Accounting Cycle of a Merchandising

Business Income Measurement Process for a

Merchandising Company Merchandising Company
- is an enterprise that buys and sells
goods to earn a profit
- primary source of revenue is sales;
service revenue is for service
company
● Wholesalers
- sell to retailers
● Retailers
- sell to consumers
Companies use either a perpetual
The eight steps of the accounting cycle inventory system or a periodic inventory
are as follows: system to account for inventory.
- identifying transactions
- recording transactions in a journal Inventory Systems
- Posting 1. Perpetual
- the unadjusted trial balance - where detailed records of
- the worksheet each inventory purchase and
- adjusting journal entries sale are maintained
- financial statements - cost of goods sold is
- closing the books calculated at the time of each
sale
Operating Cycles for a Service Company 2. Periodic
and a Merchandising Company - detailed records are not
maintained
- cost of goods sold is
calculated only at the end of
the accounting period

Calculation of Cost of Goods Sold:

Beginning inventory $ 100,000
Add: Purchases, net 800,000
Goods available for sale 900,000
Less: Ending inventory 125,000
Cost of goods sold $ 775,000

FUNACC - Accounting Cycle of a Merchandising Business

RECORDING
Sales Return and Allowances
Periodic Method - normal balance is debit
Cash 20,000 - contra account of sales
Sales 20,000
Received cash for sales Periodic Method
Sales Returns and Allowance 2,000
Accounts Receivable 20,000 Cash 2,000
Sales 20,000 Has defects = refunds
Sales on account
Sales Returns and Allowances 2,000
Perpetual Method Accounts Receivable 2,000
Cash 20,000 Has defects = deduct account
Sales 20,000
Sales 20,000
Cost of Goods Sold 15,000 Less: Sales Returns and Allowances 2,000
Merchandise Inventory 15,000 Net Sales 18,000
Received cash for sales
Perpetual Method
Accounts Receivable 20,000 Sales Returns and Allowances 2,000
Sales 20,000 Cash 2,000

Cost of Goods Sold 15,000 Merchandise Inventory 1,500

Merchandise Inventory 15,000 Cost of Goods Sold 1,500
Sales on account Has defects = refunds

The primary source of revenues is Sales Returns and Allowances 2,000

referred to as sales revenue or sales. Accounts Receivable 2,000

Sales Merchandise Inventory 1,500

- normal balance is credit Cost of Goods Sold 1,500
➔ Cost of Goods Sold (expense) Has defects = deduct account
- normal balance is debit
Freight Cost
Credit Memo Periodic Method/Perpetual Method
- seller Freight-Out/Delivery Expense 200
Debit Memo Cash 200
- buyer Seller nagbayad

FUNACC - Accounting Cycle of a Merchandising Business

Accounts Receivable 200 Dec 7 Cash 30,000
Cash 200 Accounts Receivable 120,000
Seller nagbayad muna (pinahiram) pero Sales 150,000
buyer pa din magbabayad
Dec 12 Partial payment received from ABC
Discounts company, P50,000
● Trade Discounts
- deducted from the selling Dec 12 Cash 50,000
price or list price Accounts Receivable 50,000
● Cash Discounts Discount on full payment
- discounts provided on
customers on account Dec 12 Cash 48,500
- they are given to encourage Sales Discount 1,500
customers on account to pay Accounts Receivable 50,000
or settle their account earlier Discount on partial payment
than the given credit term
Example: 2/10, N/30 Dec 17 Cash 66,400
5/15,3/10, N/30 Sales Discount 3,600
● Sales Discount Accounts Receivable 70,000
- normal balance is debit Discount on full payment
- contra account
Dec 17 Cash 67,900
Periodic Method Sales Discount 2,100
Aug 3 Accounts Receivable 100,000 Accounts Receivable 70,000
Sales 100,000 Discount on partial payment
(2/10,N/30)
Sept 20 Sold product A for P200K on Sept
Aug 13 Cash 98,000 20, 2020 with the following credit term:
Sales Discount 2,000 30% down payment
Accounts Receivable 100,000 2/10, N/30
Cash 60,000
Dec 7 Sold goods to ABC company worth Accounts Receivable 140,000
150K with the following credit terms: Sales 200,000
20% Down payment
Balance 3/10,2/15,N/30 Sept 22 Received returned defective
product A worth P3,000
Dec 7 – 17 3% 10 Days Sales Returns and Allowances 3,000
Dec 18-22 2% 15 Days Accounts Receivable 3,000

