Fundamentals of

Accountany, Business
and Management 1
Quarter 4: Module 3-9:
The Accounting Cycle of a
Merchandising Business
Fundamentals of Accountancy, Business and Management 1-Grade 11
Quarter 4– Module 3: Nature of transactions in a Merchandising Business
First Edition, 2021

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 Fundamentals of
Accountany, Business
and Management 1
Quarter 4: Module 3-9:
The Accounting Cycle of a
Merchandising Business
Introductory Message
For the facilitator:
As a facilitator, you are expected to orient the learners on how to
use this module. You also need to keep track of the learners' progress
while allowing them to manage their learning at home. Furthermore,
you are expected to encourage and assist the learners as they do the
tasks included in the module.

For the learner:

As a learner, you must learn to become responsible for your
learning. Take time to read, understand, and perform the different
activities in the module.
As you go through the different activities of this module be
reminded of the following:
1. Use the module with care. Do not put unnecessary mark/s on any
part of the module. Use a separate sheet of paper in answering the
exercises.
2. Don’t forget to answer Let Us Try before moving on to the other
activities.
3. Read the instructions carefully before doing each task.
4. Observe honesty and integrity in doing the tasks and checking your
answers.
5. Finish the task at hand before proceeding to the next.
6. Return this module to your teacher/facilitator once you are done.
If you encounter any difficulty in answering the tasks in this
module, do not hesitate to consult your teacher or facilitator. Always
bear in mind that you are not alone. We hope that through this
material, you will experience meaningful learning and gain a deep
understanding of the relevant competencies. You can do it!

ii
 Let Us Learn

This Self-Learning Module (SLM) is prepared with you in mind so that

you, our dear Grade 11 ABM learners, can continue your studies and learn
while at home. It is here to help you understand the accounting cycle of a
merchandising business. This self-learning module will help you learn
meaningfully as you accomplished the different task at your own pace. The
scope of this module permits it to be used in many different learning
situations. The language used recognizes the diverse vocabulary level of
students. The lessons are arranged to follow the standard sequence of the
course. But the order in which you read them can be changed to correspond
with the textbook you are now using.

After going through this module, you are expected to:

1. describe the nature of transaction in a

merchandising business. ABM_FABM11-IVe-j-35;
2. learn how to record transactions of a merchandising business
in the general and special journals ABM_FABM 11-IVe-j-36;
3. post transactions in the general and
subsidiary ledgers ABM_FABM 11-IVe-j-
37;
4. prepare trial balance ABM_FABM 11-IVe-j-38;
5. prepare adjusting entries ABM_FABM 11-IVe-j-39;
6. complete the accounting cycle of a merchandising business
ABM_FABM 11-IVe-j-40 and;
7. prepare the statement of cost of goods sold ABM_FABM 11-IVe-j-
39.

Let Us Try
Essay: Rubrics Provided

Differentiate service business from merchandising business and

manufacturing business according to activities.

Write your answer in a clean sheet of paper.

Rubric is given as your guide in answering the essay.

Rubric for Essay.

3
 5 4 3 2
Excellent Very Good Average Need
Improvement
Ideas The idea is The idea is The idea The idea is not
clear and mostly developed is still well defined
focused with focused with basic or general
relevant some good
details details
Organization The order of Mostly Organization is The order of the
information is organized strong enough paragraph does
captivating that make without too much not make sense
and moves sense to the confusion
the reader reader
through the
text
Convetion Standard Errors in Errors in The frequency
writing standar standard writing of errors in
convention writing convention occur standard
(spelling, conventions more often. Such writing
grammar, are rare and errors though, do convention
punctuation, hardly not impair makes the
capitalization) noticeabale readability and essay hardly
are understandability understandable
consistently of the essay
observed

Let Us Study

Merchandising is a business organization that deals with buying and

selling of goods to earn a profit. These goods are what is referred to as
merchandise or merchandise inventory. Examples are canned goods,
medicines sold in pharmacy and nails sold in hardware. Examples of
merchandising businesses are Convenience stores, Sta. Ana Pharmacy, and
DIY hardware.

If a car owned by DIY hardware is sold, this would not be a

merchandise since DIY hardware do not normally sell cars. But, to a car
dealer, a car is part of the merchandise inventory.
If, Sta. Ana Pharmacy sells their used computer, this computer will not
form part of the merchandise. However, to a computer store, a computer is a
merchandise since the store is engaged in selling computers.

There are two classifications of inventories. First for trading concern

and second for manufacturing concern.

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 For trading concern, the term “merchandise inventory” is generally
applied to goods held for sale.

For manufacturing concern, the term “merchandise inventory” refers to

“finished goods”, “goods in process”, “raw materials”, and “factory manufacturing
supplies”.

Merchandise inventory is the most valuable commodity in the company

because it generates sales when sold. Aside from that, there are several
accounting terms used in service businesses that are not used in
merchandising businesses. For example, revenue from a service company is
referred to as "service profits" or "service revenue," while revenue from a
merchandising company is referred to as "Sales Revenue."

Since both followed the same accounting period and went through the
same steps in the accounting process, the only difference is the accounting
terms.

The existence of merchandise inventory is the primary distinction

between service and merchandising businesses.

COMPARISON OF INCOME STATEMENTS

Service Company Merchandising Company

Income Statement Income Statement

Revenues from Services Net Sales

Less: Cost of Sales
Gross Profit
Less: Expenses Add/Deduct: Income or Expenses
Profit Profit

Sales revenue or sales is the primary source of revenue for merchandisers.

There are two categories in the expenses of a merchandising company

namely:

1. Cost of Goods Sold- the cost of inventory that the entity sold and
is the largest single expense of a merchandising business.

2. Operating Expenses-these are expenses incurred in the process of

earning sales revenue that are deducted from gross profit in the income
statement. Examples of these are salaries expense and insurance
expenses.

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Parts of an Income Statement for a Merchandising Entity

ABM TRADERS
Income Statement
For the year Ended Dec. 31, 2020

Net Sales P 2,400,250

Less: Cost of Sales 1,313,600
Gross Profit 1,086,650
Less: Operating Expenses 563,000
Profit P 523,650

Operating Cycle of a Merchandising Business

The operating cycle of a merchandising entity starts with purchasing

inventory, selling the inventory, and using cash to acquire more inventory and
the cycle continues. For cash sales, the cycle starts from cash to inventory
and back to cash. For sales on account, the cycle is from cash to inventory to
accounts receivable then back to cash.
[

Cash

Cash Sales Inventory Purchases

Cash Sales

Sales on Account

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Journalizing the transactions in a Merchandising Business

The first step in the accounting process is journalizing. What is being

recorded are business transactions only.

