Bfdce 73 e

Fundamentals of Accountancy,
Business, and Management 1

(Q2)
Jaelyn Leonardo Marasigan, LPT

Table of Contents
Module 7: Business Transactions and their Analysis as Applied to

Accounting Cycle of Business and Non-Business Transactions (Part II)
Introduction 90
Learning Outcomes 90
Lesson 1. Adjusting Entries 90
Lesson 2. Worksheet Preparation 105
Lesson 3. Preparation of Financial Statements 110
Lesson 4. Closing entries 113
Lesson 5. Preparation of Post-Closing Trial Balance 114
Lesson 6: Reversing Entries 115
Assessment Tasks 116
Summary 119
References 119
Module 8: The Accounting Cycle of a Merchandising Business

Introduction 120
Learning Outcomes 120
Lesson 1. Nature of Transactions in Merchandising Business 121
Lesson 2. Journalizing Transactions in Merchandising Business 121
Lesson 3. Worksheet Preparation 127
Lesson 4. Preparation of Financial Statements in Merchandising
Business 134
Lesson 5:Preparation of Closing entries and Post- Closing Trial Balance
in Merchandising Business 138
Lesson 6. Reversing Entries 140
Assessment Tasks 141
Summary 144
References 145
MODULE 7
BUSINESS TRANSACTIONS AND THEIR
ANALYSIS AS APPLIED TO THE ACCOUNTING
CYCLE OF A SERVICE FIRM (PART II)
Introduction
Analyzing business transactions, journalizing, posting to the ledger accounts

and the preparation of the trial balance were discussed in the first workbook. Analyzing,
journalizing, and posting are all done all year-round. Collectively, these steps constitute what
is called the recording phase of the accounting process. The summarizing phase starts with
the preparation of trial balance, where the ending balances of the ledgers are taken and
summarized in tabular presentation together with the proper debit and credit balances
(Florendo, 2016).
Learning Outcomes
At the end of this module, the learners should be able to:

1. prepares adjusting entries ABM_FABM11- IVa-d -33; and
2. complete the accounting cycle ABM_FABM11- IVa-d -34
Lesson 1. Adjusting Entries
Ong (2016) defined adjusting entries as entries used to update the accounts prior
to the preparation of financial statements, because the affect more than one accounting
period. Transactions are adjusted so that there will be no overstatement or understatement of
balance sheet items and income statement balances. The process of determining an entity’s
90
net income or net loss requires certain income and expense accounts to be apportioned over
several accounting periods.
Illustrative Examples of Different Adjusting Entries as explained by Ong (2016).
 Prepayments
These are the expenses already paid but not yet incurred. The pro-forma journal
entries for adjusting prepayments and examples using the asset and expense method are
illustrated below (Ong,2016).
Asset Method Expense Method

Journal Entry upon payment: Journal Entry upon payment:
Prepaid Expense xxx Expense xxx

Cash xxx Cash xxx
Adjusting Journal Entry Adjusting Journal Entry

Expense xxx Prepaid Expense xxx
Prepaid Expense xxx Expense xxx
*Note: The amount to be recorded is the *Note: The amount to be recorded is the
used or expired portion unused or unexpired portion
Example:
On April 30, 2016 Gene Co. paid ₧36,000 insurance premium for two years. Give
the adjusting entry on June 30, 2016.

Journal Entry upon payment on Journal Entry upon payment on
April 30,2016 : April 30,2016 :
Prepaid Insurance 36,000 Insurance Expense 36,000
Cash 36,000 Cash 36,000
Paid two year insurance. Paid two year insurance.
91
Adjusting Journal Entry on Adjusting Journal Entry on
June 30,2016 June 30,2016
Insurance Expense 3,000 Prepaid Insurance 33,000

Prepaid Insurance 3,000 Insurance Expense 33,000
To record expired insurance To record unexpired insurance
Computation and Analysis

Asset Method ₧36,000 x 2/24 months = ₧3,000
Expense Method ₧36,000 x 22/ 24 months = ₧33,000
Alternative Solution :
Total Cost of the Insurance ₧36,000

Divided by: Total No of Months 24 months
Insurance Cost per month ₧1500
X Expired Months 2 months
Total Cost of the Expired Insurance ₧3,000
Total Cost of the Insurance ₧36,000

Insurance Cost per month ₧1500
X Unexpired Months 22 months
Total Cost of the Unexpired Insurance ₧33,000
92
Summary for Prepayments based on the amounts computed above Ong (2016).

Prepaid Insurance Prepaid Insurance
Debit Credit Debit Credit
4/30 36,000 6/30 3,000 6/30 33,000
Bal. 33,000 Bal. 33,000
Insurance Expense Insurance Expense

6/30 3,000 4/30 36,000 6/30 33,000
Bal. 3,000 Bal. 3,000
 Deferrals
Ong (2016) defined unearned or deferred income is income already received but
not yet earned. The pro-forma journal entries and illustrative examples for adjusting deferrals
using the liability and income method are shown below.
Liability Method Income Method
Journal Entry upon payment: Journal Entry upon payment:
Cash xxx Cash xxx

Unearned Income xxx Income xxx
Received cash services to be rendered. Received cash services to be rendered.
93
Adjusting Journal Entry Adjusting Journal Entry
Unearned Income xxx Income xxx

Income xxx Unearned Income xxx
To record the earned portion of the liability. To record the earned portion of the liability.
Note: The amount to be recorded is the Note: The amount to be recorded is the
earned portion of the liability. unearned portion of the amount initially
received.
Example:
On August 1, 2016 Dr. Awao received ₧90,000 for consultation fees to be rendered
in the next 6 months. Give the adjusting journal entry at the end of September.

