AE112 - Module 2.2

AE 112-
MODULE 2.2
INSERT RELATED PICTURE HERE
(Accounting for a
Merchandising
Business)
COURSE LEARNING OUTCOMES
At the end of the module, you should
be able to:
1. understand the nature and
operating cycle of a
merchandising business;
2. know how to prepare the income
statement of a merchandising
business;
3. prepare entries for a
FINANCIAL merchandising business; and
ACCOUNTING AND 4. know how to record in a special
journal and post in subsidiary
REPORTING ledgers.
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Life is like Accounting.
Everything must be balance.
COURSE INTRODUCTION
This course provides an introduction to accounting, within the context of business
and business decisions. Students explore the role of accounting information in the
decision-making process and learn how to use various types of accounting information
found in financial statements and annual reports. This course starts with a discussion of
accounting thought and the theoretical background of accounting and the accounting
profession. The next topic is the accounting cycle - recording, handling, and summarizing
accounting data, including the preparation and presentation of financial statements for
merchandising and service companies. Moreover, it continues with transactions, financial
statements, and problems peculiar to the operations of partnerships and corporations as
distinguished from sole proprietorships. Topics include accounting for partnership formation
and operations; share capital issuances, treasury shares, other related transactions
affecting accumulated profits. Emphasis is placed on understanding the reasons
underlying basic accounting concepts and providing students with an adequate
background on the recording, classification, and summarization functions of accounting to
enable them to appreciate the varied uses of accounting data.
NATURE AND OPERATING CYCLE OF A MERCHANDISING BUSINESS
A merchandising business is a business which derives its revenue principally from the
resale of merchandise it originally procures from suppliers. Some literature defines a
merchandising business as: “a business enterprise which buys and sells merchandise
without altering the form thereof." The phrase "without altering the form thereof" is to
differentiate a merchandising business from a manufacturing business which procures raw
materials, process them into finished product, and sell them to consumers.
The series of transactions through which a business generates its revenue and its
cash receipts from customers is called the operating cycle. The operating cycle of a
merchandising business consists of the following basic transactions:
1. Purchases of merchandise
2. Sale of the merchandise, often on account; and
3. Collection of the accounts receivable from customers.
The operating cycle of a company that sells on credit is generally longer than that
of an entity that sells exclusively on a cash basis. For example, a business may extend to its
customers a credit period of 60 days, which means the customers are given 60 days within
which to pay their accounts counted from the date of sale.
As the word cycle suggests, this sequence of transaction repeats continuously.

Some of the cash collected from the customers is used to purchase more merchandise,
and the cycle begins anew. This continuous sequence of merchandising transactions is
illustrated in Figure 1.
Figure 1
THE OPERETAING CYCLE OF A MERCHANDISING BUSINESS
SELLING PROCEDURES
In effecting the sales of business, there are several steps to be taken with respect to
each one. Some of these steps require the preparation of business papers on the part of
the seller; others do not. A typical procedure in handling sales to customers of a wholesale
concern is given below, together with the names of the forms generally used for carrying
out the several steps.
Steps or Procedure Business Forms Used
Customer orders merchandise direct or  Sales order prepared by the salesman

through a salesman. or purchase order from the customer
 A copy of the sales order is used in

Merchandise are packed and checked determining the goods for packing and
ready for shipment. shipment.
 Sales invoice prepared by seller and

Merchandise is shipped by freight, mailed to the customer showing
express or truck. description, quantity and amount charged
for the merchandise.
 Delivery receipt prepared authorizing the
transportation of the merchandise.
Adjustments are sometimes required for:  Credit memorandum is issued and mailed
o clerical errors to customer advising him that his account
o damaged merchandise has been adjusted.
o shortages
o returned merchandise.
 A Statement of Account is prepared and

Customer is asked to pay if he has not mailed to customer showing the amount
yet remitted. he owes for merchandise sold to him.
Remittance received from customer.  Customer's check or other instrument is

entered in the cash book and the issuance
of Official Receipt to evidence collection.
INCOME STATEMENT FOR A MERCHANDISING BUSINESS

Service companies such as advertising agencies or accounting firms perform a
service for a fee or a commission. In determining net income, a simple income statement is
often all that is needed. As shown in Figure 2, net income is measured as the difference
between revenues and expenses.
In contrast, merchandising companies, whether wholesale or retail, use the same
basic accounting methods as service companies, but the process of buying and selling
merchandise requires some additional concepts and accounts. This process results in a
more complicated income statement than is needed by a service business. The income
statement for a merchandising concern in Figure 2 has three major parts: (1) Revenues
from Sales, (2) Cost of Goods Sold, and (3) Operating expenses. Such an income statement
differs from the income statement for a service business in that gross profit from sales must
be computed first before operating expenses are deducted in order to arrive at net sales.
Revenue from sales arises from sales of goods by the merchandising company, and
the cost of goods sold tells how much the buyer or purchaser /merchant has paid for the
goods that were sold. The difference between revenues from sales and cost of goods sold
is known as gross profit or gross margin. To be successful, the seller must sell the goods for
an amount greater than cost - that is, gross profit from sales must be large enough - to pay
operating expenses and have an adequate Income left over. Operating expenses are
those expenses, other than cost of goods sold, that are incurred in running the business. It is
further classified as General/ Administrative Expenses and Selling/ Marketing Expenses. In a
merchandising company, operating expenses are similar to the expenses you have seen in
a service company. Net income for merchandising companies is what is left after
deducting operating expenses from gross margin.
Figure 2
COMPONENTS OF INCOME STATEMENTS FOR SERVICE AND MERCHANDISING BUSINESSES
Service Business Merchandising Business

Income Statement Income Statement
Revenues Revenues from sale
Expenses Cost of Goods Sold
Net Income Gross Profit
Operating Expenses
REVENUE FROM SALES

Net Income
The first part of the merchandising income statement is revenues from sales, as
presented in Figure 2. This section requires the computation of Net Sales, which consist of
gross proceeds from sale of merchandise (Gross Sales) less sales returns and allowances
and sales discounts. If a business is to succeed or even survive, net sales must be great
enough to pay for cost of goods sold and operating expenses and to provide a sufficient
net income.
GROSS SALES
Gross sales consist of total sales for cash and/or on account or credit during a given
accounting period. When merchandise is sold, the transaction is recorded as a debit to an
asset - Cash or Accounts Receivable - and a credit to a revenue account - Sales. The Sales
account is used only for recording sales of merchandise, whether the sale is made for cash
or on credit.
If sale is for cash, the entry is:
Cash xx.xx
Sales xx.xx
If sale is on account or on credit, the entry is:
Accounts Receivable xx.xx

Sales xx.xx
• If a promissory note is received from the charge customer, then the account Notes
Receivable is debited.
TRADE DISCOUNTS
In order to avoid reprinting wholesale and retail catalogues and price lists every time
there is a price change, some manufacturers and wholesalers quote prices of merchandise
at a discount. Such discounts are called trade discounts. The list price or catalogue price is
not the intended selling price. Rather, it is the list price minus a certain percentage of
trade discount, known as invoice price is the amount of sales recorded. The use of a price
list is a way of offering selling price differentials to different customers: bigger trade discount
terms to big volume buyers.
For example, a company offers merchandise for sale at a list price of P100 and offers
the following trade discounts:
A. For purchases of 51 - 100 units ·5%

B. For purchases of 101 - 200 units - 5% , 8%
C. For purchases of more than 200 units - 5%, 8%, 10%
The computation for the invoice price under the above assumptions follows:
A - 80 units B - 150 units C - 300 units
List price(Number of units x P100) P 8,000.00 P 15,000.00 P 30,000.00
Trade discounts:
A: P 8,000 x 5% ( 400.00)
B: P15,000 x 5% P750 (1,890.00)