Business transactions are economic events recorded in the organization’s

accounting system and must be measurable in money. These transactions are
those that change the value of an asset, liability and equity. Examples are:
1. Purchase of merchandise- acquire merchandise for resale
2. Purchase returns and allowances- are merchandise returned for
reason of bad order or not in accordance with the purchaser’s
specification.
3. Payment of freight- is the cost of transporting the goods
4. Sale of Merchandise-is when merchandise is sold
5. Sales returns and allowances- is when goods sold are returned
due to damage and defect.

Now, let us recall first the steps in accounting cycle discussed in the
previous weeks before transaction is being recorded.
Step 1 aims to identify transactions and events that are measurable in money
and therefore has financial impact or effect. The basis here are the source
documents. Step 2 is the Preparation of Journal Entries where transactions
with financial impact or effect is recorded in a journal.

Special and general journal is used by the merchandising business in

recording its transactions.

General Journal (book of original entry) is used by small businesses

only if the volume of business transaction is lesser.

Special Journals eliminates the problem encountered in recording

voluminous quantities of the same and repeated transactions that can create
congestion if repeatedly recorded.

The commonly used special journals are the following:

1. Cash Receipts Journal- used to record all cash received
2. Cash Disbursement Journal- used to record all that
have been paid in cash.
3. Sales Journal (Sale on Account Journal)-used to
record cash sales (on account).
4. Purchase Journal (Purchase on Account Journal)-
used to record all cash purchases (on account)

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INVENTORY SYSTEMS

In a merchandising company, keeping track of inventory items is a

unique setup. It is the most significant factor in determining the cost of sales.
Since merchandise inventory represents goods available for sale, a method for
determining the quantity and cost of these goods is needed. To record
activities related to merchandise inventory, merchandising entities may use
one of the two systems: the perpetual inventory system or the periodic
inventory system.

1. Perpetual Inventory System-continuously updates the inventory that

should be on hand anytime. It is required that at the time of purchase,
merchandise acquisitions are recorded as debits to the inventory
account. Cost of sales account is debited and inventory account is
credited when cost of sale is determined at the time of sale.

This system is characterized using Merchandise Inventory Account

as an
Asset with the following debit and credit postings:

Merchandise Inventory
Debit Credit
1. To record purchase 1. To record purchase returns
2. To record freight-in and allowances
3. Excess of actual inventory 2. To record purchase discounts
against stock card 3. To record actual cost of oods
sold
4. Excess of stock card against
actual inventory

The perpetual inventory system is preferable for corporations that sell

low-volume, expensive merchandise like motorized vehicles, jewelry and
furnishings.
Stock card is maintained to continually update the inflow and outflow
every time there are purchases and sale of merchandise. The resulting
balance in the increase and decrease reflected in the stock card gives
information of merchandise inventory on hand. Stock cards are also kept to
show and control both units and costs.
Presented below is a sample of filled-up stock card of an item.

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 STOCK CARD
Supplier: Yellies Farms
Description: 1 Whole Chicken
Unit RECEIVED ISSUED BALANCE
Date Cost Quantity Amount Quantity Amount Quantity Amount
Feb.1 200 70 kgs. P14,000
14 200 130 P26,000 200 kgs. 40,000
28 200 60 kgs P12,000 140 kgs. 28,000

Cost of Sales Ending Inv.

Under the perpetual inventory system, there is no need to establish

ending inventory since cost of sales of P12,000 and ending inventory of 28,000
is already reflected in the stock cards.
It is called perpetual inventory system because it continuously -
perpetually show the cost of the inventory on hand anytime.

2. Periodic Inventory System-is primarily used by businesses with

cheap or low-priced goods such as groceries, hardware and autoparts.
It periodically updates the cost of inventory on hand. As compared to
the perpetual inventory system, periodic inventory do not use
inventory account when the merchandise is bought and sold. Instead,
it uses separate set of accounts like purchases, purchase discounts,
purchase returns and allowances, and transportation in. This is to
accumulate information on the net costs of the purchases.

To determine quantities, periodic inventory system calls for physical

counting of goods on hand at the end of the accounting period. Such
quantities are then multiplied by the corresponding unit costs to get the
inventory value for balance sheet purposes. It is only then, that entries to the
inventory account be made to establish its proper balance.

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PERIODIC INVENTORY SYSTEM

NET SALES

The first part of the merchandising income statement is the Net Sales as
shown below:

Yellies Merchandising
Partial Income Statement
For the year ended December 31, 2020

Net Sales
Gross Sales P 3,241,400
Less: Sales Returns and Allowances 30,000
Sales Discounts 41,850 71,850
Net Sales P 3,169,550

Exhibit 1- Partial Income Statement-Net Sales

Gross Sales
Under the accrual basis, revenues from the sale of merchandise are
considered earned in the accounting period in which the title of good passes-
usually at the point of delivery-from the seller to the buyer. Gross sales consist
of total cash sales and sales on account during the accounting period.
Revenue is recognized as earned at the time of sale even if cash for sale has
not yet been collected.

Take note that the sales should be supported by a document like official
receipt, charge invoice (credit sales) and cash register tape to provide evidence
of cash sales and sales on account.

As an income statement account, the sales account is credited

whenever sales on account or cash sales are made for sales of merchandise
held for resale only. If the merchandising company sold one of its equipment,
the credit would be made to that equipment account, not to sales account.

Example:
For the month of January, Yellies made the following sale:

1/12/2021 Official Receipt #001 Sold three units for cash to Jubs for
P45,000 (P15,000 per unit), FOB Destination

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 1/18/2021 Charge Invoice #001. Sold eight units on account to Diet for
P156,000 (P19,500 per unit) with terms 3/10, n/30, FOB
Shipping Point

The journal entry to record the sale of merchandise for cash is as follows:

General Journal
Date Account Title and Explanation Ref Debit Credit
01/12/2021 Cash 45,000
Sales 45,000
To record OR # 001 cash sale-Jubs

The journal entry to record the sale of merchandise on credit is follows:

General Journal
Date Account Title and Explanation Ref Debit Credit
01/12/2021 Accounts Receivable 156,000
Sales 156,000
To record OR # 001 cash sale-Diet on account with terms
3/10, n/30

Freight Terms: FOB DESTINATION- SELLER PAYS FREIGHT

• When the seller pays the freight to deliver the goods to the customer,
an entry will be made. But if the freight will be paid by the buyer, no
entry will be made.
• Delivery Expense is debited and Cash or Accounts Payable is credited

Example:
On Jan. 12, 2021, Yellies paid P400 to deliver the three units to Jubs.