Journal Entry upon payment on Journal Entry upon payment on
August 1, 2016 : August 1, 2016:
Cash 90,000 Cash 90,000

Unearned Consultation Fees 90,000 Consultation Fees 90,000
Received 6 months consultation fees in Received 6 months consultation fees in
advance. advance.
Adjusting Journal Entry on Adjusting Journal Entry on

September 30,2016 September 30,2016
Unearned Consultation Fees 30,000 Consultation Fees 60,000

Consultation Fees 30,000 Unearned Consultation Fees
To record consultation fees earned. 60,000
To record consultation fees not yet earned.
94
Computation and Analysis
Liability Method ₧90,000 x 2/6 months = ₧30,000
Income Method ₧90,000 x 4/6 months = ₧60,000
Alternative Solution:
Fees Earned ₧90,000

Fees to be earned per month ₧15,000
X Months Earned 2 months
Fees Earned ₧90,000

Fees to be earned per month ₧15,000
X Months Not Yet Earned 4 months
Summary of Deferrals based on the computation shown above Ong (2016).

Unearned Consultation Fees Unearned Consultation Fees
9/30 30,000 8/1 90,000 9/30 60,000
Bal. 60,000 Bal. 60,000
95
Consultation Fees Consultation Fees
9/30 30,000 9/30 60,000 8/1 90,000
Bal. 30,000 Bal. 30,000
Ong (2016) emphasized that the effects of the adjusting entries on the ledger
accounts after posting are the same regardless of the method used.
 Accrued Expense
These are expenses already incurred or used but not yet paid (Ong, 2016). The
author illustrated the proper adjusting entries to be made at the end of the accounting
period through an example shown below.
Adjusting Entry at the end of the accounting period:
Expenses xxx
Expenses Payable xxx
To record unpaid expenses.
Example:
The company received a SCWD Bill in the amount of ₧7,800 on December 26,2016.
The company intends to pay on March 8, 2017.
Utilities Expense 7,800

Utilities Payable 7,800
To record unpaid utilities for the month.
96
Analysis: This is liability on the part of the company because the SCWD bill is for the month
of December but the company has not yet paid for it. Hence, a liability on the part of the
company should be recognized at the accounting period (Ong,2016).
 Accrued Income
Ong (2016) defined accrued income as income already earned but not yet paid.
The adjusting entry to be made and an illustrative example are shown below.
Adjusting Entry at the end of the accounting period :

Receivable xxx
Income xxx
To record income earned.
Example:
A one- year, 3 % note receivable in the amount of ₧ 100,000 was received on

January 1, 2016. The interest and the principal are payable on maturity date. Give the
adjusting Journal Entry on June 30, 2016.
Interest Receivable 1,500

Interest Income 1,500
To record interest income earned.
*Computation and Analysis
Interest = Principal x Rate x Time

1
= ₧ 100,000 x 3% x 2
= 1,500
97
The note receivable bears interest at 3% per annum. This interest will be received
after one year on January 1, 2017 . However, the note has already earned half-year interest
on June 30, 2016 in the amount of ₧ 1,500 although this interest has not yet been received.
Hence, an Adjusting Journal Entry is necessary to recognize the interest earned on the notes
receivable for 6 months, that is, Jaunary 1 to June 30, 2016 (Ong, 2016).
 Bad debts/ Doubtful Accounts/ Uncollectible Accounts
These are losses due to uncollectible accounts. As illustrated in the example drawn
by Ong (2016), the adjusting entry to be made at the accounting period together are shown
below.
Adjusting Entry at the end of the accounting period :

Bad debts/ Doubtful Accounts/ Uncollectible Accounts xxx
Allowance for Bad debts/ Doubtful Accounts/ Uncollectible Accounts xxx
To record estimated uncollectible account
Example:
Accounts Receivable shows a balance of ₧ 100,000. It is estimated that 6% of this
is uncollectible. Give the adjusting entry on December 31,2016 for the provision of the
estimated uncollectible account.

Bad debts expense 6,000
Allowance for bad debts 6,000
To record estimated uncollectible account.
 Depreciation expense is the allocation of plant asset cost over minus salvage valued
divided by estimated useful life. This is the expense allotted for the wear and tear of
property, plant and equipment due to passage of time (Ong, 2016). The author also
explained the three factors to be considered in computing depreciation expense:
98
1. Cost is the purchase price of the depreciable asset.
2. Salvage value is the estimated value of the asset at the end of its useful life.
3. Estimated useful life as the name connotes, is not an exact measurement but merely
an estimation of the number of years an asset can be useful to the entity.
Cost−Salvage Value
Depreciation expense =
Estimated useful life
Example by Ong (2016)
A building with an estimated useful life of 30 years finished construction on June 1,

2016. The cost of the Building is 4.8 million pesos with an estimated salvage value of 380,000.
Depreciation Expense- Building 87,500*

Accumulated depreciation 87,500
To record depreciation expense for the building.
*Computation and Analysis
4,800,000−300,000
Depreciation Expense =
30 years
Annual Depreciation = 150,000
* June 1 to December 31, 2017 Depreciation Expense
Annual Depreciation x months used = 150, 000 x 6/12 months

= 87,500
99
llustrative Problem : Below is the Trial balance of Arawin Landscape Specialist and the
following adjustment made. See Module 6 Discussion- Ong (2016).
Arawin Landscape Specialist

Trial Balance
October 30, 2016
Cash ₧144,150
Accounts Receivable 12,500
Supplies 2,000
Prepaid Rent 28,000
Prepaid Insurance 48,000
Automobile 400,000
Equipment 64,000
Notes Payable ₧100,000
Accounts Payable 2,000
Unearned Revenues 15,000
Sunny, Capital 550,000
Sunny, Withdrawals 5,000
Lawn Cutting Revenue 45,000
Gas Expense 2,500
Salaries Expense 4,000
Advertising Expense 1,850
₧712,000 ₧712,000
Adjustments with the computation and analysis to be made from as illustrated by Ong (2016).
a. Sunny makes an adjusting entry to record the expiration of two months’ rent of
the four months.
Journal Entry made on Oct 1 :
Prepaid Rent (A)
Cash (A) 28,000
Paid a four months’ rent in advance. 28,000
100
Method Used: Asset Method
Compute for the expired or used portion.
(₧28,000 x 2/4 months) = 14,000
Adjusting Entry:
Rent Expense 14,000
Prepaid Rent 14,000
To record expired portion of rent.
b. Sunny records the expiration of one-twelfth of the entity’s one-year insurance

policy taken last Oct. 5.
Journal Entry made on Oct 5 :
Prepaid Insurance (A) 48,000

Cash (A) 48,000
Paid one year insurance premium.