(P15,000 - 750) x 8% 1,140
C: P30,000 x 5% P1,500
(P30,000 - 1,500) x 8% 2,280 (6,402)
(P28,500 - 2,280) x 10% 2.622
Invoice Price P 7,600,00 P 13,110.00 P 23,595,00
Take note that the percentage of trade discount is computed on the declining
balance of the list price. The list price and the trade discount are not reflected in the books
of either the buyer or the seller, it is only for the convenience of arriving at the agreed
price. The sale is recorded at invoice price.
SALES RETURNS AND ALLOWANCES
If a customer receives a defective or otherwise unsatisfactory product seller will

usually try to accommodate the customer. The business may allow the customer to return
the item for a cash ref und or credit to the customer's account (sales return), or it may give
the customer an allowance off the sales price (sales allowance). A good accounting
system will provide management with information for determining the reason for sales
returns and allowances because such transactions reveal dissatisfied customers.
To record a return or allowance on defective merchandise sold on account:
Sales Returns and Allowances xx.xx

To record a return or allowance on defective merchandise sold for cash:

Cash xx.xx
If Sales were debited instead of Sales Returns and Allowances, management would
not know the extent of customer dissatisfaction. Sales Returns and Allowances account is a
contra-revenue account with a normal debit balance. In the income statement, the Sales
Returns and Allowances account is shown as a deduction from the Sales account to arrive
at net sales.
SALES DISCOUNTS
When goods are sold on credit, both parties should have an understanding as to the
amount and time of payment. These terms are usually printed on the sales invoice and
constitute part of the sales agreement. The credit term includes the credit period, the cash
discounts available, and the discount period. Credit period is the period during which a
credit customer can pay or settle its account. Cash discount is a reduction from the
Invoice discount period. While trade discount is granted as incentive to purchase
merchandise in large volume, cash discount is granted as incentive for prompt payment of
account.
Customary terms differ from industry to industry. In some industries payment is

expected in a short period of time such as ten days or thirty days. In these cases, the
invoice may be marked "n/10" or "n/30" (read as "net 10" or "net 30") meaning that the
amount of the invoice is due ten days or thirty days, respectively, after the invoice date. If
the invoice is due ten days after the end of the month, it may be marked "n/10 EOM".
Some industries give discounts for early payment, called sales discounts. This
practice increases the seller's liquidity by reducing the amount of money tied up in
accounts receivable. Examples of these invoice terms are:
 2/10, n /30 - this means that the debtor may take a 2% discount if the invoice is paid
within ten (10) days of the invoice date. Otherwise, the debtor may wait thirty (30)
days and then pay the full amount of the invoice without the discount.
 2/10, 1/15, n/30 - this means that the account is due within 30 days from the invoice
date, however a 2% discount is given if the account is paid within 10 days, a 1%
discount is given if the account is paid after 10 days but within 15 days, and no
discount is given thereafter.
Because it is not usually possible to know at the time of sale whether the customer will
take advantage of the discount by paying within the discount period, sales discounts are
recorded only at the time the customer pays. In determining the due date or the last day
that a customer is entitled to the discount, it is important to exclude the invoice date and
to include the maturity/last date. For a sale made on September 22 with a 2/10 credit term,
the discount period is up to October 2.
Days remaining in September (30 - 22) 8

Days in October 2
Total days 10
To record collection of an account less discount:
Cash xx.xx
Sales Discount xx.xx
At the end of the accounting period, the Sales Discounts account has accumulated
all the sales discounts taken during the period. Because sales discounts reduce revenues
from sales, they are considered a contra-revenue account with a normal debit balance
and are deducted from gross sales to arrive at net sales in the income statement.
To illustrate let us assume the following transactions by JC Stores:
July 15 Sold merchandise on account to CJ, P10,000. Terms: 2/10, n/30
July 17 Issued a credit memo to CJ for the merchandise returned of P800.
July 25 Received full settlement of CJ's account.
Date Particulars Debit Credit
Jul 15 Accounts Receivable-CJ 10,000

Sales 10,000
To record credit sales.
Jul 17 Sales Returns and Allowances 800
Accounts Receivable-CJ 800
To record sales returns.
Jul 25 Cash 9,016
Sales Discount 184
Accounts Receivable-CJ 9,200
To record collection of account.
The collection net of discount is computed as follows:
Invoice Price P10,000

Less Returns 800
Net Price P 9,200
Less: 2% Discount 184
Collection P 9,016
The terms of the above transaction means that the buyer will be given 2% discount if
the account is paid within 10 days after the date of invoice (July 16-25). No discount is
given if paid after 10 days but within 30 days from the data of invoice. If the account is
unpaid after 30 days, the account is said to be past due and usually, the buyer begins to
be charged of interest from the 31st day.
 DISCOUNTS ON PARTIAL COLLECTION
At the time of sale, the seller may receive an initial or down payment covering part of
the invoice price. If the terms of sale apply only to the uncollected balance of the invoice
price, a cash discount would not be allowed on the down payment.
After the date of sale, the customer may make several partial payments before the
invoice becomes fully paid. In this case, the seller usually allows the cash discount only if
the account is fully settled within the discount period. The discount would be computed on
the balance of the debtor's open account before partial payments were received. In this
way, the customer would not lose the discount on the earlier payments he gave.
To illustrate, let us assume the following transactions incurred by JC STORES
Aug 2 Sold merchandise to RJ Company with list price of P20,000.

Terms: 5, 1, 3/15, n/30.
3 RJ Company returned merchandise with a list price of P600 due to the
defective quality.
6 Collected 70% of the account of RJ Company.
28 Collected the remaining balance of RJ Company.
Date Particulars Debit Credit
Aug 2 Accounts Receivable-RJ 18,810.00

Sales (20,000 x 95%=19,000 x 99%) 18,810.00
To record credit sales.
3 Sales returns and Allowances (600 x 95%=570 x 99%) 564.30
Account Receivable- RJ 564.30
To record sales returns.
Cash (18,810-564.30=18,245. 70 x 70%) 12,771.99
6 Account Receivable- RJ 12,771.99
To record 70% collection of account.
28 Cash (18,245.70-12,711. 99) 5,473.71
Accounts Receivable- RJ 5,473.71
To record final collection.
The 3% cash discount is granted only on the collection of the total balance of the
customer thin 15 days from the date of sale. Therefore, the customer can only avail of the
discounts up to August 17. After this date, there will be no discount on the collection of the
remaining balance. Hence, the customer is given 30 days to settle his account.
If the account was collected in full on or before August 17, the entry should have
been this way:
Aug 17 Cash 4,926.34

Sales Discounts (18,245.70 x 3%=547.37) 547.37
Accounts Receivable-RJ 5,473.71
FREIGHT OUT (DELIVERY EXPENSE)
In some industries, it is customary for the seller/I supplier to pay transportation costs,
charging a higher price to include them. I n other industries, it is customary for the buyer I
purchaser to pay transportation charges on merchandise. These charges are called
Freight or Transportation costs.
The terms of shipment or shipping terms will determine who between the seller and
buyer should record the freight charges and eventually be the payor of such expense. The
shipping terms refer to the agreement between the seller and the buyer with regard to the
point of transfer of ownership of the goods and identification of the party responsible for
payment of freight charges. Normally, terms of shipment are preceded by the acronym
"FOB'', which stands for Free on Board or Freight on Board. The following are the
common terms of shipment:
 FOB Shipping Point
This means that the ownership to the merchandise shipped passes to the buyer at the
point of shipment or delivery to the carrier. Freight charges on the merchandise will be
shouldered by the BUYER. These freight charges are recorded in the account Freight-In or
Transportation-In, which is an addition to the cost of goods purchased
 FOB Destination
This means that the ownership to the merchandise shipped passes to the buyer upon
reaching the point of destination, which is when they are received by the buyer. Freight
charges on the merchandise will be shouldered by the SELLER. These freight charges are
recorded in the account Freight-Out or Transportation-Out or Delivery Expenses, which is
classified as a selling expense or distribution cost.
In the above discussion, the party who shoulders the cost of the freight is charged by
the transporting company is also the party who pays for it. This is not always the case - the
party who shoulders the transportation costs may not always be the party who pays for it.
The policy of the transporting company may require the seller to pay for the expenses that
should actually be shouldered by the buyer, or vice-versa. These cases are discussed
below.
 Freight prepaid
This means that the seller has paid the transportation expenses up to the point of
destination.
 Freight collect
This means that the buyer will pay the transportation expenses when the merchandise
reaches the point of destination.
The effects of these special shipping terms are summarized below:
Shipping Term Where Title Passes Who should bear the Who pays
cost of for the freight and
transportation and Credit CASH
Debit FREIGHT
FOB Shipping Point At origin Buyer
(Place of seller)
FOB Destination At destination Seller