General Journal
Date Account Title and Explanation Ref Debit Credit
01/12/2021 Delivery Expense 400
Cash 400
To record payment for freight charges

Notice that there was no entry made regarding the sale to Diet since the term
is FOB Shipping Point.

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Sales Discounts

The offer of a cash discount is called Sales Discounts. This is to

encourage customers to pay the balance on or before the due date.

The discount term is commonly expressed as: 2/10, n /30, which

means that if payment is made within 10 days, a 2% discount is given. If paid
on the 11th and onwards, there is no more discount and the balance will be
due in 30 days.

Example:
Assume that Yellies sold merchandise on Feb.10 for 15,000; terms
2/10, n/30. At the time of sale, the entry is:
General Journal
Date Account Title and Explanation Ref Debit Credit
02/10/2021 Accounts Receivable 15,000
Sales 15,000
To record sales on account with terms 2/10, n/30

Assume further that the customer took advantage of the discount

within 10 days after the date of the invoice and paid on Feb.20, the entry
is:
General Journal
Date Account Title and Explanation Ref Debit Credit
02/20/2021 Cash 14,700
Sales Discounts 300
Accounts Receivable 15,000
To record collection on the Feb. 10 sale, discount taken

Notice that the discount period in this case was from Feb. 11, 2021 to
Feb. 20, 2021 (10 days).

If, the account was paid by the customer on February 28 which is already
beyond the discount period, instead of paying it on Feb. 20, the entry would
be:
General Journal
Date Account Title and Explanation Ref Debit Credit
02/28/2021 Cash 15,000
Accounts Receivable 15,000
To record collection of accounts receivable.

The sales discount account has accumulated all the sales discounts at
the end of the accounting period. The account is considered a contra-income
account and deducted from gross sales in the income statement (see Exhibit
1).

12
Sales Returns and Allowances
Due to the dissatisfaction with the merchandise received either because
the goods are damaged or defective, of inferior quality or not in accordance with
their specifications, customers may return the merchandise to the seller and this
will result to Sales Return. The customers are allowed to return the goods to the
seller for credit if the sale was made on account and a cash refund if it was sold
for cash.

Alternatively, allowance or deduction from the selling price may also be

granted by the seller. It is not commendable to have a high sales returns and
allowances since this may signal poor quality of merchandise, errors in billing
customers, and mistakes in delivery or shipment of goods that may result to
dissatisfied customers.

Sales returns and allowances are contra revenue account to the sales
account, which means that this is a reduction from the sales account. To
disclose the amount of sales returns and allowances, contra asset account is
used instead of debiting it to sales and its normal balance is a debit.

Each return or allowance is recorded as a debit to Sales Returns and

Allowances and a credit to Accounts Receivable (if the sale was on credit) or
Cash (if it was paid on cash) which decreases the asset.

Example:
On January 13, 2021, Diet returned merchandise purchased last January
12, 2021 under Charge Invoice 001. Although the merchandise was in good
condition, Diet returned it since it is more than what they need. The price will be
deducted from the account of Diet since the return was approved and accepted
by Yellies.

Entry:
General Journal
Date Account Title and Explanation Ref Debit Credit
1/13/2021 Sales Returns and Allowances 39,000
Accounts Receivable 39,000
To record the return of merchandise from Diet under Charge
Invoice # 001

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ACCOUNTING FOR FREIGHT COSTS

FOB Destination
- The seller shoulders the transportation costs. This is an operating
expense on the part of the seller and is debited to delivery expense if
the seller pays the freight on outgoing merchandise to a buyer.

- Goods are are placed free on board (FOB) at the buyer’s business.

- Once the goods are delivered and received by the buyer at the
point of destination, ownership over the goods is transferred to
the buyer.

- Goods still in transit are still the property of the seller. Therefore, the
seller is responsible for freight charges and other expenses up to the
point of destination.

FOB Shipping Point

- The buyer bears the shipping costs from the point of shipment up
to the point of destination.

- Goods in transit are already the property of the buyer since

ownership is transferred upon shipment of the goods.

- Cash is credited if the goods come on cash on delivery (COD), and

Accounts Payable is credited if it is on account.

Example:
Assume that the supplier of Yellies is based in Cebu. The cost to deliver
the merchandise is P4,000.

Assume further, that the term is FOB Shipping Point and Yellies paid
the carrier in cash on Feb. 8. The entry to record the the freight cost is:

General Journal
Date Account Title and Explanation Ref Debit Credit
02/08/2021 Freight-In 4,000
Cash 4,000
To record freight costs for the purchase of merchandise

No entry is recorded in the books of Yellies if the term is FOB

Destination. The P4,000 will be shouldered by the seller.

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PURCHASES of MERCHANDISE:
- This account is a temporary account and is debited when
merchandise are purchased for resale to customers either for cash or
on account (credit)

- The purchase is normally recorded when goods are received.

- Each credit purchases is supported by a purchase invoice, which is

actually the sales invoice or a charge invoice prepared by the seller or the
supplier.

- What is debited to the “Purchase“ account are the purchases of

merchandise
ONLY. Purchases of other assets like: supplies, equipment, and
similar items are debited to their respective account.

Example:
Yellies Merchandising started its operations on January 2, 2021. The
store is located in Prudential Mall, Toril Davao City. The owner invested
P400,000 to start the business. On January 3, 2021, Yellies purchased
merchandise account for P1,000,000. The supplier issued Charge Invoice No.
143 upon delivery of the merchandise.

Entry:
General Journal
Date Account Title and Explanation Ref Debit Credit
01/03/2021 Purchases 1,000,000
Accounts Payable 1,000,000
To record purchase of merchandise as per Charge Invoice
No. 143; terms 2/10, n/30

PURCHASES RETURNS AND ALLOWANCES

- Sales returns and allowances in the books of the seller are
recorded as purchase returns and allowances in the books of the
buyer.

- Merchandise is returned because it is received to be unsatisfactory

since the goods are either damaged, defective, on inferior quality and
not in accordance with the specification of the purchaser.

