UNIT II – Lesson 7

Accounting Process for Merchandising Business

Merchandising business - engaged in buying and selling merchandise or goods .

Merchandise - refers to goods, commodities or articles that are bought for resale at a profit.

Operating Cycle of a Merchandising or Trading Business

1. purchases of merchandise either on cash or on credit basis
2. sales of merchandise, also either on cash or on account basis
3. collection of accounts receivable from customers

Accounts Titles Peculiar to Merchandising concern

Merchandise Inventory - goods purchased by the business intended for sale but remain unsold.

Delivery Expense/Freight out – amount incurred or paid for transporting or delivering merchandise to customers.

Purchases – amount of goods purchased by the business intended for sale at a profit.

Freight in/Transportation-in – amount incurred or paid for transportation expense of the goods purchase which was
shouldered by the buyer.

Purchase returns and allowances - cost of merchandise returned or allowance granted by the seller to the buyer for
various reasons such as: color. Style, size ot non compliance with specifications.

Purchase discount – discount granted to the buyer or purchaser for payment within the discount period.

Sales – revenue derived in the sale of goods for merchandising and manufacturing concern.

Sales returns and allowances - cost of merchandise sold to customer but returned or allowance granted to the
customer for various reasons such as: color, style, size or non compliance with specifications.

Sales discount - discount granted by the seller for payment within the discount period.

Accounting for Purchases of merchandise:

1. Purchases - is debited for cost of merchandise bought. This represents gross cost of goods bought.

a) Pro-forma entry:

Purchases xxx
Cash/Accounts payable xxx

Terms of Purchase:
1. Cash basis:
June 1 - Bought merchandise costing, P 5,000, cash.

Journal entry:
2021
June 1 Purchases 5,000
Cash 5,000
cash purchases.

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 2. on account:
June 2 - Bought merchandise costing P 3,000 . Terms: 1/10, n/20.

Journal entry:
2021
June 2 Purchases 3,000
Accounts payable 3,000
1/10, n/20.

3. by issuance of a promissory note:

June 5 - Bought merchandise costing P 4,000. Terms: a 30-day promissory note.

Journal entry:
2021
June 5 Purchases 4,000
Notes payable 4,000
30 da promissory note.

4. with a downpayment, balance on account.

June 6 - Purchased merchandise costing P 10,000. Terms: 25% downpayment, balance on

account.

Journal entry:
2021
June 6 Purchases 10,000
Cash 2,500
Accounts payable 7,500
25% down, balance on account.

5. with a downpayment, balance a 30-day promissory note:

June 8 - Bought merchandise costing P 15,000. Terms: 50% down, balance a 30-day
promissory note.

Journal entry:
2021
June 1 Purchases 10,000
Cash 2,500
Notes payable 7,500
50% down, balance - 30 day note

2. Purchase returns and allowances - is credited to record returns and allowances granted on goods
bought. This represents the cost of goods that are slightly defective, of inferior quality or of the wrong
specification returned by the buyer to the seller. In certain cases no actual physical return may be
made but an allowance is granted in the form of a reduction in the original invoice price.

If goods were originally acquired on cash basis, a cash refund is given for return and allowances granted.

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 To illustrate:
2021
May 2 - Bought merchandise from AAA Company for P 3,500. Terms: cash.
3 - Merchandise costing P 300 was returned to AAA Company due to inferior quality.
8 - Purchased goods from Addona Inc. P 10,000. Terms: 25% downpayment, balance on
account.
10 - Merchandise costing P 500 was returned due to wrong specifications. A credit memo
was Issued to Addona Inc

Solution:
2021
May 2 - Purchases P 3,500
Cash P 3,500
cash purchases.

3 - Cash 300
Purchase returns and allowances 300
goods returned due to inferior quality

8 - Purchases 10,000
Cash 2,500
Accounts Payable 7,500
25% down, balance on account.

10 - Accounts Payable 500

Purchase returns and allowances 500
good returned due to wrong specification.

3. Purchase discount - is credited for cash discount taken on purchase of merchandise.

Kinds of discount:
1. Trade discount - are granted to wholesalers or buyers in big quantities. These are deductions
from the list price of goods bought. The amount of the invoice less the trade discount, the net
invoice price is recorded as the cost of goods bought. Trade discounts are not recorded in the books.

To illustrate:
Alcan Trading bought merchandise from Centerpoint Corp. for P 25,000. Terms: 10% and
5%; 2/10, 1/20, n/60. Compute the net invoice price.

Solution:
1. To compute the net invoice price:
Original list price ……………………………………………………….P 25,000
Less: First trade discount (10%) : (P 25,000 x 10%) …………… 2,500
Balance ………………………………………………………………….P 22,500
Less: Second trade discount (5%): ( P 22,500 x 5%) …………… 1,125
Net Invoice price ……………………………………………………… P 21,125

2. Journal entry:

Purchases P 21,125
Accounts payable P 21,125
2/10, 1/20, n/60.

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 Exercise:

On June 1, 2021, Asho Store purchased merchandise from Catty Corp. for P 30,000. Terms: less
5% and 2%; 25% downpayment, balance 2/10, n/30.

Compute the net invoice price and prepare journal entry to record the transaction.

2. Cash discount- are discounts offered as an incentive for the buyer to pay his account within the
discount period. When cash discounts are taken by the buyer of merchandise, the account used is
Purchase discounts , which is a deduction from the gross purchases.