(Place of buyer)
Freight Prepaid Seller
Freight Collect Buyer
In cases where the shipping term is FOB Destination - Freight Prepaid, whereby the
seller bears the cost and pays for it, the entry is:
Freight-Out xx.xx
Cash xx.xx
In cases where the shipping term is FOB Destination - Freight Collect, whereby the
seller bears the cost but the buyer pays for it, the entry is:
Freight-Out xx.xx
Since the freight was paid by the buyer when the seller should be paying for it, the
amount is shown as a deduction from the amount due from the buyer or charge customer.
If the sale made was for cash, then the proper credit title should be Cash or Accounts
Payable.
In cases where the shipping term is FOB Shipping Point - Freight Prepaid, whereby
the buyer bears the cost but the seller pays for it, the entry is:

Cash xx.xx
Since the freight was paid by the seller when the buyer I customer should be paying
for it, the amount is shown as an addition to the amount due from the buyer or charge
customer.
In cases where the shipping term is FOB Shipping Point - Freight Collect, whereby the
buyer bears the cost and pays for it, there is no journal entry in the books of the seller
because he was not a party to the transaction.
COST OF GOODS SOLD
Every merchandising business has goods on hand that it holds for sale to customers.
The amount of goods on hand at any one time is known as merchandise inventory. The
cost of goods available for sale during the year is the sum of two factors - merchandise
inventory at the beginning of the year plus net purchases during the year.
If a company were to sell all the goods available for sale during a given period or
year, the cost of goods sold would then equal goods that had been available for sale. In
most cases, however, the business will have goods still unsold and on hand at the end of
the year. To find out how much the seller paid for the goods that were actually sold (cost of
goods sold), the merchandise inventory at the end of the year must be subtracted from
the goods available for sale.
The partial income statement in Figure 2 shows the cost of goods sold section for
Echo Company. In this case, goods costing P179,660 were available and could have been
sold; Echo started with P52,800 in merchandise inventory at the beginning of the year and
purchased a net of P126,860 in goods during the year. At the end of the year, P48,300 in
goods were left unsold and should appear as 'merchandise inventory on the balance
sheet. When this unsold merchandise inventory is subtracted from the total available
goods that could have been sold, the resulting cost of goods sold is P131,360, which should
appear on the income statement.
Figure 3
PARTIAL INCOME STATEMENT: COST OF GOODS SOLD
Merchandise Inventory, Jan. 1, 2020 P52,800

Add: Purchases P126,400
Less: Purchase Returns and Allowances P5,640
Purchase Discounts 2,136 7,776
Net Purchases 118,624
Add: Freight-In 8,236 126,860
Total Goods Available for Sale P179,660
Less: Merchandise Inventory, Dec. 31, 2020 48,300
Cost of Goods Sold P131,360
To understand fully the concept of cost of goods sold, it is necessary to examine net
purchases and merchandise inventory.
PURCHASES
Merchandise can be purchased either for cash or on account ( or credit)

either from manufacturers or wholesalers . A manufacturer is an entity that produces the
goods that it sells. A wholesaler is an entity that sells goods in large volume (wholesale).
Merchandise bought for resale is debited to the Purchases account at the gross
purchase price. The Purchases account, a temporary or nominal account, is used only for
merchandise purchased for resale. Its sole purpose is to accumulate the total cost of
merchandise purchased during an accounting period. Inspection of the Purchases
account alone does not indicate whether the merchandise has been sold or is still on
hand. Purchases of other assets such as equipment should be recorded in the appropriate
asset account, not the Purchases account.
If the purchase is for cash, the entry is:
Purchases xx.xx
Cash xx.xx
If the purchase is on account or on credit, the entry I s:
Purchases xx.xx
Accounts Payable xx.xx
PURCHASE RETURNS AND ALLOWANCES
For various reasons, a company may need to return merchandise acquired for
resale. The business may not have been able to sell the merchandise and returns it to the
original supplier. Or the merchandise may be defective or damaged in some way and
have to be returned. In some cases, the supplier may suggest that an allowance be given
as an alternative to returning the goods for full credit. In any event, purchase returns and
allowances form a separate account and should be recorded in the journal as follows:
The entry to record return or allowance of merchandise purchased for cash is:
Cash xx.xx
Purchases Returns and Allowance xx.xx
The entry to record return/allowance of merchandise purchased on account is:

Purchases Returns and Allowance xx.xx
In the above entry, the purchaser / buyer receives "credit" (in the seller's accounts
receivable) for the returned merchandise. The Purchase Returns and Allowances account
ls used only for returns and allowances of merchandise purchased for resale. Other returns,
such as office supplies or equipment are credited directly to the related asset account, not
a contra account.
Purchase Returns and Allowances is a contra-purchase account with a normal

credit balance and is accordingly deducted from purchases in the income statement. It is
important that a separate account be used to record purchase returns and allowances
because management need the information for making decisions. It can be very costly to
return merchandise for credit. There are many costs that cannot be recovered, such as
ordering costs, accounting costs, sometimes freight costs, and interest on the money
invested in the goods. Sometimes there are lost sales resulting from poor ordering or
unusable goods. Excessive returns may indicate a need for new purchasing procedures or
new suppliers.
PURCHASE DISCOUNTS
Merchandise purchases are usually made on credit and commonly involve

purchase discounts for early payment. It is almost always worthwhile for the company to
take a discount if offered. For example, the terms 2/10, n/30 offer a 2 percent discount for
paying only twenty days early (before the period including the eleventh and thirtieth days).
This is an effective interest rate of 36 percent on a yearly basis ([360 days I 20 days] x 2 =
36). Most companies can borrow money for less than this rate. For this reason,
management wants to know the amount of discounts taken, which form a separate
account and are recorded as follows when the payment is made:

Purchase Discount xx.xx
Cash xx.xx
Like Purchase Returns and Allowances, Purchase Discounts is a contra-purchases

account with a normal credit balance is deducted from Purchases on the Income
Statement (see exhibit 3). If a company is able to make only a partial payment on.an
invoice, most creditors will allow the company to take the discount applicable to the
partial payment only when the account is paid in full. The discount usually does not apply
to freight, postage, taxes, or other charges that might appear on the invoice.
Good management of cash resources calls for both taking the discount and waiting
as long as possible to pay. To accomplish these two objectives, some companies file
invoices according to their due dates as they get them. Each day, the invoices due on
that day are pulled from the file and paid. In this manner, the company uses cash as long
as possible and also takes advantage of the discounts.
FREIGHT- IN
If the purchaser or buyer is responsible for paying the freight charges on the goods
purchased (under the shipping term FOB Shipping Point), the charges are considered
addition to the cost of purchased merchandise. But as the case of Purchase Discounts,
they should be accumulated in the Freight-in account so that management can monitor
its cost.
If the seller has advanced the payment of freight charges (under the shipping term
Freight Prepaid) that will be shouldered by the buyer, the amount is added to the
accounts payable to the seller. However, if the buyer pays its account to the seller within in
the discount period, the freight charges will not be included in computing the amount of
discount. For example, assume that an invoice for purchase of merchandise totaling
P1,890 included the cost of merchandise of P1,600, freight charges of P290 and terms 2/10,
n/30. The entry to record this transaction would be:
Purchases 1,600.00
Freight-In 290.00
Accounts Payable 1,890.00
If this invoice is paid within ten days, the discount will be P32 (P1,600 x 2%), because
it would not apply to the freight charges.
It is important not to confuse freight-in costs with freight-out or delivery expenses. If

you, as a seller, agree to pay transportation charges on goods you have sold, this expense
is a cost of selling merchandise, not a cost of purchasing merchandise. Freight-in is added
to Net purchases in the computation of Cost of Goods Sold, while Freight-out is a selling or
marketing expense in the operating expenses section of the income statement.
SPECIAL JOURNALS AND SUBSIDIARY LEDGERS