- As a request for a reduction of the balance due, the buyer issues a debit
memorandum to inform the seller that the seller’s account has been
debited due to unsatisfactory goods.

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 - This account is credited for merchandise purchased either in cash
or on account that were returned to the supplier.

Example:
Out of the merchandise purchased last January 3, 2021, it was found
after inspection on the same day that merchandise amounting to P100,000.00
was of inferior quality. Yellies issued a debit memorandum (DM 01) and
informed the supplier that it will return the damaged items.
Entry:

General Journal
Date Account Title and Explanation Ref Debit Credit
01/03/2021 Accounts Payable 100,000
Purchase Returns and Allowances 100,000
To record return of merchandise worth P100,000 as per DM 01

- Purchase returns and allowances is deducted from purchases in the

income statement since this is a contra-asset account. Please see the
exhibit below. (The amount reflected is for discussion purposes only. It does
not have bearing on the previous entries.)

Determining Cost of Goods Sold under Periodic Inventory System

The Cost of Goods Sold under the periodic inventory system is

determined at the end at the end of the period (monthly or yearly)

Yellies Merchandising
Partial Income Statement
For the year ended December 31, 2020
Cost of Sales
Merchandise Inventory, 1/1/2020 P 400,000
Purchases 1,000,000
Less: Purchase Returns and Allowances 100,000
Purchase Discounts 21,360 121,360
Net Purchases 878,640
Transportation In 82,360
Net Cost of Purchases 961,000.00
Goods Available for Sale P 1,361,000.00
Less: Merchandise Inventory, 12/31/2020 483,000.00
Cost of Sales P 878,000.00

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PURCHASE DISCOUNTS
- Just like sales discounts, purchase discount is being offered to
encourage customers for an early payment of credit purchases. In
relation to the Jan. 3, 2021 transactions, the payment is recorded
as follows:

Entry:
General Journal
Date Account Title and Explanation Ref Debit Credit
01/13/2021 Accounts Payable 1,000,000
Purchase Discounts(P1,000,000 X 2%) 20,000
Cash 980,000

- Purchase discounts, like purchase returns and allowances is also

a contra account that is deducted from purchases on the income
statement.

COMPLETE ACCOUNTING CYCLE FOR A MERCHANDISING BUSINESS

Judie Mendez is the owner of Groceryko, a retailer and wholesaler of

grocery items. The operation started on January 1, 2020. The owner issues
the following documents:
• Official Receipts for cash sales
• Charge Invoice for credit sales
• Check Voucher for cash disbursements

Step 1 & 2 Understanding and Journalizing the transactions

The special journals of Judie Mendez for the month of January 2020 are
shown below:
PURCHASE JOURNAL
Sales
Invoice
From
Account Title
Date and Ref Supplier Debit Credit
Explanation
01/02/2020 ABC Cans SI# 2020 228,000 228,000
01/10/2020 Laundry SI# 608 145,000 145,000
Supplies
01/29/2020 Shampoo SI# 350 115,000 115,000
Unlimited
Total 488,000 488,000

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 CASH RECEIPTS JOURNAL
DEBIT CREDIT CREDIT DEBIT
PARTICULAR OFFICIAL ACCOUNTS SALES
RECEIPT
DATE CASH SALES RECEIVABLE DISCOUNT
NO.
01/02/2020 Ken 1 2,000 2,000
01/04/2020 Nora 2 1,250 1,250
01/06/2020 Mark 3 2,250 2,250
01/08/2020 Jun 4 3,149 3,149
01/10/2020 Lydia 5 2,290 2,290
01/12/2020 Josie 6 4,845 4,845
01/13/2020 Ruding 7 4,000 4,000
01/14/2020 Brandon 8 5,200 5,200
01/15/2020 CHF 9 6,000 6,245 245
01/16/2020 Irish 10 2,235 2,235
01/17/2020 Ray 11 1,020 1,020
01/18/2020 Eddie 12 2,410 2,410
01/19/2020 Annie 13 680 680
01/20/2020 Orga 14 3,450 3,450
01/21/2020 AR 15 2,542 2,542
01/22/2020 Fe 16 9,850 9,850
01/23/2020 Angela 17 2,000 2,000
01/24/2020 Tiffy 18 200 200
01/25/2020 Bella 19 5,000 5,120 120

Total 60,371 36,071 24,665 365

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 SALES JOURNAL
Debit Credit
Description

(Customer's Charge Accounts

Invoice
Date Name) Receivable Sales
No.
01/02/20 Tiffy 1 9,850 9,850
01/03/20 Bella 2 4,175 4,175
01/04/20 Longskie 3 2,280 2,280
01/08/20 CHF 4 6,245 6,245
01/09/20 Mark 5 3,400 3,400
01/11/20 AR 6 2,185 2,185
01/15/20 Orga 7 3,450 3,450
01/20/20 Baby 8 1,985 1,985
01/23/20 Brandon 9 5,120 5,120
01/24/20 Rio 10 3,600 3,600
01/26/20 Annie 11 4,455 4,455
01/27/20 Lucas 12 700 700
01/28/20 Jheanne 13 2,130 2,130
01/29/20 Jairus 14 3,600 3,600
TOTAL 53,175 53,175

CASH DISBURSEMENT JOURNAL

Credit Debit Debit Debit Debit Debit Credit
Accounts Salaries Supplies Advertising Rental Purchase
Check
Date Particulars Cash Payable Exp. Expense Exp. Exp. Disc.
No.
Rental for Jan.-
1/2/20 CV001 20,000 20,000
Feb. 2020
Yu Supplies- Office
1/10/20 CV002 3,000 3,000
Supplies
1/14/20 ABC Cans CV003 220,000 228,000 8,000
Josie Fabs-salary
1/18/20 CV004 9,000 9,000
Jan. 1-15, 2020
ABS Promo
1/21/20 CV005 5,200 5,200
Advertising
Marketing
1/26/20 CV006 2,110 2,110
Supplies
TOTAL 259,310 228,000 9,000 5,110 5,200 20,000 8,000

The proprietor aside from the above special journals also maintains
general journal and it has the following entries for January.

19
 GENERAL JOURNAL
Debit Credit
Account Title and Accounts
Date Ref. Sales
Explanation Receivable

1/2/20 Cash 600,000

Mendez, Capital 600,000
To record initial investment of
Mendez

1/2/20 Transportation Equipment 210,000

Additional Information:

• The transportation equipment purchased on January 2, 2020

has an estimated useful life of 10 years with no salvage value.
• The cost of inventory on hand was 435,000. A physical
inventory count was conducted on January 30, 2020
• On the same date, a statement from Corona Gas Center reflecting a
total bill of P1,180 representing fuel purchases on January 2020
was received by Mendez. These bill were still unpaid as of January
30, 2020.