Credit terms:
Terms of credit may be offered in any of the following manner:

a) n/30 this means that the account is payable within 30 days from the invoice
date with no discount

b) 2/10, n/30 this means that a 2% discount will be given if the account is paid in full
within 10 days from the invoice date but that the account is to be paid
in full not later than 30 days from invoice date.

c) 2/5, 1/10, n/30 this means that a 2% discounts will be given if the account is paid in
full within 5 days, 1% discount if paid in full within 10 days from the
invoice date but that the account is to be paid in full not later than 30
days from invoice date.

Computation of discount:
To compute the amount of discount , the following procedures are followed:
1. Determine the amount subject to discount. This is the original invoice price, excluding
charges for freight which may be part of the invoice price, less returns and allowances
granted on the account.
2. Apply the rate of discount to No. 1 above.
3. Determine the amount to be paid on the account. This is the outstanding liability on the
account less the amount of the discount as computed in No. 2 above
To illustrate:

#01: Assume the following:

2021
May 5 - Bought merchandise from ACO Inc., P 50,000. Terms: 2/10, n/30.
13 - Paid in full the account with ACO Inc.
Solution: Journal entries:

2021
May 5 - Purchases 50,000
Accounts Payable 50,000
2/10, n/30

13 - Accounts Payable 50,000

Purchase discounts 1,000
Cash 49,000
Full payment

Note: Since full payment was made with 8 days ( 5 – 13) which within the discount period, 2%
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 discount ( 2% x 50,000) = 1,000 is recorded as purchase discount and decreases the cash to be
paid.
#2: Assume the following:
2021
June 3 - Purchased merchandise from CTL Trading, P 45,000. Terms: 2/5, 1/10, n/30.
5 - An allowance of P 200 was granted by the seller on some merchandise items
which were slightly damaged.
10 - Paid in full the account with CTL Trading.

Solution: Journal entries:

2021
June 3 Purchases 45,000
Accounts payable 45,000
2/5,1/10, n/30

5 Accounts Payable
Purchase returns and allowances
allowance for slightly damaged
merchandise.

10 Accounts Payable 44,800

Purchase discount 448
Cash 44,352
in full of account.

Note: the company is entitled to 1% discount because full payment was made 6 days from the date
of purchase which is beyond 5 days (1st discount 2/5) but within 10 days (2nd discount 1/10).

to compute the amount of discount: * to compute the amount to be paid:

Original invoice Price ……………. P45,000 Outstanding liability ……. P 44,800
Less: allowance …………………… 200 Less: amount of discount 448
Outstanding Liability ………………P 44,800 Amount to be paid …… P 44.352
x rate of discount ………… . ……._ 1%
Amount of discount ……………… ..P 448

4. Freight in (or transportation in) - debited for freight charges on goods bought. This is added to the cost of
purchases

Terms of Shipment/Shipping terms:

1. FOB Shipping Point – Free on board up to the 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 shall be shouldered by the buyer and recorded in the account
Freight-In.

2. FOB destination - Free on board up to the destination this means that the ownership to the
merchandise passes to the buyer upon reaching the point of destination, that is when they are
received by the buyer. Freight charges will be shouldered by the seller and recorded in the
account Freight –Out or Delivery Expense – classified as selling expense.

3. Freight Collect – this means that the buyer will pay for the freight charges upon receipt of the
goods. If the term is FOB Destination, the buyer can deduct the freight charges
when paying for the invoice price.

4. Freight Prepaid – this means that the seller has paid the freight charges at the time of shipment.
If the term is FOB Shipping point, the seller can add the freight charges to the invoice
price.

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  Withdrawal of merchandise by the proprietor for personal use represents a deduction to Purchases.
(Purchases account is credited).

Accounting for Sales of Merchandise

1. Sales - is credited for the gross selling price of the goods sold.

Terms of sales:
1. Cash basis

Example:
Sold merchandise to A. Ponce, P 1,500. Terms: cash
Entry:

Cash 1,500
Sales 1,500
Cash sales

2. on account

Example:
Sold merchandise to Sena Store, P 2,000. Terms: 2/10, n/30.
Entry:
Accounts Receivable ……………………………….P 2,000
Sales ………………………………………………………….P 2,000
2/10, n/30.

1. with a promissory note

Example:
Sold goods to AC Store, P 3,000. Terms: 30-day promissory note.

Entry:
Notes Receivable ……………………………………P 3,000
Sales ………………………………………………………….P 3,000
30-day promissory note.

1. with a downpayment, balance on account

Example:
Sold merchandise to PDI Store, P 4,000. Terms: 25% downpayment, balance 2/10, n/30.
Entry:
Cash …………………………………………………..P 1,000
Accounts receivable …………………………………. 3,000
Sales …………………………………………………………P 4,000
25% downpayment, balance 2/10, n/30.

1. with a downpayment, balance a promissory note

Example:
Sold goods to ADO Store, P 5,000. Terms: 20% downpayment, balance 30-day promissory note;
Entry:
Cash …………………………………………………P 1,000
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 Notes Receivable …………………………………… 4,000
Sales …………………………………………………………..P 5,000
20% downpayment, balance a 30-day, 12% note.
2. Sales returns and allowances - is debited for the returns and allowances granted by the seller.

