CHAPTER 12- ACCOUNTING CYCLE OF MERCHANDISING BUSINESS 3.

obtain Accounts Receivable

Merchandise (or merchandise inventory) refers to goods that are held for sale to 4. receive cash

customers JOURNALIZING THE TRANSACTIONS IN A MERCHANDISING BUSINESS

in the normal course of business.
Prior to the discussion on the journal entries, recall the first step in the accounting cycle
This includes goods held for resale. For example:
discussed
• Candies, canned goods, noodles sold at a grocery stores
in previous Chapters (specifically Chapter 10) on financial and non-financial transactions.
• Juice, biscuits sold in a grocery store
• Medicines sold in a pharmacy In step 1, transactions are identified and measured. At this stage, the documents used by the
business
If a grocery store decided to sell an old computer used in the office, this would not be
Are analyzed to see whether these transactions have financial impact or effect. Recall the rule
merchandise
that
Because grocery stores do not normally sell computers and the store is simply selling off old
only financial transactions are recorded and that the amount can be measured. These two
office
conditions
equipment. But a computer would be merchandise for a computer store who resells
computer units. must exist in order for a particular transaction to be recognized or recorded. As defined,
Merchandise for one firm may be a fixed asset (or property and equipment) for another. financial
In another example, a pharmacy decided to sell a table used in their display area. This table transactions are those activities that change the value of an asset, liability or equity.
is not
Step 2 is the Preparation of Journal Entries (Journalization)
Merchandise of a pharmacy. However, to a retail furniture store a table is merchandise
because the A merchandising company may use special and general journals to record its transactions.
business of a furniture store involves the buying and selling of tables.
SPECIAL JOURNALS
Some businesses encounter voluminous quantities of similar and recurring transactions,
A merchandiser’s primary source of revenue is sales revenue or sales.
which may
Expenses for a merchandising company are divided into two categories: create congestion if these transactions are recorded repeatedly in a single day or monthly in

1. Cost of goods sold (COGS) – the total cost of merchandise sold during the period; and the
general journal. The use of special journals will eliminate this problem.
2. Operating expenses (OP) - expenses incurred in the process of earning sales revenue
that are
The following are the commonly used special journals:
deducted from gross profit in the income statement.  Cash Receipts Journal –used to record all cash that had been received
Examples are sales salaries and insurance expenses.  Cash Disbursements Journal –used to record all transactions involving cash payments
 Sales Journal (Sales on Account Journal) –used to record all sales on credit (on
Gross profit (GP) is equal to Sales Revenue less the Cost of Goods Sold. account)
 Purchase Journal (Purchase on Account Journal) –used to record all purchases
Income measurement process for a merchandiser follows as:
of inventory on credit (or on account)
SALES - COGS = GROSS PROFIT - OPERATING = NET
INVENTORY SYSTEMS
EXP INCOME
(LOSS) Maintaining inventory items is a unique set-up in a merchandising business. There are two
methods of
The Operating Cycles for a merchandiser: Accounting for inventory, namely: Perpetual Inventory System and Periodic Inventory System.
Merchandising Company operating cycle (cash to cash) involves:
Merchandising entities may use either of the following inventory systems:
1. buy merchandise inventory
2. sell inventory Perpetual System — Detailed records of the cost of each item are maintained, and the
cost of each item sold is determined from records when the sale occurs. PURCHASES OF MERCHANDISE: PERIODIC SYSTEM
For example, a car dealership has separate inventory records for each vehicle.
1. When merchandise is purchased for resale to customers, the account, Purchases, is debited
 Record purchase of Inventory.
for the
 Record revenue and record cost of goods sold when the item is sold. cost of goods purchased.
 At the end of the period, no entry is needed except to adjust inventory for losses, etc.
2. Like sales, purchases may be made for cash or on account (credit).
Periodic System — Cost of goods sold is determined only at the end of an accounting period. 3. The purchase is normally recorded by the purchaser when the goods are received from the
This system involves: seller.
• Record purchase of Inventory.
• Record revenue only when the item is sold. • Each credit purchase should be supported by a purchase invoice.
• At the end of the period, you must compute cost of goods sold (COGS): • A purchase invoice received by the buyer is actually a sales invoice or a charge
1. Determine the cost of goods on hand at the beginning of the accounting period invoice
(Beginning Inventory = BI), prepared by the supplier or vendor.
2. Add it to the cost of goods purchased (COGP), • Note that only purchases of merchandise are debited to the ‘Purchase’
3. Subtract the cost of goods on hand at the end of the accounting period account.
Acquisition (purchases) of other assets: supplies, equipment, and similar
4. (Ending Inventory = EI) illustrated as follows:
item are
BI + COGP = Cost of Goods available of sale - EI = Cost of Goods Sold debited to their Respective accounts.
TO ILLUSTRATE:
Additional Considerations:
Magaling Computer Store started its operations on January 2, 2016. The store
• Perpetual systems have traditionally been used by companies that sell merchandise with
is located in
high
Sikat Mall in Bicol. The owner invested PHP500,000 to start the business.
unit values such as automobiles, furniture, and major home appliances. With the use of On January 3, 2016,
computers Magaling purchased 20 units of computers on account for PHP10,000 each.
and scanners, many companies now use the perpetual inventory system. Upon delivery of
• The perpetual inventory system is named because the accounting records continuously the units, the supplier, Delta, Inc., issued Charge Invoice No. 145 to
— Magaling.
perpetually —show the quantity and cost of the inventory that should be on hand at any Entry:
time. General Journal
The periodic system only periodically updates the cost of inventory on hand. date Account Title & Ref Debit Credit
• A perpetual inventory system provides better control over inventories than a periodic Explanation
inventory, 1/3/16 Purchases 200,00
0
since the records always show the quantity that should be on hand. Then, any shortages
Accounts 200,000
from the
Payable
actual quantity and what the records show can be investigated immediately.
To record purchase
Note: The periodic inventory system will be used in all illustrations of this
of 20 units of
chapter while the perpetual
computers at P
system will be included in the “enrichment” portion of this guide. 10,000 per unit from
Delta, Inc. as per
PERIODIC INVENTORY SYSTEM Charge Invoice 145