Step 3 - Posting to the General Ledger. The entries from the summary of
transactions in the special journals and general journals will now be posted
in each general ledger account:

GENERAL LEDGER
Account: Cash Account No. 1000
Date Item Ref. Debit Credit Balance
Investment of the
1/2/20 600,000 600,000
owner

Purchase of vehicle 210,000 390,000

From Cash Receipts

60,371 450,371
Journal

From Cash
Disbursement

Journal 259,310 191,061

20
 GENERAL LEDGER
Account No.
Account: Accounts Receivable
1200
Date Item Ref. Debit Credit Balance
From the Sales Journal 53,175 53,175
From Cash Receipts Journal 24,665 28,510

GENERAL LEDGER

Account: Transportation Account No.

1580
Equipment
Date Item Ref. Debit Credit Balance
General Journal- Purchase of
vehicle 210,000 210,000

GENERAL LEDGER
Account No.
Account: Accounts Payable
2000
Date Item Ref. Debit Credit Balance
From Purchase Journal 488,000 488,000

From Cash Disbursement Journal 228,000 260,000

GENERAL LEDGER
Account No.
Account: Mendez, Capital
3000
Date Item Ref. Debit Credit Balance
(600,
Initial Investment- General Journal 600,000
000)

GENERAL LEDGER
Account No.
Account: Sales
4000
Date Item Ref. Debit Credit Balance
From the Sales Journal 53,175 53,175
From Cash Receipts Journal 36,071 89,246

21
 GENERAL LEDGER
Account No.
Account: Sales Discount
3000
Date Item Ref. Debit Credit Balance

From Cash Receipts Journal 365 365

GENERAL LEDGER
Account No.
Account: Purchases
5100
Date Item Ref. Debit Credit Balance
From the Purchase Journal 488,000 488,000

GENERAL LEDGER
Account No.
Account: Purchase Discount
5102
Date Item Ref. Debit Credit Balance
From the Cash Disbursement
8,000 8,000
Journal

GENERAL LEDGER
Account No.
Account: Salaries Expense
5102
Date Item Ref. Debit Credit Balance
From the Cash Disbursement
9,000 9,000
Journal

GENERAL LEDGER
Account No.
Account: Supplies Expense
6150
Date Item Ref. Debit Credit Balance
From the Cash Disbursement
5,110 5,110
Journal

GENERAL LEDGER

22
 Account No.
Account: Advertising Expense
6400
Date Item Ref. Debit Credit Balance
From the Cash Disbursement
5,200 5,200
Journal

GENERAL LEDGER
Account No.
Account: Rental Expense
6300
Date Item Ref. Debit Credit Balance
From the Cash Disbursement
20,000 20,000
Journal

Step 4 & 5 -Prepare the Unadjusted Trial Balance and preparation of

Worksheet.

Here the balances in the general ledger for each account will be
extended to the first two money columns of the worksheet.

Below is the Unadjusted Trial Balance of Groceryko:

Groceryko
Worksheet
For the month ending January 30, 2020

Unadjusted Trial
ACCOUNT TITLES Balance

Debit Credit

Balance Sheet Accounts

Cash 191,061
Accounts Receivable 28,510
Merchandise Inventory -
Prepaid Expenses
Transportation Equipment 210,000
Accum. Depn.-Office Equipt. -
Accounts Payable 260,000
Accrued Expenses
Groceryko, Capital 600,000
Income Statement Accounts
Sales 89,246

23
Sales Discounts 365
Purchases 488,000
Purchase Discount 8,000
Salaries Expense 9,000
Supplies Expense 5,110
Advertising Expense 5,200
Rental Expense 20,000
Depreciation Expense -
Fuel Expense
Total 957,246 957,246

Step 6-Preparing adjusting entries. Recall 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

Now let us identify transactions in the books of

Goceryko that requires adjustments:

• Depreciation Expense:

Monthly Depreciation = Cost – Salvage Value/Life

= P210,000 / 10 years
= 21,000 per year
= 21,000/ 12 months in a year
= 1,750 per month

Adjusting Entry: Depreciation Expense 1,750

Accumulated Depreciation 1,750

• Deferred or Prepaid Expenses

The rental payment made on January 2, 2020 is for the month of

January and February 2020 as reflected in the cash disbursement
journal. The whole amount was charged to January which is not proper
because only half of it represents rental for January. The other half
represents rental for February and is an advance payment for rental.
Thus, an asset should be recognized. The adjusting entry is:

Prepaid Rent 10,000

24
 Rent Expense 10,000

This entry recognized the correct rental expense of P10,000 and a

prepaid expense (asset account) of P10,000

• Accrued Expenses

On January 30, 2020, fuel expenses incurred amounting to P2,180

should be recorded as an expense and liability. The adjusting entry
is:

Fuel Expenses 2,180

Accrued Fuel Expense 2,180

These adjusting entries will then be extended to the adjustment column

of the worksheet to arrive at the adjusted trial balance.

Groceryko
Worksheet
For the month ending
January 30, 2020
Unadjusted Trial
ACCOUNT TITLE Adjustments Adjusted Trial Balance
Balance
Debit Credit Debit Credit Debit Credit

Balance Sheet Accounts

Cash 191,061 191,061

Accounts Receivable 28,510 28,510
Merchandise Inventory -
Prepaid Expenses 10,000 10,000
Transportation Equipment 210,000 210,000
Accum. Depn.-Office Equipt. - 1,750 1,750
Accounts Payable 260,000 260,000
Accrued Expenses 2,180 2,180
Groceryko, Capital 600,000 600,000
Income Statement
Accounts
Sales 89,246 89,246
Sales Discounts 365 365
Purchases 488,000 488,000
Purchase Discount 8,000 8,000
Salaries Expense 9,000 9,000
Supplies Expense 5,110 5,110
Advertising Expense 5,200 5,200
Rental Expense 20,000 10,000 10,000

25
Depreciation Expense - 1,750 1,750
Fuel Expense 2,180 2,180

957,246 13,930 13,930 961,176 961,176

957,246

Step 7- Preparation of Financial Statements

The first statement prepared is the income statement. Nominal

accounts are extended to the appropriate column. Under the periodic
inventory system, the merchandise inventory, beg is extended to the debit
side. Ending Inventory is determined as a result of the physical count. This is
reflected on the credit side. The total debit and total credit are determined.
The excess of the credit side over the debit side represents income for the
period. This excess is added to the debit side. If, the debit exceeds the credit
side, the difference represents net loss of the business. This will be added to
the credit side.

