MODULE III

WORKSHEET WITH ADJUSTMENTS AND FINANCIAL

STATEMENTS

LESSON 1 - ADJUSTING ENTRIES

2 - WORKSHEET WITH ADJUSTMENTS

3 - FINANCIAL STATEMENTS

4 - CLOSING ENTRIES AND POST-CLOSING TRIAL

BALANCE

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 MODULE III

WORKSHEET WITH ADJUSTMENTS & FINANCIAL STATEMENTS

Module Overview

This module presents, discusses and illustrates the methods and procedures in
preparing adjusting entries, worksheet, financial statements, closing entries and post-closing
trial balance.

Adjusting entries are necessary to show fairly the income earned and expenses incurred
as well as, the financial condition of the business. A worksheet is prepared to facilitate the
preparation of financial statements. Closing entries are prepared bringing the balance of
nominal accounts or temporary accounts to zero.

Learning Objectives:

1. Identify the types of adjustments and their purposes.

2. Prepare adjusting entries.
3. Prepare a Worksheet with adjustments.
4. Prepare Financial Statements.
5. Prepare closing entries.
6. Prepare a post-closing trial balance.

Lesson 1
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 ADJUSTING ENTRIES

Reasons for preparing adjusting entries:

1. Some income not yet received but already earned are still unrecorded, this should be
recognized in the Trial Balance.
2. Some expenses not yet paid but already incurred are still unrecorded, this should be
recognized in the Trial Balance.
3. Some reported assets are already expired or used up, this should be reclassified as
expenses in the Trial Balance.
4. Some reported liabilities are already earned, this should be reclassified as income in the
Trial Balance.
5. Some reported income are still unearned, this should be reclassified as liability in the
Trial Balance.
6. Some reported expenses are still unexpired, this should be classified as assets in the
Trial Balance.

Accounts that need to be adjusted:

1. Adjustment for the expiration of prepaid expenses

2. Adjustment for the realization of income collected in advance
3. Adjustment for the accrual of expenses
4. Adjustment for the accrual of income
5. Provision for bad debts
6. Provision for depreciation

1. Adjustment for the Expiration of Prepaid Expenses

Prepaid expenses are expenses paid in advance. At the time of payment, the account is
an asset and as it is used it becomes an expense. The adjusting entry for this account depends
on the original entries made when it was paid.

There are two methods to be used:

a. Asset Method. Under this method, the original entry made is charged to an asset
account.

Illustration: Dec. 1 - Paid the rent of the store space for 3 months, Php6,000.

Journal entry Dec. 1 Prepaid Rent Php 6,000

Cash Php 6,000

Adjusting entry Dec. 31 Rent Expense 2,000

Prepaid Rent 2,000

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 Analysis: The P6,000 which was paid on December 1 is for a 3-month period, December
2019, January and February 2020. As of December 31, the end of accounting period, only
P2,000 rental for December have already incurred, so that portion is an expense and the
remaining P4,000 is still prepaid until February 28, 2020.

b. Expense Method. Under this method, expense account is charged when the
payment is made. Using the same example above, the following are the entries:

Journal entry Dec. 1 Rent Expense Php 6,000

Cash Php 6,000

Adjusting entry Dec. 31 Prepaid Rent 4,000

Rent Expense 4,000

Analysis: The rental payment of P6,000 is for the months of December, 2019, and
January and February 2020. As of December 31, only P2,000 or one month rental have been
incurred. The remaining balance of P4,000 is rental for the months of January and February,
2020.

2. Adjustment for the Realization of Income Collected in Advance/Pre-collected Income

Pre-collected/Unearned Income is income collected in advance. This arises when

payment is received before services are rendered. There are two methods of recording
income collected in advance. The adjusting entry at the end of the accounting period
depends on the original entry made.

a. Liability method. At the time of collection, the income will be recorded as a

liability.

ILLUSTRATION: Nov. 1 – Received Php 7,500 for three months consultancy services.

Journal entry: Nov. 1 Cash Php 7,500

Pre-collected Consultancy Fee Php 7,500

Adjusting entry:Dec 31 Pre-collected Consultancy Fee 5,000

Consultancy fee 5,000

Analysis: As of December 31, the two month consultancy fee of P5,000 are already
earned. Only P2,500 or consultancy fee for January 2020 is still unearned.

b. Income Method. At the time of collection, the amount will be recorded as an

income.

Journal entry: Nov. 1 Cash Php 7,500

Consultancy Fee Php 7,500

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Adjusting entry: Dec 31Consultancy Fee 2,500
Pre-collected Consultancy fee 2,500

Analysis: The consultancy fee of P7,500 was received from the client which represent
consultancy income for the months of November and December 2019 and for January 2020. As
of December 31, 2019, two months consultancy fee is already earned. The remaining P2,500 is
still unearned until January 31, 2020 of the next accounting period.

3. Accrual of Expenses

Accrued expenses are those expenses already incurred during the period but not yet
paid and recorded.

At the end of the accounting period, the income statement should reflect such expense
and the balance sheet should reflect a liability account. The adjusting entry to record the
accrual of expense at the end of the accounting period is as follows:

Salaries Expenses xxx

Salaries Payable xxx

4. Accrual of Income

These items of revenue have been earned during the period but not yet received or
collected and not yet recorded. An adjusting entry is necessary so that the revenue would be
reported in the same period. The adjusting entry to record the accrual of income at the end of
the accounting period is as follows:

Interest Receivable xxx

Interest Income xxx

5. Provision for Bad Debts

Most business firms extend credits to attract more customers. However, not all credits
extended are good or collectible. For reason or another, a certain percentage of these
collectibles are not collected. For this reason, the business should provide for losses for non
collection of credits. This loss from uncollectible accounts is called bad debts. Bad debts is a
nominal account which must be shown in the income statement at the end of the accounting
period.

The entry to adjust bad debts is as follows:

Bad debts xxx

Allowance for bad debts xxx

Bad debts or loss from bad debts is debited to show a decrease in owner’s equity due to
estimated loss.