FUNACC - Accounting Cycle of a Merchandising Business

 - normal balance is credit
Sept 26 Received a partial payment from Example 2/10, N/30 2/EOM, N/45
the customer, P40,000
Cash 40,000 Accounts Payable 20,000
Accounts Receivable 40,000 Cash 19,000
Purchase Discount 1,000
Sept 29 Received full payment from the
customer Freight Cost - Terms of Sale
Cash 94,260
Sales Discount 2,740 Freight-In
Accounts Receivable 97,000 - normal balance is debit
2%x137,000 - added to the purchases –
computation of cost of goods sold
Cost of goods sold is the total cost of
merchandise sold during the period. ● FOB Shipping Point
- Buyer pays Freight Cost
Purchases - Ownership of the goods
- normal balance is debit passes to the buyer when the
- cost of sales of the income public carrier accepts the
statement goods from the seller.

Purchases 50,000 ● FOB Destination

Cash 50,000 - Seller pays Freight Cost
Bumili tayo ng goods on cash - Ownership of the goods
remains with the seller until
Purchases 50,000 the goods reach the buyer.
Accounts Payable 50,000
Goods on account Freight In 1,000
Cash 1,000
Purchase Returns and Allowances
- contra account - purchases Oct 4 Sold Good worth 25k to XYZ store
- normal balance is credit with following terms:
FOB Destination, freight collect, P500
Accounts Payable 1,000 10% Down Payment and balance 2/10,N/30
Purchase Returns and Allowances 1,000
Returns/refunds Cash 2,500
Accounts Receivable 22,500
Purchase Discounts Sales 25,000
- contra account – purchases

FUNACC - Accounting Cycle of a Merchandising Business

Oct 5 Freight Out 500 Cash 21,766
Cash 500 Sales Discount 434
Accounts Receivable 22,200
Oct 10 Cash 22,050 (21,700x0.02)
Sales Discount 450
Accounts Receivable 22,500 VAT
● VAT registered
Oct 4 Sold Good worth 25K to XYZ store ⮚ output tax = credit (seller)
with the following terms: ⮚ input tax = debit (buyer)
FOB Shipping Point, Freight Prepaid, P500 - invoice price = VAT inclusive
10% Down Payment and balance 2/10,N/30 → VAT is included
- VAT supplier
Cash 2,500 → VAT is not yet included =
Accounts Receivable 22,500 no tax yet
Sales 25,000 ● Non-VAT
- Supplier
Accounts Receivable 500 - non-VAT supplier
Cash 500

*No entry if freight collect kasi shoulder ng Purchased the goods from a VAT registered
buyer (shoppee, lazada) supplier, P224,000 (VAT inclusive)
Purchases 200,000
Compound Entry Input Tax 24,000
Cash 2,000 Cash/Accounts Payable 224,000
Accounts Receivable 23,000 (224,000/1.12)
Sales 25,000 (200,000*0.12)

Oct 10 Cash 22,500 Cost 200,000 100%

Sales Discount 450 VAT 24,000 12%
Accounts Receivable Total 224,000 112%
23,000
(no defects pa) Purchased the goods from a VAT registered
supplier, P224,000 (VAT is not yet included)
Oct 5 Received the defective goods from Purchases 224,000
the buyer worth P800 Input Tax 26,880
Sales Returns and Allowances 800 Cash/Accounts Payable 250,880
Accounts Receivable 800 (224,000x0.12)

Oct 10

FUNACC - Accounting Cycle of a Merchandising Business

Purchased the goods from a non-VAT To close the Output and Input Tax (Input
registered supplier, P224,000 Tax is higher than the Output Tax)
Purchases 224,000 Prepaid/Deferred VAT 40,000
Cash/Accounts Payable 224,000 Output Tax 80,000
Input Tax 120,000
Sales Transaction
- as long as you’re a VAT registered, VAT Inclusive with Returns
you must collect VAT from your Oct 5 Sold goods on account, P112,000,
customers With the following terms:
20% Down Payment
Sold Goods to ABC Company, P56,000 Balance 2/10, N/30
(VAT Inclusive) FOB Destination, Freight Collect,
Cash/Accounts Receivable56,000 P2,400
Sales 50,000 Cash 22,400
Output Tax 6,000 Accounts Receivable 89,600
(56,000/1.12) Sales 100,000
(50,000x0.12) Output Tax 12,000
(112,000x0.20)
Sold Goods to ABC Company, P56,000 (112,000/1.12)
(VAT is not yet included) (100,000x0.12)
Cash/Accounts Receivable 62,720
Sales 56,000 Oct 6 LBC collected the P2,400 freight
Output Tax 6,720 Freight Out 2,142.86
(56,000x0.12) Input Tax 257.14
Cash 2, 400
__Output Tax___ ___Input Tax___ (2,400/1.12)
120,000 80,000 (2,142.86x0.12)