The statement of financial position is then prepared. All assets,

liabilities and equity accounts are extended. The ending merchandise is
extended to the debit side.

The worksheet for these two financial statements are presented below:

Groceryko
Worksheet
For the month ending January
30, 2020
Adjusted Trial
ACCOUNT TITLE Income Statement Balance Sheet
Balance
Debit Credit Debit Credit Debit Credit
Balance Sheet
Accounts
Cash 191,061
Accounts Receivable 28,510
Merchandise Inventory 435,000 435,000
Prepaid Expenses 10,000
Transportation
210,000
Equipment
Accum. Depn.-Office
1,750 1,750
Equipt.
Accounts Payable 260,000 260,000
Accrued Expenses 2,180 2,180
Groceryko, Capital 600,000 600,000
Income Statement
Accounts
Sales 89,246 89,246
Sales Discounts 365

26
Purchases 488,000
Purchase Discount 8,000 8,000
Salaries Expense 9,000
Supplies Expense 5,110
Advertising Expense 5,200
Rental Expense 10,000
Depreciation Expense 1,750
Fuel Expense 2,180
521,605 532,246 874,571 863,930
Net Income 10,641 10,641

Total 961,176 961,176 532,246 532,246 874,571 874,571

Below is the proper format for Income Statement and the Schedule of
Cost of Goods Sold of Groceryko for January 2020.

Groceryko
Income Statement
For the month ended January 30, 2020

Gross Sales 89,246.00

Less: Sales Discounts 365
Net Sales 88,881.00
Less: Cost of Goods Sold (see
schedule below) 45,000.00
Gross Profit 43,881.00
Less: Expenses
Salaries Expense 9,000.00
Supplies Expense 5,110.00
Advertising Expense 5,200.00
Rent Expense 10,000.00
Depreciation Expense 1,750.00
Fuel Expense 2,180.00 33,240.00
Net Income P 10,641.00

27
 Groceryko
Schedule of Cost of Goods Sold
For the motn ended January 30, 2020

Merchandise Inventory, Beginning -

Add: Purchases 488,000.00

Less: Purchase Discount 8,000.00 480,000.00

Cost of Goods Available for Sale 480,000.00

Less: Merchandise Inventory, End 435,000.00

Cost of Goods Sold P 45,000.00

Step 8- Closing Entries

1. Close all nominal revenue accounts by a debit to revenue and a

credit to Income Summary.
2. Close all nominal expense accounts by a credit to expense and a
debit to Income Summary
3. Close the Merchandise Inventory, beginning by a debit to
Income Summary and a credit to Merchandise Inventory.
4. Close the Merchandise Inventory, End by a debit to Merchandise
Inventory, end and a credit to Income Summary. The amount that
will be used is the result of the physical count.
5. Close the Income Summary account that reflects the net income, by
a debit to Income Summary and a credit to the equity or capital
account.

The closing journal entries will now be entered into the general journal
and information should be posted to the general ledger. After accomplishing
this, all the nominal accounts in the general ledger should have a zero
balance. In double checking this another trial balance will be prepared based
on the new balances in the general ledger. In cases where there are positive
balances in any nominal accounts, it only means there was a mistake along
the way and needs to be corrected before proceeding to the next accounting
period.

The closing entries of Groceryko are:

GENERAL JOURNAL
DATE ACCOUNT TITLES and EXPLANATIONREF DEBIT CREDIT

1/30/20 Sales 89,246.00

Sales Discounts 365

28
 Income Summary 88,881.00
To close nominal revenue accounts
Income Summary 513,240.00
Purchase Discount 8,000.00
Purchases 488,000.00
Salaries Expense 9,000.00
Supplies Expense 5,110.00
Advertising Expense 5,200.00
Rental Expense 10,000.00
Depreciation Expense 1,750.00
Fuel Expense 2,180.00
To close nominal expense accounts
and cost of goods sold accounts
Merchandise Inventory, ending 435,000.00
Income Summary 435,000.00
To set up Merchandise Inventory ,end

Income Summary
513,240 88,881
435,000
513,240 523,881
10,641
523,881 523,881

The income summary account after these entries now, has a net credit
balance of P10,641.00
The last closing entry will be to close the balance of income summary
to capital account as follows:

GENERAL
JOURNAL
DATE ACCOUNT TITLE AND REF DEBIT CREDIT
EXPLANATION
1/30/20 Income Summary 10,641
Mendez, Capital 10,641

29
PERPETUAL INVENTORY SYSTEM

On Purchases of merchandise for resale, Merchandise Inventory is

debited for the cost of goods purchased either it is purchased for cash or on
account and this is being recorded when the goods are received from the
seller.

Cash purchases and purchases on account is being supported by

purchase invoice which is sales invoice and charge invoice, respectively.

As mentioned earlier, only purchases of merchandise are debited to

Merchandise Inventory. Other assets purchased is debited to their respective
account like supplies, equipment, and other similar items.

Consider this example as an illustration:

Let us assume that Jubelle’s laptop store which opened last January 3,
2021 and is in Toril, Davao City, has an investment of P600,000. On the
following day, January 4, 2021 Jubelle purchased 30 laptops on account for
P15,000 each. A charge invoice no. 143 was issued to Jubelle by the supplier
PC laps upon delivery of the units. The entry to record the purchase is:

GENERAL JOURNAL
ACCOUNT TITLES and
DATE REF DEBIT CREDIT
EXPLANATION
450,000.00
Inventory (Merchandise
1/4/21 0
Inventory)
Accounts Payable 450,000.00

To record purchase of 30
laptop units
at P15,000 each from PC laps
per
Charge Invoice No. 143.

30
 Purchase Returns and Allowances on the other hand, is treated as a
deduction from the purchase price which is debited to Accounts Payable
and credited to Merchandise Inventory to show that the cost of
Merchandise Inventory is reduced with a return and an allowance.