Compute for the expired or used portion.
(₧48,000 x 1/12 months) = 4,000
Adjusting Entry:
Insurance Expense 4,000
To record expired portion of insurance
101
c. Sunny discovers that he used ₧1000 worth of supplies.
Journal Entry made on Oct 8:
Supplies (A) 2,000

Accounts Payable (L) 2,000
Purchased supplies on account

The used amount of supplies was given above.
Adjusting Entry:
Supplies Expense
Supplies
To record used supplies. 1,000
1,000
d. Sunny bought automobile costing 400,000. It is estimated that the automobile will
have a useful life of five years with salvage value of 40,000. Compute for the
depreciation expense for the automobile.
e. Sunny bought equipment costing 64,000. It is estimated that the automobile will
have a useful life of five years with salvage value of 4,000. Compute for the
depreciation expense for the equipment.
Solutions for transaction D and E
(Cost – Salvage Value/ Estimated Useful Life)
(₧400,000- 40,000 ) / 60 months = ₧6,000
102
Depreciation Expense- Automobile 6,000
Accumulated Depreciation- Automobile 6,000
To record depreciation expense.
(Cost – Salvage Value/ Estimated Useful Life)
(₧64,000- 4000 ) / 60 months = ₧1,000

Accumulated Depreciation- Automobile 1,000
To record depreciation expense.
f. On Oct 20, Sunny received 15,000 prepayments for six future maintenance visits
but only two visits were completed.
Journal Entry made on Oct 20:
Cash (A) 15,000

Unearned Revenue (L) 15,000
Received cash for services to be rendered
Method Used: Liability Method

Compute for the earned portion :
(15,000 x 2/6 = 5000
Adjusting Entry:
Unearned Revenue
Lawn Cutting Revenue 5,000
To record income earned. 5,000
103
g. Sunny records an expense for the salaries of his part-time employees who
earned 2,000 during the last four days of the month.

Salaries Payable 2,000
h. Sunny’s ₧100,000 notes payable, carries 18% interest which he signed last Oct.
2.
Computation of Interest :
Principal x Rate x Time = Interest
100,000 x18 % x 29/360 = 1,450
Interest Expense 1450

Interest Payable 1,450
104
Lesson 2. Worksheet Preparation
The Worksheet simplifies the adjusting and closing entries process. It can also
reveal errors. The worksheet is not part of the ledger or the journal, nor, a financial statement.
It is a summary device used by the accountant for his convenience (Ballada,2017).
Illustrative Example by Ong (2016).
Arawin Landscape Specialist
Worksheet
For the Month Ended October 30, 2016
UNADJUSTED TRIAL BALANCE ADJUSTMENTS

No. Account Title Debit Credit Debit Credit
110 Cash 144,150

120
130 Supplies 2,000 c. 1,000
140 Prepaid Rent 28,000 a. 14,000
Prepaid Insurance 48,000 b. 4,000

150
Automobile 400,000
160
Accumulated
Depreciation- d. 6,000
165 Automobile
Equipment 64,000
170
Accumulated
Depreciation- e. 1,000
175 Equipment
105
Notes Payable 100000
210
220 Accounts Payable 2,000
Salaries Payable g. 2,000

230
240 Interest Payable h. 1,450
250 Unearned Revenues 15,000 f. 5,000

310
Sunny, Withdrawals 5,000

320
Income Summary
330
Landscaping Revenue
410
Lawn Cutting
45,000 f 5,000
420 Revenue
510 Salaries Expense 4,000 g. 2,000
Supplies Expense c. 1,000

520
Rent Expense a. 14,000

530
Insurance Expense b. 4,000

540
550 Gas Expense 2,500
560 Advertising Expense 1,850
Depreciation
d. 6,000
570 Expense- Automobile
Depreciation
e. 1,000
580 Expense- Equipment
590 Interest Expense h. 1,450
712,000 712,000 34,450 34,450
106
STATEMENT OF
ADJUSTED TRIAL BALANCE COMPREHENSIVE
INCOME
No. Account Title Debit Credit Debit Credit
110 Cash 144,150
120 Accounts Receivable 12,500
130 Supplies 1,000
140 Prepaid Rent 14,000
150 Prepaid Insurance 44,000

160 Automobile 400,000
Accumulated
Depreciation- 6000
165 Automobile
170 Equipment 64,000
Accumulated
Depreciation- 1000
175 Equipment
210 Notes Payable 100000
230 Salaries Payable 2,000
240 Interest Payable 1,450
250 Unearned Revenues 10,000
310 Sunny, Capital 550,000
320 Sunny, Withdrawals 5,000
330 Income Summary

410 Landscaping Revenue
420 Lawn Cutting Revenue 50,000 50,000
510 Salaries Expense 6,000 6,000

520 Supplies Expense 1,000 1,000
530 Rent Expense 14,000 14,000
540 Insurance Expense 4,000 4,000
107
550 Gas Expense 2,500 2,500
560 Advertising Expense 1,850 1,850
Depreciation Expense-
6,000 6,000
570 Automobile
1,000 1,000
580 Equipment
590 Interest Expense 1450 1,450
722,450 722,450 37,800 50,000
Profit 12,200
50,000 50,000
STATEMENT OF FINANCIAL POSITION
No. Account Title Debit Credit

110 Cash 144,150
120 Accounts Receivable 12,500
130 Supplies 1,000
140 Prepaid Rent 14,000
150 Prepaid Insurance 44,000
160 Automobile 400,000
Accumulated Depreciation- Automobile 6000