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 Estimated or Uncollectible Account or Allowance for Bad Debts which is a contra asset
account is credited because it is a deduction from an asset account, Accounts receivable. In the
balance sheet presentation, Allowance for Bad Debts is deducted from Accounts receivable to
show the net book value or net realizable value of Accounts Receivable.

There are several methods of estimating the probable losses from bad debts: 1)
Allowance method (Percentage of sales; percentage of accounts receivable balance; aging of
accounts receivable); 2) Direct Write-off.

6. Provision for Depreciation

Assets which are relatively permanent in nature are fixed assets (Property, Plant and
Equipment). They are used by the business in its operations and are not intended for sale. The
value of these assets, except land, decreases as time passes by due to: a) wear and tear, b)
inadequacy and obsolescence.

The cost of fixed assets is allocated to the number of useful life. Depreciation is the
portion of the cost of the asset which is already used or consumed. Depreciation is also defined
as the decline in the value of fixed assets due to wear and tear.

There are several ways or methods of depreciating assets. However, this module will
deal only with the simplest method which is the straight line method. The following is the
formula:
D=C–S
n

where: D is the depreciation

C is the original/acquisition cost of the fixed asset
S is the salvage value or the amount wherein the fixed asset can
be sold after its useful life
n is the number of estimated useful life of the fixed asset

Illustration:

On June 30, 2019, a delivery truck was purchased for P250,000. It is estimated to have a
useful life for 10 years with a scrap value of P50,000.

Required:
1. Compute the annual depreciation of the delivery truck.
2. What is the adjusting entry for December 31, 2019 to record the depreciation?
3. What is the adjusting entry for December 31, 2020?
4. What is the amount of accumulated depreciation at the end of 2020.
5. What is the net book value of the delivery truck at the end of 2020?

Solution:
1. D = 250,000 – 50,000 = P20,000/year
10

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 2. Depreciation Expense P10,000
Accumulated Depreciation – delivery truck P10,000

Computation: P20,000 x ½ = P10,000

Note: The truck was purchased June 30 and the business started using it July 1. The business
used it from July 1 to December 31 or 6 months.

3. Depreciation Expense P20,000

Accumulated Depreciation – delivery truck P20,000

4. Amount of accumulated depreciation at the end of 2020

Accum dep’n 2019 P10,000

Accum dep’n 2020 20,000
P30,000
=======
5. Net book value of the delivery truck at the end of 2020.

Acquisition cost P250,000

Accum dep’n at the end of 2020 30,000
Net book value P220,000
========

LEARNING ACTIVITY

I. Give the accounts to be credited to complete the incomplete adjusting entries:

Accounts Debited Accounts Credited

1. Prepaid Insurance _______________________
2. Rent Expense _______________________
3. Office Supplies Used _______________________
4. Depreciation, Office Equipment _______________________
5. Rent Income _______________________
6. Accrued Interest Income _______________________
7. Interest Expense _______________________
8. Unearned Rent Income _______________________
9. Supplies on Hand _______________________
10. Salary Expense _______________________

II. Give the year-end adjusting entry required under each of the following independent
cases:

1. Depreciation on delivery equipment was estimated at P5,000.

2. Three months property taxes, estimated at P1,500 have been accrued but
unrecorded at the end of the accounting period.
3. The balance of the office supplies account is P8,000. At the end of the year, the
year-end inventory showed a balance of P1,500.

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4. The company owns and occupies a building that was completed and occupied for
the first time on January 1 of the current year. The building costs P2,000,000 with
an estimated life of 25 years and salvage value of P50,000.
5. Accrued interest on notes receivable is P250.
6. The Accounts Receivable balance as of December 31 is P50,000. It is estimated that
3% of it is doubtful of collection.
7. Accrued interest on notes payable is P160.
8. Total Rental Income collected as of December 31 is P15,000. Of this only P12,000
had been earned.
9. Accrued salaries is P6,000.
10. Accrued interest on mortgage payable is P6,000.

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 Lesson 2

WORKSHEET WITH ADJUSTMENTS

The Worksheet

A worksheet is an analysis paper that facilitates the preparation of financial

statements.

The following are the steps in preparing a worksheet:

1. Write the heading of the worksheet at the top of the paper with the following
information:

Name of the Business

Worksheet
December 31, 20____

2. Provide the following columns in the worksheet:

Account Trial Balance Adjustments Adjusted Income Balance
Titles Trial Balance Statement Sheet
Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit

3. Copy the trial balance on the first two money columns.

4. Enter the adjustments columns the adjusting entries. Accounts which are not found
in the trial balance should be written below the unadjusted trial balance.
5. Total the adjustments column.
6. The adjusted trial balance column is the total of the unadjusted trial balance and
the adjustments columns. If the amounts are both debits, add the amounts and
extend to the debit column of the Adjusted Trial Balance. Same procedure will be
followed if the amounts are both credits, only it will be extended to the credit
column. If the amount is debit and credit, subtract the smaller amount from the
bigger amount and extend the difference following the column of the bigger
amount.
7. Add the adjusted trial balance columns to prove the equality of debits and credits.
8. The adjusted trial balances are extended to the balance sheet and income
statement columns. Assets, liabilities and capital are extended to the balance sheet
columns while income and expenses are extended to the income statement
columns. Add the debit and credit columns of the balance sheet and income
statement. Get the difference of the debits and credits columns of the income

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 statement and the balance sheet. The difference of both should be equal. If the
credit total of the income statement is more than the debit total, the difference will
represent a net income on the other hand if the debit total is more than the credit
total, the difference is a net loss. Write the difference below the smaller amount.
9. Write in the account title column “Net Income” if the difference is a net income or
“Net Loss” if the difference is a net loss.
10. Write the final totals of the debit and credit columns and double rule.

