MODULE 5: Completing the Accounting Cycle for a Merchandising Business /

Special Journals

5.1 Completing the Accounting Cycle of a Merchandising Business

Completing the Accounting Cycle of a Merchandising Operations
 
A merchandising company requires the same types of adjusting entries as a service company, with one
additional adjustment for inventory to ensure the recorded inventory amount agrees with the actual
quantity on hand.
 
A physical count is an important control feature since a perpetual system (makes use of “stock cards”)
indicates what should be there but an actual count will determine what is actually there. This is the
Merchandise Inventory, end.
 
A merchandising company also requires the same types of closing entries as a service company.
 
The additional accounts that need to be closed out in a merchandising account include Sales, Sales
Returns and Allowances, Cost of Goods Sold, and Freight Out.
 
Merchandise Inventory is a permanent account and is not closed at the end of the period.
5.1.1 The Worksheet and the Financial Statements
 The Physical Count
In the periodic inventory system, since there is no way to determine the ending inventory, an actual
physical count must be done at the end of the period.
All merchandise owned by the entity is counted.
Quantity counted is multiplied by the unit cost
The cost of various items is added to determine the cost of the inventory.
 
Preparing the Worksheet
 Enter the General ledger balances in the Trial Balance column
 Enter the necessary adjusting entries in the Adjustments Column.
 Foot the totals to determine the equality of the Debits and the Credits
 Omit the adjusted Trial Balance Column
 Extend all revenue and expense accounts to the Income Statement column including
 the Merchandise Inventory, beg (Dr)
 the merchandise Inventory, end (Cr.)
to establish the Cost of Sales
Extend all Assets, Liabilities and Equity accounts to the Balance sheet Column including the merchandise
Inventory, end (Dr.)
Foot the balances of the Income Statement and the Balance sheet to determine the Profit or Loss.
Foot the totals to determine the equality of the Debits and the Credits

 
Preparing the Financial Statements
Prepare the Financial Statements using the Income Statement and Balance Sheet balances in the
Worksheet
Income Statement can be presented using the Cost of sale Method wherein the details of the operating
expenses are presented as
 distribution
 administrative
Other operating expenses
finance cost is deducted after the operating profit
other profits are added
 All income revenue and expense accounts including merchandise inventory shall be closed using
the Income Summary accounts
 Income Summary Accounts shall be closed to the Capital account
 The Drawing account shall be closed to the Capital account.
 Post the Post Closing-entries
 Prepare the Post Closing Statement of Financial Position (Balance Sheet)
5.2 The Special Journals
Special Journals
are used to group similar types of transactions.
If a transaction cannot be recorded in a special journal, it is recorded in the General Journal.
Special journals permit greater division of labor and reduce the time necessary to complete the posting
process.
 Sales journal: used for – all sales of Merchandise on account
 Cash receipts journal: used for – all cash receired (including cash sales)
 Purchases journal: used for – all purchase of merchandise on account
 Cash payment journal: used for – all cash paid (including cash purchases)
 General journal: used for – transactions that cannot be entered in a special journal, including
correcting, adjusting, and closing entries.
The types of special journal used depend largely on the types of transaction that
occur frequently in a business enterprise.

 Sales Journal – record sale of merchandise on account,

     source document: Sales Invoice ( recorded daily)
 Cash Receipts Journal – record receipt of cash sales, cash investment, loans and collection of
customers account and cash refund.
      source document: Official receipt, cash slips, Bank CM (recorded daily)
 Purchases Journal-purchases on account
      source documents: Purchase Invoice or Receiving report (recorded daily)                    
 Cash Disbursement Journal-cash purchases, cash payments of accounts and other liabilities,
payment of expenses, cash withdrawal of owners, cash refund to customers.
      source documents:  Official Receipts and checks issued                               
General Journal – entries that do not fit in the other journal (adjusting entries, closing entries, reversing
entries, and other transactions that do not fit in the special journals)
                             
 Effects on the General Journal
Only transactions that cannot be recorded in a special journal are recorded in the general journal.
  When the entry involves both control and subsidiary accounts:
- In journalizing, control and subsidiary accounts must be identified, and
- In posting, there must be a dual posting (to the control account and subsidiary ledger).
 
