Professional Documents
Culture Documents
HUA SIONG
COLLEGE OF ILOILO
1. Analysis of transactions.
2. Recording of the transactions in the journal. (Journalizing)
3. Posting of the journal entries to the ledger. (Classifying)
4. Preparation of the unadjusted trial balance.
5. Compilation of data needed to adjust the accounts.
6. Preparation of the worksheet and the adjusted trial balance.
7. Preparation of financial statements.
8. Journalizing and posting of adjusting entries.
9. Journalizing and posting of closing entries.
10. Preparation of post-closing trial balance.
11. Journalizing and posting of reversing entries.
1. Analysis of transactions
In actual practice transactions are evidenced by business documents such as sales invoices, official receipts,
cash vouchers, bank deposit slips etc. Based on these documents, transactions are analyzed using the rules
of debit and credit. The common source documents used in merchandising business are:
1. Sales Invoice – 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 about the goods sold. It specifies the
amount of sales, the transportation and payment forms.
2. Bill of lading – a document issued by the carrier (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. Statement of Account – formal notice to the debtor detailing the amount already due.
4. Official Receipt – Evidences the receipt of cash by the seller.
5. Deposit slips – printed forms with depositor’s name, account number and space for details of the
deposit. A validated deposit slip indicates that cash and checks were actually deposited.
6. Check – a written order to a bank by a depositor to pay the amount specified in the check from the
checking account of the depositor to the person named in the check. The entity issuing the check is the
payor while the receiver of the money is the payee.
7. Purchase requisition – a written request to the purchaser of an entity from an employee or user
department of the same entity that goods be purchased.
8. Purchase Order – an authorization made by the buyer to the seller to deliver the merchandise.
9. Receiving Report – A document containing information about goods received from a vendor.
10. Credit memorandum – a form used by the seller to notify the buyer that his account is being decreased
(Accounts Receivable to the buyer is credited) due to errors or defective products delivered or other
factors requiring adjustments.
A service business sells knowledge or expertise while a merchandising business sells a particular product.
The primary objective of a merchandising business is to buy goods and resell them at a profit. Examples of
merchandising business include grocery stores, department stores, hardware stores, drugstores, specialty
clothing stores, and retail outlets that sell to final consumers. Others include the wholesale distributors that
supply goods to retailers and other businesses.
1. Purchasing of merchandise inventory from the supplier – The company buys goods or merchandise for
resale. Information as to the quality, quantity, specifications, and the cost per unit of the goods
purchased are maintained for management use.
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2. Handling of merchandise inventory – refers to the activities on how the goods will be transported and
stored before its sale. The handling costs are added to the cost of goods bought. Transportation costs
include freight, express, drayage and cartage.
3. Returning of merchandise purchased to the supplier– Some of the goods purchased and received may
be unsatisfactory or not in accordance with the specifications in the purchase order and can be
returned to the vendor or supplier. Sometimes, certain deductions or allowances from the original
purchase price are allowed by the supplier.
4. Selling of merchandise at a mark-up – This activity is the major source of revenue of a merchandising
firm. Sale of goods purchased at a price above the cost is to provide adequate profit or margin.
5. Customers returning goods to the merchandising firm – Some goods sold may be returned by
customers due to some defects, or is not in accordance with their purchase order. Deductions or
allowances from the original sales price can also be granted to customers.
6. Maintaining adequate merchandise inventory on hand – This is to ensure that customers’ orders are
satisfied at all times.
The merchandising firm purchases inventory, sells the inventory and uses cash or credit 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. It is
advantageous for the management to shorten the cycle. It means that the faster the sale of inventory and
collection of accounts receivable, the higher is the profits.
CASH CASH
payment of
collection of accounts Cash accounts
receivable purchases payable
sale on account
Purchases
INVENTORY INVENTORY on Account
There are two systems to account for inventory: the perpetual system and the periodic system.
1. Under the Periodic System, an inventory count is conducted only at the end of each accounting period
or depending upon the policy of the management. It could be monthly, quarterly or annually. At that
time, each product available for sale is counted and multiplied by its per unit cost, and the total of all
such calculations equals the value of inventory at the end of the period. Periodic inventory system is
generally used in retail stores such as clothing stores, grocery and convenient stores, and large
discount stores, in which the unit price of each item is lower.