165
170 Equipment 64,000
175 Accumulated Depreciation- Equipment 1000
210 Notes Payable 100000

230 Salaries Payable 2,000
240 Interest Payable 1,450
250 Unearned Revenues 10,000
310 Sunny, Capital 550,000
320 Sunny, Withdrawals 5,000
108
330 Income Summary
410 Landscaping Revenue
420 Lawn Cutting Revenue

510 Salaries Expense
520 Supplies Expense
530 Rent Expense
540 Insurance Expense

550 Gas Expense
560 Advertising Expense
570 Depreciation Expense- Automobile
580 Depreciation Expense- Equipment

590 Interest Expense
684,650 672,450
Profit 12,200
684,650 684,650
109
Lesson 3. Preparation of Financial Statements
From the example drawn above by Ong (2016), we now prepare for the following
statements.
a. Statement of Comprehensive Income (Income Statement)
ARAWIN LANDSCAPE SPECIALIST

STATEMENT OF COMPREHENSIVE INCOME
FOR THE MONTH ENDED OCTOBER 31,2016
Revenues
Lawn Cutting Revenues ₧50,000
Expenses
Salaries Expense ₧6,000
Supplies Expense 1,000
Rent Expense 14,000
Gas Expense 2,500
Depreciation Expense- Equipment 1,000
Interest Expense 1450 37,800
Profit ₧12,200
b. Statement of Changes in Equity

STATEMENT OF CHANGES IN EQUITY
Sunny Owner's Equity October 1, 2016 ₱550,000

Add: Additional Investment ₱-
Profit 12,200 12,200
110
Total ₱562,200
Less: Withdrawals 5,000
Sunny Owner's Equity October 31, 2016 ₱557,200
c. Statement of Financial Position (Balance Sheet)

STATEMENT OF FINANCIAL POSITION
OCTOBER 31,2016
Assets
Current Assets
Cash ₱144,150
Supplies 1,000
Prepaid Rent 14,000
Total Current Assets ₱215,650
Property, Plant and Equipment (Net)
Automobile ₱400,000
Less: Accumulated Depreciation 6,000 ₱394,000
Equipment ₱64,000
Less: Accumulated Depreciation 1,000 63,000 457,000
Total Assets ₱672,650
Liabilities
Current Liabilities
Notes Payable ₱100000
Total Current Liabilities ₱115450
Owner’s Equity
111
Sunny Owner's Equity October 31, 2016 557,200
Total Liabilities and Owner's Equity ₱672,650
d. Statement of Cash Flow

STATEMENT OF CASH FLOWS
FOR THE MONTH ENDED OCT 31,2016
Cash Flows from Operating Activities
Cash received from customers ₱47,500
Payments to employees (4,000)
Paymenst for rent (28,000)
Payments for insurance (48,000)
Payments for advertising (1,850)
Payments for other operating expenses (2,500)
Net Cash provided by operating activities (36,850)
Cash Flows from Investing Activities
₱
Payments to acquire automobile (300,000)
Payments to acquire equipment (64,000)
Net Cash provided by investing activities (364000)
Cash Flows from Financing Activities
Cash received as investment by the owner ₱550,000
Payments for withdrawals by the owner (5,000)
Net Cash provided by financing activities 545,000
Net Increase (Decrease) in Cash 144,150
Cash balance at the beginning -
Cash balance at the end of the period 144,150
112
Lesson 4. Closing Entries
Ong (2016) emphasized that accumulation of information on the details of

operations entails maintaining separate revenue and expenses accounts. The author also
said that at the end of the period, this information is reported in the income statement. The
revenue and expense accounts are then closed to the owner’s equity. This process also
shows the results of operation. The closing entries update the owner’s capital account at the
end of the period. They also eliminate the balances of nominal accounts to ready them for the
next accounting period.
To close temporary account, an entry is made to make its balance become zero.
Closing entries transfer the balances of the temporary accounts to the capital account. The
Income Summary considered to be a summary account, is used to close the income and
expense accounts (Ong,2016).
The Steps in Closing Accounts as illustrated in the book of Ong (2016) are as follows:
1. Close the income accounts

Since income accounts have normal credit balances, each revenue account
will have to be debited in the amount of its balance to bring their balances to zero. The
credit is made to the income summary account.
2016
Oct. 31 Lawn Cutting Revenue 50,000
Income Summary 50,000
To close income accounts.
2. Close the expense accounts
Expense accounts have normal debit balances, each of these will have to be
credited to close account. Thus, a compound entry is needed considering the number
of expense accounts. The total of all expense accounts is then debited to Income
Summary. The entry to close the expense accounts of Anime World Gallery:
113
2016
Oct. 31 Income Summary 37,800
Rent Expense 14,000
Gas Expense 2,500
Depreciation Expense-Automobile 6,000
Depreciation Expense-Equipment 1,000
Interest Expense 1,450
To close expense accounts.
3. Close the income summary to capital
2016
Oct. 31 Income Summary 12,200
To close income summary to capital.
4. Close the withdrawal account
2016
Oct. 31 Sunny, Capital 5,000
To close drawing account to capital.
Lesson 5. Preparation of Post-Closing Trial Balance
A post-closing trial balance is a list of balances of the general ledger accounts after
the closing entries have been made. The trial balance serves as a check to determine whether
the total debits equal to the total credits, thereby signifying that the proper closing process
has been made. Temporary accounts will not be listed as they have been reset to zero. On
114
post-closing trial balance, only real accounts have values and are listed thereby (Florendo,
2016).
Illustrative Example of Post-Closing Trial Balance Ong (2016).