COMBINATION JOURNAL
 combines the features of the special journal and general journal in a single record
 usually used by business entities whose transactions are too many for the general journal but
too few for the special journal.
 This is often used by small professional and small service businesses.

MODULE 6:
6.1 Partnership
(According to Title IX  Article 1767 of the Civil Code of the Philippines)
A  Partnership is a contract wherein two (2) or more persons bind themselves to contribute
money, property, or industry to a common fund, with the intention of dividing the profits
among themselves.
 Manner of Creation -by mere agreement of the partners , it can be verbal or written
(Articles of Co-Partnership)
 Number of Organizers-2 or more but not more than 5
 Start of Juridical Personality-execution of the partnership contract
 Management-every partner is a manager if the partners did not appoint a manager
 The extent of Liability for Debts- every partner is liable to the extent of his personal
assets except for  the limited partner
 Term of Existence- any period of time stipulated by the partners
 Dissolution- may be dissolved anytime by the partners
 Transfer of interest- the interest may be transferred but only with the consent of the
partners

6.1.1 Nature of a Partnership

Characteristics of a Partnership
 Mutual contribution - of money, property or industry to a common fund.
 Division of profits or losses- each partner must share in the profits or losses of the
venture
 Co-ownership of contributed assets –all assets contributed to the partnership is owned
by all of the partners.
 Mutual agency –any partner can bind the other partner to a contract
 Limited life - it can be dissolved through 1) admission of a new partner, 2) death of a
partner, 3) Insolvency of a partner, 4) Incapacity of a partner 5) withdrawal of a partner,
6) expiration of the term specified in the partnership agreement.
 Unlimited liability – all partners (except limited partners) including industrial partners
are personally liable for all debts incurred by the partnership.
  Partnerships are subject to income tax, except Gen. Professional Partnerships
 Partner’s equity accounts – accounting for partnership are much like accounting for sole
proprietorships  wherein each partner has a:
- capital account and
-withdrawal account.

 
Major Classification of Partnerships
 General partnership -all partners are liable to the extent of their separate property.
 Limited partnership -Limited partners are liable only to the extent of their personal
contributions. The law states that there shall be at least one general partner.
 Commercial (trading) partnership -one formed for the transaction of business.
 Professional (non-trading) partnership -one formed for the exercise of a profession
called the "General Professional partnership"
 De -Jure Partnership - a partnership that has complied with all the legal requirements.
 De-Facto partnership - a partnership that has not complied with all the legal
requirements (incomplete requirements)
 
Kinds of Partners
 Capitalist partner-one who contributes money or property to the common fund.
 Industrial partner -one who contributes his knowledge or personal service to the
partnership
 Capitalist-Industrial partner -contributes cash /other assets and services
 General partner- liable to the extent of his separate property after all the assets of the
partnership are exhausted
 Limited partner -liable only to the extent of his capital contribution
 Managing partner -a partner who has been appointed as manager of the partnership
 Liquidating partner -one who is designated to wind up or settle the affairs of the
partnership after dissolution
 Continuing partner- one who continues the business of the partnership after it has been
dissolved by reason of the admission of a new partner, retirement,  or expulsion of one
of the partners.
 Surviving partner-one who remains after a partnership has been dissolved by the death
of a partner
 Sub-Partner-One who is not a partner but an associate of a partner in his share
 Nominal partner or partner by estoppel-one who is really not a partner but represent
himself as one
6.1.2 Partnership Accounting (Formation)
Accounting for partnership and sole proprietorship are the same in recording
assets/liabilities/income and expenses except for capital and drawing accounts
A capital and drawing account should be established for each partner.