2. With the Perpetual System, the inventory account is updated after every inventory purchase or sale.
Before computers became widely available, only companies that sold a relatively small number of high-
priced items such as jewelries, cars, etc. used this system. Even with the perpetual inventory system,
the company still needs to do the inventory count at least annually. The major advantage of doing a
periodic inventory count is to determine how much inventory has been lost, stolen, or subject to
spoilage.
HO 8 – FINACR 030 3
Under this system, the increase or decrease of inventory is not updated every time there is purchase or sale of
inventory. Every time the company purchase inventory, an income statement account, “Purchases” is debited.
Every time the company sell inventory, the Inventory account is not decreased so the amount of inventory sold
is not recorded at the time of sale. In order to know how much inventory was sold, an inventory count is
conducted at the end of the accounting period, and the amount of the Cost of Goods Sold (COGS) or Cost of
Sales is computed using a formula.
Purchase of Merchandise
1. Purchases
The Purchases account is an income statement/temporary account/nominal account, and is used only
for merchandise purchased for resale. Its sole purpose is to accumulate the total cost of merchandise
purchased during an accounting period, that is why it has a debit normal balance. The account may be
accompanied by cash or sales invoice or charge sales invoice of the supplier. It is debited for the cost
of goods bought as shown in the seller’s invoice. The sample journal entries to record this account are
as follows:
Purchase Returns and Allowances is a contra Purchases account and has a credit normal balance. It is
deducted from Purchases in computing the Cost of Goods Sold. It is important that a separate account
be used to record purchase returns and allowances because the management needs the information
for decision-making. If merchandise purchased is to be returned or an allowance is to be claimed from
a supplier (creditor), the same should be confirmed in writing. A pre-numbered form sent to the
supplier containing the details of the amount of debit covering the return or allowance claimed is called
a debit memorandum. A debit memorandum is a form issued by a purchaser to inform a creditor that
the debit (decrease A/P) has been posted to the accounts payable of the buyer to the creditor. The
debit memorandum is sometimes referred to as a “debit memo” or DM. The sample journal entries to
record this account is as follows:
3. Purchase Discounts
This is a reduction in the amount due that is granted by the supplier when the buyer pays its account
within the discount period. Discounts are incentives of the company for buyers to pay early. Purchase
discount is a contra account that is deducted from Purchases in computing the Cost of Sales. The
sample journal entry to record this account is:
4. Freight in
If the buyer pays the expenses (FOB Shipping Point) of transporting the goods from the place of the
seller to the place of the buyer, such expenses are debited to Freight in. This account is an addition to
the Purchases account especially when computing the Cost Goods Sold (Cost of Sales). Other
accounts used for these expenses are Transportation In, and Transportation on Purchases. The
sample journal entry to record this account is:
Freight in 500
Cash 500
HO 8 – FINACR 030 4
1. Sales
The major source of revenue of a merchandising company results from sale of merchandise. Income
or sales is earned by a merchandising company if there is transfer of legal ownership of goods
(passage of title) from the seller to the buyer. Transfer of title happens during the physical delivery of
the goods. Each time a sale is made, a revenue account called Sales is increased (credited) by the
amount of the selling price of the goods sold. The accompanying debit is Cash if the term of sale is
cash or to Accounts Receivable is the goods are sold on account.