The following sections explain and illustrate how the journals can be modified to be
more effective accounting devices for the purpose of recording and organizing financial
data for a merchandising business.
GENERAL JOURNAL
A general journal is an all-purpose journal where all transactions can be entered. A

business may use a general journal as its only book of original entry. A popular form of
general journal has two- money columns - one for debit accounts and another for credit
amounts. This is the form of journal used in the earlier chapters. Usually a two-column
journal is referred to simply as general journal.
The use of the general journal requires much time and effort when entries are
posted to the accounts in the general .ledger because each debit entry and each credit
entry must be posted individually to their respective ledger accounts. This process also
increases the possibility of committing errors. Thus, when similar transactions occur
repetitively, a company may use one or more special journals.
SPECIAL JOURNALS
Keeping a two-column journal may be adequate to meet the information needs of

the business, but only up to a certain level of activities. As the volume of transactions
increases and the business activities become more complex, one accounting employee
cannot handle the heavier workload resulting from the growth of the business. It becomes
necessary to distribute the recording and posting responsibilities among several
accounting employees. Since two or more accounting employees cannot simultaneously
handle one journal, it becomes necessary to break up the general journal into several
journals.
A special journal is a book of original entry where only certain (special) type of
frequent and repetitive transactions is entered. For example, only cash receipts are
entered in a cash receipts journal, or only sales are recorded in a sales journal. They are
used to facilitate the recording of a large number of similar transactions.
TYPES AND FORMS OF SPECIAL JOURNALS
As a part of making plans to use special journals, the accounting employee or

system programmer may consider the following questions:
 What special journals must be maintained?

 How many and what columns must a journal have?
 How must the columns be arranged within the journal?
There are no definite answers to these questions. The types, forms, and number of
special journals that a business enterprise may keep, and also the special money columns
to be provided for each journal depends on the following factors:
 The nature and size of the business

 The types of frequent transactions that comprise the normal operations of the
business
 The volume of the enterprise's business transactions
 Accounting systems, methods, and techniques that are being used
 Internal control procedures within the business
 The types and frequency of financial reporting needed
 Government and legal requirements related to recording and reporting
 The skill and number of the accounting employees assigned to keep the
records.
A special journal that appropriately meets the recording needs of one business firm
may not be suitable for another, even if they are engaged in the same line of business. The
special journals kept by a service-type business differ from those kept by a merchandising
or manufacturing business. An enterprise that uses the periodic inventory system has a
different form of journals from that of a business that uses the perpetual system. The special
journals suitable to use in one year may be outgrown and may no longer be appropriate
for the following years. Some types of special journals that businesses may keep are:
 Cash receipts journal

 Cash payments journal
 Service income journal (for use by a service business)
 Sales journal (for use by a merchandising I manufacturing business)
 Purchases journal (for use by a merchandising business)
 Payroll journal
 Materials requisition journal (for use by a manufacturing business)
 Voucher register (for use under the imprest system)
 Check register (for use under the imprest system)
Even the headings and number of the columns to be provided for, and the
arrangement of the monetary and non-monetary columns within the special journal, vary a
lot. There is no one correct form for a special journal.
After the types and forms of special journals to be used are already determined the
accounting employee must then analyze each transaction and decide in which special
journal it must be journalized, and under which columns the data must be entered. Keep in
mind that not all transactions can be entered in the special journals. Therefore, the business
still needs to keep a general journal for recording transactions such as those that do not
involve cash receipts, cash payments, and rendering of service.
In a merchandising business, most business transactions - usually 90 to 95 percent -

fall into one of four categories. Each kind of transaction may be recorded in a special
journal as shown below:
Transaction Special Journal Posting

Abbreviation
Sale of merchandise on credit Sales Journal SJ
Purchase of any item on credit Purchases Journal PJ

Receipt of cash from any source Cash Receipts Journal CRJ
Payment of cash for any purpose Cash Payments Journal CPJ
It is important to note that the use of these four journals reduces the amount of
detailed work. For example, the amount of posting is greatly reduced because, instead of
posting every debit and credit for each transaction, in most cases only column totals,
which represent many transactions, are costed. In addition, the labor can be divided,
assigning each journal to a different employee. This division of labor is important in
establishing good internal control
 ADVANTAGES OF SPECIAL JOURNALS

1. Less space is required for recording journal entries since normally only one line is
used and a full explanation is not necessary
2. Less time is required in journalizing. The account title of no more than one account
is written for each transaction.
3. Less time is necessary for posting. There is only one general ledger posting done per
month for each special money column.
4. Detail is eliminated from the general ledger. Since only special column totals are
posted, the general ledger accounts are relieved of voluminous entries.
5. Division of labor is permitted. One person may be assigned to handle one special
journal, thereby allowing several persons to work simultaneously on the accounting
records.
6. Computerization of accounting work becomes feasible. The use of special journals
and repetitive transactions paves the way for the use of automation in recording of
business transactions.
GENERAL LEDGER
Completed business transactions are recorded chronologically, for the first time, in
books of original entries called journals. From the journals, the financial data are transferred
to ledger accounts known as posting. The purpose of posting is to classify the transactions
in order that their effects on each accounting element can be summarized in one place,
the ledger or ledger account.
In previous modules, transactions were recorded using only general ledger

accounts. These accounts, often referred to as controlling accounts, are used to prepare
financial statements that summarize the financial position of a business and the results of its
operations. Although general ledger accounts provide a useful overview of a company's
financial activities, they do not provide the detailed information needed to effectively
manage most business firms. This detailed information is "found in accounting records
called subsidiary ledgers.
SUBSIDIARY LEDGER
Important details become more readily available if subsidiary ledgers are

maintained. For example, if the business has lease contracts on 7 store branches, the
general ledger will show the summary information about rent expenses but not the details
of the lease on each branch. Imagine a general ledger that contains accounts receivable
from a thousand customers and the accounts payable to a hundred suppliers. The general
ledger becomes very thick and difficult to handle. Since only one accounting employee
can conveniently handle the general ledger at any one time, postings of the voluminous
transactions become too much work for one employee even though computers are being
used.
To break up the general ledger, specific groups of similar accounts are taken out
from it to become separate books called subsidiary ledgers. Each group of similar
accounts taken out is replaced by one account called controlling account.
The accounts in the subsidiary ledgers will contain the details needed in planning
and controlling the operations of the business. The information in the subsidiary accounts is
intended to meet the needs of the authorized employees of the business. Subsidiary
records are usually not accessible to persons outside the business. Data from the subsidiary
ledgers are not directly used in the preparation of financial statements. The individual
balances of these accounts add up the controlling account balance in the general ledger
and are placed in a schedule.
Figure 4 is a list of examples of subsidiary ledgers, their corresponding controlling
accounts, and the details that may be included in each subsidiary account found there.
Figure 4
CONTROLLING ACCOUNTS AND RELATED SUBSIDIARY LEDGERS
Controlling Account Subsidiary Ledger Some details found in the subsidiary

accounts
Cash in Bank Cash in Bank Ledger Deposits, withdrawals, ending balances,
including the required minimum balances
Accounts Receivable Accounts Receivable Trade customers' accounts, including

Ledger credit limits, addresses, restrictions,
references
Notes Receivable Notes Receivable Outstanding notes due from customers
Ledger and other borrowers
Merchandise Inventory Ledger or Purchases, costs of goods sold, and

Inventory Stock Cards balances of each item in the inventory on
a given date
Investments Investment Ledger Types, purposes, custodians, quantities,
costs and ending balances
Land, Building, and Plant Ledger Descriptions, accountabilities, costs,

