2,679 77,143
140 Supplies
Feb 19 18,750 69,750
69,750
150 Prepaid Insurance

48,000
48,000
54
160 Land
460,000
460,000
170 Building
Balance Forwarded 1,750,000
1,750,000
1,750,000
175 Accumulated Depreciation-Building

350,000
350,000
180 Equipment
2,310,000
2,310,000
185 Accumulated Depreciation-Equipment

630,000
630,000
210 Accounts Payable
Feb 2 64,000 44,000
4 170,000 214,000
8 170,000 44,000
20 125,000 169,000
24 373,000 542,000
28 25,000 517,000

Balance Forwarded
-
-
Output VAT
Balance Forwarded -
Feb 5 28,929 28,929
7 26,786 55,715
10 7,500 48,215
16 42,000 90,215
25 45,000 135,215
26 7,607 127,608
55
230 Mortgage Payable
2,600,000
2,600,000
310 Buenaflor, Capital

1,569,000
1,569,000

Balance Forwarded -
Feb 28 400,000 400,000
400,000
330 Income Summary

Balance Forwarded -
-
-
410 Sales
Balance Forwarded -
Feb 5 241,071 241,071
7 223,214 464,285
16 350,000 814,285
25 375,000 1,189,285

Balance Forwarded -
Feb 10 62,500 62,500
26 63,393 125,893
430 Sales Discounts

Balance Forwarded -
Feb 12 4,000 4,000
23 7,840 11,840
510 Purchases
Balance Forwarded -
Feb 4 151,786 151,786
20 111,607 263,393
24 333,036 596,429

Balance Forwarded -
Feb 28 22,321 22,321
22,321

Balance Forwarded -
Feb 2 1,920 1,920
8 5,100 7,020
56
Balance Forwarded -
Feb 9 3,571 3,571
24 8,036 11,607

Balance Forwarded -
Feb 15 51,000 51,000
51,000

Balance Forwarded -
Feb -
-

Balance Forwarded -
Feb -
-

Balance Forwarded -
Feb -
-

Balance Forwarded -
Feb -
-

Balance Forwarded -
Feb 18 3,571 3,571
3,571

Balance Forwarded -
Feb 7 5,357 5,357
5,357

Balance Forwarded -
Feb 14 23,214 23,214
23,214

Balance Forwarded -
Feb 22 6,250 6,250
6,250
57
Requirement No. 3:
Teresita Buenaflor Shoes

Worksheet
For the Month Ended February 28, 2015
Statement of
Acct Account Titles Financial Position
Code Debit Credit Debit Credit Debit Credit Debit Credit
110 Cash 221,180 221,180
120 Accounts Receivables 428,000 428,000
Input VAT 77,143 77,143
130 Merchandise Inventory 413,000 413,000 397,000 397,000
140 Supplies 69,750 d 55,750 14,000
150 Prepaid Insurance 48,000 b 2,000 46,000
160 Land 460,000 460,000
170 Building 1,750,000 1,750,000
175 Accumulated Depreciation-Building 350,000 c 9,000 359,000
180 Equipment 2,310,000 2,310,000
185 Accumulated Depreciation-Equipment 630,000 c 12,000 642,000
210 Accounts Payable 517,000 517,000
220 Salaries Payable - a 51,000 51,000
Output VAT 127,608 127,608
230 Mortgage Payable 2,600,000 2,600,000
310 Buenaflor, Capital 1,569,000 1,569,000
320 Buenaflor, Withdrawals 400,000 400,000
330 Income Summary - 237,715 237,715
410 Sales 1,189,285 1,189,285
420 Sales Returns and Allowances 125,893 125,893
430 Sales Discounts 11,840 11,840
510 Purchases 596,429 596,429
520 Purchases Returns and Allowances 22,321 22,321
530 Purchases Discounts 7,020 7,020
540 Transportation In 11,607 11,607
610 Salaries Expense 51,000 a 51,000 102,000
620 Supplies Expense - d 55,750 55,750
630 Insurance Expense - b 2,000 2,000
640 Depreciation Expense-Building - c 9,000 9,000
650 Depreciation Expense-Equipment - c 12,000 12,000
660 Transportation Out 3,571 3,571
670 Advertising Expense 5,357 5,357
680 Interest Expense 23,214 23,214
690 Miscellaneous Expense 6,250 6,250
Totals 7,012,234 7,012,234 129,750 129,750 1,615,626 1,615,626 6,103,323 6,103,323
58
Requirement No. 4:

Statement of Income
Net Sales
Less:Sales Returns and Allowances P 125,893
Cost of Goods Sold
Inventory, January 31, 2015 413,000
Purchases 596,429
Less:Purchases Returns and Allowances P 22,321
Net Purchases 567,088
Net Cost of Purchases 578,695
Cost of Goods Available for Sale 991,695
Less:Inventory, February 28, 2015 397,000
Cost of Goods Sold 594,695
Gross Margin from Sales 456,857
Operating Expenses
Salaries Expense 102,000
Supplies Expense 55,750
Insurance Expense 2,000
Depreciation Expense-Equipment 12,000
Advertising Expense 5,357
Miscellaneous Expense 6,250
Total Operating Expenses 219,142
Net Income P 237,715

Statement of Changes in Equity
Buenaflor, Capital January 31, 2015 P 1,569,000

Add: Net Income 237,715
Total 1,806,715
Less:Withdrawals 400,000
Buenaflor, Capital Gebruary 28, 2015 P 1,406,715
59
Statement of Financial Position
ASSETS
Current Assets
Cash P 221,180
Accounts Receivables 428,000
Input VAT 77,143
Supplies 14,000
Total Current Assets P 1,183,323
Noncurrent Assets
Land 460,000
Building P 1,750,000
Less: Accumulated Depreciation-Building 359,000 1,391,000
Equipment 2,310,000
Less: Accumulated Depreciation-Equipment 642,000 1,668,000
Total Noncurrent Assets 3,519,000
TOTAL ASSETS P 4,702,323
LIABILITIES AND CAPITAL

Current Liabilities
Accounts Payable P 517,000
Output VAT 127,608
Total Current Liabilities P 695,608
Noncurrent Liabilities
Mortgage Payable 2,600,000
Total Noncurrent Liabilities 2,600,000
Owner's Capital
Buenaflor, Capital February 28, 2015 1,406,715
TOTAL LIABILITIES AND CAPITAL 4,702,323
Requirement No. 5:
a Feb 28 Salaries Expense 51,000

b Feb 28 Insurance Expense 2,000

c Feb 28 Depreciation Expense-Building 9,000

Accumulated Depreciation-Building 9,000
Accumulated Depreciation-Equipment 12,000
d Feb 28 Supplies Expense 55,750

Supplies 55,750
60
Feb 28 Sales 1,189,285
Merchandise Inventory, February 28, 2015 397,000
Income Summary 1,615,626
28 Income Summary 1,377,911

Merchandise Inventory, January 31, 2015 413,000
Purchases 596,429
Sales Returns and Allowances 125,893
Supplies Expense 55,750
Insurance Expense 2,000
Miscellaneous Expense 6,250
28 Income Summary 237,715

Buenaflor, Capital 237,715
28 Buenaflor, Capital 400,000

Buenaflor, Withdrawals 400,000
Requirement No. 6:
110 Cash
Feb 1 113,000 146,000
2 62,080 83,920
7 6,000 77,920
7 250,000 327,920
8 164,900 163,020
9 4,000 159,020
12 196,000 355,020
14 26,000 329,020
15 51,000 278,020
18 4,000 274,020
19 21,000 253,020
22 7,000 246,020
23 384,160 630,180
24 9,000 621,180
28 400,000 221,180

Feb 1 113,000 79,000
5 270,000 349,000
10 70,000 279,000
12 200,000 79,000
16 392,000 471,000
23 392,000 79,000
25 420,000 499,000
26 71,000 428,000
61
Feb 28 CLE 397,000 810,000
28 CLE 413,000 397,000
Input VAT
Balance Forwarded -
Feb 4 18,214 18,214
7 643 18,857
9 429 19,286
14 2,786 22,071
18 429 22,500
19 2,250 24,750
20 13,393 38,143
22 750 38,893
24 39,964 78,857
24 964 79,821
28 2,679 77,143
140 Supplies
Feb 19 18,750 69,750
28 AJE 55,750 14,000