Typically, the entry will be based on a business document called invoice. The sales invoice is prepared
after the accounting department receives notice from the shipping department of the shipment of the
goods to the customer. The entry to record this transaction is as follows:
Goods sold and delivered to a customer may be returned to the seller for a variety of reasons. These
include wrong color, wrong size, wrong style, wrong amount, or inferior quality. An allowance may be
also granted to a customer for any of a number of reasons, including inferior quality or damage or
deterioration in transit. A sales return is a cancelation of a sale. It could be recorded as a debit in the
Sales account, but the amount of sales returns may serve as a useful information to owners and other
interested parties. Thus they are recorded in a separate account entitled Sales Returns and
Allowances, which is a contra revenue account to Sales. Sales Return and Allowances has a debit
normal balance and is deducted to Sales in order to get the Net Sales. If a sales return is received, or
a sales allowance granted, the customer is usually informed in writing. A pre-numbered form sent to a
customer (debtor), showing the details of the amount of credit covering the return or allowance granted
is called a credit memorandum. A credit memorandum is a form issued by a seller to inform the buyer
(debtor) that a credit (decrease A/R) has been posted to the Accounts receivable of the seller to the
debtor. It is also called “credit memo” or CM. The entry to record this kind of transaction is as follows:
Sales Returns and Allowances 1,000 Sales Returns and Allowances 1,000
Cash 1,000 Accounts receivable 1,000
To record refund to customer Defective merchandise returned by
the buyer
3. Sales Discount
The granting of sales discount is another factor that reduces the amount of cash actually collected from
the sale of goods. The Sales Discount is a contra account to Sales. It has a debit normal balance and
is deducted to Sales in order to get the Net Sales in the Income Statement. It is not an expense
incurred in generating revenue. Rather, its purpose is to reduce recorded revenue to the amount
actually realized from sales. The journal entry to record this account is usually:
Cash 9,000
Sales Discount 1,000
Accounts receivable 10,000
Collection of account less discount
This is a selling expense account incurred by the seller in making the sale to the customer. This is not
included in computing the cost of goods sold. It is included in the operating expenses of the business
under selling expenses. Because this is an expense account, it has a debit normal balance. The
journal entry to record this account is usually:
Discounts on Merchandise:
There are two types of Discounts on Merchandise:
1. Trade Discount
This discount is a deduction from the list price. The purpose of this discount is to increase the volume
of sales. This discount is frequently increased with the size of the purchases to attract customers to
buy in large quantities. This type of discount is considered a means of arriving at the selling price and
is not recorded in the accounting records. A trade discount may be stated as a series of discounts.
Illustration:
a b c d
List Price
1st Trade Discount
New/Final Selling Price
e f g
List Price
1st Trade Discount
2. Cash Discount
A cash discount is a strong encouragement to customers to pay their bill within the discount period.
Thus, the purpose of Cash Discounts is to encourage early payment of customers on account. Cash
discounts are called purchase discounts from the buyer’s view point and sales discount from the seller’s
view point. A cash discount is computed on the amount of the invoice less any returns, allowances and
down payment.
Net Amount
20, 2 / 10, n / 30
Credit Period
Discount Period
A. On March 1, 2017, Classic Company sold merchandise with the following list price. For each of the
sales terms below, determine the proper amount of accounts receivable to be debited.
B. On March 1, 2017, Classic Merchandising sold merchandise with a list price of P 20,000. For each of
the credit terms below, determine the proper amount of cash received at the time payment was
received and the amount of sales discount if there is any.
C. On September 25, 2017, Classic Merchandising bought merchandise with the following list price. For
each of the credit terms below, determine the proper amount of cash paid by Classic Merchandising
and the amount of purchase discount if there is any.
List price Credit Terms Date of payment of Amount paid at the Amount of
Classic date of payment Purchase discount
Merchandising
2017 Dr Cr
2017 Dr Cr
HO 8 – FINACR 030 8
D. Classic Merchandising sold merchandise with the following list price. For each of the credit terms
below, determine the proper amount of cash received by Classic Merchandising and the amount of sales
discount if there is any.
List Credit Terms Date of sale of Date of receipt Amount received Amount of
price Classic of payment at the date of Sales
Merchandising from the buyer payment from discount
the buyer
2017 2017
1. 20,000 2/10, n/30 Mar 2 Mar 8
2. 20,000 2/10, n/30 Apr 6 Apr 20
3. 100,000 20, 2/15, n/60 May 15 Jun 3
4. 100,000 20, 2/15, n/60 Sep 8 Sep 20
5. 100,000 10, 5/10, 2/20, n/45 Dec 3 Dec 10
2017 Dr Cr
2017 Dr Cr
HO 8 – FINACR 030 9
Record the following transactions using the periodic inventory system of Prudent Trading.