Recording purchases and related transactions under the Periodic Inventory System
 • Buyer pays freight costs.
PURCHASE RETURNS AND ALLOWANCES
• Freight-In is debited if buyer pays freight.
1. A purchaser may find the merchandise received to be unsatisfactory because the goods are: • Cash is credited if the goods come on cash on delivery (COD), for example, and
 damaged or defective was paid immediately. Accounts Payable would be credited if on account.
 of inferior quality
• Ownership over the goods is transferred to the buyer once it is out of the
 not in accordance with the purchaser’s specifications
2. The purchaser initiates the request for a reduction of the balance due through the issuance of a premises of the
debit seller.
memorandum. The debit memorandum is a document issued by a buyer to inform a seller that
FOB Destination
the
seller’s account has been debited because of unsatisfactory goods. • Goods placed free on board (FOB) at buyer’s business.
3. A return of merchandise ( a deduction from the purchase price when unsatisfactory goods are
• Seller pays freight costs.
kept) is
shown by the entry where Accounts Payable is debited and Purchase Returns and allowances is
• Delivery Expense is debited if seller pays freight on outgoing merchandise to a
credited
buyer.
to show that the purchases was reduced with a return or an allowance.
This is an operating expense to the seller.
4. The Purchase Returns and Allowances account is a “contra purchases” account when
merchandise is • Ownership over the goods is transferred to the buyer once the goods are delivered
returned to a supplier. and received by the buyer.