ILLUSTRATION:

The following is the trial balance of Amaya Contracting Services on December 31, 2019:

Amaya Contracting Services

Trial Balance
December 31, 2019

Account Titles Debit Credit

Cash P 900
Accounts Receivable 1,200
Prepaid Insurance 1,500
Tools 5,000
Furniture and Fixtures 6,500
Service Truck 50,000
Notes Payable P20,000
Amaya, Capital 43,450
Amaya, Drawing 2,000
Service Income 6,000
Advertising Expense 300
Salaries Expense 900
Utility Expense 150
Rent Expense 1,000
TOTALS P69,450 P69,450
====================
Data for Adjustments:
1. Of the amount debited to Prepaid Insurance, P300 remains unexpired as of Dec. 31.
2. Bad Debts are to be provided at 10% of Accounts Receivable.
3. The Furniture and Fixture were acquired January 1, 2019 and are estimated to have a
useful life of 5 years with no salvage value.
4. The Service Truck was acquired January 1,2019and is estimated to have a useful life of
10 years with a salvage value of P5,000.
5. Of the Service Income received P1,000 is for the nest accounting period.
6. Accrued Salaries Expense is P500.

Required:
1. Adjusting entries
2. 10-column worksheet

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SOLUTION:

1. Adjusting Journal Entries

Particulars Debit Credit

1. Insurance Expense P 1,200
Prepaid Insurance P 1,200

2. Bad Debts 120

Allowance for Bad Debts 120

3. Depreciation Expense 1,300

Accumulated Depreciation – Furniture 1,300
& Fixture
D = 6,500/5yrs

4. Depreciation Expense 4,500

Accumulated Depreciation – Service 4,500
Truck
D = 50,000-5,000/10yrs

5. Service Income 1,000

Unearned Service Income 1,000

6. Salaries Expense 500

Salaries Payable 500

2. Worksheet
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 Amaya Contracting Services
Worksheet
December 31, 2019

Account Titles Trial Balance Adjustments Adjusted Trial Balance Income Statement Balance Sheet

Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit
Cash P 900 P 900 P 900
Accounts Receivable 1,200 1,200 1,200
Prepaid Insurance 1,500 1)1,200 300 300
Tools 5,000 5,000 5,000
Furniture & Fixture 6,500 6,500 6,500
Service Truck 50,000 50,000 50,000
Notes Payable P 20,000 P 20,000 P 20,000
Amaya, Capital 43,450 43,450 43,450
Amaya, Drawing 2,000 2,000 2,000
Service Income 6,000 5)1,000 5,000 5,000
Advertising Expense 300 300 300
Salaries Expense 900 6) 500 1,400 1,400
Utility Expense 150 150 150
Rent Expense 1,000 1,000 1,000
TOTALS P 69,450 P 69,450

Insurance Expense 1)1,200 1,200 1,200

Bad Debts 2) 120 120 120
Allowance for Bad Debts 2) 120 120 120
Depreciation Expense 3)1,300 1,300 1,300
Accumulated Dep’n- Furn & Fix 3)1,300 1,300 1,300
Depreciation Expense 4)4,500 4,500 4,500
Accumulated Dep’n- Serv Truck 4)4,500 4,500 4,500
Unearned Service Income 5)1,000 1,000 1,000
Salaries Payable 6) 500 500 500
TOTALS P 8,620 P 8,620 P75,870 P75,870 P 9,970 P 5,000 P65,900 P 70,870
Net Loss 4,970 4,970
TOTALS P 9,970 P 9,970 P 70,870 P 70,870

LEARNING ACTIVITY

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The trial balance of Akil Janitorial Services on December 31, 2019 follows:

Akil Janitorial Services

Trial Balance
December 31,2019

Account titles Debit Credit

Cash P 1,600
Accounts Receivable 2,000
Prepaid Insurance 600
Office Equipment 14,400
Automobile 26,700
Accounts Payable P 1,500
Akil, Capital 29,700
Akil, Drawing 1,000
Service Income 25,000
Salaries Expense 7,000
Advertising Expense 700
Rent Expense 1,500
Telephone Expense 400
Utility Expense 300
_____________________
TOTALS P 56,200 P 56,200
=====================
Data for adjustments:

1. Expired insurance is P400.

2. Estimated depreciation for office equipment is P500 while automobile is P1,000.
3. Accrued salaries is P1,200.
4. Advertising expense account represent a 5-month advertising which started October 1
of the current year.
5. Allowance for bad debts is estimated at 5% of Accounts Receivable balance.

Required:

1. Adjusting journal entries

2. 10-column worksheet

Lesson 3

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 FINANCIAL STATEMENTS

Financial Statements are the means by which the information accumulated and
processed in financial accounting is periodically communicated to the users. Financial
Statements are the end product or output of the accounting process.

The following are the basic financial statements prepared by the accountant:
1. Statement of financial position or balance sheet.
2. Statement of financial operations or the income statement.
3. Statement of the changes in equity/capital statement.
4. Statement of cash flows or cash flow statement.
5. Notes, comprising a summary of significant accounting policies and explanatory notes.

For this lesson, we will discuss only statement of financial position, statement of
financial operations and statement of changes in equity.

Usually, financial statements are prepared at the end of the year or end of accounting
period. However, interim financial statements may be prepared for internal purposes.

Balance Sheet is a statement showing the financial position of the business, namely
assets, liabilities and equity.

Income Statement is a statement showing the performance of the business for a given
period.

Capital Statement shows the changes affecting directly the capital of the business and
relates the income statement to the balance sheet.

ILLUSTRATION:

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 The following financial statements are taken from the worksheet of Amaya Consulting
Services presented in lesson 2.