POST- CLOSING TRIAL BALANCE
Cash ₱144,150
Supplies 1,000
Prepaid Rent 14,000
Automobile 400,000
Accumulated Depreciation- Automobile ₱6,000
Equipment 64,000
Accumulated Depreciation- Equipment 1,000
Notes Payable 100,000
₱679,650 ₱679,650
Lesson 6. Reversing Entries
Reversing Entries are journal entries to reverse the effect of adjusting entries made
on the last day of the accounting period. These are made on the first day of the next
accounting period in order to simplify recording of frequent and recurring transactions
(Florendo, 2016).
115
Note that reversing entries are only applicable to the following adjusting entries as cited by
(Ong,2016).
a. Prepayments (Expense Method)

b. Unearned revenue (Expense Method)
c. Accrued expenses
d. Accrued income
Assessment Tasks
TASK NO.1 (WRITTEN WORK)
Instructions: A. Presented below are the transactions of BELA SKIN CARE
CLINIC. Journalize the following transactions.
May 1 Megan Dah invested ₱ 725,000 in the business.
3 Acquired equipment amounting to ₱ 85,000 from Bel Ohi

Suppliers on credit
5 Purchase supplies for the clinic costing ₱ 15,000.
11 Paid Bel Ohi Suppliers in full
13 Megan Dah withdrew ₱ 250,000 for personal use
17 Paid salaries of the staff and employees for ₱ 25,000
20 Paid utility bills for the month ₱ 8,000
29 Paid rent for the month ₱ 15,000
116
B. Given the following transactions, give the adjusting journal entries for the prepayments
and deferrals on December 2017.
Date Transaction Asset Method Expense Method
July 1 Paid 2 years rent in advance,

₱ 300,000
Arpil 30 Paid 3 years insurance

premium in advance.
₱ 90,000.
Sept 15 Received 6 month rent in

advance for ₱ 60,000.
B. On November 1, 2016, Mr. Kemeki, open a consulting firm. The business adjusts
and closes its accounts at the end of each month.
The following trial balance was prepared after one month of operations. More
information:
 No interest has yet been paid on the note payable. Accrued interest at
November 30 amounts to ₱ 400.
 Salaries earned by the employees but not yet recorded or paid amounted
to ₱1000 by November 30.
 Many clients are asked to make advance payment for consulting services
to be rendered in future months. These advances are credited to the
Unearned Service Revenue account once received. During April, ₱5,000 of
these advances were earned by the business.
117
 Supplies on hand by November 30 amounted to ₱ 800.
 The office equipment was purchased on November 1 and is being
depreciated over an estimated useful life of 10 years with no residual value.
Unadjusted Trial Balance

Cash ₱20,000
Prepaid Expenses 6,800
Supplies 2,000
Furniture and Fixture 52,800
Accumulated Depreciation- Furniture ₱0
Interest Payable 0
Unearned Service revenue 14,000
Okayi, Capital 42,000
Okayi, Drawings 3,000
Service revenue 2,100
₱90,100 ₱90,100
Requirement:
1. Prepare the adjusting entries for November 30.
2. Prepare a statement of comprehensive income for November 2016.
118
Summary
 Adjusting entries are prepared at the end of the accounting period to unrecorded
revenue that has been earned and unrecorded expenses that have been incurred
during the accounting period.
 Closing entries reduce the balance of the temporary accounts to zero to prepare them
for accumulating amounts for another accounting period.
 The post-closing trial balance proves the equality of debits and credits after the
preparation of closing entries
References
 Ballada, W., (2017). Fundamentals of Accountancy, Business and
Management I. Prof. Win Ballada.
 Florendo, J.G., (2016). Fundamentals of Accountancy, Business and
Management I. Rex Book Store Inc. (RBSI)
 Ong, F.L., (2016). Fundamentals of Accountancy, Business and Management
I for Senior High School. C & E Publishing, Inc.
119
MODULE 8
THE ACCOUNTING CYCLE OF A
MERCHANDISING BUSINESS
Introduction
Product-oriented firms and service-oriented firms are the classifications of

businesses. In this module, an overview on the accounting process of a merchandising
firm will be discussed (Florendo, 2016).
Learning Outcomes
At the end of this module, the learners should be able to:

1. describes the nature of transactions in a merchandising business
ABM_FABM11-IVe-j -35
2. records transactions of a merchandising business in the
3. general and special journals ABM_FABM11-IVe-j-36
4. posts transactions in the general and subsidiary ledgers
5. prepares a trial balance ABM_FABM11-IVe-j -38
6. prepares adjusting entries ABM_FABM11-IVe-j -39
7. completes the accounting cycle of a merchandising business
ABM_FABM11-IVe-j -40; and
8. prepares the Statement of Cost of Goods Sold and Gross Profit
120
Lesson 1. Nature of Transactions in Merchandising Business.
A merchandising business is companies that buys goods and resell theses goods
without making any modifications, at a price higher than its purchase price for the purpose of
making profit. This type of business is much common in the Philippines and can range from
small-to-large-sized entities (Florendo,2016).
Lesson 2. Journalizing Transactions in Merchandising

Business.
The comparison of the buyer’s and seller’s books the pro-forma journal entries as
illustrated by Ong (2016) are shown below.
COMPARISON OF BUYER’S BOOK AND SELLER’S BOOKS

Buyer’s Point of View Seller’s Point of View
1. Purchased merchandise for cash. 1. Sold merchandise for cash.
Purchases Cash
Cash Sales
2. Purchased merchandise on account 2. Sold merchandise on account
Purchases Accounts Receivable

Accounts Payable Sales
3. Returned defective merchandise bought 3. Received defective merchandise sold

on account, on account.
Allowances granted to buyer for the Allowances granted to buyer for the
account purchase. account sales
Issued debit memo to the seller for the Issued credit memo to the seller for the
return. return.
Accounts Payable Sales Return and Allowances
Accounts receivable
121
Purchase Return and
Allowances
4. Received cash refund for returned 4. Paid cash refund for returned
merchandise. merchandise.
Cash Sales Return and Allowances

Purchase Return and Cash
Allowances
5. Transportation Charges incurred in 5. Transportation Charges incurred in

buying. (Assumption: Freight charges to buying. (Assumption: Freight charges to be
be shouldered by the buyer) shouldered by the seller)
Freight In Freight out or Delivery Expense