Equipment estimated lives, accumulated
depreciation, net book value
Accounts Payable Accounts Payable Trade suppliers' accounts, including credit
Ledger limits, restrictions, references
Notes Payable Notes Payable Ledger Outstanding notes due to various lenders
Share Capital (for Shareholders' Ledger Names of shareholders, shares held, paid-
corporations) up capital, and dividends paid to them
Sales Sales Ledger Department or branch location or product

line
Operating expenses General Expense Amounts and accountabilities for
ledger expenses incurred and paid
& Selling Expense
Salaries, Bonuses and Ledger
Employees' Ledger Cumulative earnings of employees, fringe
allowances, payroll benefits earned, contributions for SSS-
taxes Philhealth-Pag-IBIG; income taxes withheld
 ADVANTAGES OF SUBSIDIARY LEDGERS
1. Important details that cannot be included in the general ledger account can
be conveniently included in the subsidiary accounts.
2. Since postings to be subsidiary ledgers are done immediately, the balances of
the individual subsidiary accounts are always up-to-date.
3. The use of a separate subsidiary ledger for a group of similar accounts allows for a
systematic division of posting responsibilities among several accounting employees.
4. Since there are separate subsidiary ledgers, simultaneous postings of the
transactions become feasible.
5. Since many similar accounts in the general ledger are replaced by one controlling
account, the general ledger becomes thinner and is easier to handle.
6. The schedules prepared from the subsidiary ledgers are useful to the manager as he
plans and controls the activities of the business.
7. Journalizing and posting errors are localized and are easier to locate. If the balance
of a controlling account is equal to the total of the schedule prepared from the
related subsidiary ledger, it can be assumed that no error in posting was committed
in that particular group of accounts.
8. It helps to strengthen the internal control system within the business.
SALES JOURNAL
A special journal designed to be used to record all sales of merchandise on credit or

on account is called a sales journal. Cash sales are recorded in the cash receipts journal,
which is explained later.
Figure 5 illustrates a typical sales journal. Six sales transactions involving five people
are recorded in this sales journal. As each sale takes place, several copies of the sales
invoice are made. The accounting department of the seller uses one copy to make the
entry in the sales journal. The date, the customer's name, the invoice number, credit terms,
and the amount of the sale are copied from the invoice. These data correspond to the
columns of the sales journal. The procedures for using a sales journal are as follows:
1. Enter each sales invoice in the sales journal on a single line, recording date,
invoice no., customer's name, terms, and amount.
2. At the end of each day, post each individual sale to a customer's account in
the accounts receivable ledger. As each sale is posted, place a check mark (/)
in the Posting Reference (PR) column of the sales journal (or customer account
number, if used) to indicate that it has been posted. In the PR column of each
customer, place SJ1 (representing Sales Journal Page 1) to indicate the source
of entry. In the Particulars column, details of the sale like the invoice no. and
terms are indicated.
3. At the end of the month, sum the Debit/Credit column in the sales journal to
determine the total credit sales, and post the total to the general ledger
accounts (debit Accounts Receivable and credit Sales). Place the numbers of
the accounts debited and credited beneath the total in the sales journal to
indicate that this step has been completed, and in the general ledger place an
SJ1 in the PR column of each account to indicate the source of entry.
4. Verify the accuracy of the posting by adding the account balances of the
accounts receivable subsidiary ledger and by matching the total with the
Accounts Receivable controlling account balance in the general ledger. This
step can be accomplished by listing the accounts in a schedule of accounts
receivable, as shown In Figure 5.
Figure 4
Sales Journal and Related Ledger Accounts
Figure 5
SCHEDULE OF ACCOUNTS RECEIVABLE
Gamma Company
Schedule of Accounts Receivable
May 31, 2020
P. Castro P 1,975.00
E. Cruz 335.00
M. Garcia 1,165.00
G. Javier 500.00
M. Pablo 975.00
Total P 4,950.00
Note the following time-saving features of the sales journal:
1. Only one line is needed to record each transaction. Each entry consists of a debit to
each customer in Accounts Receivable and a corresponding credit to Sales.
2. Account names do not have to be written out because account names occurring
most frequently are used as column headings. Thus entry in a column has the effect
of debiting or crediting the account.
3. No explanations are necessary, because the function of the special journal is to
record just one type of transaction. Only credit sales are recorded in the sales
journal. Sales for cash must be recorded in the cash receipts journal, which is
described later in this chapter.
4. Only one amount - the total credit sales for the month - needs to be posted. It is
posted twice: once as a debit to Accounts Receivable and once as a credit to
Sales. Instead of the six sales entries in the example, there might be hundreds of
actual sales transactions in a more realistic situation. Thus one can see the saving in
posting time.
SALES BY DEPARTMENTS
Where sales are kept by departments, instead of providing only one Sales column,
there must be one Sales column for each department. The departmental sales columns in
the sales journal indicate at any time during the month, the total volume of sales, credit
and/or cash sales (if sales journal s used to record all sales). A sales journal with three
departments is presented below:
SALES JOURNAL Page 1
Date SI No. SOLD TO TERMS PR Accounts Sales (CR)

Receivable
(DR) Shirts Pants Dress
RECORDING OTHER RELATED SALES TRANSACTIONS
1. Sales Returns and Allowances
Sales returns and allowances granted to charge or credit customers are

property recorded in the general journal as a debit to Sales Returns and Allowances
account and a credit to Accounts Payable. Sales returns to cash customers
whereby a cash refund is made shall be recorded in the cash payments journal.
2. Sales on account with a down payment
If a sales transaction involves a down payment with the balance payable at

a later date, the entire sales transaction is recorded in the sales journal as a credit
sale. The down payment is recorded in the cash receipts journal as a credit to
Accounts Receivable. If a "Cash Sales" column is used in the Sales Journal and Cash
Receipts Journal, then the amount of down payment is indicated in the "Cash Sales"
column.
3. Sales on account with a note
If a sales transaction involves the receipt of a promissory note of a customer, the

entire sales transaction is recorded In the sales journal as a credit sale, i.e. Notes
Receivable account is debited and Sales account credited. A column for Notes
Receivable may be added in the sales journal if such is frequently received from
charge customers. But if promissory notes are not frequently received, then the
charge sale is still recorded in the sales journal as a debit to Accounts Receivable.
Simultaneously, an entry is made in the general journal debiting Notes Receivable
and crediting the Accounts Receivable account.
4. Sale of plant assets other than merchandise
The sales journal is used for sales of merchandise only. Hence, the sale of an
asset other than merchandise must be recorded in the cash receipts journal if cash
is involved or in the general journal if sold on account.
PURCHASES JOURNAL
The techniques associated with the sales journal are very similar to those of the
purchases journal. The purchases journal is used to record all purchases on credit and may
take the form of a single-column journal or multi-column journal. In a single-column journal,
shown in Figure 6, only credit purchases of merchandise for resale to customers are
recorded. This kind of transaction is recorded with a debit to Purchases and a credit to
Accounts Payable. When the single-column purchases journal is used, credit purchases of
things other than merchandise are recorded in the general journal. Also, cash purchases
are not recorded in the purchases journal but in the cash payments journal, which is
explained later.
As with Accounts Receivable, the Accounts Payable account in the general ledger
is used by most companies as a controlling account. So that the c0mpany will know how
much it owes each supplier, it keeps a separate account for each supplier in an Accounts
Payable Subsidiary Ledger. The ideas and techniques described above for the account
receivable subsidiary ledger and general ledger account apply also to the accounts
payable subsidiary ledger and general ledger account. Thus the total of the separate
accounts in the accounts payable subsidiary ledger will equal the balance of the
Accounts Payable controlling account in the general ledger. The reason is that the monthly
total of the credit purchases posted to the individual accounts each day is equal to the
total credit purchases posted to the controlling account each month.
The steps for using a purchases journal, as shown in Figure 6, are as follows:
1. Enter each purchase invoice (sales invoice of supplier) in the purchases journal
on a single line, recording date, invoice no., supplier's name, terms if given, and
amount.
2. At the end of each day, post each individual purchase to the supplier's account
in the accounts payable subsidiary ledger. As each purchase is posted, place a
check mark (/) in the Posting Reference (PR) column of the purchases journal to
show that it has been posted. Also place a PJ1 (representing Purchases Journal
page 1) in the PR column of each supplier's account to show the source of entry.
3. At the end of the month, sum the credit purchases, and post the amount in the
general ledger accounts (Accounts Payable and Purchases). Place the numbers
of the accounts debited and credited beneath the totals in the purchases
journal to show that this step has been carried out.
4. Check the accuracy of the postings by adding the balances of the accounts
payable ledger accounts and matching the total with the Accounts Payable
controlling account balance in the general ledger. This step may be carried out
by preparing a schedule of accounts payable.
The single-column purchases journal may be expanded to record credit purchases of

things other than merchandise by adding a separate column for other debit accounts that
are often used. For example, the multi-column purchases journal in Figure 7 has columns
for Freight-in, Office Supplies, and Sundry (Other) Accounts. Here the total credits to
Accounts Payable (P9,437) equal the total debits to Purchases, Freight-in, and Office
Supplies (P9,200 + P50 + P187).
Figure 6
Purchases Journal and Related Ledger Accounts
Figure 7
Multi-Column Purchases Journal
As in the procedure already described, the individual transactions in the Accounts