Pro-forma entry:

a) cash sales - a cash refund:

Sales returns and allowances ………………………………. xxx
Cash…………………….. ……………………………… ……. xxx
cash refund.

a) account sales - reduction from accounts receivable:

Sales returns and allowance ………………………………… xxx
Accounts receivable …………………………………… ……….. xxx

3. Sales discounts - is debited for the cash discounts taken by the buyer upon payment in full within the
discount period.

Pro-forma entry:

to record collection of account in full within the discount period:

Cash ………………………………………………………….. xxx
Sales discounts ………………………………………………. xxx
Accounts receivable ……………………………………………….. xxx

4. Freight out - is debited for the transportation expenses incurred by the seller to bring the goods to the
buyer’s place when the term of shipment is F.O.B. Destination. ( other terms: Delivery expense
or transportation out)

Two Approaches Used in Accounting for Merchandise Transactions

1. Periodic Inventory System -

A traditional periodic inventory system operates as follows:

a) When merchandise is purchased, its cost is debited to an account “Purchases”.

b) When merchandise is sold, an entry is made to recognize the sales revenue but no entry is made to
record the cost of goods sold.
c) As the inventory records are not updated as transactions occur, there is no inventory subsidiary ledger.
d) At year end, a complete physical count of the merchandise on hand is conducted. An entry to set up the
inventory at the end should be made during the year-end closing entries:

Merchandise Inventory, end xxx

Income Summary xxx

e) The cost of goods sold for the entire year is then determined as follows:
Inventory, beginning xxx
Add: Net cost of Purchases
Purchases xxx
Add: Freight in xxx
Total xxx
Less: Purchase returns and allowances xxx
Purchase discounts xxx xxx xxx

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 Cost of goods available for sale xxx
Less: Inventory, end xxx
Cost of goods sold xxx

2. Perpetual Inventory System - the business keeps a continual record of the transactions, affecting the
quantity and the amount of inventory

- operates as follows:
a) When merchandise is purchased, its cost is debited to an account “Merchandise Inventory”.
b) When merchandise is sold, two entries are necessary : one to recognize the sales revenue and the
second to recognize the related the cost of goods sold.

c) Uses an inventory subsidiary ledger. This ledger provides company personnel with up-to-date
information about each type of product that the company buys and sells, including the per unit cost and
the number of units purchases, sold and currently on hand.

d) In order to ensure the accuracy of the perpetual inventory records, a physical count of the inventory on
hand is made at least once a year – usually at year-end. Any discrepancy between the amount of
merchandise per physical count and the inventory controlling account balance, the latter is adjusted to
the quantities and peso amounts indicated by the physical inventory. The pro-forma adjustment is:
Cost of goods sold xxx
Merchandise Inventory xxx
To adjust the perpetual records to
reflect the results of the year-end physical count.

Acquisition of Property and Equipment

- PAS 16 states that property and equipment shall be initially recorded at its cost

- COST includes:
 Purchase price (net of trade discount)
 Transportation cost
 Installation cost, and
 All other costs incurred in acquiring the assets and preparing it for productive use.

- These costs increases the asset account and is recorded by debiting the asset account.

- Discount on early payment on account or allowance granted by the seller decreases the asset
and is credited directly to the asset account.

Example: Journalize the following selected transactions of DEE Company:

2021
Sept. 1 – Purchased a machinery from ADD Corporation with a list price of P 500,000. Terms 5%, 2/30,
n/60.
- Paid additional costs upon acquisition of machinery:
Transportation costs P 1,500
Installation costs 2,500
Cost of trial runs 1,200
5 – Dee complained of a slight defects on the machinery and was granted an allowance of P 3,000.
25 - Dee paid the account with ADD Corporation in full.

Solution:

2021
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 Sept. 1 Machinery 475,000
Accounts payable 475,000
2/30, n/60

Machinery 5,200
Cash 5,200
Additional costs incurred for machinery

5 Accounts Payable 3,000

Machinery 3,000
Allowance granted by ADD corp.

25 Accounts Payable 472,000

Machinery 9,440
Cash 462,560
Full payment to ADD Corp.

If full payment is made beyond the discount period, ex. Oct. 20, 2021: then no discount will be granted
to DEE Company, Entry would be:

Oct. 20 Accounts Payable 472,000

Cash 472,000
Full payment to ADD Corp.

Sale of Property and Equipment -

- when the asset is disposed of, the cost of the asset must be removed from the asset account and
accumulated depreciation at the date of disposal must also be removed from the books of account.

- the carrying value ( Cost less accumulated depreciation) of the asset is compared with the
selling price of the asset, the difference is gain or loss on sale of the asset.

Example: Given the following data taken from the books of JUDY SHOP:

Office furniture P 90,000

Accumulated depreciation 18,000

Required: Record the sale of the office furniture if the selling price is:
a) P 72,000 b) P 80,000 c) P 65,000

a) Selling Price is P 72,000:

Cash 72,000
Accumulated Depreciation 18,000
Office furniture 90,000
Sale of office furniture

b) Selling Price is P 80,000:

Cash 80,000
Accumulated Depreciation 18,000
Office furniture 90,000
Gain on sale of furniture 8,000
Sale of office furniture

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 c) Selling Price is P 65,000:
Cash 65,000
Accumulated Depreciation 18,000
Loss on sale of furniture 7,000
Office furniture 90,000
Sale of office furniture

Transactions involving the use of Promissory Note

Promissory note – is a written promise made by a maker (debtor) promising to pay a payee(creditor) a
sum certain in money at a fixed or determinable future time.