1. Income Statement

Amaya Consulting Services

Income Statement
For the year ended, December 31, 2019

Service Income P 5,000

Less: Operating Expenses
Advertising P 300
Salaries Expense 1,400
Utility Expense 150
Rent Expense 1,000
Insurance Expense 1,200
Depreciation Expense 3,800
Bad Debts Expense 120 9,970
Net Income (P4,970)
======

2. Balance Sheet

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 Amaya Consulting Services
Balance sheet
As of December 31, 2019

ASSETS
Current Assets:
Cash P 900
Accounts Receivable P 1,200
Less: Allowance for Bad Debts 120 1,080
Prepaid Insurance 300
Total Current Assets P 2,280

Property and Equipment

Tools P 5,000
Furniture & Fixture P 6,500
Less: Accum. Depreciation 1,300 5,200
Service Truck P50,000
Less: Accum. Depreciation 4,500 45,500
Total Property & Equipment 55,700
Total Assets P57,980
=======

LIABILITES

Current Liabilities
Notes Payable P 20,000
Salaries Payable 500
Unearned Service Income 1,000
Total Liabilities P 21,500

OWNER’S EQUITY

Amaya, Capital (see stmt of owner’s equity) 36,480

Total Liabilities & Capital P 57,980
========

3. Statement of Changes in Owner’s Equity

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 Amaya Consulting Services
Statement of Changes in Owner’s Equity
As of December 31, 2019

Amaya, Capital P 43,450

Less: Amaya, Drawing 2,000
Net Capital P 41,450
Less: Net Loss (see income statement) 4,970
Total Owner’s Equity P 36,480
=======

LEARNING ACTIVITY:

From the worksheet that you prepared in Lesson2 learning activity, prepare the income
statement, balance sheet and statement of changes in owner’s equity for Akil Janitorial Services.

Lesson 4

17
 CLOSING ENTRIES, POST-CLOSING TRIAL BALANCE & REVERSING ENTRIES

Closing Entries

After the income statement has been prepared, the nominal accounts (revenues and
expenses) have served its purpose, that is, they have been used to measure and show the
nature and causes of changes in financial condition of the business. They provided the sources
of income and nature of expenses.

Procedures in preparing closing entries:

1. Debit all the credits (revenue/income accounts) and credit Income and Expense
Summary account.
2. Debit Income and Expense Summary account and credit all the debit accounts
(expenses).
3. Close the difference of 1 & 2 to the Capital account.
4. Close the Drawing account, if any, to Capital account

Illustration:

Refer to the Worksheet (income statement columns) of Amaya Contracting Services:

1. Service Income P 5,000

Income & Expense Summary P 5,000
To close the revenue account

2. Income & Expense Summary 9,970

Adverting Expense 300
Salaries Expense 1,400
Utility Expense 150
Rent Expense 1,000
Insurance Expense 1,200
Depreciation Expense 3,800
Bad Debts Expense 120
To close the expense accounts

3. Amaya, Capital 4,970

Income & Expense Summary 4,970
To close the balance of Income & Expense Summary

4. Amaya, Capital 2,000

Amaya, Drawing 2,000
To close the drawing account

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 Note: after preparing the closing entries, post the entries to the ledger and rule the
accounts. After posting the closing entries what is left open are the real accounts or the
balance accounts.

Post-closing Trial Balance

Post-closing Trial Balance is a Trial Balance that is prepared after closing entries have
been made. This type of Trial Balance includes only the real accounts. Sometimes, this Trial
Balance is also termed as Balance Sheet in a Trial Balance form.

Illustration:

Refer again to the ledger of Amaya Consulting Services:

Amaya Consulting Services

Post-closing Trial Balance
December 31, 2019

Account Titles Debit Credit

Cash P 900
Accounts Receivable 1,200
Allowance for Bad Debts P 120
Prepaid Insurance 300
Tools 5,000
Furniture and Fixture 6,500
Accumulated Depreciation 1,300
Service Truck 50,000
Accumulated Depreciation 4,500
Notes Payable 20,000
Salaries Payable 500
Unearned Service Income 1,000
Amaya, Capital 36,480
---------------------------------
TOTALS P63,900 P63,900
=====================

Reversing Entries:

A reversing entry is an entry which is the exact opposite of related adjusting entry made
at the end of the period. It is prepared to simplify the recording of regular transactions in the
next accounting period. Reversing entries are actually not required. Not all adjusting entries
should be reversed. Generally, reversing entries are made for any adjusting entry that increased
an asset or a liability account. Therefore, all accruals are reversed but deferrals (deferred
income and prepaid expense) initially recorded as income or expense are reversed. Reversing
entries are usually made on the first day of the next accounting period.

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ILLUSTRATION:

Refer to the Adjusting Entries of Amaya Contracting Services. Based from the adjusting entries
prepared, adjusting entry #5 is the only adjusting entry that will be reversed.

Unearned Service Income P 1,000

Service Income P 1,000

LEARNING ACTIVITY:

From the worksheet of Akil Janitorial Services that you prepared in Lesson2 learning
activity, prepare the following: 1) closing entries, 2) post-closing trial balance and 3) reversing
entries.

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MODULE SUMMARY

Module III discussed the last four steps of the accounting process. Presented and
discussed in lesson 1 the reasons why there is a need to prepare adjusting entries and the
accounts that need to be adjusted. After adjusting entries had been prepared, a worksheet will
be prepared to facilitate the preparation of financial statements which is the Income Statement
and Balance Sheet.

To complete the accounting cycle, closing entries will be prepared to bring the nominal
or income statement accounts to zero. Nominal accounts are those accounts that represent a
specific accounting period, their balances are good only for one accounting period. Further, real
or permanent or balance sheet accounts are those accounts that have beginning and ending
balances. The ending balances at the end of one accounting period will become the beginning
balances for the next accounting period. The last step in the accounting process is the
preparation of the post-closing trial balance, which is often called a balance sheet in a trial
balance form.

SUMMATIVE TEST

TRUE OR FALSE: Write true if the statement is correct and false if it wrong. Write your answers
on the space provided before each number.

____________1. Adjusting entries are necessary so that asset, liability, revenue and
expense account balances are correctly recorded.
____________2. Assets become liabilities when they expire.
____________3. Book value is the original cost of a building less depreciation expense.
____________4. Accumulated Depreciation accounts may be referred to as contra-asset
accounts.
____________5. Adjusting entries affect cash flows in the current period.
____________6. Recording incurred but unpaid expenses is an example of an accrual.
____________7. A deferral is the recognition of an expense that has arisen but has not
yet been recorded.
____________8. An adjusting entry includes at least one balance sheet account and at
least one income statement account.
____________9. Adjusting entries are made after the preparation of financial
statements.
____________10. Net income for a period will be overstated if accrued salaries are not
recorded at the end of the accounting period.