Consider this example as an illustration:

Two units of laptops was damaged during shipment last Jan. 4,

2021. A debit memorandum (DM 001) was issued by Jubelle and
informed the supplier that it will return the damaged units. The
entry would be:
GENERAL JOURNAL
ACCOUNT TITLES and
DATE REF DEBIT CREDIT
EXPLANATION
Inventory (Merchandise
1/4/21 450,000.00
Inventory)
Accounts Payable 450,000.00

To record purchase of 30
laptop
units
at P15,000 each from PC
laps per

ACCOUNTING FOR FREIGHT COSTS

FOB SHIPPING POINT- Under the perpetual inventory system, freight

paid by the buyer is debited to Merchandise Inventory account while
cash and accounts payable is credited for cash and purchases on
account respectively.

FOB DESTINATION- under the perpetual inventory system, freight

paid by the seller is debited to Delivery Expense which is an operating
expense on the part of the seller.

For example. The supplier is based in Cagayan and it will cost P2,000
to deliver 30 laptops to Bohol. The entry to record the freight paid by
the buyer if the term is FOB Shipping Point is:

Merchandise Inventory 2,000

Cash 2,000

No entry will be made on the part of the buyer if the term is FOB
Destination since the freight will be paid by the seller.

31
PURCHASE DISCOUNTS

Below are common discount terms for both purchases and sales.

1. 2/10, n/30- this means that 2% discount is given if paid and

collected in 10 days and no more discount if it is paid after the
10th.

2. 2/10, 1/20, n/30- this means that 2% discount is given if paid and
collected in 10 days, 1% if paid and collected on the 11th to the 20th
day and no discount if paid on the 21st up to the 30th day.

3. 2/10, EOM- this means that 2% discount is given if paid

and collected within 10 days after the End of the Month.

This discount is recorded by the buyer as a reduction to Merchandise

Inventory.

For example:
Assume that the credit terms of a merchandise purchased on January
10, 2021 which amounts to P100,000 is 2/10, n/30. If the buyer pays on or
before January 20, 2021, the buyer is entitled to a 2% discount. If the buyer
pays on the 11th day onwards, it can no longer avail of the discount. Instead,
the full amount of P100,000 will be paid in full. Assume further that the full
amount is paid on January 20, 2021, the entry to record the discount availed
is :

GENERAL JOURNAL
ACCOUNT TITLES and
DATE REF DEBIT CREDIT
EXPLANATION
1/20/21 Accounts Payable 100,000.00
Merchandise Inventory 2,000.00
Cash 98,000.00

To record payment with

2% discount
computed as ( 100,000 X
2%)

Assume further that instead of paying on the discount date, the payment
was made on January 31, 2021, thus forfeiting the discount. The entry to record
would be:

32
 GENERAL JOURNAL
ACCOUNT TITLES and
DATE REF DEBIT CREDIT
EXPLANATION
1/20/21 Accounts Payable 100,000.00
Cash 100,000.00

SALES TRANSACTIONS: REVENUE ENTRIES FOR A MERCHANDISER

In a merchandising company, revenues are earned when the goods are

transferred from seller to buyer. All sales is supported by a document like
cash receipts, cash register tapes for cash sales and charge invoice for credit
sales. Two entries will be made for each sale.

First Entry

* Accounts Receivable XX
Sales XX

(For sales on account)

* Cash XX
Sales XX

(For cash sales)

Both entries increases assets for the amount of sales.

Second Entry: This records the cost of merchandise sold.

Cost of Goods Sols XX

Inventory XX

This entry increases expenses and decreases asset

The sales account is credited only for sales of good held for resale. Sales of
assets not held for resale (such as equipment, buildings, land, etc.) are
credited directly to the asset account.

Let us illustrate:
Assume that there are no freight costs incurred when the
merchandise was purchased. The following sales was made for the
month of January 2021.

33
 1/10/2021 Sold three units of merchandise for cash amounting
to P30,000.00 (cost per unit is P9,000), FOB Destination.

1/15/2021 Sold two units on account for P24,000.00 (price per

unit is P12,000.00), FOB, Shipping Point.

Entry would be:

ACCOUNT TITLES and

DATE REF DEBIT CREDIT
EXPLANATION
1/10/21
Cash 30,000.00
Sales 30,000.00
Cost of Goods Sold
27,000.00
Inventory 27,000.00
To record cash sales

GENERAL JOURNAL
ACCOUNT TITLES and
DATE REF DEBIT CREDIT
EXPLANATION
1/15/21 Accounts Receivable 24,000.00
Sales 24,000.00
Cost of Goods Sold 18,000.00
Inventory 18,000.00

To record sales on account

If the term is FOB Destination and seller pays the freight to deliver the
goods to the customer, an entry debiting Delivery Expense and crediting Cash or
Accounts Payable will be made. But if the buyer will pay for the freight no entry
will be made.

Example:

Assume that on January 10, 2021, the seller paid P600 to deliver the
two units sold.

The entry is:

1/10/21 Delivery Expense 600.00

Cash 600.00
Notice that no entry will be made on the sale of FOB Shipping point.

34
SALES RETURNS AND ALLOWANCES

The normal balance of Sales Returns and Allowances is a debit. Two

entries will be made for every sales return and allowance. The first is to record
the sales return or allowance and the second is to record the increase in
Merchandise Inventory.

The first entry is:

Sales Returns and Allowances xx
Accounts Receivable/ Cash xx

The second entry is:

Merchandise Inventory (increases the assets) xx
Cost of Goods Sold (decreases the expenses) xx

Example:
The merchandise amounting to P10,000 was returned by the customer
on January 16, 2021. The return was approved and accepted by the seller.
The price will be deducted from the account of the buyer.

The entry is:

GENERAL JOURNAL
ACCOUNT TITLES and
DATE REF DEBIT CREDIT
EXPLANATION
Sales Returns and
1/16/21 10,000.00
Allowances

Accounts Receivable 10,000.00

Merchandise Inventory 9,000.00

Cost of Goods Sold 9,000.00

To record return of
merchandise

Sales Discounts is an offer to a customer to encourage them to pay the

balance earlier. Usual discount terms are expressed as: 2/10, n/30 which
means that a customer is given 2% discount if paid within 10 days. Again,
Sales Discounts is a contra revenue account with a normal debit balance.

Example:
Let us assume that Judie purchased 6 laptops on cash for P9,000 per unit
from a supplier on January 15, 2021 and was sold to Jubelle on January 20,
2021 under Charge Invoice No.001 amounting to P15,000 per unit with terms

35
2/10, n/30, FOB Shipping Point. On January 25, 2021, Jubelle paid the account
in full.