Elements of a Promissory note:

 Date of the note – the date the note is drawn.
 Place – place where the note is drawn.
 Face of the note – the principal amount to be paid
 Maturity date of the note – date on which the note is paid
 Maturity value – the amount to be paid on the note.
- non-interest bearing note - Maturity value = Principal
- interest bearing note - Maturity value = Principal + Interest (principal x rate x time)
 Maker of the note – the person who is to make payment on the note (debtor)
 Payee of the note – the person to receive payment on the note (creditor)

Kinds of promissory note:

 Non-interest bearing Note – is one whereby the face of the note or principal is the same as its
maturity value.
 Interest bearing Note – is one whereby the maturity value of the note is equal to the face of the
note or principal plus the interest stated in the note.

How to record Promissory Note:

 Notes Payable - if the business is the maker or debtor. In this case, the business draws or
issues the promissory note. For interest bearing note payable, interest expense is incurred.

 Notes Receivable - if the business is the payee or creditor. In this case, the business received
the promissory note from a customer or client, who is the debtor. For interest bearing note
receivable, interest income is earned.

Illustrations: Transactions Involving Promissory Note:

1. Non- interest bearing promissory note

P 10,000.00 April 1, 2021

For value received, I promise to pay Mr. Y the amount of P Ten thousand pesos
only on May 1, , 2021
Mr. X

Determine:
1. Date of the note _______April 1, 2021_________________

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 2. Face or principal of the note P 10,000 __________
3. Term of the note_________30 days
4. Maker of the note _______Mr. X___________________________
5. Payee_________________Mr. Y___________________________
6. Maturity value : __________P 10,000_______________________
7. Maturity date of the note: ______May 1, 2021 ____________

Journal Entries: Books of Mr. X (maker of the note)

2021
April 1 Cash 10,000
Notes Payable 10,000
Promissory note issued to Mr. Y

May 1 Notes Payable 10,000

Cash 10,000
Payment of note.

Journal Entries: Books of Mr. Y (Payee of the note)

2021
April 1 Notes Receivable 10,000
Cash 10,000
Promissory note received from Mr. X

May 1 Cash 10,000

Notes Receivable 10,000
Note collected.

2. Interest bearing promissory note

P 20,000.00 August 10, 2021

60 days after date, I promise to pay Mrs. Dee the amount of P Twenty thousand pesos
only, with 12% interest.
Mrs. Lee

Determine:

1. Date of the note ______August 10, 2021________________

2. Face or principal of the note_______P 20,000_____________
3. Term of the note__________60 days_________________________

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 4. Maker of the note ________Mrs Lee_________________________
5. Payee_________________Mrs. Dee______________________
6. Maturity value __________P 20,000 + 400 (Interest : 20,000 x 12% x 60/360) = P 20,400___
7. Maturity date of the note _______October 9, 2021_(count 60 days from August 10, 2021 – exclude the
first day, include the last day)
August. ( 31- 10) = 21
Sept. 30
Oct. 1-9 9 - last day
60 days

Journal Entries: Books of Mrs. Lee (maker of the note)

2021
Aug 10 Cash 20,000
Notes Payable 20,000
Promissory note issued to Mrs Dee

Oct. 9 Notes Payable 20,000

Interest Expense 400
Cash 20,400
Payment of note.

Journal Entries: Books of Mrs. Dee (Payee of the note)

2021
Aug 10 Notes Receivable 20,000
Cash 20,000
Promissory note received from Mr. X

Oct 9 Cash 20,400

Notes Receivable 20,000
Interest income 400
Note collected.

Discounting of Own Note –

Discounting – is a financing arrangement whereby interest is immediately deducted from the loan
proceeds.

How to record discounting of own note (Notes Payable)

On the date of discounting – the entry is :

Cash on hand/in bank (for net proceeds) xxx
Interest expense (for interest deducted) xxx
Notes Payable (for face of note) xxx
Discounted our 30-day, 12% note with
PNB at 8%.

On date of full payment- the entry is:

Notes Payable ( face of note) xxx
Cash on hand/in bank xxx
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 PNB, full payment of loan

.Example: Prepare journal entries in the books of Tyrone Company for the month of October 2021.
October 1 - Discounted our 60-day, 18% note for P 150,000 with PNB.
November 30 - Paid the note due today.

Solution:
2021
Oct 1 Cash 145,500
Interest Expense 4,500
Notes Payable 150,000
Own note discounted with PNB

Nov. 30 Notes Payable 150,000

Cash 150,000
Payment of note

To compute for:
Interest = 150,000 x 18% x 60/360 = 4,500
Proceeds = Principal less Interest = 150,000 – 4,500 = P 145,500
Exercises –

Accounting for Purchases and Sales of Merchandise

1. Record the following selected transactions of MAS Store:

2021
Jan. 10 - Purchased goods from AYO Co Corp. for P 10,000. Terms: less 10% and 5%, 2/10, 1/20, n/60.
12 - An allowance was granted by AYO Co corp. due to wrong specification, P 500.
18 - Paid the account in full.

2. Record the following selected transactions:

2021
Aug. 2 - Purchased merchandise from VFE Enterprises, P 15,000. Terms: 2/10, n/30.
4 - Returned unsatisfactory merchandise to VFE Enterprises and received a credit memo for P 800.
22 - Paid the account in full.