Payable column are posted regularly to the accounts payable subsidiary ledger, and the
totals of each column in the journal are posted monthly to the correct general ledger
accounts. Some credit purchases call for a debit to an account that has no special
column (that is, no place to record the debit) in the purchases journal. These transactions
are recorded in the Sundry Accounts column with an indication of the account title to
which the debit is to be made.
RECORDING OTHER RELATED PURCHASES TRANSACTIONS
1. Purchase Returns and Allowances

Purchase returns and allowances granted by suppliers are properly
recorded in the general journal as a debit to Accounts Payable account and
a credit to Purchase Returns and Allowances. Cash refund from suppliers for
returns of merchandise for cash are recorded in the cash receipts journal.
2. Purchases on account with a down payment
If a purchase transaction involves a down payment with the balance
payable at a later date, the entire purchase transaction is recorded in the
purchases journal as a credit purchase. The down payment is recorded in
the cash payments journal as a debit to Accounts Payable. If a "Cash
Purchases" column is used in both Purchases Journal and Cash Payments
Journal, then the amount of down payment is indicated in such column.
3. Purchases on account with a note
If a purchase transaction involves the issuance of a promissory note to
a supplier, the entire purchase transaction is recorded in the purchases
journal as a credit purchase, i.e. Notes Payable account is credited and
Purchases account debited. A column for Notes Payable may be added in
the purchases journal if such is frequently issued to suppliers. But 1f promissory
notes are not frequently issued, then the credit purchase is still recorded in
the purchases journal as a credit to Accounts Payable. Simultaneously, an
entry is made in the general journal debiting Accounts Payable and crediting
the Notes Payable account.
CASH RECEIPTS JOURNAL
As the name implies, cash receipts journal (CRJ) is a book where all cash inflows,
irrespective of the source or nature, are recorded. Some examples of transactions that are
entered in this book are:
 Cash investment of the proprietor

 Cash from cash customers
 Collections from customers to apply on open accounts
 Proceeds from borrowings from banks, financial institutions, or other third parties
 Collections of income from non-operating sources
 Proceeds from the sale of Investments and other assets
 Collections of loans from customers, employees, or other third parties
To be efficient, the cash receipts journal must be multi-column. Several columns are
necessary because, though all cash receipts are alike in that they require a debit to Cash,
they are different that they require a variety of credit entries. Thus you should be alert to
several important differences between the cash receipts journal and the journals previously
presented. Among these differences a Sundry Accounts column, use of account numbers
in the Posting Reference (PR) column, and da posting to the credits to Sundry Accounts.
The cash receipts journal illustrated in Figure 8 is based on the following selected
transactions for May:
May 1 - H. Mina invested P20,000 in a mini-grocery business.
5 - Sold various grocery items for P1,200 cash
8 - Collected P500 from G. Javier, less 2 percent discount
16 - Collected P750 from P. Castro
19- Sold various grocery items for P1,000 cash
20- Sold some equipment not used in business for P500 cash. The book value of the
equipment was P500.
24 - Signed a note at the bank for loan of P5,000
28 - Collected P600 from P. Castro
The cash receipts journal illustrated in Figure 8, has two debit columns - Cash and
Sales discounts ·and three credit columns - Sundry, Accounts Receivable and Sales. The
debit columns are:
1. Cash. Each entry must have an amount in this column because each transaction
must be a receipt of cash.
2. Sales discounts. The company in the illustration allows a 2 percent discount for
prompt payment. Therefore, it is useful to have a column for sales discounts. Note
that in the transaction of May 8, the debit to Cash and Sales Discount is equal to
the credit to Accounts Receivable.
The credit columns are the following:
1. Sundry. This column is used for the credit portion of any entry that is neither a cash
collection from accounts receivable nor a cash sale. The name of the account to
be credited is indicated in the Account Credited column. For example, the
transactions of May 1, 20, and 24 involved credits to accounts other than Accounts
Receivable or Sales. These individual postings should be done daily (or weekly if
there are few of them). If a company finds that it is consistently crediting a certain
account in the Sundry Accounts column, it may be appropriate to add another
credit column to the cash receipts journal for that particular account.
2. Accounts Receivable. This column is used to record collections from account
customers. The customer's name is written in the space entitled Account Credited so
that the payment can be entered in his or her account in the accounts receivable
subsidiary ledger. The postings to the individual accounts receivable accounts are
usually done daily so that the customer's account balance will be known in case of
an inquiry.
3. Sales. This column is used to record all cash sales during the month. Retail firms that
normally use cash registers would make an entry at the end of each day for the
total sales from each cash register for that day. The debit, of course, is in the Cash
debit column.
Figure 8
RELATIONSHIP OF CASH RECEIPTS JOURNAL TO THE GENERAL LEDGER AND ACCOUNTS

RECEIVABLE SUBSIDIARY LEDGER
POSTINGS FROM THE CASH RECEIPTS JOURNAL
The posting from the cash receipts journal, as illustrated in Figure 8, can be
summarized as follows:
1. Post the Accounts Receivable column daily to each individual account in_ the
accounts receivable subsidiary ledger. A check mark (/) in the Post. Ref. (PR)
column of the cash receipts journal indicates that the amount has been posted,
and a CRJ1 (representing Cash Receipts Journal page 1) in the PR column of each
ledger account indicates the source of the entry.
2. Post the credits in the Sundry Accounts column daily or at convenient short intervals
during the month to the general ledger accounts. Write the account number in the
PR column of the cash receipts journal as the Individual items are posted to indicate
that the posting has been done, and write CRJ1 in the PR column of each ledger
account to indicate the source of the entry.
3. At the end of the month, total the columns in the cash receipts journal. The sum of
the debit column totals must equal the sum of the credit column totals, as follows:
Debit Column Totals Credit Column Totals
Cash P 32,540 Accounts Receivable P 1,850
Sales Discounts 10 Sales 5,200
Sundry 25,500
Total Debits P 32,550 Total Credits P 32,550
This step is called cross-footing, a procedure we encountered earlier.
4. Post the column totals as follows:

a. Cash debit column - posted as a debit to the Cash account.
b. Sales discounts debit column - posted as a debit to the Sales discount account
c. Accounts receivable credit column - posted as a credit to the Accounts
Receivable controlling account.
d. Sales credit column - posted as a credit to the Sales account
e. The account numbers are written below each column in the cash receipts
journal as they are posted to indicate that this step has been completed. A
CRJ1 is written in the Post. Ref. column of each account to indicate the source
of the entry.
f. Note that the Sundry Accounts column totals are not posted by total because
each entry was posted separately when the transaction occurred. The
individual accounts were posted in step 2 above. Accountants place a check
mark ( / ) at the bottom of the column to show that appropriate postings in that
column have been made and that the total is not posted.
RECORDING OTHER RELATED CASH RECEIPTS TRANSACTIONS
1. Collection of a promissory note with interest
Two accounts are entered in the Accounts Credited column: the first line for Notes
Receivable, and the second line, for Interest Income. There will also be two entries in the
Sundry column: the first line for the principal amount of the note, and the second line for
the amount of interest earned. The total principal and interest s extended under the Cash
debit column, second line. For example, a P10,000 60-day,12% note was collected on
maturity date, then the entry on the cash receipts journals:
CASH PAYMENTS JOURNAL
The cash payments journal (CPJ) is a book where all cash outflows, irrespective of
the nature or purpose, are recorded. This is also called cash disbursements journal. Some
examples of transactions that are entered in this book are:
 Payments of expenses
 Payments to suppliers and other trade creditors
 Cash withdrawals of the proprietor for his personal use
 Payments of matured loans and other obligations to banks, financial institutions, and
other third parties
 Payments for acquired investments and other assets
 Loan granted to customers, employees, and other parties
The source documents of the entries in this journal are the cash vouchers (or check
voucher if checks are used as payment), supplier's invoices and bills, and checks issued. As
with the cash receipts journal, the cash payments journal must be multi-column and is
similar in design to the cash receipts journal. The cash payments journal illustrated in Figure
8-6 is based on the following selected transactions of Mina's Mini-grocery for May:
May 2 - Purchased merchandise from S Grocery for cash, P400