Cash or Accounts Payable Cash or Accounts Payable
6. Payment of Accounts Payable within the 6. Collection within the discount period
discount period arising from the arising from the sale of merchandise
purchase of merchandise
Accounts Payable Cash

Purchase Discount Sales
Cash Accounts Receivable.
7. Payment after the discount period 7. Collection after the discount period
Accounts Payable Cash

Cash Accounts Receivable.
122
The summary for the pro-forma journal entries normal balances of accounts as
illustrated by Ong (2016) are as follow:
Normal Balances of Accounts Normal Balances of Accounts

Purchases Purchase Returns Sales Returns and Sales
Freight in and Allowances Allowances
Purchase Discount Sales Discount
Freight out
Sample Problem by Ong (2016).
MEKE-MI CO. NUKO TRADING

a. Purchased merchandise for ₱ 55,000 a. Sold merchandise for cash ₱ 55,000
Purchases 55,000 Cash 55,000

Cash 55,000 Sales 55,000
b. Purchased merchandise ₱ 155,000 b. Sold merchandise on account ₱ 155,000

on account. Terms: 2/n, n/60 on account. Terms: 2/n, n/60
Purchases 155,000 Accounts Receivable 155,000

Accounts Payable 155,000 Sales 155,000
c. Returned ₱5,000 defective merchandise c. Received ₱5,000 defective merchandise

bought on account, sold on account.
123
Accounts Payable 5,000 Sales Return and Allowances 5,000
Purchase Return and Accounts receivable 5,000
Allowances 5,000
d. Received ₱ 300 cash refund for returned d. Paid ₱ 300 cash refund for returned
Cash 300 Sales Return and Allowances 300
Purchase Return and Cash 300
Allowances 300
e. Paid transportation charges ₱ 1,000 e. Paid transportation charges ₱ 1,000

(Assumption: Freight charges to be (Assumption: Freight charges to be
shouldered by the buyer) shouldered by the seller)
Freight In 1000 Freight out or Delivery Expense 1,000

Cash or Accounts Payable Cash or Accounts Payable 1,000
1000
f. Payment of Accounts Payable within the f. Collection within the discount period
discount period arising from the purchase of arising from the sale of merchandise
merchandise
Accounts Payable 145,000 Cash 142,100

Purchase Discount 2,900 Sales 2,900
Cash 142,100 Accounts Receivable 145,000
Computation: Computation:
Purchase Price ₱ 150,000 Purchase Price ₱ 150,000
Less: Purchase Less: Purchase
Return and Allowances 5,000 Return and Allowances 5,000
Net Purchases ₱ 145,000 Net Purchases ₱ 145,000
Less: Purchase Less: Purchase
124
Discount(145,000 x 2%) 2,900 Discount(145,000 x 2%) 2,900
Cash Paid ₱ 142,100 Cash Paid ₱ 142,100
g. Purchase merchandise ₱ 14,000 on g. Sold merchandise ₱ 14,000 on account

account Terms: 3/n, n/60 Terms: 3/n, n/60
Purchases 14,000 Accounts Receivable 14,000

Accounts Payable 14,000 Sales 14,000
h. Payment after the discount period h. Collection after the discount period
Accounts Payable 14,000 Cash 14,000

Cash 14,000 Accounts Receivable 14,000
Pro- Forma Journal Entries for the Periodic and Perpetual System as drawn from the
example of Ong (2016) are stated below.
COMPARISON BETWEEN PERIODIC AND PERPETUAL INVENTORY SYSTEM
PERIODIC PERPETUAL
Purchase of merchandise for cash/ on account
Purchases Merchandise Inventory

Cash/Accounts Payable Accounts Payable
Payment of freight charges
Freight- In Merchandise Inventory

Cash Cash
Returned defective merchandise bought on account,
Allowances granted to “seller” for the account purchase.
Issued debit memo to the seller for the return.
Accounts Payable Accounts Payable
Purchase Return and Merchandise Inventory
Allowances
125
Payment of account within the discount period.
Accounts Payable Accounts Payable
Purchase Discount Merchandise Inventory
Cash Cash
Sale of merchandise on account
Accounts Receivable Accounts Receivable.

Sales Sales
Cost of Goods Sold
Merchandise Inventory
Returned defective merchandise bought on account,

Allowances granted to “buyer” for the account sales.
Issued credit memo to the buyer for the return.
Sales Returns and Allowances Sales Returns and Allowances
Accounts Receivable Accounts Receivable
Merchandise Inventory
Cost of Goods Sold
Collection within the discount period

Cash Cash
Sales Discount Sales Discount
Accounts Receivable Accounts Receivable
Initial Investment
Merchandise Inventory Merchandise Inventory
Owner’s Capital Owner’s Capital
Additional Investment
126
Temporary Withdrawal (Owner is anticipating profit in the business and has the intention of
returning the amount withdrawn)
Owner’s Drawing Owner’s Drawing
Permanent Withdrawal (Owner has no intention of returning the amount withdrawn

Lesson 3. Worksheet Preparation in Merchandising Business.
Illustrative Problem by Ong (2016) : The following is the unadjusted trial balance of
Aranda Merchants Co for December 31,2016 and the necessary adjustment to be made at
the end of the accounting period.
UNADJUSTED TRIAL BALANCE

Debit Credit
Cash ₧ 240,000
Merchandise Inventory 428,000
Store Supplies 25,000
Office Supplies 18,000
Land 160,000
Building 202,600
Accumulated Depreciation- Building ₧56,500
Office Equipment 86,000
A. Capital 600,000
A, Withdrawals 100,000
127
Sales 2,460,000
Sales Return and Allowances 27,500
Sales Discounts 30,000
Purchases 1,498,000
Purchase Return and Allowances 56,000
Purchase Discounts 22,000
Transportation In 60,000
Sale Salaries Expenses 200,000
Office Salaries Expense 160,000
Office supplies expense
Transportation Out 65,000
Depreciation Expense- Office Equipment
Depreciation Expense- Building
₧ 3,862,500 ₧ 3,862,500
Adjustments to be made at the end of the accounting period as drawn from the example
of Ong (2016).
1. Office supplies expense for the year is ₱ 10,000.