Closing of VAT Oct 7 Received Defective goods

To close the Output and Input Tax returned by the customer on account
Output Tax 120,000 of Oct 5, P800
Input Tax 80,000 Sales Returns and Allowances
VAT Payable 40,000 714.29
→ remit the difference between output and Output Tax
input tax 85.71
Accounts Receivable
VAT Payable 40,000 800
Cash 40,000 (800/1.12)
(714.29x0.12)

FUNACC - Accounting Cycle of a Merchandising Business

 x 2%
Sales 100,000 1,585.71
Less: Returns and Allow. __714.29
99,285.71 Oct 14 Received full payment from
0.12 Customer on account of Oct 5 (with
11,914.29 partial payment)
Cash 57,024
______Output Tax________ Sales Discount 1,585.71
85.71 12,000 Output Tax 190.29
Accounts Receivable
Bal. 11,914.29 58,800

Oct 9 Partial Payment received Accounts Receivable

P30,000 89,600 800
Cash 30,000 30,000
Accounts Receivable 58,800
30,000
VAT Inclusive
Oct 14 Received full payment from Dec 1 Purchased goods from XYZ
Customer on account of Oct 5 Company, P280,500 with a credit
(without partial payment) term of 3/5, 2/10, N/30
Cash 87,024 FOB Shipping Point, Freight Prepaid,
Sales Discount 1,585.71 P1,600
Output Tax 190.29
Accounts Receivable Purchases 250,446.43
88,800 Input Tax 30,053.57
(88,800/1.12x0.02) Account Payable 280,500
(1,585.71x0.12) (280,500/1.12)
(280,500-250,446.43 or 250,446.43X0.12)
Accounts Receivable__
89,600 800 Freight In 1,428.57
Input Tax 171.43
88,800 Accounts Payable 1,600
(1,600/1.12)
Balance 89,600 (1,428.57x0.12)
Less: Returns 800
Balance 88,800 Compound Entry of Dec 1
/ 112% Purchases 250,446.43
79,285.71 Input Tax 30,225

FUNACC - Accounting Cycle of a Merchandising Business

Freight In 1,428.57
Accounts Payable 282,100

Dec 3 Returned Defective goods to XYZ

Company, P6,000 Subsidiary Ledgers
Accounts Payable 6,000 - balances in accounts
Purchase Returns and Allowances 5,357.14 receivable/accounts payable
Input Tax 642.86 - transactions on account
(6,000/1.12) ● Buyer
(5,357.14x0.12) - customer’s cards
● Seller
Dec 5 A partial payment of P100,000 - supplier’s cards
was made
Accounts Payable 100,000 Special Journals
Cash ● Sales Journal
100,000 - sales of a person
- after recording the
_______Accounts Payable________ transaction, post it to the
6,000 280,500 customer’s record (on
100,000 1,600 account)
● Purchase Journal
106,000 282,100 - purchases of a person
- purchases that are used for
Bal. 176,100 the business
- after recording the
Dec 11 Paid XYZ Company transaction, post it to the
Accounts Payable 176,100 supplier’s record (on account)
Cash 170,610 ● General Journal
Purchase Discount 4,901.79 - purpose: transactions you
Input Tax 588.21 cannot record in special
journals
Purchases on Account 280,500 ⮚ Adjusting Entry
Less: Returns __6,000 ⮚ Closing Entry
274,500 ⮚ Reversing Entry
Remove VAT / 1.12 - some transactions cannot be
245,089.29 recorded in special journals
Discount Rate x __ 2% ⮚ Bought an equipment on
4,901.79 account
⮚ Returns/Allowances

