Adjusting entries (Merchandising)

1. Ending Inventory (Periodic)

Merchandise Inventory 12/31 xx

Income summary xx (yung ending inventory deducted sa goods available for sale
para mag arrive sa COGS)

2. Bad debt expense

(2 methods of recording bad debts)

- Direct write off method

Set-up (estimate bad debts)

No entry

Write off of accounts receivable

Bad debt expense xx

Accounts receivable xx

- Allowance method

Set up (estimate bad debts)

Bad debt expense xx

Allowance for bad debts xx

Write off of accounts receivable

Allowance for bad debts xx

Accounts receivable xx

Methods of estimating bad debt (set-up)

1. Percentage of Accounts receivable

2. Percentage of sales
3. Aging of Accounts receivable
Scenario 1 (Percentage of accounts receivable)

Sales : P800,000

Accounts receivable ending balance : P500,000

Allowance for bad debts beginning balance : P5,000

Write off of accounts receivable : P10,000

% of uncollectible : 3% of ending accounts receivable

500,00 x 3% = 15,000 (required ending balance of allowance)

For bad debts

a. Bad debt expense? 20, 000

b. Ending balance of Allowance? 15,000
c. AJE 12/31?
Bad debt expense 20,000
Allowance for bad debts 20,000

Allowance for Bad Debts

Debit Credit

5,000 beginning balance

Write off 10,000 20,000 BD expense

Total DR 10,000 25,000 Total Cr

15,000 Ending balance

Scenario 2 Percentage of sales

(Income statement approach)

Sales : P800,000

Accounts receivable ending balance : P500,000

Allowance for bad debts beginning balance : P5,000

Write off of accounts receivable : P10,000

% of uncollectible : 2% of sales

800,000 x 2% = 16,000 (Bad debts expense)

a. Bad debt expense? 16,000

b. Ending balance of Allowance? 11, 000
c. AJE 12/31?

Bad debt expense 16,000

Allowance for Bad debts 16,000

Allowance for Bad Debts

Debit Credit

5,000 beginning balance

Write off 10,000 16,000 BD expense

Total DR 10,000 21,000 Total Cr

11,000 Ending balance

Scenario 3: Aging of accounts receivable

Sales : P800,000

Accounts receivable ending balance : P500,000

Allowance for bad debts beginning balance : P5,000

Write off of accounts receivable : P10,000

Aging schedule:

Age % uncollectible A/R Bad debts

0-30 days 1% 200,000 (200,000 x 1% = 2,000)

31-60 days 2% 100,000 (100,000 x 2% = 2,000)

61-90 days 5% 100,000 (100,000 x 5% = 5,000)

Over 90 days 10% 100,000 100,000 x 10% = 10,000)

500,000 19, 000

Allowance for Bad Debts

Debit Credit

5,000 beginning balance

Write off 10,000 24,000 BD expense

Total DR 10,000 29,000 Total Cr

19,000 Ending balance

a. Bad debt expense? 24,00

b. Ending balance of Allowance? 19, 000 (per schedule)
c. AJE 12/31?
Bad debt expense 24,000
Allowance for bad debts 24,000

Set up (estimate bad debts)

Bad debt expense 20,000

Allowance for bad debts 20,000

Write off of accounts receivable

Allowance for bad debts 20,000

Accounts receivable 20,000

Recovery of account written off

Accounts receivable 20,000

Allowance for bad debts 20,000

Collection

Cash 20,000

Accounts receivable 20,000

Selling expenses:

Those expenses incurred in bringing the inventory to the customer

Freight out

Advertising and promotion

Store furniture depreciated (shelves)

Commission expense

Rental of store space

General and administrative expenses

Expense incurred not involving selling activities

Expense of accounting, admin and HR dept (salaries)

Rentals (if occupied by admin, HR or accounting)

Financial statement analysis

I. Horizontal analysis
o Increase/decrease of accounts and percentages
II. Vertical analysis
III. Ratio analysis