2017
Sep 1 Purchased from Noah Enterprise, merchandise amounting to P 10,000 for cash
2 Purchased from Bethel Company P 50,000 worth of merchandise, terms: 1/15, n/30.
16 Paid full amount of its account to Bethel.
17 Purchased from Gideon, P 60,000 worth of merchandise; terms: 2/10, n/30
18 Paid freight for the merchandise purchased from Gideon, P 1,000. Debited to Freight in.
30 Paid Gideon for the merchandise purchased
PURCHASES
2017 Dr Cr
PURCHASE DISCOUNT
FREIGHT IN
After journalizing the transactions, compute the balance of the following accounts:
1. Purchases
2. Purchase discount
3. Net Purchases
4. Freight in/Transportation in
5. Cost of Purchases
Record the following transactions using the periodic inventory system of Prudent Trading.
2017
HO 8 – FINACR 030 10
Sep. 1 Purchased from Ruth Company P 50,000 worth of merchandise, terms: 1/15, n/30.
2 Returned to Ruth Company, P 10,000 worth of damaged merchandise.
10 Paid full amount of his account to Ruth Company.
17 Purchased from Naomi, P 90,000 worth of merchandise; terms: 2/5, n/30
17 Paid freight for the merchandise purchased from Naomi. Debited to Freight in. P 1,000
19 Received credit memo worth P 10,000 from Naomi.
24 Paid Naoimi for the merchandise purchased
27 Purchased office equipment from Shem, P 70,000.
29 Paid 60% of his account to Shem.
PURCHASES
2017 Dr Cr
PURCHASE RET./ALLOW.
PURCHASE DISCOUNT
FREIGHT IN
After journalizing the transactions, compute the balance of the following accounts:
1. Purchases
2. Purchase Return and Allowances
3. Purchase discount
4. Net Purchases
5. Freight in/Transportation in
6. Cost of Purchases
Record the following transactions using the periodic inventory system of Prudent Trading.
2017
Sep 1 Purchased from Joshua Company P 90,000 worth of merchandise, terms: 1/15, n/30.
2 Returned to Joshua P 10,000 worth of damaged merchandise.
HO 8 – FINACR 030 11
PURCHASES
2017 Dr Cr
PURCHASE RET./ALLOW.
PURCHASE DISCOUNT
FREIGHT IN
After journalizing the transactions, compute the balance of the following accounts:
1. Purchases
2. Purchase Return and Allowances
3. Purchase discount
4. Net Purchases
5. Freight in/Transportation in
6. Cost of Purchases
Record the following transactions using the periodic inventory system of Prudent Trading.
2017
Sep. 1 Sold merchandise to Jonah, P 12,000 for cash
2 Sold merchandise to Eli, P 20,000 on account.
3 Received P 15,000 from Eli
5 Sold merchandise to Jacob P 60,000, terms, 2/10, n/30
HO 8 – FINACR 030 12
SALES DISCOUNT
After journalizing the transactions, compute the balance of the following accounts:
1. Gross Sales
2. Sales discount
3. Net Sales
Record the following transactions using the periodic inventory system of Prudent Trading.
HO 8 – FINACR 030 13
SALES
2017 Dr Cr
SALES DISCOUNT
FREIGHT OUT
After journalizing the transactions, compute the balance of the following accounts:
1. Sales
2. Sales discount
3. Net Sales
4. Transportation Expense/Freight out
Record the following transactions using the periodic inventory system of Prudent Trading.
2017
Sep. 1 Sold merchandise to Jethro, P 25,000 on account, terms 2/15, 1/25, n/60.
2 Jethro returned P 5,000 worth of defective merchandise to Prudent Trading.
18 Received full amount owed from Jethro.
19 Sold merchandise to Paul P 60,000, terms, 2/10, n/30
19 Paid Transportation expense for Paul, P 1,500.
22 Prudent issued credit memo to Paul for the merchandise returned by Paul worth P 10,000.
23 Paul paid Prudent Trading the full amount
24 Thomas bought P 50,000 worth of merchandise, terms 10, 2/5, n/45
HO 8 – FINACR 030 14
SALES RET./ALLOW.