3. Record the following selected transactions of No deal Department Store, a merchandising concern owned
and managed by Miss Tina Go:

2021
Oct. 5- Purchased merchandise for P 5,000 from Glad Earth Commercial. Terms: 1/20,n/60.
6- Purchased merchandise from Southern Trading Inc. for P 2,800. Terms: less 10%, n/30.
7- Purchased merchandise from Shaliman Enterprises for P 5,000. Terms: 20%
downpayment, balance, n/60.
8- Paid freight on the above purchases, P 150 cash.
9- Returned unsatisfactory merchandise to Shaliman Enterprises and received a credit
memo for P200
11- Purchased a cash register from Far East Equipment company for P 5,500. Terms: less
10%, 1/10, n/30.
12- Paid freight on the above purchases, P 100 cash.
15- Paid account with Glad Earth Commercial in full.
21- Paid account with Far East Equipment company in full.
23- Miss Tina Go withdrew cash of P 500 and merchandise acquired at a cost of P 500 and
priced to sell for P 850.
25 Purchased merchandise from Elite Commercial for P 3,250. Terms: cash.
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 27 Purchased wrapping papers and twine for P 1,000 from Ace Commercial. Terms: C.O.D.

4. Record the following selected transactions of Visayan Fish Products:

2021
July 2 - Sold merchandise to Sabina Poutry for P 5,000/ Terms: 2/5, n/30.
3 - Sold merchandise to Sta, Clara Cooperative for P 10,000. Terms: a 30-12% note.
5 - Sold merchandise for cash, P 2,250.
6 - Sold an old equipment for P 2,500 cash. The equipment was acquired at a cost of P 4,000 and has a
net book value of P 2,100.
7 - Collected in full the account of Sabina Poultry.
11 - Sold merchandise to Sarmineto Fish Traders for P 6,000. Terms: 50% down, balance, 2/10, n/30.
12 - Paid freight on the above sale, P 200.
15 - Gave a cash refund of P 250 for returns from cash customers.
21 - Collected the account of Sarmiento Fish Traders in full.
Aug. 2 - Collected the note from Sta. Clara in full.

5. Record the following selected transactions of Emerald Trading:

2021
June 1 Purchases merchandise for cash, P 4,500.
3 - Sold merchandise for cash, P 2,250.
4 - Purchased merchandise from Deluxe Novelties for P 5,000. Terms: 2/10, n/30.
5 - Received a cash refund of P 150 for defective merchandise returned to supplier on purchase of
June 1st.
7 - Purchased office furniture from Cresta Furnitures for P 2,500. Terms: on account.
10 - Purchased office supplies for cash, P 350.
11 - Sold merchandise to DEF Company for P 3,000. Terms: n/30.
12 - Paid freight on the above sale, P 200.
14 - Paid Deluxe Novelties in full of account.
16 - Received a cash refund of P 50 for office supplies returned ti supplier due to wrong
specifications.
17 - Paid Cresta Furnitures in full of account.
20 - Sold merchandise to Century Trading for P 10,000. Terms: 20% downpayment, a 30-10% note for
P 5,000, balance 1/10, n/30.
21 - Purchased merchandise from AL’s Trading, P 8,000. Terms: 2/10, n/30.
22 - Paid freight on the above purchases, P 250.
27 - The owner, Mr. Cruz, withdrew merchandise purchased at a cost of P500 and priced to sell at P
780.

Exercise:
Required. Prepare journal entries for the month of August, 2021 in the books of :

a) MMK Services b) RRG Trading

August, 2021

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 3 – MMK Services issued a 120-day, 20% note for P 15,000 to RRG Trading in full settlement of its
account with them.
6 - MMK Services rendered services to RRG Trading for P 10,000. Terms: P 2,000 dowm, balance on
account.
11 – MMK received a 15-day, 18% note from RRG in full settlement of account.
23 – MMK paid the note due to RRG including interest due thereon.
26 – RRG paid its note due today including the interest due thereon.

Activity 1
Problem 1:

The following are the selected transactions of VISTA TRADING during its first month of operations:
2021
Oct 1 Victor Tan invested P 6,000 cash, store supplies, P 4,000, store furniture and equipment,
. acquired at a cost of P 55,000 on which there is an outstanding balance of P 25,000 to be
assumed by the business and merchandise worth P 85,000 in a trading firm registered as Vista
Trading.
2 Paid business taxes and licenses amounting to P 1,750.
2 The proprietor had a savings account with BDO of P 75,000, he transferred P 50,000 of these
savings to a current account in the name of the business.
3 Bought additional store furniture for P 15,000 from Ace Furniture. Terms: 2/20, n/30.FOB
shipping point, freight collect, Shipping costs, P 400.
4 Purchased merchandise for P 16,500 from Tramo Merchandising. Terms: 1/10, n/60.
5 Paid rent for the month, P 3,500.
5 Sold merchandise for P 5,000 to C.R. Store. Terms: 2/10, n/30.
6 Sold merchandise for P 10,000 to various cash customers..
7 Bought office supplies for P 1,500. Terms: C.O.D.
8 Received credit of P 500 from Tramo Merchandising as allowance for slight defects on
merchandise items bought.
9 Purchased merchandise for P 15,000 for MC Corp. terms: 30% down payment for which a check
was issued, balance 2/15, n/60. FOB destination, freight prepaid, Shipping cost, P 300.
12 Discounted our 45-20% note for P 50,000 with BDO and the proceeds was credited to our current
account with them.
13 Sold merchandise for P 2,500 to TS Store. Terms: 15-day, 12% note.
14 Paid Tramo merchandising in full of account by issuing a check.
15 Collected one-half of account of CR Store.
15 Purchased merchandise for P 15,000 from Ever Commercial. Terms: 10%, 15-day 12% note