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 MODULE IV
MERCHANDISING BUSINESS

Learning Objectives

After reading this module, you should be able to:

1. Show the difference in computing the net income for a service business and
merchandising business.
2. Account for sales and compute for net sales revenue.
3. Account for purchases and compute for net purchases.
4. Determine the cost of goods sold.
5. Prepare financial statements for a merchandising business.
6. Record merchandising transactions using special journals.

Lesson 1

Accounting for Sales and Related Items

Terms Used for a merchandising business. The following among others are the account titles
used in merchandising business:

1. Sales – this account is always credited every time sale of merchandise is made, whether
on cash or on credit.
2. Sales Discount – this account is always debited every time a discount is granted to a
customer. This account will decrease sales revenue.
3. Sales Returns and Allowances – this account is always debited every time a customer
returns defective goods or request for an allowance in the price, for the same reasons,
without returning the merchandise purchased. This account will decrease sales
revenue.
4. Purchases – this account is always debited whenever a merchandise is bought for resale
whether on cash or on credit.
5. Purchase discount – this account is always credited whenever a discount is granted by a
supplier. This account will decrease purchases.
6. Purchase Returns and Allowances – this account is always credited whenever a return of
defective goods is made to the supplier. This account will decrease purchases.
7. Transportation In/Freight In – this account is always debited for transportation expenses
incurred in transporting the goods purchased. This account will increase the amount of
purchases.
8. Transportation Out/Freight Out – this account is always debited for transportation
expenses paid in transporting the goods sold. This account is considered as operating
expenses.
9. Cost of Goods Sold – this represents cost of merchandise given to the customer for the
sales revenue revenue received.
10. Operating Expenses – expenses incurred for the day to day operations of the business.
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 Selling Expenses – expenses incurred in storing, promoting, packaging and
delivering the merchandise such as Freight Out, Sales Salaries, Advertising, Sales
Commission and Depreciation Expense for store furniture and equipment.
General or Administrative Expenses – consist of expenses needed in the general
administration of the office other than the store such as Bad Debts Expense,
Office Supplies Expense, Utilities Expense and Depreciation for office furniture
and equipment.
11. Trade discount – a discount granted by the supplier to attract more customers. It is not
recorded in the books of accounts.
12. Cash Discount – a discount granted to the customer for him to pay on time or before
the due date.

Summary of Account Titles Used in Recording Merchandise

Books of the buyer(customer):

PURCHASES FREIGHT IN

Debited for cost of Debited for cost of

Goods bought. transporting goods under
the term FOB shipping point

PURCHASE RETURNS AND ALLOWANCES PURCHASE DISCOUNT

Credited for cost of Credited for discount

goods returned or for taken when account is
reduction in paid within the discount
purchase price. period.

Books of the seller(supplier):

SALES SALES RETURNS & ALLOWANCES

Credited for revenue Debited for returns

for goods sold to of goods sold or for
customers. reduction in the
sales price.

SALES DISCOUNT FREIGHT OUT

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Debited for decrease Debited for cost of
in sales or revenue delivering goods
due to decrease in and treated as
amount collected selling expense,
from customers. under the term FOB
Destination.

ILLUSTRATION:

1. Accounting for Sales

a. Sales on cash
Cash xxx
Sales xxx

b. Sales on account
Accounts Receivable xxx
Sales xxx

2. Accounting for Sales Returns and Allowances

a. Sales on cash
aa. cash is refunded/returned to the buyer
Sales Returns and Allowances xxx
Cash xxx

bb. no cash refund but the seller accepted/acknowledge the return

Sales Returns and Allowances xxx
Accounts Payable xxx
b. Sales on account
Sales Returns and Allowances xxx
Accounts Receivable xxx

3. Accounting for Sales Discounts

Cash xxx
Sales Discount xxx
Accounts Receivable xxx

4. Accounting for Freight Out/Transportation Out

Freight Out xxx
Cash/Accounts Payable xxx

SAMPLE SALES TRANSACTIONS WITH SOLUTION

24
The following among others are the transactions of Arsen Sari-Sari Store:

January 7 - Arsen sold merchandise to Darlene worth P20,000 cash.

8- Arsen paid P500 for the transportation of the goods sold.
11 - Darlene returned P1,000 worth of damaged goods. Arsen accepted the return
and refunded same amount to Darlene.
16 - Darlene purchased merchandise from Arsen P50,000; Terms: 10 & 5; 2/10, n/15.
19 - Arsen give an allowance of P1,500 for defective goods sold on January 16.
24 - Darlene settled her account in full.

Required: Journal entries for Arsen Sari-Sari Store

Solution:

Date Particulars F Debit Credit

January 7 Cash P20,000
Sales P 20,000

8 Freight Out 500

Cash 500

11 Sales Returns and Allowances 1,000

Cash 1,000

16 Accounts Receivable 42,750

Sales* 42,750

19 Sales Returns & Allowances 1,500

Accounts Receivable 1,500

24 Cash(41,250-825) 40,425
Sales Discount* 825
Accounts Receivable(42,750-1500) 41,250

*computation for the selling price or sales price

List Price(LP): P50,000; Terms: (TDR)10 & 5;
(SDR)2/10, n/15
Trade Discount = LP x TDR = 50,000 x 10% = 5,000
50,000-5,000 = 45,000 x 5% = 2,250
7,250
=====
Sales price = LP – TD = 50,000 – 7250 = 42,750
======
*computation for the sales discount(SD)
Sales discount term: 2/10, n/15 means that a 2%
discount will be granted to the customer if he pays
within 10 days from the date of purchase and no

25
 discount if paid after 10 days but within 15 days
Further, the basis of computing sales discount will be
selling price minus returns and allowances, if any.
SD = SP x SDR = 41,250 x 2% = 825

LEARNING ACTIVITY:

Record the following sales transactions of Berta Cash & Carry Grocery:

June 1 – Sold merchandise worth P20,000 cash to Mimi.