 
Partner’s Capital Account
 credited for his initial investment
 credited for his additional net investment (assets –liabilities  ) assumed by the partner
 credit balance of the drawing account at the end of the period (income)
 debited for permanent withdrawals
 debit balance of the drawing account at the end of the period + loss

Partner's  Drawing  Account

 debited for personal advances during the period, salaries (manager)
 balances are closed to the corresponding capital accounts at the end of the  period
 
Loans  Receivable from partner
 if a partner withdraws a substantial amount of money with the intention of repaying it
 
Loans  Payable to Partners
 If a partner lends to the partnership amounts in excess of his agreed investment
 Loans payable to partners should be distinguished from claims of outside creditors.
 The partner will only be paid in full after outside claims had been settled in case of
liquidation.
 
Valuation of investment by partners
 Books of the partnership are opened with entries reflecting the net contribution of the
partner (Assets-Liabilities = Capital Accounts)
 Non-cash assets are recorded at values agreed upon, in the absence of an
agreement,   at fair market values at the date of transfer to the partnership
 
Adjustment of accounts prior to formation
 In cases wherein partners have existing businesses,  treatment of assets and liabilities
will be the same.
 However, when nominal accounts (income and expenses) are to be adjusted, the capital
account will be debited or credited.
6.1.3 Division of Profit and Loss

PERTINENT LAWS ON THE DISTRIBUTION OF PROFIT OR LOSS

Art. 1797.
The losses and profits shall be distributed in conformity with the agreement.
If only the share of each partner in the profits has been agreed upon, the share of each in the
losses shall be in the same proportion.
In the absence of stipulation, the share of each partner in the profits and losses shall be in
proportion to what he may have contributed.
The industrial partner shall receive a just and fair share in the profitss but does not share in the
losses.

DISTRIBUTION OF PROFITS OR LOSSES

Factors to be considered in a just and fair profit and loss sharing agreement:
Services rendered by the partners to the partnership
Amount of capital contributed by the partners
The entrepreneurial ability or managerial skills of the partners
May be expressed in:
Percentage - 33%, 67%  
Fraction -      1/3, 2/3    
Decimal -      33 , 0.67 
Ratio    -      1: 3 , 2:3    
6.2 Corporations
Corporations
As defined in the Revised Corporation Code of the Philippines ( RA 11232) has the following
attributes:
 An artificial being -with a personality separate and apart from its individual
shareholders or members.
 Created by operation of law-Created, not by mere agreement of the parties like in the
case of partnerships. It is also called a juridical person.
 Composed of one (1) person;  or five(5) or more persons not exceeding 15
-One Person  Corporation - allowed as long as it has a minimum capitalization of P 1
Million.
 Has the right of succession -Has the capacity of perpetual existence.

 Has the powers, attributes, and properties-powers are expressly authorized by law or
incident to its existence.
 A Corporation can enter into Partnerships, Joint Ventures, and Commercial Agreements.
Comparison
manner of creation
number of organizers
start of juridical personality
management
the extent of liability for debts
right of succession
term of existence
dissolution
transfer of interest
Partnership Corporation
by mere agreement of the partners -verbal or
Articles of Incorporation
written (Articles of Co-Partnership)
1 or more but not more than 15 (  the R
 2 or more but not more than 5
Corporation Code  RA 11232)
execution of the partnership contract issuance of the Certificate of Incorpora
every partner is a manager if the partners did not
Board of Directors
appoint a manager
stockholders are liable only up to the e
liable to the extent of his personal assets except
of his interest or investment in the
for  the limited partner
corporation
none yes-has the capacity of continuous exis
any period of time stipulated by the partners perpetual
maybe dissolved anytime by the partners maybe dissolved with the consent of th
Shares can be transferred even without
yes, but only with the consent of the partners
consent of the other stockholders

Partnership VS Corporation
 
Advantages of a Corporation
 Legal capacity to act as a legal entity
 Shareholders have limited liability
 Continuity of existence -perpetual
 Shares of stocks can be transferred w/o consent of the other shareholders
 Management is centralized to the board of directors
 Shareholders are not general agents of business
 Greater ability to acquire fund
Disadvantages of a Corporation
 Complicated in formation and management
 A greater degree of government control
 The high cost of formulation and operation
  Higher taxation
 Shareholder subservient to the wishes of the majority shareholders
 Control separate from ownership
 Transferability of shares permitting incompatible and conflicting elements in one
venture.