2. Unpaid sale salaries amounting to ₱ 17,000.
3. Depreciation expense of building and and office equipment amounts to ₱ 26,000 and
₱ 22,000 this year
4. Merchandise Inventory – December 31,2016 is ₱ 350,000.
Posting of Adjustments as illustrated in the book of Ong (2016).
Trial Balance Adjustments

Cash 240,000
128
Office Supplies 18,000 a. 10,000
Land 160,000
Building 202,600
Accumulated Depreciation-
Building 56,500 c. 26,000

Equipment 28,000 d. 22,000
Salaries Payable 140,000 b. 17,000
A. Capital 600,000
Sales 2,460,000
129
Purchases 1,498,000
Sale Salaries Expenses 200,000 b. 17,000
Office supplies expense a. 10,000

Depreciation Expense- Office
Equipment d. 22,000
Depreciation Expense- Building c. 26,000
3,862,500 3,862,500 75,000 75,000
Preparation of Adjusted Trial Balance Ong (2016).
Adjusted Trial Balance

Debit Credit
Cash 240,000
130
Land 160,000
Building 202,600
Accumulated Depreciation- Building 82,500
A. Capital 600,000
Sales 2,460,000
Purchases 1,498,000
Office supplies expense 10,000

Depreciation Expense- Office Equipment 22,000
Depreciation Expense- Building 26,000
131
3,927,500 3,927,500
Preparation of Statements – Footings by Ong (2016).
Income Statement Balance Sheet

Cash 240,000
Merchandise Inventory 428,000 350,000 350,000
Land 160,000
Building 202,600

Equipment 50,000
132
A. Capital 600,000
2,460,00
Sales 0
Purchases 1,498,000

Equipment 22,000
133
2,595,400 2,888,000 1,682,100 1,389,500
Profit 292,600 292,600
2,888,000 2,888,000 1,682,100 1,682,100
Lesson 4. Preparation of Financial Statement of a

Merchandising Business.
Preparation of Financial Statements of a Merchandising Business such as Statement

of Cost of Goods Sold and Statement of Comprehensive Income, Statement of Changes in
Equity, Statement of Financial Position and Statement of Cash Flows as illustrated by Ong
(2016) are stated below. The amounts used can be found in the worksheet presented above.
a. Statement of Cost of Goods Sold and Statement of Comprehensive

Income (Income Statement)
Aranda Merchants Co.

Income Statement
For the Year-Ended December 31, 2016
Net Sales
Gross Sales ₱2,460,000
Less: Sales Returns and
Allowances ₱27,500
Sales Discount 30,000 57,500

Net Sales ₱2,402,500
134
Cost of Sales
Merchandise Inventory 1/1/2016 ₱428,000
Purchases 1,498,000
Less: Purchase Returns and
Allowances 56,000
Purchase Discount 22,000 78,000
Net Purchases ₱1,420,000
Net Cost of Purchases 1,480,000
Goods Available for Sale 1,908,000

Less: Merchandise Inventory
12/31/2016 350,000 1,558,000
Cost of Sales 844,500
Gross Profit
Operating Expenses
Selling Expenses
Sales Salaries 217,000
Total Selling Expense 282,000

Administrative Expense
135

Equipment 22,000
Building 26,000
Total Administrative Expense 269,900

Total Operating Expenses 551,900
Profit ₱292,600
b. Statement of Changes in Equity

Income Statement
For the Year-Ended December 31, 2016
A. Owner’s Equity Capital 1/1/16 ₱600,000
Add: Profit 292,600
Total ₱892,600
A. Drawings 100,000
A, Owner's Equity 12/31/2016 ₱792,600
c. Statement of Financial Position (Balance Sheet)

Statement of Financial Position
December 31, 2016
Current Assets
Cash 240,000
136
Total Current Assets 1,133,500
Property, Plant, and Equipment
Land 160,000
Building 202,600
Accumulated Depreciation- Building 82,500 120,100
Accumulated Depreciation- Equipment 50,000 36,000 316,100
Total Assets 1,449,600
Liabilities
Current Liabilities
Total Current Liabilities 357,000
Non Current Liabilities
Notes Payables 300,000
Total Liabilities 657,000
Owner's Equity
A. Capital 12/31/2016 792,600
Total Liabilities and Owner's Equity 1,449,600
137
Lesson 5. Preparation of Closing Entries and Post- Closing
Trial Balance (Ong, 2016)
Date Accounts and Explanation PR Debit Credit

2016
Dec Merchandise Inventory, End 350,000
31 Sales 2,460,000
Purchase Returns and Allowances 56,000
Income Summary 2,888,000
To close temporary accounts with credit balances and
establish the ending merchandise inventory.
31 Income Summary 2,595,400

Merchandise Inventory, Beg. 428,000
Sales Returns and Allowances 27,500
Sales Discount 30,000
Purchases 1,498,000
Sales Salaries Expense 217,000
Office Supplies Expense 10,000
Depreciation Expense- Ofc. Equipment 22,000
To close temporary accounts with debit balances and
to remove beginning inventory.
138
31 Income Summary 292,600
A, Capital 292,600
To close income summary account
31 A, Capital 100,000
To close the withdrawal account
Post- Closing Trial Balance by Ong (2016).