TO ILLUSTRATE:

Out of the 20 computer units purchased last January 3, 2016, it was found after inspection on the TO ILLUSTRATE:
same day that one unit was damaged during shipment. Magaling issued a debit memorandum
(DM 01) and informed the supplier that it will return the one damaged item. Assume the supplier of Magaling is based in Manila. In order to bring the 20 computer units to
Entry: Bicol,
it will cost PHP3,000 to deliver the goods. If the terms is FOB Shipping Point, the entry to
General Journal
record,
date Account Title & re Debit Credit assuming Magaling paid the common carrier in cash on January 4, 2016 is :
Explanation f
Entry:
1/3/16 Accounts Payable 10,000 General Journal
Purchase Returns 10,000 date Account Title & Ref Debit Credit
and Allowances Explanation
To record return of 1 1/4/16 Freight-In 3,000
unit of computer worth Cash 3,000
P 10,000 from Delta, To record freight costs
Inc. as per DM 01 for the purchase of 20
units of computers
ACCOUNTING FOR FREIGHT COSTS
The sales agreement should indicate whether the seller or the buyer is to pay the cost of
transporting If the terms is FOB Destination, no entry is recorded in the books of Magaling. The PHP3,000
will be
the goods to the buyer’s place of business. The two most common arrangements for freight
paid by the seller, in this case Delta, Inc.
costs are
PURCHASE DISCOUNTS:
FOB SHIPPING POINT AND FOB DESTINATION.
FOB Shipping Point: • Credit terms (specify the amount of cash discount and time period during which a
discount is offered)
• Goods placed free on board (FOB) the carrier by seller.
may permit the buyer to claim a cash discount for the prompt payment of a balance due.
 If the credit terms show 2/10, n/30 means a 2% discount is given if paid within 10 days 145
(called the discount period); otherwise, the invoice is due in 30 days.
• The buyer calls this discount a purchase discount. Recording of sales and related transactions under the Periodic Inventory System
• A purchase discount is normally based on the invoice cost less returns and allowances, if SALES TRANSACTIONS: REVENUE ENTRIES FOR A MERCHANDISER
any.
• Revenues are reported when earned in accordance with the revenue recognition principle,
and in a
TO ILLUSTRATE merchandising company, revenues are earned when the goods are transferred from seller
The credit terms for the purchase of 20 computer units (total cost PHP200,000) is 2/10, to buyer.
n/30. This means that • All sales should be supported by a document such as a cash register tape (to
if Magaling pays on or before January 13, 2016, it is entitled to a 2% discount, otherwise provide evidence of
Magaling will have to cash sales) or cash receipt, or office receipt for cash sales, and charge invoice for
pay the full amount on or before February 4, 2016 (30 days after purchase). On January 10, credit sales,
2016, Magaling or sales on account.
paid the account in full with Delta. • One entry is made with each sale:
Entry:
Debit — Accounts Receivable (if a credit sale) or
General Journal Cash (if a cash sale) which increases
date Account Title & Ref Debit Credit
assets for the sales amount
Explanation
Credit — Sales which increases revenues
1/10/16 Accounts Payable 200,000
Purchase Discount 4,000
Cash 196,000 • The sales account is credited only for sales of goods held for resale. Sales of assets not
To record full held for
payment of Delta, resale (such as equipment, buildings, land, etc.) are credited directly to the asset account.
Charge Invoice No. TO ILLUSTRATE :
145 w/ 2% discount
For the month of January, Magaling made the following sale:
computed as P
200,000 @ 2% 1/10/2016 Official Receipt (OR) No. 001 Sold two units for cash to Marie Cruz for
PHP36,000
Assuming that instead of paying on January 10, 2016, Magaling paid on February 4, 2016, (PHP18,000 per unit), FOB Destination.
thus forfeiting the 2% discount, the entry to record is: 1/15/2016 Charge Invoice (ChI) No. 001 Sold five units on account to Rafael Reyes for
Entry: PHP97,500
General Journal (PHP19,500 per unit) with terms 3/10, n/ 30, FOB Shipping Point
date Account Title & Ref Debit Credit
Explanation Entry:
1/10/16 Accounts Payable 200,000 General Journal
Cash 200,000 date Account Title & Ref Debit Credit
To record full Explanation
payment of Delta, 1/10/16 Cash
Charge Invoice No. 36,000
 Sales 36,000
To record OR # 001 SALES RETURNS AND ALLOWANCES:
cash sale – Marie • Sales Returns result when customers are dissatisfied with merchandise and are allowed
Cruz to return the goods
to the seller for credit or a refund.
• Sales Allowances result when customers are dissatisfied, and the seller allows a deduction
General Journal from the selling price.
date Account Title & Ref Debit Credit • To grant the return or allowance, the seller prepares a credit memorandum to inform the
Explanation customer that a
1/15/16 Accounts Receivable 97.500 credit has been made to the customer’s account receivable.
Sales 97,500 • Sales Returns and Allowances is a contra revenue account to the Sales account. A contra
To record Charge account is a
Invoice No. 001 reduction to a particular account.
Rafael Reyes on • A contra account is used, instead of debiting sales, to disclose the amount of sales returns
account with terms and allowances
in the accounts.
3/10, n/30
• This information is important to management as excessive returns and allowances
FREIGHT TERMS: FOB DESTINATION — SELLER PAYS FREIGHT suggest inferior
• An entry is made when seller pays the freight to deliver goods to a customer or buyer. If the merchandise, inefficiencies in filling orders, errors in billing customers, and mistakes in
buyer delivery or shipment of goods.
will pay for the freight, no entry is made. • The normal balance of Sales Returns and Allowances is a debit.
• Debit — Delivery Expense and credit — Cash or Accounts Payable • One entry is made with each sales return and allowance:
The entry to record the sales return or allowance:
TO ILLUSTRATE:
• Debit — Sales Return and Allowances which decreases revenues for the amount
On January 10, 2016 Magaling paid MM Express, PHP500 to deliver the two units to Marie of the sale
Cruz.
• Credit — Accounts Receivable (if a credit sale) or Cash (if a cash sale) which
General Journal decreases assets
date Account Title & Ref Debit Credit
TO ILLUSTRATE:
Explanation
On January 16, 2016, Rafael Reyes returned one unit of the computers purchased last January
1/10/16 Delivery Expense 500
15, 2016 under
Cash 500
Charge Invoice 001. The unit returned was in good condition. However, Rafael Reyes returned
To record full
the unit because
payment of Delta
it is one unit more than what they need. The return was approved and accepted by Magaling.
Charge Invoice No.
The price will be
145
deducted from the account of Rafael Reyes.