6.2.1 Basic Considerations

The Revised Corporation Code of the Philippines (RA 11232) is the general law that
governs the creation of private Corporations In the Philippines, while Government-Owned and
Controlled Corporations (GOCCs) are governed by Special Laws.
 
Steps in the Creation of a Corporation
 Promotion-bringing together incorporators or persons interested in the business
 Incorporation -submission of the Articles of Incorporation and the Corporation By-Laws
 Formal organization and commencement  -the adoption of by-laws and election of the
board of directors and administrative officers and the start of the business operation.
 
All Corporations shall file the Articles of Incorporation with the SEC which specifies the
vital details about the corporation such as the name of the corporation; purpose, place of
business; names, nationalities, and residence of incorporators; names of acting directors until
duly elected; a Stock or Non-Stock Corporation, and the authorized share capital.
Upon approval of the Articles of Incorporation, the Corporation shall be issued the Certificate
of Incorporation by the Securities and Exchange Commission (SEC)
 
By-laws are the rules of action adopted by the corporation for its internal government and for
the government of its officers, shareholders, or members.
 
Major Components of a Corporation
 Corporators -those who compose a corporation. Incorporators, shareholders or
members.
 Incorporators-shareholders or members mentioned in the articles of incorporation,
originally forming the articles of incorporation.
 Shareholders-Stockholders in a stock corporation
 Members-Corporators of a non-stock corp.
 
Major Classes of Corporations:
 Stock Corporation -share capital is divided into shares and is authorized to distribute to
the holders of such shares dividends or allotments of the surplus profit on the basis of
shares held.
  Non-Stock Corporation -no part of income is distributed or dividends to its members,
trustees, or officers.
 
Major Classes of Shares
 Par value shares -the specific amount is fixed in the Articles of Incorporation and
appearing in the certificate of stock( minimum issue price of the share)
 No par value shares-without any value appearing on the face of the certificate of stock.
It may have a stated fixed value in the Articles of  Incorporation. The minimum stated
value is p 5.00 per share.
 Ordinary shares - has control over the corporation because it has voting rights.
 Preference shares -receive a fixed dividend ( % of its face value) but with no voting
rights.
 
Shareholders' Equity
the residual interest of the owners in the net assets of a corporation measured by the
excess of assets over liabilities
Components:
 Share Capital - shares issued to shareholders
 Retained Earnings - accumulated profits of the corporation

6.3 Summary: Partnership and Corporation
6.1 Partnership (Article 1767 Title IX Civil Code of the Philippines)
 Composed of two (2) or more persons but not more than 5 who enters into an
agreement to contribute money, property, or industry to a common fund, with the
intention of dividing the profits among themselves.
 The partnership agreement can be verbal or in writing. If the capitalization is P 3,000
and above, it can be registered with the SEC.
 The capitalist partner -contributes money or property
 The industrial partner -contributes his industry
 In the valuation of non-cash assets contributed by the partners, it will be based on the
amount agreed upon by the partners or the fair value of the asset. 
 Partnership accounting is the same with Sole proprietorship, except that each partner
will have a separate Capital and Drawing accounts.
 The partnership agreement shall be the basis for the division of profits and losses.
 The industrial partner shall not share in the partnership losses.
 
6.2 Corporation (Revised Corporation Code (RA 11232),
 an artificial being created by the operation of law.
 corporators or owners can be a One Person Corporation or two (2) or more but not
more than fifteen(15).