Post-Closing Trial Balance
December 31, 2016
Cash 240,000
Land 160,000
Building 202,600


A. Capital 792,600
1,582,100 1,582,100
139
Lesson 6. Reversing Entries
Reversing Entries are journal entries to reverse the effect of adjusting entries
made on the last day of the accounting period. These are made on the first day of the next
accounting period in order to simplify recording of frequent and recurring transactions
(Florendo, 2016).
Note that reversing entries are only applicable to the following adjusting entries as cited by
(Ong 2016).
a. Prepayments (Expense Method)
b. Unearned revenue (Expense Method)
c. Accrued expenses
d. Accrued income
140
Assessment Tasks
Instruction: Journalize the following transactions :
KEIKO MERCHANTS CO. HARUKO TRADING

a. Purchased merchandise for ₱ 45,000 a. Sold merchandise for cash ₱ 45,000
b. Purchased merchandise ₱ 185,000 b. Sold merchandise on account ₱ 185,000

on account. Terms: 2/n, n/60 on account. Terms: 2/n, n/60
c. Returned ₱6,000 defective merchandise c. Received ₱6,000 defective merchandise

bought on account, sold on account.
d. Received ₱ 400 cash refund for returned d. Paid ₱ 400 cash refund for returned
e. Paid transportation charges ₱ 2,000 e. Paid transportation charges ₱ 2,000

(Assumption: Freight charges to be (Assumption: Freight charges to be
shouldered by the buyer) shouldered by the seller)
f. Payment of Accounts Payable within the f. Collection within the discount period
discount period arising from the purchase arising from the sale of merchandise
of merchandise
141
g. Purchase merchandise ₱ 24,000 on g. Sold merchandise ₱ 24,000 on account
account Terms: 3/n, n/60 Terms: 3/n, n/60
h. Payment after the discount period for h. Collection after the discount period
transaction g. transaction g.
B. The following accounts and amounts are the unadjusted trial balance of Belinda Co.
Necessary adjustments are to be made.
Cash 45,000
Land 100,000
Building 200,000
Store Equipment 22,500

Accumulated Depreciation- Store
Equipment
5,900
142
Accumulated Depreciation- Office
Equipment 4,000
Ango, Capital 500,000
Ango, Drawings 40,000
Sales 12,000 141,400
Purchases 132,000
Rent Expense 10,000
Miscellaneous expense 5,000
143
764,300 764,300
Additional information determined for December 31, 2017.

a. Depreciation of store equipment is 1,800 and that of office equipment is 2,250
b. Supplies used during the year amounted to 6,000.
c. Bad debts accounts at year end is 12,500.
d. Unpaid salaries at year end amounted to 30,500.
e. Ending inventory amounted to 38500.
C. Prepare a 10-column worksheet

D. Prepare the closing entries
E. Prepare the post-closing trial balance.
Summary
 A business that buys and sells goods for reselling at a higher price is called
merchandising business.
 Periodic and perpetual are the two methods for inventory system reporting.
 The accounting process involves series of steps. These steps are
a. Business transaction analysis
b. Journalizing transactions
c. Posting to the Ledger
d. Preparation of Unadjusted Trial Balance
e. Adjusting entries
f. Preparation of Adjusted Trial Balance
g. Preparation of Financial Statements
144
h. Closing Entries
i. Preparation of Post-Closing Trial Balance
j. Preparation of Post-Closing Trial Balance
k. Reversing Entries- if applicable.
References
 Florendo, J.G., (2016). Fundamentals of Accountancy, Business and

Management I. Rex Book Store Inc. (RBSI)
 Ong, F.L., (2016). Fundamentals of Accountancy, Business and Management
I for Senior High School. C & E Publishing, Inc.
145

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Fundamentals of Accountancy,

Business, and Management 1

Jaelyn Leonardo Marasigan, LPT

Module 7: Business Transactions and their Analysis as Applied to

Module 8: The Accounting Cycle of a Merchandising Business

Analyzing business transactions, journalizing, posting to the ledger accounts

At the end of this module, the learners should be able to:

Lesson 1. Adjusting Entries

Illustrative Examples of Different Adjusting Entries as explained by Ong (2016).

Asset Method Expense Method

Prepaid Expense xxx Expense xxx

Adjusting Journal Entry Adjusting Journal Entry

Asset Method Expense Method

Insurance Expense 3,000 Prepaid Insurance 33,000

Computation and Analysis

Total Cost of the Insurance ₧36,000

Total Cost of the Insurance ₧36,000

Asset Method Expense Method

Insurance Expense Insurance Expense

Debit Credit Debit Credit

Liability Method Income Method

Journal Entry upon payment: Journal Entry upon payment:

Cash xxx Cash xxx

Unearned Income xxx Income xxx

Liability Method Income Method

Cash 90,000 Cash 90,000

Adjusting Journal Entry on Adjusting Journal Entry on

Unearned Consultation Fees 30,000 Consultation Fees 60,000

Fees Earned ₧90,000

Fees Earned ₧90,000

Summary of Deferrals based on the computation shown above Ong (2016).

Liability Method Income Method

9/30 30,000 8/1 90,000 9/30 60,000

Bal. 60,000 Bal. 60,000

Bal. 30,000 Bal. 30,000

Adjusting Entry at the end of the accounting period:

Utilities Expense 7,800

Adjusting Entry at the end of the accounting period :

A one- year, 3 % note receivable in the amount of ₧ 100,000 was received on

Adjusting Entry at the end of the accounting period:

Interest Receivable 1,500

*Computation and Analysis

Interest = Principal x Rate x Time

 Bad debts/ Doubtful Accounts/ Uncollectible Accounts

Adjusting Entry at the end of the accounting period :

Adjusting Entry at the end of the accounting period:

Example by Ong (2016)

A building with an estimated useful life of 30 years finished construction on June 1,

Adjusting Entry at the end of the accounting period:

Depreciation Expense- Building 87,500*

*Computation and Analysis

Annual Depreciation = 150,000

* June 1 to December 31, 2017 Depreciation Expense

Annual Depreciation x months used = 150, 000 x 6/12 months

Arawin Landscape Specialist

b. Sunny records the expiration of one-twelfth of the entity’s one-year insurance

Journal Entry made on Oct 5 :

Prepaid Insurance (A) 48,000

Method Used: Asset Method

Journal Entry made on Oct 8:

Supplies (A) 2,000

Method Used: Asset Method

Solutions for transaction D and E