Take note that no entry will be made regarding the sale to Rafael Reyes since the term is FOB
Shipping Point.
Entry: Entry:

General Journal General Journal

date Account Title & Ref Debit Credit date Account Title & Ref Debit Credit
Explanation Explanation
1/10/16 Sales Return & 19,500 1/17/16 Purchases 50,000
Allowances Cash 50,000
Accounts 19,500 To record purchased
receivable on cash five units of
To record return of computers
one unit of computer
from Rafael Reyes
under charge Invoice 1/18/16 Accounts receivable 90,000
001 Sales 90,000
\ To record sales on
SALES DISCOUNTS
account under charge
1. A sales discount is the offer of a cash discount to encourage customers to pay the balance at Invoice # 002 to Jun
an earlier date.
Cruz with terms
2. An example of a discount term is commonly expressed as: 2/10, n/30, which means that 2/10,n/30
the customer is given
2% discount if payment is made within 10 days. After 10 days there is no discount, and 1/23/16 Cash 88,200
the balance is due in 30 days. Sales Discount 1,800
3. Sales Discounts is a contra revenue account with a normal debit balance. Accounts 90,000
receivable
TO ILLUSTRATE:
To record collection
Assume that Magaling purchased on cash , five units of computers at P 10,000 per unit from a of accounts
supplier on January 17, 2016. receivable from Jun
These units were subsequently sold to Jun Cruz on January 18, 2016 . Under charge Invoice Cruz net of 2% sales
(CHI) No. 002 amounting to
P 90,000, (P18,000 per unit) with terms 2/10, n/30, FOB Shipping Point. On January 23, 2016, discount
Cruz paid account in full.
Notice in the entry on January 23, 2016 that the cash received from Jun Cruz was net of the 2%
discount because
he made the payment within the discount period. Take note that the discount period in this case
was from
January 19, 2016 to January 28, 2016 (10 days).
What If Jun Cruz paid the account on January 30, 2016 instead of January 23, 2016? The entry would be:

General Journal
date Account Title & Explanation Ref Debit Credit
1/30/16 Cash 90,000
Accounts receivable 90,000
To record collection of
accounts receivable from Jun
Cruz

The cost of good sold under the periodic inventory system is determined at the end of the period (monthly or
yearly by a short computation, as follows:

Cost of goods sold:

Merchandise Inventory,
Beginning 100,000

Purchases 250,000

Less: Purchases returns and

allowances 5,000

Purchases discounts 2,000 7,000

Net purchases 243,000

Add: Freight in 6,000

Cost of goods purchased 249,000

Cost of goods available for

sale 349,000

Merchandise Inventory,
Ending 118,570

Cost of goods sold 230,250

In a periodic inventory system, separate ledger accounts are maintained for various items composing the cost of goods sold (Purchases, Purchase Returns & Allowances, Freight-In, Purchase
Discounts). At the end of the accounting period, a physical count of inventory is necessary to establish the ending balance of the inventory.
COMPLETE ACCOUNTING CYCLE FOR A MERCHANDISING BUSINESS

Agila Merchandising, owned by Lito Agila, sells ready-to-wear shirts and dresses to its customers. It started its operations on January 1, 2016.
The company issues the following documents :
• Official Receipts - for all cash collections
• Charge Sales Invoice – for all sales on account
• Check Voucher – for all cash disbursements

Step 1 & 2 –Understanding and Journalizing the transactions

For the month of January 2016, the special journals of Agila are shown below:

SALES JOURNAL
Date Description/ Charge Invoice Debit Credit
(Customer) or Sales Invoice A/R Sales
#
1/5/16 Dax 1 2,102 2,102
1/7/16 Marie 2 3,060 3,060
1/9/16 Astro 3 1,475 1,475
Cancelled 4
1/11/16 PNSC 5 8,960 8,960
1/15/16 PECO 6 7,125 7,125
1/1/6/16 Ipedcare 7 4,560 4,560
1/19/16 Te 8 1,250 1,250
1/22/16 Joshua 9 3,125 3,125
1/22/16 Joseph 10 4,510 4,510
1/24/16 Jesper 11 2,080 2,080
1/28/16 Nelcie 12 1,180 1,180
1/29/16 Ryan 13 900 900
1/30/16 Arlen 14 3,450 3,450
1/30/16 Art 15 1,478 1,478
Total for Jan 45,255
2016
CASH RECEIPTS JOURNAL

Date Description/ Official Debit Credit Credit Debit

Particular Receipt #
Cash Sales A/R Sales
Disc
1/2/16 Ana 1 1,000 1,000
1/4/16 Maria 2 1,890 1,890
1/6/16 Peter 3 1,289 1,289
1/7/16 Jun 4 3,456 3,456
1/7/16 Karen 5 1.290 1.290
1/8/16 Jane 6 3,876 3,876
1/8/16 May 7 4,561 4,561
1/10/16 April 8 5,600 5,600
1/15/16 PNSC 9 8,060 8,960 900
1/16/16 Ana 10 4,235 4,235
1/17/16 Juan 11 2,010 2,010
1/21/16 Rafael 12 3,410 3,410
1/22/16 Ray 13 893 893
1/29/16 Te 14 1,250 1,250
1/24/16 Geo 15 3,452 3452
1/24/16 Dax 16 2,102 2,102
1/25/16 Angela 17 1,000 1,000
1/29/16 Clyde 18 345 345
1/30/16 Joseph 19 4,000 4,510 510
Total 53,719 38,307 16,822 1,410

PURCHASE JOURNAL

Date Acct. Title & Ref Charge Inv. Debit Credit

Explanation Or Sales Purchases AP
Invoice
1/2/16 XYS Clothing SI 102 228,560 228,560
1/10/16 RTW Superstore SI 611 133,070 133,070
1/29/16 Dresses unlimited SI341 98,120 98,120
Total 459,750 459,750
CASH DISBURSEMENT JOURNAL