SALES DISCOUNT
FREIGHT OUT
After journalizing the transactions, compute the balance of the following accounts:
1. Sales
2. Sales Return and Allowances
3. Sales discount
4. Net Sales
5. Transportation Expense/Freight out
Exercise: Record the following transactions using the periodic inventory system of Prudent Trading.
2017
Sep. 1 Purchased from Joshua Company P 80,000 worth of merchandise, terms: 2/10, n/30.
2 Returned to Joshua P 5,000 worth of damaged merchandise.
3 Sold merchandise to James Enterprise P 70,000 for cash.
5 Sold merchandise on account to Thomas Company, P 60,000, terms: 3/10, n/30.
8 Sold merchandise on account to Shem Trading, P 50,000, terms: 10, 2/15, n/30
9 Paid freight for merchandise sold, P 2,000.
14 Paid full amount of his account to Joshua.
15 Received payment from Thomas Company
15 Purchased from Micah, P 80,000 worth of merchandise; terms: 2/10, n/30
16 Paid refund P 3,000 to James Enterprise for damaged merchandise delivered.
2017 Dr Cr
HO 8 – FINACR 030 15
SALES
PURCHASES
SALES RET./ALLOW.
PURCHASE RET./ALLOW.
SALES DISCOUNT
PURCHASE DISCOUNT
FREIGHT IN
FREIGHT OUT
HO 8 – FINACR 030 16
After journalizing the transactions, compute the balance of the following accounts:
1. Purchases
2. Purchase Return and Allowances
3. Purchase discount
4. Net Purchases
5. Freight in/Transportation in
6. Cost of Purchases
After journalizing the transactions, compute the balance of the following accounts:
1. Sales
2. Sales Return and Allowances
3. Sales discount
4. Net Sales
5. Transportation Expense/Freight out
Exercise:
Record the following transactions using the periodic inventory system of Gateway Trading.
2017
Sep. 1 Purchased from Gabriel Company P 50,000 worth of merchandise, terms: 3/15, n/30.
2 Received CM from Gabriel Company, P 3,000
3 Sold merchandise to Lot Enterprise P 40,000 for cash.
5 Sold merchandise on account to Peter Company, P 90,000, terms: 3/20, n/30.
6 Purchased P 120,000 to Timothy Enterprise, 10, 2/10, n/30.
8 Sold merchandise on account to Shem Trading, P 60,000, terms: 10, 2/10, n/30
9 Paid freight out, P 4,000.
14 Paid full amount of his account to Gabriel.
15 Received payment from Peter Company
15 Purchased from Micah, P 70,000 worth of merchandise; terms: 2/10, n/30
16 Paid refund P 2,000 to Lot Enterprise for damaged merchandise delivered.
17 Paid freight for the merchandise purchased from Micah, P 3,000.
17 Issued CM to Shem Trading, P 8,000.
18 Sold merchandise on account to Philip Company, P 50,000, terms: 2/10, n/30
18 Received full payment from Shem Trading.
20 Cash Purchases, P 20,000.
21 Paid 60% of his account to Timothy Enterprise.
22 Cash sales, P 40,000.
22 Issued credit memo to Philip Company, P 4,000.
23 Purchase merchandise on account from Martha Enterprise, P 55,000, 3/5, 1/10, n/30.
26 Paid Micah for the merchandise purchased.
2017 Dr Cr
HO 8 – FINACR 030 17
SALES
PURCHASES
SALES RET./ALLOW.
PURCHASE RET./ALLOW.
SALES DISCOUNT
PURCHASE DISCOUNT
FREIGHT IN
FREIGHT OUT
HO 8 – FINACR 030 18
After journalizing the transactions, compute the balance of the following accounts:
1. Purchases
2. Purchase Return and Allowances
3. Purchase discount
4. Net Purchases
5. Freight in/Transportation in
6. Cost of Purchases
After journalizing the transactions, compute the balance of the following accounts:
6. Sales
7. Sales Return and Allowances
8. Sales discount
9. Net Sales
10. Transportation Expense/Freight out