Feb 28 AJE 2,000 46,000
160 Land
460,000
170 Building
1,750,000
175 Accumulated Depreciation-Building

Feb 28 AJE 9,000 359,000
359,000
180 Equipment
2,310,000
185 Accumulated Depreciation-Equipment

Feb 28 AJE 12,000 642,000
642,000
62
210 Accounts Payable
Feb 2 64,000 44,000
4 170,000 214,000
8 170,000 44,000
20 125,000 169,000
24 373,000 542,000
28 25,000 517,000

Balance Forwarded
Feb 28 AJE 51,000 51,000
51,000
Output VAT
Balance Forwarded -
Feb 5 28,929 28,929
7 26,786 55,715
10 7,500 48,215
16 42,000 90,215
25 45,000 135,215
26 7,607 127,608
230 Mortgage Payable

2,600,000
310 Buenaflor, Capital

Feb 28 CLE 237,715 1,806,715
28 CLE 400,000 1,406,715

Balance Forwarded -
Feb 28 400,000 400,000
28 CLE 400,000 -
330 Income Summary

Balance Forwarded -
Feb 28 CLE 1,615,626 1,615,626
28 CLE 1,377,911 237,715
28 CLE 237,715 -
410 Sales
Balance Forwarded -
Feb 5 241,071 241,071
7 223,214 464,285
16 350,000 814,285
25 375,000 1,189,285
28 CLE 1,189,285 -
63
Balance Forwarded -
Feb 10 62,500 62,500
26 63,393 125,893
28 CLE 125,893 -
430 Sales Discounts

Balance Forwarded -
Feb 12 4,000 4,000
23 7,840 11,840
28 CLE 11,840 -
510 Purchases
Balance Forwarded -
Feb 4 151,786 151,786
20 111,607 263,393
24 333,036 596,429
28 CLE 596,429 -

Balance Forwarded -
Feb 28 22,321 22,321
28 CLE 22,321 -

Balance Forwarded -
Feb 2 1,920 1,920
8 5,100 7,020
28 CLE 7,020 -
Balance Forwarded -
Feb 9 3,571 3,571
24 8,036 11,607
28 CLE 11,607 -

Balance Forwarded -
Feb 15 51,000 51,000
28 AJE 51,000 102,000
28 CLE 102,000 -

Balance Forwarded -
Feb 28 55,750 55,750
28 CLE 55,750 -
64
Balance Forwarded -
Feb 28 AJE 2,000 2,000
28 CLE 2,000 -

Balance Forwarded -
Feb 28 AJE 9,000 9,000
28 CLE 9,000 -

Balance Forwarded -
Feb 28 AJE 12,000 12,000
28 CLE 12,000 -

Balance Forwarded -
Feb 18 3,571 3,571
28 CLE 3,571 -

Balance Forwarded -
Feb 7 5,357 5,357
28 CLE 5,357 -

Balance Forwarded -
Feb 14 23,214 23,214
28 CLE 23,214 -

Balance Forwarded -
Feb 22 6,250 6,250
28 CLE 6,250 -
65
Requirement No. 7:

Post-Closing Trial Balance
Cash P 221,180
Accounts Receivables 428,000
Input VAT 77,143
Supplies 14,000
Land 460,000
Building 1,750,000
Accumulated Depreciation-Building P 359,000
Equipment 2,310,000
Accumulated Depreciation-Equipment 642,000
Output VAT 127,608
Mortgage Payable 2,600,000
Buenaflor, Capital February 28, 2015 1,406,715
Totals P 5,703,323 P 5,703,323
Requirement No. 8:
Feb 28 Salaries Payable 51,000

EXTEND
Name: _________________________________________ Time: _____________________
Case 1. Prepare a worksheet under periodic inventory system:
John Bala Maps

Unadjusted Trial Balance
Cash 31,000
Accumulated Depreciation 50,000
Bala, Capital 517,000
Bala, Withdrawals 87,000
Sales 2,675,000
Sales Returns and Allowance 26,000
Purchases 1,512,000
Rent Expense 26,000
Totals 3,333,000 3,333,000
66
Additional information:
a. Merchandise inventory as t December 31, 2018 amounted to P532,000.
b. Insurance coverage with premiums of P18,000 has expired during the year.
c. Depreciation for the year amounted to P25,000.
d. Office supplies remaining at year-end amounted to P15,000.
e. Salaries in the amount of P9,000 have accrued as at December 31, 2018.
Case 2. Prepare a worksheet under perpetual inventory system:
John Bala Maps

Unadjusted Trial Balance
Cash 31,000
Accumulated Depreciation 50,000
Bala, Capital 517,000
Bala, Withdrawals 87,000
Sales 2,675,000
Sales Returns and Allowance 26,000
Rent Expense 26,000
Totals 3,300,000 3,300,000
a. Insurance coverage with premiums of P18,000 has expired during the
year.
b. Depreciation for the year amounted to P25,000.
c. Office supplies remaining at year-end amounted to P15,000.
d. Salaries in the amount of P9,000 have accrued as at December 31,
2018.
67
Case 1. Solution Sheet.
John Bala Maps

Worksheet
Statement of Financial
Account Titles Position
Cash
Accounts Receivable
Prepaid Insurance
Office Supplies
Office Equipment
Accumulated Depreciation
Accounts Payable
Bala, Capital
Bala, Withdrawals
Income Summary
Sales
Sales Returns and Allowance
Sales Discounts
Purchases
Purchases Returns and Allowances
Purchases Discounts
Transportation In
Salaries Expense
Advertising Expense
Rent Expense
68
Case 2. Solution Sheet.
John Bala Maps

Worksheet
Statement of Financial
Account Titles Position
Cash
Accounts Receivable
Prepaid Insurance
Office Supplies
Office Equipment
Accumulated Depreciation
Accounts Payable
Bala, Capital
Bala, Withdrawals
Income Summary
Sales
Sales Returns and Allowance
Sales Discounts
Cost of Sales
Salaries Expense
Advertising Expense
Rent Expense
Totals
69
EVALUATE
Name: _________________________________________ Time: _____________________
Essay.
1. Show the pro-forma entries for merchandise inventory using:
f. The adjusting entry method; and
Page 1
Date Account titles and Explanation P .R. Debit Credit

1 1
2 2
3 3
4 4
5 5
6 6
7 7
8 8
9 9
10 10
11 11
12 12
13 13
14 14
15 15
g. The closing entry method.
2. Discuss the importance the following financial statements:
a. Statement of Income
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
70
b. Statement of Changes in Equity
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
c. Statement of Financial Position
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
d. Statement of Cash Flows
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
3. Differentiate the preparation of the Statement of Income using the

Nature of Expense Method and the Function of Expense Method.
_______________________________________________________________________
_______________________________________________________________________
_______________________________________________________________________
_______________________________________________________________________
_______________________________________________________________________
4. Why temporary accounts are closed at end of an accounting period?