Date Description Check/ Credit Debit Debit Debit Debit Debit Credit
Voucher
#
Cash A/P Sal Sup Ad Rental Pur
Exp Exp Exp Exp Disc
1/2/16 St. Realty CV 01 10,000 10,000
Rental for
Jan-Feb 2016
1/5/16 Del Supplies CV 02 3,500 3,500
Office Sup
1/5/16 XYS CV 03 220,000 228,560 8,560
Clothing-payt
of account
1/16/18 Jean Guzman- CV 04 7,500 7,500
salary Jan 1-
15, 2016
1/16/18 Sonic Promo- Cv 05 4,800 4,800
Advertising
1/25/18 Goldmic CV 06 1,990 1,990
Supplies
Total 247790 228,560 7,500 5,490 4,800 10,000 8,560

General Journal
Date Account Title & Explanation Ref Debit Credit
1/2/16 Cash 500,000
Agila, Capital 500,000
To record investment

General Journal
Date Account Title & Explanation Ref Debit Credit
1/2/16 Transportation Equipment 150,000
Cash 150,000
To record acquisition of
transportation equipment

Additional Information:
• The delivery vehicle purchased in January 2, 2016 is estimated to be useful for 10 years with no residual or salvage value.
• A physical count of merchandise inventory was conducted on January 30, 2016. The cost of the inventory on hand was PHP438,700.
• On January 30, 2016, Agila received a statement of account from Gus Oil Center reflecting a total bill of PHP2,180, representing fuel purchases on January 2016 that were still
unpaid as of the said date.

Step 3 – Posting to the General Ledger. From the summary of transactions in the special journals and general journals, the entries will now be posted in each general ledger
account:
GENERAL LEDGER
Account : Cash Account No:1000
Date Description/ Re Debit Credit Balanc
Particular f e
1/2/1 Investment of owner 500,00 500,000
6 0
Purchased of Vehicle 150,00 350,000
0
From the cash receipts 53,719 403,719
journal
From the cash 254,29 149,429
Disbursement Journal 0

Account : Accounts receivable Account No:1200

Date Description/Particular Ref Debit Credit Balance

From the sales journal 45,255 45,255

From the cash receipts 16,822 28,433
journal

Account :Transportation equipment Account No:1680

Date Description/Particular Ref Debit Credit Balance

General Journal-purchase 150,000 150,000

of vehicle

Account :Accounts Payable Account No:2000

Date Description/Particular Ref Debit Credit Balance

From the Purchase Journal 459,750 (459,750)

From the Cash 228,560 (231,190)
Disbursements Journal
Account :Agila, Capital Account No:3000
Date Description/Particular Ref Debit Credit Balance

Initial Investment – General 500,000 (500,000)

Journal

Account : Sales Account No:4100

Date Description/Particular Ref Debit Credit Balance

From the Sales Journal 45,255 (45,255)

From the cash receipts 38,307 (83,562)
journal

Account : Sales Discount Account No:4102

Date Description/Particular Ref Debit Credit Balance

From the Cash Receipts 1,410 1,410

Journal

Account : Purchases Account No:5100

Date Description/Particular Ref Debit Credit Balance

From the purchase journal 459,750 459,750

Account : Purchases Discount Account No:5102

Date Description/Particular Ref Debit Credit Balance

From the Cash disbursement 8,560 (8,560)

Journal

Account : Salaries Expense Account No: 6100

Date Description/Particular Ref Debit Credit Balance

From the Cash disbursement 14,000 14,000

Journal

Account : Supplies Expense Account No: 6100

 Date Description/Particular Ref Debit Credit Balance

From the Cash disbursement 5,490 5,490

Journal

Account : Advertising Expense Account No: 6100

Date Description/Particular Ref Debit Credit Balance

From the Cash disbursement 4,800 4,800

Journal

Account : Rental Expense Account No: 6100

Date Description/Particular Ref Debit Credit Balance

From the Cash disbursement 10,000 10,000

Journal

Step 4 & 5– Prepare the unadjusted trial balance, and preparation of worksheet. The balances in the general ledger for each account will be extended to the first two money columns of the
worksheet. The unadjusted trial of Agila is:

AGILA MERCHANDISING
Worksheet
For the month ending January 31, 2016

ACCOUNT TITLE UNADJUSTED TRIAL BALANCE

DEBIT CREDIT
Balance Sheet Accounts
Cash 149.429
Accounts receivable 28,433
Merchandise Inventory 0
Transportaion Equipment 150,000
Accu Depreciation- Transpo. Equipt 0
Accounts Payable 231,190
Agila, Capital 500,000

Income Statement Accounts

Sales 83,562
Sales Discount 1,410
Purchases 459,750
Purchase Discount 8,560
Salaries Expense 14,000
Supplies Expense 5,490
 Advertising Expense 4,800
Rental Expense 10,000
Depreciation Expense 0
Total Balance 823,312 823,312

Step 6 – Prepare adjusting entries. Recall in Chapter 11, the five basic sources of adjusting entries:
1. Depreciation expense
2. Deferred expenses or prepaid expenses
3. Deferred income or unearned Income
4. Accrued expenses or accrued liabilities
5. Accrued income or accrued assets

Identify transactions in the books of Agila that will require adjustments:

 Depreciation of transportation equipment purchased on January 2, 2016
Monthly Depreciation = (Cost – Residual value ) /120 months

= (150,000-0)/120
= 1,250
Adjusting Entry:
Depreciation Expense 1,250
Accu Deprn- Transpo Equipt 1,250

 Deferred or Prepaid Expenses

In the cash disbursement journal, the rental payment made on January 2, 2016 is for the month of January and February 2016 amounting to PHP10,000. The entire amount was charged to rental
expense which is not proper because one half (1/2) of the said payment is considered as an advance payment of rental. Thus, an asset should be recognized. The adjusting entry is:

Prepaid Expense 5,000

Rental Expense 5,000

Note: With this entry, the correct rental expense of PHP5,000 and a prepaid expense of PHP5,000 ( an asset account) are recognized.

 Accrued Expenses
On January 30, 2016, fuel expenses incurred amounting to PHP2,180 should be recorded as an expenses and liability. The entry to adjust is:

Fuel Expense 2,180

Accrued Expenses 2,180

AGILA MERCHANDISING
Worksheet
For the month ending January 30, 2016

ACCT TITLE UNADJUSTED TRIAL BALANCE ADJUSTMENTS ADJUSTED TRIAL BALANCE

DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
Balance Sheet
Account
Cash 149,429 149,429
A/R 28,433 28,433
Mdse Inventory
Prepaid Exp 5,000 5,000
Traspo Exp 150,000
Accum Depr- 1,250 1,250
Office equipt
A/P 231,190 2,180 231,190
Accrued Exp 2,180

Agila, Capital 500,000 500,000

Income
Statement
Account
Sales 83,562 83,562
Sales Discount 1,410 14,10
Purchases 459,750 459,750
Purchase disc 8,560 8,560
Salaries Exp 14,000 14,000
Supplies Exp 5,490 5,490
Ad Exp 4,800 4,800
Rental exp 10,000 5,000 5,000
Depr Exp 1,250 1,250
Fuel Exp 2,180 2,180
TOTAL 823,312 823,312 8,430 8,430 826,742 826,742

Preparation of Financial Statements. The first statement prepared is the income statement. All income statement accounts are extended to the appropriate column. Using the periodic
inventory system, the beginning balance of merchandise inventory account is also extended to the debit side, while the result of the physical count to determine the ending inventory is
reflected on the credit side. The total debit and total credit are determined and if credit balance is higher than the debit side, the difference is added to the debit side. The difference is actually
the income for the period. However, if the total debit side exceeds the total credit side, the difference is added to the credit side and this is the net loss of the business. The statement of
financial position is then prepared. All assets, liabilities and equity accounts are extended. The ending merchandise inventory is extended to the debit side.
The worksheet for these two financial statements are presented below:

AGILA MERCHANDISING
Worksheet
For the month ending January 30, 2016

ACCT TITLE ADJUSTED TRIAL BALANCE INCOME STEMENT STATEMENT OF FINANCIAL

POSITION
DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
Balance Sheet
Account
Cash 149,429 149,429
A/R 28,433 28,433
Mdse Inventory 438,700 438,700
Prepaid Exp 5,000 5,000
Traspo Exp 150,000 150,000
Accum Depr- 1,250 1,250
Office equipt
A/P 231,190 231,190
Accrued Exp 2,180 2,180