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 15 Paid freight on the above purchase, P 550.
16 Issued a check to Ace Furniture in full payment of account.
17 Sold merchandise to O. Santos for P 6,000 for which we accepted a 30 – 15% note.
17 Cash sales for the week amounted to P 14,200.
18 Paid in full account with MC Corp for which a check was issued.
19 Gave a cash refund for merchandise items returned by cash customers, P 200.
20 The proprietor withdrew merchandise costing P 1,500 but which was priced to sell for P 2,000.
22 Sold merchandise to DD Store for P 5,000. Terms: P 1,000 down, balance 2/10, n/30.
22 Paid freight on the above sale, P 200.
23 Cash sales amounted to P 25,200.
24 Received defective merchandise returned by DD Store for which we gave a credit of P 300.
25 Collected the account of CR Store in full.
27 Made a deposit to BDO, P 15,000 cash.
28 Received a check from DD store in full payment of account.
28 Collected the note of TS store.
29 Sold merchandise to XX Co., P 4,500. Terms: 2/10, n/30.
30 Purchased merchandise from NST Commercial, P 6,000. Terms: C.O.D,. a check was issued.
30 Paid the note due today.
30 Paid for the following:
Light P 1,200
Telephone 1,000
30 Paid salaries for the month P 10,000 less SSS Contribution, P 750; Philhealth, P200; Pag-ibig
contributions, P 150,
30 Employer’s contributions:
SSS Contribution……………….P 1,050
Philhealth………………………… 200
Pag-ibig……………………………. 150
EC …………………………………. 40
31 Remitted the contributions to the different agencies

VISTA TRADING
CHART OF ACCOUNTS

Statement of Financial Position Accounts Income Statement Accounts

Assets Income
110 Cash on hand 410 Sales
111 Cash in bank 411 Sales returns and allowances
120 Accounts Receivable 412 Sales discounts
130 Notes Receivable 420 Interest Income
140 Merchandise Inventory
150 Store Supplies Cost and Expenses
160 Office Supplies 510 Purchases
170 Store Furniture and Equipment 511 Purchase returns and allowances
512 Purchase discounts
Liabilities 513 Freight in
210 Accounts Payable 530 Salary Expense
220 Notes Payable 540 Taxes and Licenses
223 Interest Payable 550 Rent Expense
224 SSS Contribution Payable 560 Freight out
225 Philhealth Contributions Payable 570 Utility Expense
226 Pag-ibig Contributions Payable 580 SSS Contribution Expense
227 Withholding Taxes Payable 581 Philhealth Contribution Expense
582 Pag-ibig Contribution Expense
Owner’s Equity 583 Employees Compensation Expense

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 590 Interest Expense
310 Victor Tan, Capital
320 Victor Tan, Drawing

REQUIRED: Record the transaction in a two-column journal.

Completing the accounting cycle for Merchandising Concern

Illustrative Problem:
The following trial balance was taken from the books of Superb Store as of the end of its accounting year,
December 31, 2021:

SUPERB STORE
Trial Balance
December 31. 2021

Debit Credit
Cash P 277,830
Accounts Receivable 275,000
Allowance for bad debts 2,000
Notes Receivable 60,000
Merchandise Inventory, January 1, 2021 1,578,650
Delivery Equipment 500,000
Accumulated depreciation – delivery equipment 50,000
Store Equipment 150,000
Accumulated depreciation – store equipment 15,000
Office Equipment 50,000
Accumulated depreciation – office equipment 10,000
Accounts Payable 976,450
Notes Payable 100,000
C. Kat, capital 1,503,945
C. Kat, Personal 60,000
Sales 3,760,600
Sales returns and allowances 37,500
Sales discounts 50,650
Purchases 2,625,250
Purchase returns and allowances 26,250
Purchases discounts 39,160
Transportation in 60,250
Sales salaries 215,675
Advertising expense 33,000
Commission expense 75,250
Delivery expense 112,500
Miscellaneous selling expenses 12,450
Office salaries 125,900
Rent expense 110,000
Insurance expense 24,000
Office supplies expense 22,250
Taxes and licenses 10,250
Misecllaneous general expenses 6,200
Interest income 1,200
Interest expense 12,000 ________
6,484,605 6,484,605

Below are the data needed for adjustments at December 31:

17
 1. All property accounts are depreciated at 10% per annum.
2. Unpaid expenses:
a) Sales Salary - P 5,000
b) Rent expense, - P 10,000
3. Office Supplies on hand amounted to P 500.
4. It is estimated that 10% of outstanding accounts receivable will become uncollectible.
5. Accrued interest on notes receivable, P 250.
6. Accrued interest on notes payable, P 750.
7. Prepaid Advertising, P 2,000.
8. Merchandise inventory, December 31, 2021, P 1,850,620.