Explain.
_______________________________________________________________________
_______________________________________________________________________
_______________________________________________________________________
_______________________________________________________________________
_______________________________________________________________________
5. Are the preparation of a post-closing trial balance and reversing

entries necessary to be prepared at the end of an accounting period?
Explain.
_______________________________________________________________________
_______________________________________________________________________
_______________________________________________________________________
_______________________________________________________________________
_______________________________________________________________________
V. Topic Summary
➢ A physical count for unsold merchandise for sale is made at the end of
an accounting period. The account title used for the total amount of
goods unsold is Merchandise Inventory.
➢ The ending merchandise inventory becomes the beginning merchandise
inventory for the next accounting period.
➢ There are two methods to recognize the merchandise inventory end, the
adjusting entry method and the closing entry method.
71
➢ In merchandising business, the worksheet to be prepared is an eight-
column. The adjusted trial balance column in service business is
eliminated.
➢ The statement of income is prepared using either the nature of expense
method or the function of expense method.
➢ The statement of financial position has two formats; the report format
and the account format. The report format is a vertical presentation
where assets are shown first followed by the liabilities and equity,
while the account format is horizontal presentation, where the assets
are shown on the left side and the liabilities and equity are shown on
the right side.
VI. Post-Assessment
Name: _________________________________________ Time: _____________________
The ledger accounts of the Christine Sousa Bags for the year ended December
31, 2018 are as follows:
Accu. Depreciation-Off. Bldg. 100,000 Notes Payable due in 2 yrs 200,000

Accu. Depreciation-Off. Equipt. 150,000 Office Building 1,600,000
Accounts Receivable 136,000 Office Equipment 570,000
Accounts Payable 74,000 Office Supplies 42,000
Cash 72,000 Prepaid Advertising 75,000
Transportation In 72,000 Purchases Discounts 172,000
Insurance Expense 25,000 Purchases Returns And Allowances 133,000
Interest Expense 208,000 Purchases 2,643,000
Sousa, Capital 1,510,000 Salaries Expense 862,000
Sousa, Withdrawals 200,000 Sales Discounts 161,000
Land 400,000 Sales Returns and Allowances 187,000
Merchandise Inventory 598,000 Sales 4,600,000
Mortgage Payable 1,100,000 Travel Expense 188,000
a. Office supplies consumed during the year amounted to P17,000.

b. Advertising expense in the amount of P25,000 has expired during the
year.
c. Salaries of P21,000 have accrued as at December 31, 2018.
d. Depreciation on the office building and on the office equipment amounted
to P15,000 and P20,000, respectively.
e. The December 31, 2018 ending inventory is P723,000.
Required:
1. Prepare the worksheet

2. Prepare the following financial statements:
a. Statement of Income using the function of expense method
b. Statement of Changes in Equity
c. Statement of Financial Position using the report format
3. Prepare the adjusting journal entries
4. Prepare the closing journal entries using the adjusting entry method
5. Prepare the post-closing trial balance
6. Prepare the reversing entries
72
1. Worksheet.
73
2a. Statement of Income
2b. Statement of Changes in Equity
74
2c. Statement of Financial Position
75
3. Adjusting Journal Entries
76
4. Closing Journal Entries
77
5. Post-Closing Trial Balance
78
6. Reversing Journal Entries
Page 1

1 1
2 2
3 3
4 4
5 5
6 6
7 7
8 8
9 9
10 10
11 11
12 12
13 13
14 14
15 15
VII. References
Ballada, Win and Susan Ballada. (2018). Basic Accounting Made Easy 21st
Edition. Manila: Domdane Publishers and Made Easy Books.
Lopez, Rafael M. Jr. (2008). Fundamentals of Accounting Millennial Edition. Davao
City: MS Lopez Printing and Publishing.
Ledesma, Ester L. (2014). Financial Accounting Theory Review Booklets. Manila: CRC-
Ace The Professional CPA Review School.
Rante, Gloria Aradaniel. (2013). Accounting for Service Entities. Mandaluyong
City: Millenium Books, Inc.
79
Lesson 3
Special and Combination Journals and Voucher System
A special journal (also known as a specialized journal) is useful in a
manual accounting or bookkeeping system to reduce the tedious task of
recording both the debit and credit general ledger account names and
amounts in a general journal.
Voucher system is an internal control procedure in accounting to ensure

that every disbursements or payments made by the business are properly
documented with supporting evidence such as invoices, receipts, and so on;
that goods and/or services are actually received from valid suppliers
and/or vendors; that the description or nature of payment is known and
clear; that the cash disbursed is authorized and approved; that the
disbursement is controlled with voucher series number to ensure
completeness; and last but not the least, that any fraud or theft will be
eliminated or minimized.
At the end of this Lesson, the student learners would be able to:
1. understand the limitations of using the general journal and the
general ledger;
2. describe the use of controlling accounts and subsidiary ledgers;
3. explain the goals and uses of special journals;
4. record transactions using special journals;
5. post transactions to the general and subsidiary ledgers;
6. prepare and prove the accuracy of subsidiary ledgers;
7. prepare schedules of accounts receivable and accounts payable; and
8. explain the distinguishing features of the voucher system.
II. Pre-Assessment
Name: _________________________________________ Time: _____________________
Instruction: After each statement, encircle TRUE if the statement is

correct or FALSE if the statement is incorrect: (1pt each)
1. Transactions involving the payment of cash for any purpose are

usually recorded in a cash journal. TRUE FALSE
2. Special journals are modified in practice to adapt to the specific
needs of an entity. TRUE FALSE
3. The primary ledger that contains all of the balance sheet and income
statement accounts is called the general ledger. TRUE FALSE
4. At the end of each month, the total of the amount column of the sales
journal is posted as debit to accounts receivable and a credit to
sales. TRUE FALSE
5. After postings have been completed for the month, if the sum of the
balances in the accounts receivable subsidiary ledger does not agree
with the balance of the accounts receivable account in the general
ledger, the errors must be located and corrected. TRUE FALSE
6. Sales on account of office equipment used in the business would be
recorded in the sales journal. TRUE FALSE
7. Each on amount in the other accounts column of the cash receipts
journal must be posted individually to the appropriate general ledger
account. TRUE FALSE
80
8. When there are numerous accounts with a common characteristic, it is
common to place them in a separate ledger is called a detail ledger.
TRUE FALSE
9. The sale of merchandise for cash is recorded in the sales journal.
TRUE FALSE
10. The total of the other accounts column of the cash receipts journal
is not posted to the general ledger. TRUE FALSE
11. When special journals, control accounts and subsidiary ledgers are
used, no posting to any ledger is performed until the end of the
month. TRUE FALSE
12. For each transaction recorded in the purchases journal, the credit is
entered in the accounts payable column. TRUE FALSE
13. Acquisitions on account which are not provided for in special debit
columns are recorded in the other accounts column in the purchases
journal. TRUE FALSE
14. Debits to creditors’ accounts for invoices paid are recorded in the
accounts payable debit column of the cash payments journal.
TRUE FALSE
15. A check register is used to record all expenditures. TRUE FALSE
III. Lesson Map
Sales Journal
Cash Receipts Journal
Cash Disbursements
Journal
General Journal
These are the minimum special journals that can be created to be able to
reduce lengthy recording of transactions. The totals of each column in
these journals are recorded on a monthly basis and not as when the
transaction occurred.
81
IV. Core Content
ENGAGE
Name: _________________________________________ Time: _____________________
A list of terms and related statements appear below. From the list of
terms, select one that relates to each statement. Write your answer on the
space provided.
A. Special Journals G. General Ledger

B. Accounts Receivable Ledger H. Accounts Payable Ledger
C. Geneeral Journal I. Chart of Accounts
D. Cash Payments Journal J. Purchases Journal
E. Cash Receipts Journal K. Sales Journal
F. Controlling Account L. Subsidiary Ledger
1. _____________________. Journals designed in a tabular fashion to

accommodate the recording of specific types of similar transactions.
2. _____________________. A journal containing transactions that cannot

be appropriately recorded in a special journal.
3. _____________________. The principal ledger containing all of the

balance sheet and income statement accounts.
4. _____________________. A group of accounts containing customer names.
5. _____________________. A general ledger account which is supported by

information in a subsidiary ledger.
6. _____________________. A supplementary record used to provide

detailed information for a control account in the general ledger.
7. _____________________. A special journal used exclusively for

recording sale of merchandise on account.
8. _____________________. A special journal used to record cash

receipts.
9. _____________________. A special journal used for recording all items

purchased on account.
10. _____________________. A special journal used for recording all cash

payments.
EXPLORE
Name: _________________________________________ Time: _____________________
Describe the limitations of using a general journal and a general ledger.