Agila, Capital 500,000 500,000

Income
Statement
Account
Sales 83,562 83,562
Sales Discount 1,410 1,410
Purchases 459,750 459,750 -
Purchase disc 8,560 8,560
Salaries Exp 14,000 14,000 -
Supplies Exp 5,490 5,490
Ad Exp 4,800 4,800
Rental exp 5,000 5,000
Depr Exp 1,250 1,250
Fuel Exp 2,180 2,180
493,880 530,822
Net Income 36,942 36,942
Total Balances 826,742 826,742 530,822 530,822 771,562 771,562
Aration The proper format of the income statement and the schedule of cost goods sold of Agila for January 2016 are presented below:

AGILA MERCHANDISING
Schedule of Cost of Goods Sold
For the month ended January 30, 2016

Merchandise Inventory, Beginning -0-

Add: Purchases 459, 970

Less: Purchase Discount 8, 560

——————————-

Cost of Goods Available for Sale 451, 190

Less: Merchandise Inventory, Ending (438, 700)

——————————-

Cost of Goods Sold 12,490

——————————-
 AGILA MERCHANDISING
Income Statement
For the month ended January 31, 2016

GROSS SALES 83,562

Less: Sales Discounts (1,410)

———————————

NET SALES 82,152

Less: Cost of Goods Sold (see above schedule) (12,490)

———————————

GROSS PROFIT 69, 662

LESS: EXPENSES

Salaries Expense 14,000

Salaries Expense 5, 490

Advertising Expense 4,800

Rental Expense 5,000

Depreciation Expense 1, 250

Fuel Expense 2, 180

——————————-

Total Expense 32, 270

——————————-

NET INCOME 36, 942

=================

Step 8 – Closing Entries. The closing journal entries consist of the following:
• All of the nominal revenue accounts should be closed to the income summary account by a Debit to revenue and credit to income summary.
• All of the nominal expense and cost of goods sold accounts should be closed to the income summary by a Credit to expense and a debit to income summary.
• The Merchandise Inventory, Beginning is closed to Income summary account by a debit to Income Summary and a
credit to Merchandise Inventory.
• The Merchandise Inventory, Ending is set up in the books by a debit to Merchandise Inventory, Ending and a credit to
Income Summary. The amount that will be used is the result of the physical count.
• The balance in the income summary account should now reflect the net income for the accounting period. The next journal
entry should close the income summary account to the equity or capital account. If there is a net profit this entry will be a
debit to income summary and a credit to owner’s capital account.

Once the closing journal entries have been entered into the general journal, the information should be posted to the general
ledger. When this is accomplished, all of the nominal accounts in the general ledger should have zero balances. To double check
on this, we prepare another trial balance based on the new balances in the general ledger. If we have any nominal accounts with
positive balances, a mistake was made along the way and will need to be corrected before proceeding to the next accounting
period.

The closing entries of Agila are:

GENERAL JOURNAL

DATE ACCOUNT TITLE AND EXPLANATION REF DEBIT CREDIT

1/31/16 Sales 83, 562

Sales Discounts 1,410

Income Summary 82,152

To close nominal revenue accounts

Income Summary 483,910

Purchase Discount 8,560

Purchases 459,750

Salaries Expense 14,000

Supplies Expense 5,490

Advertising Expense 4,800

Rental Expense 5,000

Depreciation Expense 1,250

Fuel Expense 2,180

 To close nominal expense and cost of goods
sold account

Merchandise Inventory, Ending 438,700

Income Summary 438,700

To set up merchandise inventory ending

After these entries, the income summary account has a balance of:

Total Credits (82,152 + 438,700) = 520,852

Total Debit = 483,910

Net (credit balance)Income = 36,942

The last closing entry is to close the balance of income summary to the capital account:

GENERAL JOURNAL

DATE ACCT. TITLE & EXPLANATION REF DEBIT CREDIT

1/30/16 Income summary 36,942
Agila, Capital 36,942