REQUIRED: Prepare:
1. Adjusting journal entries
2. A ten-column worksheet
3. Income Statement
4. Statement of Financial Position
5. Closing Entries
6. Post closing trial balance
7. Reversing Entries

Solution
GENERAL JOURNAL

Date Particulars PR Debit Credit

2021
Dec. 31 1) Depreciation Expense – Delivery Equipment P 50,000
Depreciation Expense – Store Equipment 15,000
Depreciation Expense – Office Equipment 5,000
Accumulated Depreciation – Delivery Equipment P 50,000
Accumulated Depreciation– Store Equipment 15,000
Accumulated Depreciation – Office Equipment 5,000
Provision for depreciation

(2) Sales Salaries 5,000

Rent Expense 10,000
Sales Salaries Payable 5,000
Rent Payable 10,000
Unpaid expenses

(3) Office supplies 500

Office supplies expense 500
Unused supplies

(4) Bad Debts Expense 25,500

Allowance for Bad debts 25,500
Provision for estimated uncollectible accounts

(5) Interest Receivable 250

Interest Income 250
Accrued interest on notes receivable.

(6) Interest Expense 750

Interest Payable 750
Accrued interest on notes payable.

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 (7) Prepaid Advertising 2,000
Advertising Expense 2,000
Prepaid advertising

Note: Merchandise Inventory, December 31, 2021 is set up in the closing Entries.

SUPERB STORE
Adjusted Trial Balance
December 31. 2021

Debit Credit
Cash P 277,830
Accounts Receivable 275,000
Allowance for bad debts 27,500
Notes Receivable 60,000
Interest Receivable 250
Merchandise Inventory, January 1, 2021 1,578,650
Office supplies 500
Prepaid Advertising 2,000
Delivery Equipment 500,000
Accumulated depreciation – delivery equipment 100,000
Store Equipment 150,000
Accumulated depreciation – store equipment 30,000
Office Equipment 50,000
Accumulated depreciation – office equipment 15,000
Accounts Payable 976,450
Notes Payable 100,000
Interest Payable 750
Sales Salary Payable 5,000
Rent Payable 10,000
C. Kat, capital 1,503,945
C. Kat, Personal 60,000
Sales 3,760,600
Sales returns and allowances 37,500
Sales discounts 50,650
Purchases 2,625,250
Purchase returns and allowances 26,250
Purchases discounts 39,160
Transportation in 60,250
Sales salaries 220,675
Advertising expense 31,000
Commission expense 75,250
Delivery expense 112,500
Depreciation expense – Delivery Equipment 50,000
Depreciation expense – store equipment 15,000
Miscellaneous selling expenses 12,450
Office salaries 125,900
Rent expense 120,000
Insurance expense 24,000
Office supplies expense 21,750
Taxes and licenses 10,250
Depreciation expense – office equipment 5,000
Bad debts expense 25,500
Miscellaneous general expenses 6,200
Interest income 1,450
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 Interest expense 12,750 ________
6,596,105 6,596,105

Functional form:
SUPERB STORE
Income Statement
Year ended December 31, 2021

Sales P 3,760,600
Less: Sales returns and allowances P 37,500
Sales discounts 50,650 88,150
Net Sales 3,672,450
Less: Cost of Sales:
Merchandise inventory, January 1, 2021 P 1,578,650
Add: Net cost of Purchases:
Purchases P2,625,250
Less: Purchase returns and P 26,250
allowances
Purchase discounts 39,160 65,410
Net Purchases 2,559,840
Add: Transportation in 60,250 2,620,090
Total Cost of Good Available for Sale P
4,198,740
Less: Merchandise Inventory, December 31, 1,850,620 2,348,120
2021
Gross Income P 1,324,330
Add: other operating income:
Interest income 1,450
Total P 1,325,780
Less: Operating Expenses:
Selling Expenses :
Sales salaries 220,675
Delivery expense 112,500
Advertising expense 31,000
Commission expense 75,250
Depreciation expense – store equipment 15,000
Depreciation expense – delivery equipment 50,000
Miscellaneous selling Expenses 12,450 516,875
Administrative Expenses:
Office salaries 125,900
Office supplies expense 21,750
Rent Expense 120,000
Depreciation expense – office equipment 5,000
Bad debts expense 25,500
Taxes and Licenses 10,250
Insurance Expense 24,000
Miscellaneous general expenses 6,200 338,600 855,475
Operating Income 470,305
Less: Finance cost
interest expense 12,750
Net Income 457,555

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 SUPERB STORE
Statement of Changes In Owner’s Equity
Year Ended December 31, 20157

C. Kat, Capital , January 1, 2021 P 1,503,945

Add: net income 457,555
Total P 1,961,500
C. Kat, Personal 60,000
C. Kat, Capital, December 31, 2021 P 1,901,500

MARS TRADING
Statement of Financial Position
December 31, 2021

A S S E T S
Current Assets
Cash P 277,830
Accounts receivable P 275,000
Less: Allowance for doubtful accounts 27,500 247,500
Notes receivable 60,000
Interest Receivable 250
Merchandise Inventory, Dec. 31, 2021 1,850,620
Prepaid Advertising 2,000
Office supplies 500
Total current assets P 2,438,700

Non-current Assets:
Delivery Equipment P 500,000
Less: Accumulated depreciation 100,000 400,000
Store Equipment P 150,000
Less: Accumulated depreciation 30,000 120,000
Office equipment P 50,000
Less: Accumulated depreciation 15,000 35,000
Total non-current assets 555,000
Total Assets P 2,993,700

LIABILITIES AND OWNER’S EQUITY

Current Liabilities:
Accounts payable P 976,450
Notes Payable 100,000
Interest Payable 750
Sales Salary payable 5,000
Rent payable 10,000
Total current liabilities P 1,092,200

Owner’s Equity:
C. Kat, Capital, December 31, 2021 1,901,500
Total liabilities and owner’s equity P 2,993,700

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CLOSING JOURNAL ENTRIES

Date Particulars PR Debit Credit

2021
Dec. 31 Merchandise Inventory, Dec. 31, 2021 P 1,850,620
Sales 3,760,600
Purchase returns and allowances 26,250
Purchase discounts 39,160
Interest Income 1,450
Income Summary P 5,678,080
To set up merchandise inventory ending and close
nominal accounts with credit balance.