3 – Mimi returned defective goods amounting to P500. Berta refunded same amount to
Mimi.
8 – Berta sold merchandise to Mimi, P40,000; Terms: 2/15, n/30.
10- Berta paid P750 to Partas Bus Company for the transportation of the goods sold to
Mimi.
13 – Mimi returned defective goods worth P1,000. Berta accepted the return.
15 - Berta sold merchandise to Mimi, LP 60,000. Terms: 10 & 5, 2/10, n/15.
21 - Mimi settled her June 8 account in full.

Lesson 2

Accounting for Purchases and Related Items

26
ILLUSTRATION:

1. Accounting for purchases

c. Purchases on cash
Purchases xxx
Cash xxx

d. Purchases on account
Purchases xxx
Accounts Payable xxx

2. Accounting for Purchase Returns and Allowances

c. Purchases on cash
aa. cash is refunded/returned by the seller
Cash xxx
Purchase Returns and Allowances xxx

bb. no cash refund but the seller accepted/acknowledge the return

Accounts Receivable xxx
Purchase Returns and Allowances xxx

d. Purchases on account
Accounts Payable xxx
Purchase Returns and Allowances xxx

3. Accounting for Purchase Discounts

Accounts Payable xxx
Cash xxx
Purchase Discount xxx

4. Accounting for Freight In/Transportation In

Freight In xxx
Cash/Accounts Payable xxx

SAMPLE TRANSACTIONS WITH SOLUTION

The following among others are the transactions of Darlene Mini Store:

January 7 - Darlene purchase merchandise worth P20,000 cash from Arsen.

8- Arsen paid P500 for the transportation of the goods sold.
11 - Darlene returned P1,000 worth of damaged goods. Arsen accepted the return
and refunded same amount to Darlene.
16 - Darlene purchased merchandise from Arsen P50,000; Terms: 10 & 5; 2/10, n/15.
19 - Arsen give an allowance of P1,500 for defective goods sold on January 16.
24 - Darlene settled her account in full.

Required: Journal entries for Darlene Mini Store

27
Solution:

Date Particulars F Debit Credit

January 7 Purchase P20,000
Cash P 20,000

8 No entry (the transportation expenses will be

shouldered by the seller/supplier)

11 Cash 1,000
Purchase Returns and Allowances 1,000

16 Purchases* 42,750
Accounts Payable 42,750

19 Accounts Payable 1,500

Purchase Returns and Allowances 1,500

24 Accounts Payable (42,750-1500) 41,250

Cash(41,250-825) 40,425
Purchase Discount* 825

*computation for the purchase price

List Price(LP): P50,000; Terms: (TDR)10 & 5;
(PDR)2/10, n/15
Trade Discount = LP x TDR = 50,000 x 10% = 5,000
50,000-5,000 = 45,000 x 5% = 2,250
7,250
=====
Purchase price = LP – TD = 50,000 – 7250 = 42,750
======
*computation for the purchase discount(PD)
Puchase discount term: 2/10, n/15 means that a 2%
discount will be granted to the customer if he pays
within 10 days from the date of purchase and no
discount if paid after 10 days but within 15 days
Further, the basis of computing purchase discount will
be purchase price minus returns and allowances, if
any.
PD = PP x PDR = 41,250 x 2% = 825
Note: computation of trade discount is the same
whether you are the seller or buyer. Sales discount
and purchase discount computations are also the
same whether you are the seller or the buyer. Sales
discount and purchase discount are called cash
discounts.

28
LEARNING ACTIVITY:

1. Record the following purchases and related transactions of Mimi Mini Mart:

June 1 – Purchased merchandise worth P20,000 cash from Berta Cash & Carry Grocery.
3 – Mimi returned defective goods amounting to P500. Berta refunded same amount to
Mimi.
8 – Berta sold merchandise to Mimi, P40,000; Terms: 2/15, n/30.
10- Berta paid P750 to Partas Bus Company for the transportation of the goods sold to
Mimi.
13 – Mimi returned defective goods worth P1,000. Berta accepted the return.
15 - Berta sold merchandise to Mimi, LP 60,000. Terms: 10 & 5, 2/10, n/15.
21 - Mimi settled her June 8 account in full.

`
2. The following are the transaction of AJ Sari-Sari Store during the first month of
operations:

January 2 – AJ invested cash of Php20, 000 and merchandise worth Php30, 000 to start a sari-
sari store business.
2 – Paid Php2, 000 for taxes and licences.
4 – Purchased display cabinet worth Php15, 000 cash
7 – Cash sale for the week - Php15,000.
10 – Purchased store equipment worth Php5,000 on account.
13 – Sold merchandise on account, Php10,500. Terms: 2/10, n/15
15 – Purchased merchandise worth, Php25, 000, paying Php5, 000 cash and the balance
on account.
16 - Returned defective goods worth Php1,000. The supplier accepted the return.
18 – Sales for the week:
Cash Php25, 000
On account Php10, 000
21 – Collected in full the account on January 13.
24 – Cash sales for the week – Php40, 000.
25 – Paid Php 500 for the transportation of the above sales.
29 – Paid the following;
Electricity Php2, 000
Salary of the helper Php7, 500
30 – Paid the one-half of the account on January 15.

REQUIRED:
1. Journal Entries
2. Posting
3. Trial Balance

29
 Lesson 3
Worksheet and Financial Statements

You learned in Module III, that a worksheet is an analysis paper that facilitates the
preparation of financial statements of an entity. Financial Statements, like the Income

30
Statement (Statement of Financial Operations) and the Balance Sheet (Statement of Financial
Condition) will be extracted from the worksheet.

In this lesson, you will be preparing a simple interim worksheet, the column of which
will be unadjusted trial balance, cost of sales, income statement and balance sheet for a
merchandising business.

