FAR-REVIEWER

CHAPTER 10; MERCHANDISING BUSINESS

Merchandising Business

- One that buys and sell goods without changing

their physical form.

Inventory
- Refers to the goods that a merchandising
business has purchased and primarily intended
for resale.
- Asset that are held for sale in the ordinary
course of the business activities.
KINDS OF INVENTORY SYSTEMS
1. Perpetual Inventory System
- A program that continuously estimates your
inventory based on your electronic records, not
a physical inventory.
- The perpetual inventory system is commonly
used for inventories that are specifically
identifiable and are relatively high valued.
2. Periodic Inventory System
- A method of inventory valuation for financial
reporting purposes in which a physical count of
the inventory is performed at specific intervals.
- rendered.
BEGINNING INVENTORY $ xx
Purchases
- The account used to record purchases of
inventory under the periodic system.
Freight-In
- The account used to record the shipping costs
incurred on purchases of inventory under the
periodic system
Purchase returns
- The account used to record returns of
purchased goods to the supplier.
Purchased discounts
- The account used to record cash discounts
availed of on the purchased goods.
Gross profit
- Represents the profit a business earns after
deducting the cost of the good sold or services

Add. Net purchases xx Net sales $xx

Total goods available for sale (xx) Less. Cost of Good sold xx
Less. Ending inventory (physical account) (xx) Gross profit $xx
Cost of goods sold $ xx

Net sales $xx

(a) Net purchases computed as follows: Cost of good sold xx
Purchases $xx Gross profit xx
Add. Freight-in xx Rent expense xx
Less. Purchase returns (xx) Dep. Expense xx
Less. Purchase discounts (xx) Sal. Expense xx
Net purchases $xx Profit (net profit) $xx
Net sales = total sales -sales return and discounts.
General journal
- All other transactions that cannot be recorded
Sales $xx in the special journals are recorded int the
general journal.
Less. Sales returns xx • General ledger- contains all the accounts
Less. Sales discount xx appearing in the trial balance.
• Subsidiary ledger- provides breakdown of
Net sales $xx the balances of controlling accounts.

Sales

- Include both cash sales and credit sales STEPS IN THE ACCOUNTING CYCLE

Sales returns 1. Identifying and Analyzing

2. Journalizing
- The account used to record goods returned by
3. Posting
customers 4. Unadjusted trial balance
Sales discounts 5. Adjusting entries
6. Adjusted trial balance
- The account used to record cash discounts 7. Income statement
given to customers. 8. Closing entries
9. Post-closing trial balance
FORMULA 10. Reversing entries

Gross Profit= Net sales- Cost of goods sold

Net sales= Total sales – Sales returns &
discounts
Cost of Goods sold= Beginning inventory + net
purchases – Ending inventory
Net purchases = purchases + freight-in –
purchase returns & discounts

Special journal
- Is used to record transactions of similar nature
• Sales journal- used to record sales on
account.
• Purchase journal- used to record
purchases of inventory on account.
• Cash receipts journal- used to record all
transactions involving receipts of cash.
• Cash disbursement journal- used to
record all transactions involving
payments of cash.
CHAPTER 11: PARTNERSHIP FORMATION Advantages and disadvantages of a partnership:
ADVANTAGES DISADVANTAGES
Partnership • Ease of formation • Easily
- Is an unincorporated association of two or more dissolved/limited
individuals to carry on, as co-owners, a life
business, with the intention of dividing the • Shared responsibility • Unlimited
profits among themselves. of running the liability
business
CHARACTERISTICS OF A PARTNERSHIP • Flexibility in decision • Conflict among
making partners
• Greater capital • Lesser capital
1. Ease of formation- as compared to
compared to sole compared to a
corporations, the formation of a partnership
proprietorship corporation
requires less formality.
• Relative lack of • A partnership
2. Separate legal personality- the partnership has regulation by the (other than a
a judicial personality separate and distinct from government as general
the partners. The partnership can transact and compared to professional
acquire properties in its name. corporation partnership) is
3. Mutual agency- the partners are agents of the taxed like a
partnership for the purpose of its business. As corporation
such, a partner may legally bind the partnership
to a contract or agreement that is in line with Note 😊
the partnership’s operation. - The equity of a partnership is similar to the
4. Co-ownership of property- each partner is a co- equity of a sole proprietorship except that the
owner of the properties invested in the former is subdivided into the partner’s capital
partnership and each has an equal right with his balances.
partners to possess specific partnership - The equity of a corporation is similar to the
property for partnership purposes. equity of a cooperative, in the sense that both
5. Co-owner’s of profits- a partnership is created have “share capital”.
as a business (a profit-oriented entity), as such,
each entitled to share his share in the MAJOR CONSIDERATION IN THE ACCOUNTING FOR
partnership profit THE EQUITY OF PARTNERHIP
6. Limited life- the creation of a partnership is
basically consensual. 1. Formation- accounting for initial
7. Transfer of ownership- in case of dissolution, investments to the partnership.
the transfer of ownership, whether to a new or 2. Operations – division of profits or losses
existing partner, requires the approval of the 3. Dissolution- admission of a new partner and
remaining partners. withdrawal, retirement or death of a
8. Unlimited liability- each partner, including partner.
industrial ones, may be held personally liable 4. Liquidation- winding-up of affairs.
for partnership debt after all partnership assets
have been exhausted. FORMATION
 A partnership in which all partners are - A contract of a partnership is consensual. It is
individually liable is called a general created by the agreement of the partners which
partnership. may be constituted in any form, such as oral or
 A partnership in which at least one written. A partnerships legal existence begins
partner is personally liable is called from the moment the contract is executed,
limited partnership. unless otherwise stipulated.
VALUATION OF CONTRIBUTIONS OF PARTNERS.
- Contributions of partners to the partnerships
are initially measured at fair value.
- Fair value is “the price that would be received RIGUEL ALLEJE, DRAWINGS
to sell an asset or paid to transfer a liability in CR. DR.
an orderly transaction between market xx xx
participants at the measurement date”.