31 Income Summary 5,220,525

Merchandise Inventory, Jan. 1, 2021 1,578,650
Purchases 2,625,250
Sales returns and allowances 37,500
Sales discounts 50,650
Transportation in 60,250
Sales salaries 220,675
Delivery expense 112,500
Advertising expense 31,000
Commission expense 75,250
Depreciation expense – store equipment 15,000
Depreciation expense – delivery equipment 50,000
Miscellaneous selling Expenses 12,450
Office salaries 125,900
Office supplies expense 21,750
Rent Expense 120,000
Depreciation expense – office equipment 5,000
Bad debts expense 25,500
Taxes and Licenses 10,250
Insurance Expense 24,000
Miscellaneous general expenses 6,200
Interest Expense 12,750
To close merchandise inventory beginning and
nominal accounts with debit balance.

31 Income Summary 457,555

C. Kat, Capital 457,555
To close income summary account to capital.
Account.

31 C. Kat, Capital 60,000

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 C. Kat, Personal 60,000
To close drawing account to capital account.

SUPERB STORE
Post-Closing Trial Balance
December 31. 2021

Debit Credit
Cash P 277,830
Accounts Receivable 275,000
Allowance for bad debts 27,500
Notes Receivable 60,000
Interest Receivable 250
Merchandise Inventory, December 31, 2021 1,850,620
Office supplies 500
Prepaid Advertising 2,000
Delivery Equipment 500,000
Accumulated depreciation – delivery equipment 100,000
Store Equipment 150,000
Accumulated depreciation – store equipment 30,000
Office Equipment 50,000
Accumulated depreciation – office equipment 15,000
Accounts Payable 976,450
Notes Payable 100,000
Interest Payable 750
Sales Salary Payable 5,000
Rent Payable 10,000
C. Kat, capital _________ 1,901,500
P 3,166,200 P 3,166,200

REVERSING ENTRIES

GENERAL JOURNAL

Date Particulars PR Debit Credit

2021
Dec. 31 Sales Salaries Payable 5,000
Rent Payable 10,000
Sales Salaries 5,000
Rent Expense 10,000
To reverse adjusting entry for unpaid expenses

Office supplies expense 500

Office supplies 500
To reverse adjustment for unused supplies

Interest income 250

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 Interest Receivable 250
To reverse adjustment for accrued interest income

Interest Payable 750

Interest Expense 750
To reverse adjustment for accrued interest expense

Advertising Expense 2,000

Prepaid Advertising 2,000
To reverse adjustment for prepaid advertising

Activity 1:
Problem 1:

Mars Trading
Adjusted Trial Balance
December 31, 2021
Debit Credit
Cash on hand P 25,500
Cash in bank 279,000
Accounts receivable 484,200
Allowance for doubtful accounts P 2,421
Notes receivable 20,000
Interest receivable 200
Merchandise Inventory, January 1, 2017 528,000
Prepaid Advertising 1,000
Prepaid Insurance 3,200
Unused selling supplies 1,800
Unused office supplies 1,200
Land 145,000
Building 580,000
Accumulated depreciation – building 82,500
Store Furniture and Fixtures 124,750
Accumulated depreciation – Store Furniture and Fixtures 26,125
Delivery Equipment 150,000
Accumulated depreciation – Delivery Equipment 24,500
Office furniture and Equipment 83,500
Accumulated depreciation – Office Furniture & Equipment 13,500
Accounts payable 168,645
Notes Payable 50,000
Interest Payable 1,250
Salary payable 10,000
Utilities payable 2,000
Mortgage payable 150,000
J. Del Mar, Capital 1.621,244
J. Del Mar, drawing 27,500
Sales 2,463,500
Sales returns and allowances 27,500
Sales discounts 42,750
Purchases 1,264,000
Purchase returns and allowances 56,400
Purchase discounts 21,360
Freight in 82,360
Sales salaries 225,000
Delivery expense 37,400

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 Advertising expense 20,000
Selling supplies expense 24,375
Insurance Expense - selling 6,450
Utilities expense – selling 12,150
Office salaries 303,900
Office supplies expense 15,300
Utilities expense – office 3,750
Insurance expense – office 2,150
Depreciation expense – Building - store 38,000
Depreciation expense – Building – office 20,000
Depreciation expense – store furniture and equipment 15,000
Depreciation expense – office furniture and equipment 8,350
Depreciation expense – Delivery equipment 12,000
Doubtful Accounts Expense 1,600
Miscellaneous selling expense 52,650
Miscellaneous general expenses 32,350
Interest expense 4,660
Rental income 12,000
Interest income ________ 1.100
4,706,545 4,706,545

Additional information:
. Merchandise Inventory, December 31, 2021, P 483,000.

PREPARE: 1. Income Statement for the year ended, December 31, 2021.
2. Statement of Changes in Owner’s Equity
3. Statement of Financial Position as of December 31, 2021
4. Closing Entries
5. Post Closing Trial Balance

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