Steps in preparing the interim worksheet for a merchandising business:

1. Write the heading of your worksheet.

2. Fill up the column heading of your worksheet.
3. Copy the trial balance to the first two columns of your eight column worksheet.
4. Extend the amounts to their respective columns except the amount for merchandise
inventory. Assets, Liabilities and Capital to your Balance Sheet columns; Sales and
related accounts and Expenses to your Income Statement columns.
5. Purchases and related accounts to your Costs of Sales columns.
6. The merchandise inventory amount from the trial balance will be extended to the debit
column of the Costs of Sales while the ending inventory amount will be extended to the
credit column of the Costs of Sales and debit column of the Balance Sheet.
7. Add the columns of the Costs of Sales. Get the difference of the debit and credit
columns and add the difference to the credit column of Costs of Sales and extend the
same amount to the debit column of the Income Statement. The difference represents
the amount for costs of sales.
8. Add the columns of the Income Statement. Get the difference of the debit and credit
columns and add the difference to the debit column of the Income Statement and
extend the same amount to the credit column of the Balance Sheet. If the total credit is
more than the total debit of the Income Statement Columns, the difference is a Net
Income. On the other hand, if the business incurred a loss, the difference will be
extended to the debit column of the Balance Sheet.
9. Add the columns of the Income Statement and the Balance Sheet. Double rule.

ILLUSTRATION:

To illustrate, copy the trial balance of AJ Sari-Sari Store that you prepare in lesson2, to your 8
column worksheet. Merchandise Inventory, end, P18,500.

31
 AJ SARI-SARI STORE
WORKSHEET
January 31, 2020

Account Titles Trial Balance Cost of Sales Income Statement Balance Sheet
Debit Credit Debit Credit Debit Credit Debit Credit
Cash P 68,290 P 68,290
Accounts Receivable 10,000 10,000
Merchandise Inventory 30,000 P 30,000 P 18,500 18,500
Furniture 15,000 15,000
Store Equipment 5,000 5,000
Accounts Payable P 14,000 P 14,000
AJ, Capital 50,000 50,000
Sales 100,500 P 100,500
Sales Discount 210 P 210
Purchases 25,000 25,000
Purchase Returns and Allowances 1,000 1,000
Taxes and Licenses 2,000 2,000
Transportation Out 500 500
Salary Expense 7,500 7,500
Utilities Expenses 2,000 0000000 -------------- 2,000
TOTALS P165,500 P165,500 P 55,000 P 19,500
Cost of Sales ======== 35,500 35,500
TOTALS P 55,000 P 55,000 P 47,710 P 100,500 P 116,790 P 64,000
Net Profit ========= ======== 52,790 52,790
TOTALS P 100,500 P 100,500 P 116,790 P 116,790
========= ========= ========= ========

AJ SARI-SARI STORE
Income Statement
As of January 31, 2020
32
Sales P100,500
Less: Sales Discount 210
Net Sales P100,290
Less: Costs of Sales
Merchandise Inventory, beg P 30,000
Add: Purchases P 25,000
Less: Purchase Returns & Allow. 1,000 24,000
Goods Available for Sale P 54,000
Less: Merchandise Inventory, end 18,500 35,500
Gross Profit P 64,790
Less: Operating Expenses
Taxes and Licenses P 2,000
Transportation Out 500
Salary Expenses 7,500
Utilities Expenses 2,000 12,000
Net Income P 52,790
========

AJ SARI-SARI STORE
Balance Sheet
January 31, 2020

33
 ASSETS

Current Assets
Cash P 68,290
Accounts Receivable 10,000
Merchandise Inventory 18,500
Total Current Assets P 96,790

Property and Equipment

Furniture P 15,000
Store Equipment 5,000
Total Property and Equipment 20,000
Total Assets P116,790
========

LIABILITIES

Current Liabilities P 14,000

Total Liabilities P 14,000

OWNERS’ EQUITY

AJ, Capital P 50,000

Add: Net Income 52,790
Total Owners’ Equity 102,790
Total Liabilities & Owners’ Equity P116,790
=======

LEARNING ACTIVITY:

I. The following is the trial balance of Sure Company as of December 31, 2019:

Sure Company
Trial Balance
December 31,2019

34
 Debit Credit
Cash P 41,540
Accounts Receivable 15,200
Merchandise Inventory 17,000
Supplies 320
Prepaid Insurance 1,000
Building 50,000
Furniture 10,000
Accounts Payable P 2,120
Notes Payable 8,000
Carlos , Capital 75,000
Carlos, Withdrawal 1,000
Sales 100,000
Sales Discount 500
Sales Returns & Allowances 660
Purchases 44,000
Purchase Discount 200
Purchase Returns 400
Salaries and Wages 9,560
Delivery Expense 300
Rent Income 6,540
Interest Expense 500
Miscellaneous expense 680
---------------------------------
TOTALS P192,260 P192,260
====================

Required:
1. 8-column worksheet
2. Income Statement, Merchandise Inventory, end P15,000
3. Balance Sheet

LESSON 4
SPECIAL JOURNALS

Special Journals is an accounting device used to streamline the transactions of a

merchandising business. Usually, a merchandising business has four distinct types of
transactions: sales, purchases, cash receipts and cash disbursements. A special journal could be
maintained for each one of these transactions with the other transactions recorded in the two-
column general journal.
35
 Advantages of using special journals:
1. Time saving – transactions of repetitive in nature will be recorded in the same journal
and posting will be minimized since amounts are posted in total.
2. Division of labor – several persons can work simultaneously.
3. Specialization and pinpointing of responsibility.
4. Errors are minimized.