___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
__________________________________________________________________________.
82
EXPLAIN
CONTROL ACCOUNTS AND SUBSIDIARY LEDGERS
When an entity keeps charges to and payments from all customers in a single
accounts receivable account in the general ledger, the account in T-account
form would appear as follows:
Accounts Receivable
38,000 9,000
1,000 4,000
Using this procedure, the entity can’t easily bill or mail statements to
customers, answer inquiries about individual customer balances, or make any
collection efforts if it has only a single record showing total claims
against all customers. The entity needs to know each customer's name and
address, transaction dates, amounts billed, and amounts received on account
for each account receivable.
The problem can be partly solved by maintaining in the general ledger an

account for each customer. The trial balance of such a general ledger may
appear as follows:
Trial Balance
Debit Credit
Cash P 131,300
Accounts Receivable-Customer A 3,000
Accounts Receivable-Customer B 7,000
Accounts Receivable-Customer C 8,000
Accounts Receivable-Customer D 10,000
All Other Assets 153,500
All Liabilities P 35,500
Owner's Capital 250,000
Owner's Withdrawals 8,000
Revenues 54,500
All Expenses 19,200
P 340,000 P 340,000
This approach has limitations too. The general ledger becomes unreasonably
large when hundreds of customers' accounts are involved. With thousands of
customers, it becomes unworkable.
This problem can be best addressed using an accounts receivable control

account in the general ledger, and individual customer accounts in a
subsidiary ledger. Under this approach, the general ledger is kept to a
manageable size, and a detailed record of transactions with individual
customers exists in the subsidiary ledger. It is a controlling account in
the sense that its balance should equal the total of the individual account
Balances in the subsidiary ledger. The individual customer accounts are the
subsidiary accounts. They are controlled by the accounts receivable account
in the general ledger.
The accounts receivable subsidiary ledger, like the general ledger, may
simply be a group of accounts in a binder, or it may be a file card
arrangement. In either case, the order is either numerical by customer
number or alphabetical by customer name.
83
The sum of all the individual balances in the accounts receivable
subsidiary ledger must equal the balance in the accounts receivable control
account in the general ledger. For every amount posted to the accounts
receivable control account, an equal amount must be posted to one or more
of the customers' accounts in the accounts receivable subsidiary ledger.
The following shows the relationships between the accounts receivable

control account in the general ledger and the accounts receivable
subsidiary ledger:
Subsidiary Ledger
Accounts Receivable
Customer A Customer B
3,000 7,000 General Ledger
Accounts Receivable
Control Account
28,000
Customer C Customer D
8,000 10,000
General Ledger
Trial Balance
Debit Credit
Cash P 131,300
All Other Assets 153,500
All Liabilities P 35,500
Owner's Capital 250,000
Owner's Withdrawals 8,000
Revenues 54,500
All Expenses 19,200
P 340,000 P 340,000
The control account-subsidiary ledger technique can be used to yield a

detailed breakdown of many general ledger accounts, not just accounts
receivable. Subsidiary ledgers are often used for accounts payable,
inventory, and property and equipment.
SPECIAL JOURNALS
These are journals of original entry other than the general journal that
are designed for recording specific types of transactions of a similar
nature. Most entities use the following special journals:
84
Journal Specific Transactions Recorded Posting Abbreviation
Sales Journal Sales of merchandise on account S
Cash Receipts Journal Receipts of cash CR
Purchases Journal Credit purchases of merchandise and P

other items
Cash Disbursements Journal Payments of cash CD
General Journal Entries that do not fit in the

other journals
Cash sales are usually recorded in the cash receipts journal rather than in
the sales journal because cash is best controlled when all routine cash
receipts are recorded in one journal Similarly, an entity can increase
control over cash disbursements by recording cash purchases of merchandise
or other items in the cash disbursements journal rather than in the
purchases journal.
When special journals are used, the general journal is maintained for
adjusting, closing and reversing entries; and for recording transactions
that do not fit in other special journals. Examples of the latter include
the recording of purchases returns and allowances, and sales returns and
allowances.
Advantages of Using Special Journals
A major advantage of special journals is that their use permits division of

labor. When special journals are used, the recording step in the accounting
cycle can be divided among several persons, each of whom is responsible for
particular types of transactions. Personnel making entries in special
journals need not have a thorough knowledge of the entire accounting
system.
The use of special journals often reduces recording time. Special journal
transactions need no routine explanations for each entry. Also, because
special column headings are used, account titles need not be repeated
unlike in the general journal. Probably the most significant advantage of
using special journals is the time saved in posting from the journals to
the ledgers. When a general journal is used, each entry must be posted
separately to the general ledger. The tabular arrangement of special
journals, however, often permits all entries to a given account in a
specific journal to be added and posted as a single aggregate posting.
For instance, if you entered 800 sales transactions in a general journal,

you would make 800 debit postings to the accounts receivable account and
another 800 separate credit postings to the sales account. Using the sales
journal, however, there will only be two postings from the sales journal to
the general ledger-one to accounts receivable and another to sales.
Clearly, as more transactions are involved, more posting time is saved.
SALES JOURNAL
The sales journal of the Nazario Sea Products, shown in Exhibit 9-1, is
designed for an entity using the periodic inventory system. This journal
lists all credit sales for the month of June. The information for each sale
is obtained from a copy of the related sales invoice, which should be
prenumbered for control purposes. This journal is specifically designed to
record sales of merchandise on account. In contrast, cash sales are
recorded in the cash receipts journal. Credit sales of assets other than
85
merchandise inventory (e.g. property and equipment) are entered in the
general Journal.
For each transaction, the accountant enters the date, sales invoice no, and
customer account to be debited along with the amount of the same credit
term is extended to all customers, as assumed in the illustration, there is
no need to insert a column to describe the sales terms in the sales
journal.
The posting of any journal to the general ledger must result in equal
debits and credits. In addition, for any posting to a control account in
the general ledger, the same total amount must be posted to one or more
related subsidiary ledger accounts. Exhibit 9-1 illustrates how to post the
amounts in Nazario Sea Products sales journal.
Amounts recorded in the sales journal are posted daily to the subsidiary
ledger to keep a current record of the accounts receivable from each
customer. Daily posting permits the business to answer customer inquiries
promptly. A check mark i) is placed in the posting reference column of the
sales journal to signify that the amount has been posted to the customer's
account in the subsidiary ledger.
Updating the subsidiary ledger daily also allows the credit department to
review and monitor a customer's account balance at times other than a
billing date. Cycle billings may likewise be implemented; for example,
billing customers whose names begin with different letters at different
times of the month. The advantage of cycle billings is that statements of
account can be mailed throughout the month rather than in one large group
at the end of the month.
At the end of the month, when all sales have been recorded and the sales
journal has been totaled and ruled, the total sales figure is posted to the
general ledger as a debit to the accounts receivable control account and as
a credit to the sales account. Note the double posting reference at the
bottom of the sales journal; this indicates that accounts receivable is
account no. 120 in the general ledger and sales is account no. 410.
When amounts are posted to the ledgers, the journal page number is entered
in the account to identify the source of the data. In Exhibit 9-1, all
journal references in the ledger are "S1" since the postings originated
from page 1 of the sales journal.
Exhibit 9-1 Sales Journal and Posting to Ledgers

SALES JOURNAL
86
Page 1
Invoice Post. Dr. Accounts Receicable (120)/
Date Amount Debited
No. Ref. Cr. Sales (410)
2018
June 1 001 Zamboanga Exports / 20,000
5 002 Butuan Company / 10,000
12 003 Cagayan de Oro Stores / 100,000
22 004 Dapitan Retailers / 40,000
29 005 Dipolog Traders / 30,000
30 006 Pagadian Grocers / 50,000
Total 250,000
GENERAL LEDGER
Accounts Receivable (120) Sales (410)

6/30 S1 250,000 6/30 S1 250,000
ACCOUNTS RECEIVABLE SUBSIDIARY LEDGER
Dapitan Retailers Zamboanga Exports