6 - Paid for newspaper advertising in the News Daily, P200
8 - Paid one month's rent to S. Angeles, P250
11 - Paid J. Celso for May 1 invoice (previously recorded in the purchases
journal) P2,500, less 2 percent discount earned for payment in ten days or less
16 - Paid C. Luna, a salesperson, his salary P600
17 - Paid M Ferrer for invoice of May 2 (previously recorded in the purchases
journal) P300, less 2 percent discount
24 - Paid H Insurance Company for one-year insurance policy P480
27 - Paid D. Sison for invoice of May 17 (previously recorded in the purchases
journal) P3,200, less 2 percent discount .
30 - Purchased office equipment for P400 and service equipment for P500
from A&B Company.
31 - Purchased land of P15,000 from B Real Estate. Terms: P5,000 down
payment and a note payable for P10,000.
The cash payments journal, as illustrated in Figure 9, has two credit columns and
three debit columns. The credit columns are as follows:
1. Cash. Each entry must have an amount in this column because each transaction
must involve the payment of cash.
2. Purchase Discounts. When purchase discounts are taken, they are recorded in this
column.
3. Sundry. Cash can be expended for many reasons, thus a Sundry Accounts column is
needed in the cash payments journal. The title of the account to be debited is
written in the Account Debited column. If a company finds that a particular
account occurs often In the Sundry Accounts column, it may be desirable to add
another debit column to the cash payments journal.
4. Accounts Payable. This column total is used to record payments to suppliers that
have extended credit to the company. The supplier's name is written In the Account
Debited column so that the payment can be entered in his or her account in the
accounts payable ledger.
5. Purchases. This column is used to record all cash purchases during the month.
Figure 9
RELATIONSHIP OF CASH PAYMENTS JOURNAL TO THE
GENERAL LEDGER AND ACOUNTS PAYABLE SUBSIDIARY LEDGER
POSTINGS FROM THE CASH PAYMENTS JOURNAL
The posting of the cash payments journal, as illustrated in Figure 9, can be

summarized as follows:
1. The Accounts Payable column should be posted daily to each individual account in
the accounts payable subsidiary ledger. A check mark (/) is placed in the Post. Ref.
column of the cash payments journal to indicate that the posting is accomplished.
2. The debits in the Sundry Accounts columns should be posted to the general ledger
daily or at convenient short intervals during the month. The account number is
written in the Post. Ref. column on the cash payments journal as the individual items
are posted In order to indicate that the posting has been completed, and a CPJ1
(representing Cash Payments Journal page 1) fs written in the Post. Ref. column of
each ledger account.
3. At the end of the month, the columns are totaled and cross-footed. That is, the sum
of the credit column totals must equal the sum of the debit column totals, as follows:
Debit Column Totals Credit Column Totals
Cash P 13,710 Accounts Receivable P 6,000
Sales Discounts 120 Sales 400
Sundry 7,430
Total Debits P 13,830 Total Credits P 13,830
4. The column totals for Cash, Purchase Discounts, Accounts Payable, and Purchases
are posted at the end of the month to their respective accounts in the general
ledger. The account numbers are written below each column in the cash payments
journal as they are posted to indicate that this step has been completed, and a
CPJ1 is written in the Post. Ref. column of each ledger account. A check mark is
placed under the total of Sundry Accounts column in the cash payments journal to
indicate that appropriate postings in the column have been made and that the
total is not posted.
GENERAL JOURNAL
Transactions that do not involve sales, purchases, cash receipts, or cash payments
should be recorded in the general journal. The journal entries that are properly recorded in
the two-column general journal may be summarized as follows:
 Current transactions which cannot conveniently be recorded in any of the

four special journals;
 Correcting journal entries;
 Adjusting journal entries;
 Closing journal entries;
 Reversing journal entries.
Just like in the special journals, all entries in the general journal must be supported by
a source document. The source documents used to record entries in the general journal
are called journal vouchers. The journal voucher shows among other data the JV No.
(Which must be pre-numbered); the date of the transaction; the accounts and amounts
debited and credited; a brief explanation of the transaction; signature or initial of the
approving official; and the signature or initial of the bookkeeper/accountant recording the
journal voucher. Illustrated below is a sample form of a journal voucher:
JC STORES
No. 1 Session Road, Baguio City
JOURNAL VOUCHER No. ________________

Date_______________
Explanation Amount
Account Titles Debit Credit
Prepared by: Approved by:
Bookkeeper/Accountant Approving Official
As mentioned earlier, amount the transactions properly recorded in the general journal are
as follows:
1. Sales returns or allowances granted to a charge customer:

114
T o record returns from customer.
When such debit or credit is made to a controlling account in the general journal, the
entry must be posted twice: once in the controlling account in the general ledger and
once in the individual account in the subsidiary ledger. This procedure keeps the subsidiary
ledger equal to the controlling account. In the above entry, the debit amount is posted on
the Sales Returns and Allowances account and the credit amount is posted to the
Accounts Receivable controlling account in the general ledger (shown by the account no.
114), and by a credit to the customer's account in the accounts receivable subsidiary
ledger (shown by the check mark).
2. Sale of an asset account other than merchandise

Office Equipment xx.xx
3. Investment of non-cash assets by the owner

Furniture and Fixtures xx.xx
Mina, Capital xx.xx
4. Settlement of a customer's account with a promissory note
Notes Receivable xx.xx

5. Withdrawal of merchandise at cost by owner for personal use.
Mina, Capital xx.xx

Purchases xx.xx
6. Withdrawal of merchandise at selling price by owner for personal use
Mina, Capital xx.xx

Sales xx.xx
7. Discount or allowance granted by supplier for the purchase of fixed asset on account

8. Return of defective merchandise to a supplier

Purchase Returns and Allowances xx.xx
9. Settlement of account to a supplier with a promissory note

Notes Payable xx.xx
Practice Exercise 2.2-1. COMPUTATION OF CASH AND TRADE DISCOUNTS
Determine the amount of trade discount, invoice price recorded as sales, amount
to be discounted, cash discount and the amount collected for the following sales,
assuming customers paid within the discount period. Show computations in good form.
Use the solution guide provided.
List Price Trade Discount Terms Returns

A 29,600 3% 1/10,n/30 500
B 55,200 5% 2/7,n/15 ·0-
c 68,000 3%, 1% n/30 3,000
D 46,725 2% 2/15,n/30 1,250
E 34,120 -0- 1/15,n/30 2,420
F 18,900 6%,2% 5/10,n/15 -0-
G 15,750 4% n/15 145
H 71,010 10% 2/15,n/30 4,750
I 135,680 4%,3%,2% 2/20,n/30 8,230
J 5,690 -0- n/10 800
Complete the following table:
Trade Invoice Amount to Cash Amount