The four special journals are the following:

1. Sales Journal – use to record sales whether on cash or on account
June 2 – Cash sales, P12,000
8 – Sales on account to Jack E. Bagbaga, P10,000; Terms: 2/10, n/15
10 – Sales on account to Vicente Chan, P5,000; Terms: n/20
Date Name of Customer Invoice Terms F Accounts Cash Sales
Number Receivable Sales
Debit Debit Credit
June 2 Various customers 001 P12,000 P12,000
8 Jack E. Bagbaga 002 2/10, n/15 P10,000 10,000
10 Vicente Chan 003 n/20 5,000 _______ 5,000
P15,000 P12,000 P27,000

 This column will not be posted to the general ledger

2. Purchases Journal – use to record purchases whether on cash or on credit

June 5 – Purchased merchandise on account from Martha, P20,000; Terms: 2/10, n/15
10 – Cash purchases, P15,000
16 – Purchased merchandise on account from Dina, P10,000; Terms: 5 & 10, 2/15, n/20

Date Name of Supplier Invoice Terms F Accounts Cash Purchases

Number Payable Purchases
Credit Credit Debit
June 5 Martha 006 2/10, n/15 P20,000 P20,000
10 Various Suppliers 015 P15,000 15,000
16 Dina 100 5 & 10, 2/15, n/20 10,000 _______ 10,000
P30,000 P15,000 P45,000

3. Cash Receipts Journal – all cash receipt transactions are recorded in this book of original
entry such as cash investment, loan proceeds, cash sales, collections of accounts
receivable and cash refund.

June 1 – King made an additional investment of P100,000 cash.

12 – Cash sales, P 12,000.
18 – Collected the account of Jack E. Bagbaga, P10,000; Terms: 2/10,n/15

Date Received From Explanation OR # Cash Sales Accounts Cash Account Title Sundry
Discount Rec’ble Sales
Debit Debit Credit Credit Debit Credit

36
June 1 King Add’l investment 008 P100,000 King, Capital P100,000
12 Various Sales on cash 015 12,000 P12,000
customers
18 Jack Collection of A/R 020 9,800 P 200 P10,000
P121,800 P 200 P10,000 P12,000 P100,000
======= ====== ======  =======

4. Cash Payments Journal – this journal is used to record all cash disbursements including
cash purchases, payment of expenses and payment of accounts payable and other
transactions involving the payment of cash.

June 10 – Cash purchases, P15,000.

14 – Paid the account due to Martha, P20,000; Terms: 2/10, n/15
25 – Mr. King withdrew cash, P500 for his personal use.
30 – Paid the salary of the store helper, P5,000.

Date Paid to Explanation Vouche Cash Purchase Accounts Cash Account Title Sundry
r Discount Payable Purchase
Number s
Credit Credit Debit Debit Debit Credit
June 10 Various Cash purchases 009 P15,000 P15,000
suppliers
14 Martha Payment of A/P 020 11,600 P 400 P12,000
25 King Personal use 027 500 King, Personal P 500
30 Store helper Payment of salary 035 5,000 Salary Expense 5,000
P32,100 P 400 P12,000 P15,000 P 5,500
======= ====== ======= ======= ======


5. General Journal – it is used to record all other transactions which cannot be recorded in
the four special journals, like return of defective goods to the suppliers, defective goods
returned by a customer and other transactions.

LEARNING ACTIVITY:

Journalize the following transactions of “THE COUSINS GENERAL MERCHANDISE” using the five
special journals:

July 1 - Jem invested P250,000 cash to start the business.

2 - Paid P5,000 for taxes and licenses.
5 – Purchased merchandise worth P25,000 cash.
6 – Paid P700 cash to Partas for the transportation of the above purchases.
7 – Sales for the week: Cash, P35,000; Sales on account to Dave, P5,000; Terms: 2/10; n/15.
37
 10 – Purchased merchandise from COD Corp., P20,000; Terms: 2/15, n/30.
15 – Paid the following expenses: Selling Expenses, P5,000; Administrative Expenses,
P10,000.
17 – Collected the account of Dave.
20 – Sales for the week: Cash sales, P30,000; Sales on account to Jaen, P7,500.
21 – Paid P1,000 for the transportation of the above sale of merchandise.
25 – Paid the account due to COD Corp.
28 – Jaen returned defective goods worth P500. Jem accepted the return.

MODULE SUMMARY

Module IV is the last module for Basic Accounting. It discussed merchandising type of
business organization. Merchandising business is engaged in the buying and selling of goods.
The process for a merchandising is quite longer compared with service type of business.

The process starts from the buying of goods to transporting the goods from the place of
the supplier to the place of the buyer, followed by warehousing and handling of the goods
before it will be displayed to the store, ready to be sold. After selling, some customers request
that goods will be delivered to their residence.
38
 Further, additional accounting terminologies will be used in merchandising. These are
purchases, purchase returns and allowances, purchase discounts, sales, sales discount, sales
returns and allowances, freight in and freight out.

Income Statement for this type of business is also different, in some aspect, with that of
a service type of business. The main difference is the Cost of Sales portion of the Income
Statement. For the Balance Sheet, the same account titles, except for the current asset portion,
in which a merchandise inventory account is included.

The last lesson is Special Journals. Special Journals are used when transactions are
already voluminous. With the use of this kind of journals, different accounting clerks can work
at the same time.

You are now through with all your modules in Basic Accounting. This subject is your
foundation for a higher accounting subject. Your tutor, is expecting much from you. Don’t
forget what you have learned in this subject because this will help you in the future.

SUMMATIVE TEST:

Identify the word or words described in the following statements. Write your answers on the
space provided before each number.

_____________ 1. It is a type of business organization which is engaged in the buying and

selling of goods.
_____________2. This account is always debited every time a purchase of goods is made
whether on cash or on account.

39
_____________3. A discount offered to customers for them to settle their account before
the due date.
_____________4. A discount offered to attract more customers.
_____________5. Transportation costs for merchandise sold.
_____________6. Expenses related to the day to day operations of the business.
_____________7. A journal used in recording cash disbursements.
_____________8. This account is always credited every time a sale of merchandise is
made whether on cash or on credit.
_____________9. A journal used in recording sales of goods.
_____________10. An analysis paper that facilitates the preparation of financial reports.

40