6/22 S1 40,000 6/1 S1 20,000
Dipolog Traders Butuan Company

6/29 S1 30,000 6/5 S1 10,000
Pagadian Grocers Cagayan de Oro Stores

6/30 S1 50,000 6/12 S1 100,000
Sales journals may accommodate additional information. For example, columns

could be included for sales by department or by product, so that a
breakdown of sales is available to management Columns may also be provided
for output tax information, when necessary
CASH RECEIPTS JOURNAL
All transactions involving cash receipts are recorded in a cash receipts

journal. Exhibit 9- 2 showed the cash receipts journal for an entity using
the periodic inventory system in a merchandising business, the main sources
of cash are collections on account and cash sales. Thus, this journal has
debit columns for cash and sales discounts; and credit columns for accounts
receivable and sales. In addition, there are columns on the right- hand
side of the journal which can be used to record the account titles and
credits to other accounts resulting from cash receipts not related to cash
sales and collections on account. Examples of these include investments by
the owner and loan releases.
87
Cash receipts are evidenced by source documents like prenumbered official
receipts (OR), cash register tapes (CRT) or cash slips, and bank credit
memorandum (CM). Note that the entries on June 15 and June 30, debiting
cash and crediting sales, recorded cash sales for a certain period. In
practice, cash sales, which are usually supported by cash register tapes,
should be recorded daily rather than semi-monthly.
The June 8 entry recorded P19,600 cash collected from Zamboanga Exports
related to sales on account on June 1 of P20,000. The cash discount were
taken. The entry debited cash for P19,600 and sales discounts for P400, and
credited accounts receivable for P20,000. Official receipt no. 001 was
issued to acknowledge the cash receipt of P19,600. The entry for Dipolog
Traders on June 29 is similar.
The June 21 transaction illustrated the use of two journals--cash receipts

and general journal--to record a business event. Here, Cagayan de Oro
Stores settled its P100,000 June 12 account by issuing a promissory note
for P50,000 and remitting P49,000 (P50,000 less 2% sales discounts) for the
balance.
In the cash receipts journal, the debits are to cash, P49,000 and sales
discounts, P1,000; and accounts receivable is credited for P50,000. The
receipt of notes receivable in lieu of an existing accounts receivable is a
non-cash transaction that should be recorded in the general journal. The
entry debits notes receivable and credits accounts receivable for P50,000
each.
The June 1 entry represented cash received as investments by the owner,

Milavel Nazario. The June 10 cash receipts pertained to a DBA Bank loan
released through a credit to the current account of Nazario Sea Products
maintained in the same bank. In both cases, the other accounts' columns are
used.
Exhibit 9-2 Cash Receipts Journal and Posting to Ledgers

CASH RECEIPTS JOURNAL
88
Before posting the cash receipts journal, each column is added and the
journal balanced to make sure that total debits equal total credits. In the
illustration, P1,348,000 + P2,000 = P100,000 + P450,000 + P800,000.
The totals of the cash, sales discounts, accounts receivable, and sales
columns are posted to the general ledger, as noted by the posting
references below these columns. In addition, the individual items in the
other accounts' column are posted to the general ledger. The total of this
column is used only to balance the journal and are not posted.
Individual items in the accounts receivable column are posted on a daily

basis to the customers' subsidiary ledger to keep this ledger in balance
with the accounts receivable control account. Postings to the customers'
accounts are indicated by a check mark .
A schedule of account balances in the subsidiary ledger is usually prepared

at the end of each accounting period to verify that the subsidiary ledger
agrees with the related control account. The schedule of accounts
receivable for Nazario Sea Products indicated that the subsidiary ledger
agreed with its control account in the general ledger.
PURCHASES JOURNAL
Merchandising businesses frequently purchase merchandise and supplies. Such

purchases are usually made on account. The purchases journal is designed to
account for purchases of merchandise, supplies and other assets on account.
In contrast, cash purchases are recorded in the cash disbursements journal.
Exhibit 9-3 illustrated the purchases journal for an entity using the
periodic inventory system. In the illustration, the primary source document
used as the basis for the entries in the journal is the receiving report
(RR). The journal showed special columns for debits to purchases, office
supplies, and store supplies, as well as for credits to accounts payable. A
column is also provided for debits to accounts for which no special column
is available. In practice, a column for input taxes may be included. A
separate column for purchase terms may also be provided to help identify
the due date and the discounts available.
The amounts in the accounts payable column are posted to the accounts
payable subsidiary ledger on a daily basis. A check mark in the posting
reference column indicates that this has been done. At the end of the
month, the columns are totaled, and the journal is balanced to ensure that
total debits equal total credits. The posting pattern for the purchases
journal is diagrammed in Exhibit 9-3 below.
89
CASH DISBURSEMENTS JOURNAL
All cash payments are recorded in a cash disbursements journal. Exhibit 9-4
showed the June cash disbursements journal for Nazario Sea Products after
the related transactions have been recorded, and the journal balanced and
posted. Note the special columns for credits to cash and purchases
discounts, and for debits to accounts payable and purchases. Ordinarily,
these accounts will have the most entries.
This special journal has columns for the date and the number of check
issued for each cash payment. Also, the other accounts column is available
for recording debits to other accounts.
The June 2 entry in Exhibit 9-4 recorded the issue of check no. 101 for
P280,000 as payment for accrued salaries at the end of May. The entries on
June 12 and June 19 recorded payment on accounts to Gingoog Distributors
and Oroquieta Suppliers, less 2% and 1% purchases discounts, respectively.
Note that an equipment worth P100,000 was acquired on June 15 by giving

P50,000 cash and a note payable for P50,000. The cash payment of P50,000
was recorded in the cash disbursements journal. The issuance of notes for
the acquired equipment was recorded in the general journal rather than in
the purchases journal; this is because the purchases journal in the
illustration did not provide for a special credit column for notes payable.
If the entity frequently issues notes to support acquisitions on account,
then a notes payable credit column should be created in the purchases
journal. The other entries in the journal are self-explanatory.
After both the purchases and the cash disbursements journal have been
posted, the accounts payable control account has a P330,000 balance
(P590,000 from Exhibit 9-3 P260,000 payment). This total agreed with the
schedule of accounts payable below:
90
GENERAL JOURNAL
When special journals are used, transactions that cannot be recorded

appropriately in a special journal are recorded in the general journal.
Examples include merchandise returns; write-offs of uncollectible accounts;
and certain non-cash transactions involving notes receivable and notes
payable.
The entries below demonstrate that whenever a posting is made to the

accounts receivable or accounts payable control account from the general
journal, a posting is also made to the related subsidiary ledger account.
91
GENERAL JOURNAL
Page 1
July 2 Sales Returns and Allowances 430 10,000

Accounts Receivable-Dapital Retailers 120 10,000
5 Accounts Payable-Davao Wholesalers 210 7,000

Purchases Returns and Allowances 530 7,000
15 Store Equipment 180 50,000

Notes Payable 230 50,000
21 Notes Receivable 150 50,000

Accounts Receivable-Cagayan de Oro Stores 120 50,000
PROVING THE LEDGERS
At the end of the period, after all postings have been made, equality
should exist between the following:
➢ total debit balances and total credit balances of the accounts in the
general ledger. These amounts are used to prepare the trial balance.
➢ the balance of the accounts receivable control account in the general

ledger and the sum of the individual customer accounts in the
accounts receivable subsidiary ledger.
➢ the balance of the accounts payable control account in the general

ledger and the sum of the individual creditor accounts in the
accounts payable subsidiary ledger.
This control procedure is important because this helps ensure the accuracy
of the accounting records.
FLEXIBILITY OF SPECIAL-PURPOSE JOURNALS
The functions of special-purpose journals are to reduce and simplify the

work in accounting and to allow for division of labor. These journals
should be designed to fit the business for which they are used. As noted
earlier, if certain accounts manifest often in the other accounts column of
a journal, it may be advisable to add a column for those accounts when a
new page of a special-purpose journal is prepared.
In addition, if certain transactions appear repeatedly in the general