FUNACC - Accounting Cycle of a Merchandising Business

 ● Customer’s Record Cash In Bank 960
- accounts receivable
● Supplier’s Record Increase the PCF to P3,000
- accounts payable Petty Cash Fund 2,000
● Cash Receipts Journal Cash In Bank 2,000
- down payments of customer
- partial payments of customer Increase the PCF by 3,000
- full payments of customer Petty Cash Fund 3,000
- initial investment Cash In Bank 3,000
- posting of accounts receivable
in customer’s record Bank Reconciliation Statement
● Cash Payments Journal - bank statement
- your expenses - imprest system
- cash in bank – ledger – balance –
BANK RECONCILIATION per book balance = 30,0000
Petty Cash Fund - bank – client – balance, per bank
- payment for minor expenses balance = 35,000
- current asset = balance sheet
- debit = establish/increase Different Timing = Recording of
- credit = still haven’t replenish and to Transaction
start adjusting (amount then should Depositor
be total of expenses) ● Debit Memo
→ Cash Disbursement Journal - deductions made by bank for
Petty Cash Fund 1,000 which the depositor has not
Cash In Bank 1,000 recorded them yet in his
→ to establish books
- bank service charge, NSF
To make a Replenishment Check, dishonored check
Summary of Expenses ● Credit Memo
Supplies 300 - increase made by bank for
Transportation 500 which the depositor has not
Utilities 150 recorded them yet in his
Misc. Expense 10 books
960 - loan proceeds, collection of
notes
Supplies Expense 300
Transportation 500 Bank
Utilities Expense 150 ● Outstanding Checks
Misc. Expense 10

FUNACC - Accounting Cycle of a Merchandising Business

 -
checks issued by the Bank Reconciliation Statement
depositor which are not yet January 31, 2018
presented for encashment by
the payee Unadjusted Balance Per Book 58,457
● Deposit In Transit Less: Debit Memo
- cash awaiting deposit Bank Service Charge 55
Dishonored Check 680 735
Per Book Per Bank Adjusted Balance Per Book 57,772
35,000 35,000
5,000 500 bank service charge Unadjusted Balance Per Bank 57,446
30,000 34,500 Add: Deposit In Transit 3,449
500 5,000 outstanding check Total 60,895
29,500 29,500 Less: Outstanding Checks
72 2,492
76 681 3,173
Cash In Bank 8,000 Adjusted Balance Per Bank 57,722
Accounts Receivable 8,000
Adjusting Entries
Balance per books Bank Service Charge 55
45,000 45,000 Cash in Bank 55
+8,000 +8,000
-8,000 bouncing check 53,000 Accounts Receivable 680
45,000 8,000 Cash in Bank 680
45,000
Compound Entry
Bank Service Charge 55
Sat 50,000 Accounts Receivable 680
Sun 20,000 Cash In Bank 735
Mon (Holiday) 10,000
Problem 4, P369-370
Cash In Bank 5,000 Boulevard Sales Company
Sales 5,000 Bank Reconciliation Statement
March 31, 2018
Cash In Bank 20,000
Sales 20,000
→ Deposit in Transit

Exercise 7 Page 268 Unadjusted Balance Per Book 88,430

Pedro Gil Luncheonette Add: Credit Memo

FUNACC - Accounting Cycle of a Merchandising Business

 Face Value of the Note 7,500 Purchase Returns 19
Interest 400 7,900 Purchase Discount 18
Total 96,330 Sales 1,500
Less: Debit Memo Commission Income 5
Bank Service Charge 225 Income Summary 1,532
NSF Check 700 925
Adjusted Balance Per Book 95,405 Close the accounts with debit balance
Income Summary 1,334
Unadjusted Balance Per Bank 86,855 Purchases 850
Add: Deposit In Transit 12,000 Freight In 15
Total 98,855 Sales R/A 25
Less: Outstanding Checks Sales Disc. 16
124 2,500 Freight Out 19
126 950 3,450 Salaries/Wages 72
Adjusted Balance Per Bank 95,405 Taxes Expense 75
Utilities Expense 64
Adjusting Entries Merch Inv., Jan 1 198
Cash in Bank 7,900
Notes Receivable 7,500 Adjusting Entry
Interest Income 400 To establish merchandise inventory end
Merchandise Inventory, Dec 31 85
Bank Service Charge 225 Income Summary 85
Accounts Receivable 700
Cash In Bank 925 ________MerchandiseInventory_________
Jan 1 198 Dec 31 CE 198
P297 Dec 31 AE 85
Adjusting Entry
Income Summary-Temporary Balance 85
Merchandise Inventory, Dec 31 47,755
Income Summary 47,755 ____________IncomeSummary_________
Dec 31 CE2 1,334 Dec 31 AE 85
________MerchandiseInventory______ 31 CE1 1,532
Jan 01 27,250 CE 27,250
Dec 31 AE 47,755 1,334 1,617
Balance 283
P319 → Net Profit
Closing Entries
- CDID
Close the accounts with credit balance Close Income Summary to the Capital

FUNACC - Accounting Cycle of a Merchandising Business

Income Summary 283
Villar, Capital 283

Close the Drawings account to the

Capital
Villar, Capital 16
Villar Drawings 16

FUNACC - Accounting Cycle of a Merchandising Business