TYPE OF MEASUREMENT xx
CONTIBUTION
Cash and cash Face amount 7 (PAS 7)
equivalents The drawings account isa nominal account that is
Inventory Lower of cost and net realizable value closed to the related capital account at the end of
 Net realizable value (NRV) is the period. This account is a contra equity account
estimated selling price less and has a normal debit balance.
estimated costs of
completion and costs to sell. RECEIVABLE FROM/PAYABLE TO A PARTNER
(Pas 2) - The partnership may enter into a loan
transaction with a partner. A loan extended by
PARTNERS’ LEDGER ACCOUNT the partnership to a partner is recorded as a
1. Capital’s accounts receivable from the partner, while a loan
2. Drawings accounts obtained by the partnership from a partner is
3. Receivable from/Payable to a partner recorded as payable to the partner.
- A partner’s capital balance is normally credited
CAPITAL AND DRAWINGS ACCOUNT for the fair value of his net contribution to the
Each partner has his or her own capital and drawings partnership. If a partner’s capital balance is
account. These accounts are equity accounts and are credited for an amount greater than or less
used to record than the fair value of his net contribution, there
The following transactions: is bonus.

KNIGHT VELASQUEZ, CAPITAL BUNOS ON INITIAL INVESTMENTS

DR. CR. - An accounting problem exists when a partner’s
xx capital account is credited for an amount
xx greater that the fair value of his contributions.
xx
- Under the bonus method, any increase (or
xx xx
decrease) in the capital credit of a partner
xx
deducted from (or added to) the capital credits
of the other partners. The total partnership
capital remains equal to the fair value of the
partners net contributions to the partnership.
The partner’s capital account is a real account and
has a normal credit balance.
CHAPTER 12: PARTNERSHIP OPERATIONS
Division of profits and losses
- The partners share in the partnership or losses
in accordance with their partnership
agreement.
c. Interest on capital contributions- the
partnership agreement may stipulate that
capitalist partners are entitled to an annual
interest on their capital contributions.

Art. 1797 of the Philippine civil code NOTE 😊

- Provides the following additional rules in the The partners share in partnership profits and
profit or loss sharing of partners: losses based on their agreement.
• If only the share of each partner in the profits If only the share in profits has been agreed
has been agreed upon, the share of each in the upon, the share in losses shall be in the same
losses shall be in the same proportion. proportion.
• In the absence of stipulation, the share of each If no profit sharing has been agreed upon, the
partner in the profits and losses shall be in partners shall share in proportion to their
proportion to what he may have contributed, contribution. However, an industrial partner
but the industrial partner shall not be liable for shall not liable for losses.
the losses. As for the profits, the industrial Profit or loss allocated as follows:
partner shall receive such share as may be just 1.) Salaries, bonus ( bonus is allocates on if
and equitable under the circumstances. If there is profit),and interest on capital, if
beside his services he has contributed capital, these are stipulated ;and
he shall also receive a share in the profits in 2.) Any remaining amount is allocated based
proportion to his capital. on P/L ratio.
 An industrial partner is one who contributes
services to the partnership rather than cash or
other non-cash assets.
 A capitalist partner is one who contributes cash
or other non-cash assets to the partnership.
 A partner who contributes both services and
cash or other non-cash asset is both an
industrial and a capitalist partner.
• The designation of losses and profits cannot be
entered to one of the partners ( art. 1798 ). A
stipulation which excludes one or more
partners from any share in the profits or losses
is void (art.1799).

In addition to profit or loss sharing, the partnership

agreement may also stipulate any of the following:
a. Salaries- normally, an industrial partner receives
salary in addition to his share in the
partnership’s profits as compensation for his
services to the partnership.
b. Bonuses- the managing partner may be entitled
to a bonus for excellent management
performance. unlike for salaries, a partner is
entitled to a bonus only if the partnership earns
profit. The partner is not entitled to any bonus
if the partnership incurs loss.
CHAPTER 13: PARTNERSHIP DISSOLUTION
Dissolution
- Is the change in the relation of the partners
caused by any partner being dissociated from
the business.
- Dissolution is different from liquidation.
partnership’s books. The only entry to be made
in the partnership’s books is a transfer within
equity. A new capital account is established for
the new partner and a corresponding decrease
is made on the capital account(s) of the selling
partner(s)

Liquidation
- Is the termination of business operations or the
winding up of affairs.

Partnership dissolution does not necessarily terminate

the business. The business continues until the
remaining partners decide to liquidate the business. If
the business is continued after dissolution, new articles
of partnership should be drawn up.

MAJOR CONSIDERATONS IN THE ACCOUNTING FOR

PARTNERSHIP DISSOLUTION:

1. Admission of a partner
2. Withdrawal, retirement or death of a partner
3. Incorporation of a partnership

The admission of a new partner or the withdrawal,

retirement or death of an existing partner dissolves the
original partnership agreement because it creates
change in the relation of the partners (i.e., a change in
the number of the partners in a partnership).
It should be noted that the admission of a new
partner requires the consent of all the existing partners.

ADMISSION OF PARTNER
The admission of a new partner may be effected
either through:
a. Purchase of interest in partnership, or
b. Investment in the partnership

PURCHASED OF INTEREST
- A new partner may be admitted when he
purchase part or all of the interest of one or
more of the existing partners. This transaction is
a personal transaction between and among the
partners.as such, any consideration paid or
receives by a partner is not recorded in the