journal, it may be advisable to set up a new special journal for that
purpose For example, if Nazario Sea Products finds that it must often give
allowances to customers, it may set up a sales returns and allowances
journal in short, special journals should be designed to suit transactions
commonly encountered by an entity.
VOUCHER SYSTEM
Most entities control purchases and cash disbursements by formalizing the

process of verification and approval of payments using a method known as
the voucher system. Under this system, checks may be drawn only upon a
92
written authorization in the form of a voucher approved by responsible
officials The system consists of vouchers, voucher register, unpaid voucher
file, check register and paid voucher file. The voucher register takes the
place of the purchases journal while the check register substitutes the
cash disbursements journal.
Voucher
The voucher is a serially numbered form that identifies the name and
address of the payee, the due date, terms, description and invoice amount.
This form includes a section for designated officers to sign their approval
for payment. It also has spaces for details such as the date of payment,
check number and ledger entries.
Before the designated official approves the voucher for payment, various
personnel perform verification procedures that include the following:
1. comparison of purchase requisition, purchase order, invoice, and

receiving report for agreement of quantities, prices, types of goods,
and terms.
2. review of extensions and footings in the invoice.
3. approval of account distribution (ie, the general ledger accounts to

be debited)
Copies of the purchase requisition, purchase order, invoice, and receiving

report should be attached to the voucher. These documents will comprise the
voucher package. The voucher is recorded in the book of original entry
called the voucher register.
Voucher Register
As noted, the voucher register takes the place of the purchases journal,
and provides a record of all authorized check payments. In a voucher
system, all expenditures are recorded first in the voucher register.
Approved vouchers are entered in the voucher register in numerical

sequence. The vouchers should be prenumbered so they can be accounted for
and referred to easily. Observe in Exhibit 9-5 that all entries in the
voucher register resulted to a credit to accounts payable control account
the vouchers payable account may also be used in place of the accounts
payable account. If an entity opted for the use of the vouchers payable
account, the balance in this account may be properly reported in the
balance sheet as accounts payable.
The register has columns for expense and asset accounts frequently debited
such as purchases, transportation in, office supplies, and transportation
out. Debits and credits to accounts for which columns are not provided for
are made in the other accounts section.
Exhibit 9-5 VOUCHER REGISTER

Voucher Date Credits Debits Other Accounts
Payee Accounts Office Account
No. Date Paid Ck. No. Purchases Trans. In Trans. Out PR Debit Credit
Payable Supplies Title
121 12/1 Rodriguez Co. 12/9 528 35,000 35,000
122 12/3 Rubinos Freight 12/5 527 3,000 3,000
123 12/5 Escutin, Inc. 12/15 531 12,000 12,000
… … … … … … … … … … …
146 12/21 Sonza Co. 12/31 539 120,000 Office Equipment 150 120,000
147 12/27 Nancy Mulles, Co. 25,000 25,000
148 12/30 Espinosa Delivery 2,500 2,500
1,850,000 1,220,000 85,000 46,000 32,000 467,000
(320.00) (550.00) (560.00) (160.00) (680.00) (/)
93
Unpaid Voucher File
The voucher register has columns to record payment date and check number,
which are entered when the voucher is paid. Alter vouchers have been
entered in the voucher register, they are filed in the order of required
date of payment. In this way, the entity will not miss discounts, and its
credit standing will not be impaired. When a voucher is processed, the due
date is written on the face of the voucher for filing convenience.
The absence of entries in payment date and check number columns of the
voucher register indicate that the voucher is unpaid. The total unpaid
vouchers at any time may be determined by adding the items in the voucher
register for which the date paid and check number columns contain no
entries. This total should agree with the total of vouchers in the unpaid
file and, at the end of the month, with the amount in the accounts payable
account.
Check Register
The check register in Exhibit 9-6 is a simplified form of the cash

disbursements journal. The register is a record of all check payments.
Since checks are entered in the check register in numerical sequence, this
record provides a convenient reference for the check number and the date of
payment.
Checks are issued only in payment of approved and recorded vouchers. Every
check issued is recorded by a debit to accounts payable and credit to cash,
and to purchases discounts, if appropriate.
On or before the due date, the voucher package is removed from the unpaid
file and forwarded to the disbursing officer for final approval of payment.
After signing the voucher, the disbursing officer has a check drawn. The
check number and payment date are recorded in the voucher, which is then
returned to the accounting department.
To safeguard against irregularities, the voucher and its underlying

documents should be cancelled by the disbursing officer before the voucher
is returned to the accounting department The department is now responsible
for the recording of the check payment in the check register and the
voucher register.
Exhibit 9-6 CHECK REGISTER

Check Debits Credits
Payee Voucher No. Account Purchases
No. Date Cash in Bank
Payable Discounts
525 12/2 Palma Corporation 120 25,000 25,000
527 12/5 Rubinos Freight 122 3,000 3,000
528 12/9 Rodriguez Company 121 35,000 700 34,300
… … … … … … …
530 12/31 Sonza Company 146 120,000 120,000
1,670,000 12,000 1,658,000
(320) (570) (110)
Paid Voucher File
The paid voucher along with its supporting documents are filed in numerical
sequence in a paid vouchers file This file is then available for
examination by internal or external auditors requiring information about a
specific expenditure.
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Special Problems in a Voucher System
Gross or Net Amounts
Under the voucher system, discounts may cause the amount of the check to
differ from the gross amount of this voucher. For example, the entries for
recording and paying the liability to Rodriguez Company for merchandise
(voucher no. 121, dated Dec. 1; see Exhibit 9-6) are summarized in general
journal form as follows:
Voucher Register
Dec 1 Purchases 35,000

Check Register
Dec 9 Accounts Payable 35,000

Purchases Discounts 700
Cash in Bank 34,300
Because both the gross and the net amounts of the liability are indicated
in the voucher, this system should create no difficulty. Some entities,
however, anticipate taking all discounts and prepare vouchers at the net
amount. When this procedure is followed, only two money columns are needed
in the check register-one for a debit to accounts payable and the other for
a credit to cash in bank.
If the entity should miss a discount, an adjustment must be made in the

voucher (or the original voucher must be cancelled and a new one prepared).
The accountant must also record discounts lost in the general journal. An
alternative solution for handling lost discounts when the net price method
is used is to provide a discounts lost column in the check register.
Recording Purchases Returns and Allowances
Companies usually handle purchases returns and allowances by cancelling the

original voucher and issuing a new one for the lower amount. For example,
in Exhibit 9-7, voucher no. 147 for P25,000, prepared for a merchandise
purchase from Nancy Mulles Company, was recorded in the voucher register on
Dec. 27. Merchandise costing P5,000 is returned for credit and that a
credit memo is received on Dec. 30. The original voucher for P25,000 is
cancelled and a reference made on it to a new voucher for P20,000.
In addition, a notation about the new voucher (no 149) is made in the date
paid column of the voucher register beside the entry for the original
voucher. In recording the new voucher, the bookkeeper credits P20,000 in
the accounts payable column.
In the other accounts column, accounts payable is debited for P25,000 and
purchases returns and allowances is credited for P5,000. The net effect of
these recording procedures is a debit of P25,000 to purchases, a credit of
P20,000 to accounts payable, and a credit of P5,000 to purchases returns
and allowances.
95
Exhibit 9-7 VOUCHER REGISTER
Voucher Date Credits Debits Other Accounts
Payee Accounts Account
No. Date Paid Ck. No. Purchases … PR Debit Credit
Payable Title
147 12/27 Nancy Mules Company Cancelled; V# 149 25,000 25,000
… … … … … …
149 12/30 Nancy Mules Company 20,000 Accounts Payable 25,000
Purchases Returns
5,000
& allowances
Recording Partial Payments
When installment or partial payments are made on invoices, a separate

voucher is prepared for each check issued. If a single voucher has been
prepared for an invoice and the entity later decided to pay in
installments, the original voucher is cancelled and new vouchers are
prepared. The cancellation of the original voucher and the issuance of new
vouchers can be recorded in the same way that purchases returns are
recorded.
COMBINATION JOURNAL
Combination journal provides the cornerstone for a simple yet effective