List Price Discount Price Returns be discount collected
discounted
A 29,600 500
B 55,200 -0-
Ic 68,000 3,000
D 46,725 1,250
E 34,120 2,420
F 18,900 -0-
G 15,750 145
H 71,010 4,750
I 135,680 8,230
J 5,690 800
Practice Exercise 2.2-2. COMPUTATION OF MISSING AMOUNTS
Compute the peso amount of each item indicated by a letter in the table below. Treat
each horizontal row of numbers as a separate problem:
Sales Beginning Net Ending Cost of Gross Operating Income

inventory purchases inventory goods profit expenses (Loss)
sold
125,000 [a] 35,000 10,000 [b] 40,000 [c] 12,000
(d] 12,000 [e] 18,000 108,000 60,000 40,000 20,000
230,000 22,000 167,000 (f] [g] 50,000 [h] (1,000)
390,000 40,000 [i] 60,000 [j] [k] 120,000 40,000
Computations:
Particulars Amount Particulars Amount
Practice Exercise 2.2-3. Journalizing & Posting (subsidiary ledgers)
The following transactions were completed by Emy Palad in September, 20XX.
1 - Emy Palad started a general merchandise business with an investment of P20,000 cash,
P18,000 merchandise and P1 ,500 store supplies.
2 - Paid rent on store for September, P3,800.
3 - Bought two display cabinets for the store from Blim Company, P2,800; term: cash.
3 - Cash purchases, P8,950.
3 - Bought merchandise from Baguio Trading, P8,600, term: 2/10, 1/20, n/30.
4 - Received a credit memorandum from Baguio Trading for defective merchandise

returned, P520.
6 - Sold merchandise to Leon Barreto, P2,715, term: 2/10, n/30.
7 - Issued a credit memorandum to Leon Barreto for merchandise returned, P115.
8 - Cash sales, P16,500.
9 - Purchased a cash register from Luzon Equipment Co. for P4,200, terms: P1,200 down
payment, balance in two equal Installments due October 9 and Nov. 9.
9 - Received a 20-day, 15% note from Ralph Vidal, evidencing the P3,000 loan given to him.
11 - Bought additional store supplies on credit from Fajardo Store, P750.
12 - Paid miscellaneous expenses, P1 ,280.
13 - Paid Baguio Trading in full.
15 - Received shipment of merchandise from Cagayan Corp., P3,000, for which a 15-day,
12% note was given.
16 - Collected the account of Leon Barreto in full.
18- Emy Palad, the owner, took merchandise costing P750 for her personal use.
19 - Purchased merchandise from Laguna Industries, P3,500, term: 2120, n/60 21 - Cash
sales, P5,520
24- Emy Palad transferred her personal truck for the permanent use of the business, P30,000.
25 - Sold merchandise to Helen Salas, P2,500, receiving down payment of P500, 20-day 9%
note for P1 ,200, balance 1/15, n/40.
26 - Paid utility bills, P1,330.
26 - Sold merchandise to Emmanuel Diaz, P5,500; terms: n/30.
29 - Collected the 20-day, 15% note from Ralph Vidal.
29 - Borrowed P9,000, 60-day, 12% note from Insular Bank. Interest of P180 was deducted in
advance.
30 - Paid salaries of employees for September, P5,200.
30 - Paid the 15-day, 12% note given to Cagayan Corp. on September 15.
All sales on account are evidenced by sales invoices (start with 511), cash receipts are
supported by official receipts (start with 111), cash payments are evidenced by cash
vouchers (start with 211).
REQUIRED:
a. Record the above transactions in the appropriate journal or journals.

b. Post to the general and subsidiary ledger accounts.
c. Prepare a trial balance from the general ledger.
d. Prepare schedule of accounts receivable and schedule of accounts payable.
PURCHASES JOURNAL Page 1
DEBIT CREDIT
Date Purchase From PR
Purchases Sundry Account
Payable
Account Title PR Amount
CASH PAYMENTS JOURNAL Page 1
CV DEBIT CREDIT
Date no. Account Credited PR Sundry Accounts Purchases Purchase Cash
Payable Discounts
CAST RECEIPTS JOURNAL Page 1
OR CREDIT DEBIT
Date No. Account Credited PR
Sundry Accounts Sales Sales Cash
receivable Discounts
SALES JOURNAL Page 1
Date SI Sold To Terms PR Accounts Receivable (DR)/

no. Sales (CR)
GENERAL JOURNAL Page 1
Date Particulars PR Debit Credit
SUBSIDIARY LEDGER ACCOUNTS RECEIVABLE
Leon Barreto
Date Particulars PR Debit Credit Balance
Helen Salas
Emmanuel Diaz
SUBSIDIARY LEDGER ACCOUNTS PAYABLE
Baguio Trading
Luzon Equipment Co.
Fajardo Store
Cagayan Corp.
Laguna Industries
GENERAL LEDGER
Cash Account No. 110
Accounts Receivable Account No. 120
Notes Receivable Account No. 125
Merchandise Inventory Account No. 130
Store Supplies Account No. 135
Store Furniture Account No. 140
Store Equipment Account No. 150
Delivery Equipment Account No. 160
Accounts Payable Account No.210
Notes Payable Account No.240
E. Palad, Capital Account No. 310
E. Palad, Drawing Account No. 320
Sales Account No. 410
Sales Discount Account No. 420
Sales Returns & Allowances Account No. 430
Interest Income Account No. 440
Purchases Account No. 510
Purchase Discount Account No. 520
Purchase Returns & Allowances Account No. 530
Rent Expenses Account No. 610
Salaries Expense Account No. 620
Utilities Expense Account No. 630
Interest Expense Account No. 640
Miscellaneous Expense Account No. 650
Trial Balance
Schedule of Accounts Receivable
Schedule of Accounts Payable
End of Module 2.2

AE112 - Module 2.2

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AE112 - Module 2.2

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AE 112-

As the word cycle suggests, this sequence of transaction repeats continuously.

THE OPERETAING CYCLE OF A MERCHANDISING BUSINESS

Steps or Procedure Business Forms Used

Customer orders merchandise direct or  Sales order prepared by the salesman

 A copy of the sales order is used in

 Sales invoice prepared by seller and

 A Statement of Account is prepared and

Remittance received from customer.  Customer's check or other instrument is

INCOME STATEMENT FOR A MERCHANDISING BUSINESS

COMPONENTS OF INCOME STATEMENTS FOR SERVICE AND MERCHANDISING BUSINESSES

Service Business Merchandising Business

Revenues Revenues from sale

Expenses Cost of Goods Sold

Net Income Gross Profit

REVENUE FROM SALES

If sale is for cash, the entry is:

If sale is on account or on credit, the entry is:

Accounts Receivable xx.xx

A. For purchases of 51 - 100 units ·5%

B: P15,000 x 5% P750 (1,890.00)

Invoice Price P 7,600,00 P 13,110.00 P 23,595,00

SALES RETURNS AND ALLOWANCES

If a customer receives a defective or otherwise unsatisfactory product seller will

To record a return or allowance on defective merchandise sold on account:

Sales Returns and Allowances xx.xx

To record a return or allowance on defective merchandise sold for cash:

Sales Returns and Allowances xx.xx

Customary terms differ from industry to industry. In some industries payment is

Days remaining in September (30 - 22) 8

To record collection of an account less discount:

To illustrate let us assume the following transactions by JC Stores:

July 15 Sold merchandise on account to CJ, P10,000. Terms: 2/10, n/30

July 17 Issued a credit memo to CJ for the merchandise returned of P800.

July 25 Received full settlement of CJ's account.

Date Particulars Debit Credit

Jul 15 Accounts Receivable-CJ 10,000

The collection net of discount is computed as follows:

Invoice Price P10,000

 DISCOUNTS ON PARTIAL COLLECTION

To illustrate, let us assume the following transactions incurred by JC STORES

Aug 2 Sold merchandise to RJ Company with list price of P20,000.

Date Particulars Debit Credit

Aug 2 Accounts Receivable-RJ 18,810.00

Aug 17 Cash 4,926.34

 FOB Shipping Point

The effects of these special shipping terms are summarized below:

FOB Destination At destination Seller

Freight Prepaid Seller

Freight Collect Buyer

Accounts Receivable xx.xx

PARTIAL INCOME STATEMENT: COST OF GOODS SOLD

Merchandise Inventory, Jan. 1, 2020 P52,800

Merchandise can be purchased either for cash or on account ( or credit)

If the purchase is for cash, the entry is:

If the purchase is on account or on credit, the entry I s:

PURCHASE RETURNS AND ALLOWANCES

The entry to record return/allowance of merchandise purchased on account is:

Accounts Payable xx.xx

Purchase Returns and Allowances is a contra-purchase account with a normal

Merchandise purchases are usually made on credit and commonly involve

Accounts Payable xx.xx

Like Purchase Returns and Allowances, Purchase Discounts is a contra-purchases