accounting system in many small entities. This journal combines features of
the general journal and the special journals in a single record. If a small
business entity has enough transactions to make the general journal
difficult to use but too few transactions to make it worthwhile to set up
special journals, the combination journal offers a solution. This journal
is used most often in small professional offices and small service
businesses.
Like the special journals, the combination journal contains separate amount
columns for the accounts used most often (eg. Cash-debit and credit,
Accounts Receivable-debit and credit, Accounts Payable-debit and credit,
Sales-credit, Salaries Expense-debit) to record the entity's transactions.
These columns facilitate the easier recording of transactions and permit
summary postings at the end of the month.
Other accounts columns allow the recording of transactions that do not fit
into any of the special columns. These columns are also used for entries
that would normally appear in the general journal such as adjusting and
closing entries.
Video Reference:
https://www.youtube.com/watch?v=yYE1KKo0dfo&list=RDCMUC9EwVTy54-mxdH1e-
aF4ixQ&index=2
https://www.youtube.com/watch?v=qYF8S2R7gwU&list=RDCMUC9EwVTy54-mxdH1e-
aF4ixQ&index=1
96
EXTEND
Name: _________________________________________ Time: _____________________
Olson Sala Company completed the following sales transactions during the
month of June 2018. All credit sales have terms of 3/10,n/30 and all
invoices are dated as at the transaction date.
June 1 Olson Sala invested P52,000 of his funds in the bsuiness.
1 Sold merchandise on account to R. Bituin, P32,000. Invoice no. 377.

3 Sold merchandise on account to A. Perdales, P54,000. Invoice no. 378.
4 Sold P46,000 of merchandise for cash.

7 Received payment from R. Bituin less discounts.
9 Received payment from A. Perdales less discounts.

13 Sold merchandise to B. Ceballus on account, P62,000. Invoice no. 379.
15 Borrowed P30,000 from the Monte de Santa Cruz Bank by issuing a 10%
note payable due in 3 months.
15 B. Ceballus returned P11,000 of merchandise from the June 13 sale.
16 Sold merchandise to A. Ramel on account, P17,000. Invoice no. 380.
21 Colleted amount due from B. Ceballus less returns and discounts.
29 Received P6,000 from A. Ramel.
30 Sold goods on account to P. Maritimo, P34,000. Invoice no. 381.
Required:
1. Record the transactions in the appropriate journals. Use the forms
below.
2. Total the sales and cash receipts journals.
3. Using the following account numbers and journal page numbers, post to
the general and accounts receivable ledgers and subsidiary ledgers:
Account No. Journal Page No.

Cash 110 Sales 16
Accounts Receivable 120 Cash Receipts 35
Notes Payable 210 General 13
Sala, Capital 310
Sales 410
Sales Returns and Allowances 420
Sales Discounts 430
4. Post the transactions to its respective subsidiary ledgers.

5. Prepare a schedule of accounts receivable.
97
1-2. SPECIAL JOURNALS
SALES JOURNAL Page 16

Invoice Post. Dr-Accounts Receivable/
Date Account Debited
No. Ref. Cr-Sales
2018
June
5
Total
CASH RECEIPTS JOURNAL Page 35

O.R. Debits Credits
Date No. Decription Sales Accounts
Cash Sales Account Title PR Amount
Dicounts Receivable
2018
June
(110) (430) (120) (410)
3. POSTING TO GENERAL LEDGER AND ACCOUNTS RECEIVABLE LEDGERS AND SUBSIDIARY

LEDGERS
GENERAL JOURNAL Page 13

DATE ACCOUNT TILES AND EXPLANATION P. R. DEBIT CREDIT
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4. SCHEDULE OF ACCOUNTS RECEIVABLE
Page 1

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EVALUATE
Name: _________________________________________ Time: _____________________
CASE 1: Lumen Almachar operates a neighbourhood pharmacy in front of the

community hospital. The books of original entry include purchases journal,
cash payments journal and general journal. A subsidiary ledger is used for
accounts payable. The following are the transactions related to purchases
and cash payments for the month of June: (Round-off amounts to the nearest
ones)
June 1 Purchased merchandise from Seco Co. on account for P23,420. Invoice no. 71
dated June 1, terms 2/10,n/30.
2 Issued check no. 536 for P10,000 in payment for rent for June.
5 Purchased merchandise from Ricarte Drug Supply on account for P56,240.

Invoice no. 72 dated June 2, terms 1/15,n/30.
7 Purchased merchandise from Casas Drug Co. on account for P36,735. Invoice
no. 73 dated June 5, terms 3/10 eom.
9 Issued check no.537 to Seco Co. in payment of invoice no. 71 less discount.
12 Received a credit memorandum from Ricarte Drug Supply for P4,620 for
merchandise returned that was purchased on June 5.
14 Purchased merchandise from Balino Drug Co. on account for P47,940. Invoice
no. 74 dated June 14, terms 2/10,n/30.
15 Received a P5,370 credit memorandum from Casas Drug Co. for merchandise
returned that was purchased on June 7.
16 Issued a check no. 538 to Ricarte Drug Supply in payment of invoice no. 72
less the credit memorandum of June 12, and less 1% discount.
101
23 Issued check no. 539 to Balino Drug Co. in payment of invoice no. 74 less
2% discount.
27 Purchased merchandise from Abeto Pharmaceuticals on account for P63,847.
Invoice No. 75 dated June 27, terms 2/10 eom.
30 Issued check no. 540 for P27,020 to Tudtud Co. for a rush purchase of
merchandise.
Required:
1. Record the transactions in the purchases (page 7), cash payments
(page 7) and general journals (page 7).
2. Enter the totals and rule the purchases and cash payments journals.
Post from the journals to the general ledger accounts and accounts
payable subsidiary ledgers. Use the following accounts: Cash (110),
P918,000; Accounts Payable (210), P621,769; Purchases (510),
P1,382,625; Purchases Returns and Allowances (520), P31,623;
Purchases Discounts (530), P21,145 and Rent Expense (620), P50,000.
3. Prepare a schedule of accounts payable. Show that the total accounts

payable in the schedule equals the difference between June 1 and June
30 Balances of Accounts Payable in the general ledger.
PURCHASES JOURNAL Page 7

R.R. Credits Debits
Date No. Amount Credited P.R. Accounts Office Store Other Accounts
Purchases
Payable Supplies Supplies Account Title PR Amount
2018
June
Totals - - - - -
(210) (510) (/)
CASH DISBURSEMENTS JOURNAL Page 7

Ck. Credits Debitts
Date No. Description Purchases Accounts
Cash Purchases Account Title PR Amount
Discounts Payable
2018
June
Totals - - - - -
(110) (520) (210) (510) (/)
GENERAL JOURNAL Page 7

DATE ACCOUNT TILES AND EXPLANATION P. R. DEBIT CREDIT
102
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104
CASE 2: Ferdinand Romero Company, which employs a voucher system, had the
following transactions during the month of July 2018: (Round-off amounts to
the nearest ones)
July 1 Recorded voucher no. 701 payable to Gloria for merchandise purchased,
P9,500. Terms 2/10,n/30.
2 Recorded voucher no. 702 payable to Reyes Rentals for July rent, P7,250.
3 Issued check no. 803 in payment of voucher no. 702.
9 Recorded voucher no. 703 payable to Tanupan Express, Inc. for freight,
P520. Terms: F.O.B. shipping point.
10 Issued check no. 804 in payment of voucher no. 701 less discounts.
11 Issued check no. 805 in payment of voucher no. 703.
15 Recorded voucher no. 704 payable to Pechon Company for P8,000 merchandise;
terms 2/10,n/30.
20 Received credit memo from Pechon Company for P2,000 merchandise recorded
in voucher no. 704. Cancelled voucher no. 704 and issued voucher no. 705.
24 Recorded voucher no. 706 payable to Jerusalem Company for P12,500

merchandise; terms 2/10,n/30.
Required: Prepare the voucher and check register, and record the
transactions for Ferdinand Romero Company. (use the form below)
VOUCHER REGISTER
Credits Debits
Voucher Date Other Accounts
Payee Accounts Trans. Office Trans.
Purchases
No. Date Paid Ck. No. Payable In Supplies Out Account Title PR Debit Credit
Totals - - - - - - -
(320) (550) (560) (160) (680) (/) (/)
CHECK REGISTER
Debits Credits
CHECK Voucher
Payee Accounts Purchases Cash in
No. Date No. Payable Discounts Bank
Totals - - -
(320) (570) (110)
105
V. Topic Summary
• There are two kinds of Journals, these are the General Journal and
Special Journals which are called “books of original entries”.
• The controlling account (also known as an adjustment or control account)

is an account in the general ledger for which a corresponding subsidiary
ledger has been created. The subsidiary ledger allows for tracking
transactions within the controlling account in more detail.
• Only transactions involving sale of merchandise on account or on credit

terms are recorded in the Sales Journal.
• Only transactions involving purchases of merchandise on account or on

credit terms are recorded in the Purchases Journal. Also, acquisitions
of assets on account are also recorded in this journal.
• The Cash Receipts Journal records transactions involving receipts of

cash, sale of merchandise in cash, collection of customer’s accounts,
investment of the owner in terms of cash, cash received from a bank
loan, refund from a supplier for returned merchandise purchased in cash,
etc.
• Cash Disbursements Journal records transactions involving cash payments,

purchases of merchandise in cash, payment of supplier’s account, owner’s
withdrawals in cash, cash refund to customers who purchased merchandise
in cash, acquisitions of assets in cash, payments of expenses, etc.
• The General Journal is the journal used to record transactions that

cannot be recorded in Sales Journal, Purchases Journal, Cash Receipts
Journal and Cash Disbursement Journal. These includes the recording of
investments of the owner not involving cash, return of merchandise
bought on account, return of merchandise by a customer that were sold on
account, adjusting and correcting journal entries, and closing and
reversing entries.
• The Combination Journal is a customized journal that may be designed by

a Certified Public Accountant that will make his work comfortably. It
can be a combination of special journals. It provides the cornerstone
for a simple yet effective accounting system in many small entities.
This journal combines features of the general journal and the special
journals in a single record.
• The Voucher Register takes the place of the purchases journal and
provides a record of all authorized check payments. In a voucher system,
all expenditures are recorded first in the voucher register. Approved
vouchers are entered in the voucher register in numerical sequence.
• A Check Register is a simplified form of the cash disbursements journal.

The register is a record of all check payments.
106
VI. Post-Assessment
Name: _________________________________________ Time: _____________________
Listed below are account titles used in the discussions from Module 1 to 5,
identify the classification of the account either an asset, liability,
capital, income or expense account and determine its normal balance either
debit or credit on the appropriate column provided for you to answer:
Account Classification Normal

Account Titles (Asset/Liability/Capital/ Balance
Income/Expense (Debit/Credit)
1 Accounts Payable
3 Accrued Interest Income
4 Accrued Salaries Expense
5 Accumulated Depreciation
6 Allowance for Uncollectible Accounts
7 Biological Assets
8 Bonds Payable
9 Building
10 Cash
11 Cash Equivalents
12 Communication Expense
13 Cost of Sales
14 Depreciation
15 Furniture and Fixtures
16 Input VAT
18 Intangible Assets
19 Interest Income
20 Interest Income
21 Interest Receivable
22 Land
23 Leasehold Improvements
24 Machineries
26 Mortgage Payable
27 Notes Payable
28 Notes Receivable
29 Office Equipment
30 Office Supplies
31 Office Supplies Expense
32 Output VAT
34 Prepaid Rent
35 Purchases
38 Rent Expense
39 Repairs and Maintenance
40 Representation and Entertainment
41 Salaries and Wages
42 Salaries Payable
43 Sales
44 Sales Discounts
46 Service Income
47 Taxes and Licenses
48 Tranportation Out
49 Transportation and Travel
51 Uncollectible Accounts
52 Unearned Interest Income
53 Unused Office Supplies
54 Used Office Supplies
55 Withdrawals
107
VII. References
Ballada, Win and Susan Ballada. (2018). Basic Accounting Made Easy 21st
Edition. Manila: Domdane Publishers and Made Easy Books.
Lopez, Rafael M. Jr. (2008). Fundamentals of Accounting Millennial Edition. Davao
City: MS Lopez Printing and Publishing.
Ledesma, Ester L. (2014). Financial Accounting Theory Review Booklets. Manila: CRC-
Ace The Professional CPA Review School.
Rante, Gloria Aradaniel. (2013). Accounting for Service Entities. Mandaluyong
City: Millenium Books, Inc.
108

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Ba 1 Module 5 Leson 1

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Module 5 – Merchandising Operations

The previous modules illustrated the accounting cycle of entities that

In the previous modules, the discussions were limited to processing of

➢ Only a limited number of transactions can be processed daily because

➢ Transactions recorded in the general journal must be posted

To overcome these limitations, entities adopt an accounting system that

The lesson will discuss the basics for a Trading/Merchandising Business’.

Instruction: After each statement, encircle TRUE if the statement is

1. The difference between revenues from sales and cost of sales is

III. Lesson Map

In the preparation of the Statement of Income of a merchandising firm, new

IV. Core Content

Name: _________________________________________ Time: _____________________

List the Statement of Income account titles that are unique in

Name: _________________________________________ Time: _____________________

2. Bureau of Internal Revenue (BIR)

For a sole proprietorship:

COMPARISON OF INCOME STATEMENTS

Service entities perform services for a fee. In ascertaining profit, a

Statement of Income Statement of Income

Revenues from Services Net Sales

Figure 7-1 Components of Statements of Income for Service and Merchandising

Gloria Detoya Traders

Net Sales P 2,393,250

Exhibit 7-1 Parts of an Income Statement for a Merchandising Entity

OPERATING CYCLE OF A MERCHANDISING BUSINESS

Figure 7-2 Operating Cycle of a Merchandiser

The topic was discussed in details in Module 3, Lesson 1.

Merchandising businesses use various business forms and documents to help

1. Sales invoice is prepared by the seller of goods and sent to the

2. The bill of lading is a document issued by the carrier-a trucking,

3. The statement of account is a formal notice to the debtor

4. The official receipt evidences the receipt of cash by the seller

5. Deposit slip is a printed form with depositor's name, account

6. A check is a written order to a bank by a depositor to pay the

8. The purchase order is an authorization made by the buyer to the

9. Receiving report is a document containing information about goods

10. A credit memorandum is a form used by the seller to notify the

STEPS IN A PURCHASE TRANSACTION

The procedures are as follows:

1. When certain items are needed, the user department fills in a

2. The purchasing department then prepares a purchase order after

3. After receiving the purchase order, the seller forwards an invoice to

4. Upon receiving the shipment of merchandise, the purchaser's receiving

5. Before approving the invoice for payment, the accounts payable

All of the above forms-purchase requisition, purchase order, invoice, and

Credit Term: 2/10, n/30

Discount Rate is the rate given by sellers to buyers to encourage them to

Cash discounts are recorded as Purchase Discounts from the buyer's

It is usually worthwhile for the buyer to take a discount if offered

Cash Discount of 2% on P150,000 P 3,000

*Amount Due = P150,000 Invoice Price - P3,000 Cash Discounts

Suppliers furnish smaller wholesalers or retailers with price lists and

There is no trade discount account and there is no special accounting entry

Illustration. Pinnacle Technologies quoted a list price of P2,500 for each

List Price P 17,500

List Price P 17,500

Trade Discount Credit Terms Date Paid

➢ On letter b, no cash discount since the account was paid on June 15

➢ On letter c, the buyer still enjoys the discount because June 11 is

When merchandise is shipped by a common carrier--a trucking entity or an

In freight prepaid, the seller pays the transportation costs before

FOB Shipping Point, Freight Collect Buyer Buyer

FOB Destination, Freight Collect Seller Buyer

Name: _____________________ Time: _

Name: _____________________ Time: _