GENERAL JOURNAL
ACCOUNT TITLES
DATE REF DEBIT CREDIT
and EXPLANATION
1/15/21 Merchandise Inventory 54,000.00
Cash 54,000.00
To record six units of laptop purchased on cash

GENERAL JOURNAL
ACCOUNT TITLES and
DATE REF DEBIT CREDIT
EXPLANATION
1/20/21 Accounts Receivable 90,000.00
Sales 90,000.00
Cost of Goods Sold 54,000.00
Merchandise Inventory 54,000.00
To record sales on account
under Charge Invoice No. 001
with terms 2/10, n/30

GENERAL JOURNAL
ACCOUNT TITLES and
DATE REF DEBIT CREDIT
EXPLANATION
1/25/21 Cash 88,200.00
Sales Discount 1,800.00
Accounts Receivable 90,000.00
To record collection of
Accounts Receivable from
Jubel, net of 2% sales
discounts
At this point, the cash received from Jubelle was net of the discount
since payment was made within the discount period which is from January
21, 2021 to January 30, 2021 (10 days)

If, Jubelle paid the account on January 31, 2021 which is already
beyond the 10 days discount period, the entry is:

GENERAL JOURNAL
ACCOUNT TITLES and
DATE REF DEBIT CREDIT
EXPLANATION
1/31/21 Cash 90,000.00
Accounts Receivable 90,000.00
To record collection of Accounts Receivable

36
DETERMINING COST OF GOODS SOLD under the PERPETUAL
INVENTORY SYSTEM

Under the perpetual inventory system, the cost of goods sold is

determined by getting the running balance in the general ledger account. In
posting the journal entries to the general ledger, the cumulative cost of goods
sold can be determined at any time since this system maintains a separate
ledger for “Cost of Goods Sold.”

FLOW OF INVENTORY COSTS

A physical count is necessary to determine the ending inventory balance

under the periodic inventory system. The cost of these inventory will then be
computed. But there are instances where the unit prices purchased are
different. Cost flow assumption this time is needed. The two most common
cost flow assumption used is the Average Cost and the First in, First Out
(FIFO).

Example:
Diether is engaged in buying and selling cellphone cases. In January 2021,
Diether had the following transactions:

1/2/21 Merchandise Inventory on hand is 800 pieces

@ P54 each P 43,200
1/12/21 Purchased 1200 pieces @ P60 each 72,000
1/12/21 Purchased 2000 pieces @ P65 each 130,000
P245,200

A total of 2,500 units were sold during the month of February 2021. Therefore,
the ending inventory in units is 1,500 (800+1200+2000-2500). A problem arise
as to the unit cost that will be used in determining the value of the inventory.
This will differ depending on the cost flow assumption adopted by the company.

Using the Average Cost the cost of ending inventory is computed as follows:

Average unit cost is computed as follows:

Total cost of Inventory P245,200

Divided by total quantities
(800+1200+2000) 4,000
Average cost per unit is 61.30
The cost of Merchandise Inventory, end is P 91,950
(1,500 X P61.30)

37
Using the First in, First Out (FIFO) the cost of ending inventory is computed
as follows:

800 units @ P54

1,200 @ 60
500 @ 65
--------------------------
2,500 units

Therefore, the ending inventory will come from the January 12 purchases:
1,500 units @ P65.00 = P 97,500

As the name implies FIFO involves the assumption that goods sold are the
first units purchased which means the oldest goods on hand. The remaining
inventory is the most recent purchases.

Let Us Practice
Activity 1

Instruction: In a separate sheet of paper write the correct answer of your

choice and show the solution. Your score will be based on the correct
computation of your solution for two (2) points each.

Below is information that would be your basis in answering questions 1-5

Account Name Debit Credit

Sales 855,000
Sales Returns and Allowances 15,000
Sales Discounts 8,000
Purchases 200,000
Purchase Returns and Allowancces 21,000
Transportation In 28,000
Selling Expenses 62,000
General and Administrative Expenses 300,000

The merchandise inventory, beginning was P55,000 and the merchandise

inventory, ending was P35,000.

1. The nets sales of the period were

a. P832,000 b. P823,000

38
 c. P840,000 d. P878,000

2. The net purchases for the period were

a. P221,000 c. P210,000
b. P179,000 d. P207,000

3. The cost of goods sold for the period was

a. P262,000 c. P255,000
b. P227,000 d. P283,000

4. Net Income for the period was

a. P543,000 c. P605,000
b. P852,000 d. P243,000

5. Assuming that the net purchases was P800,000 during the year and that
the merchandise inventory, end was P10,000 less than the merchandise
inventory, beg of P220,000, how much was the cost of goods sold?
a. P1,020,000 c. P 838,000
b. P 810,000 d. P1,048,000

Activity 2:

Based on the information given in Activity 1, prepare the Statement of

Cost of Sales.

39
 Let Us Practice More
Activity 1

Instruction: Journalize the following transactions. Record it in the

General Journal provided below. Use a separate sheet of paper.

Jan.1- Ms. Rubis invested the following:

a. Bank deposit with Land Bank amounting to P950,000
b. Merchandise with a net realizable value of P300,000
c. Transportation Equipment of P2,100,000

Jan.2 Purchase merchandise for cash from Brandon Merchandising

amounting to P120,000. Ms. Rubis paid the freight and and handling
costing P3,000.

Jan. 3 Returned P4,000 cost of merchandise to Yok Trading due to

some defects and no replacements have been made.

Jan. 5 Sold merchandise for cash, P150,000 to Bhe grocery and gavea 2%
trade discount and paid freight on shipment costing P4,200.

Jan. 7- Purchase merchandise on account from AR Co. amounting to

P60,000. Term is 3/10, n/30

GENERAL JOURNAL
2020 Particulars Folio Debit Credit
Jan. 1

40
ACTIVITY 2
Below are entries found in the General Journal of Ms. Rubis in addition
to the entries in Activity 1.

GENERAL JOURNAL
2020 Particulars Folio Debit Credit
Jan. 8 Accounts Receivable 182,000.00
Sales 182,000.00
Freight-Out 1,400.00
Cash in Bank 1,400.00

12 Accounts Payable 40,000.00

Purchase Discount 1,200.00
Cash in Bank 38,800.00

18 Cash in Bank 167,280.00

Sales Discount 2,620.00
Accounts Receivable 167,280.00

20 Cash in Bank 52,100.00

Sales 52,100.00

22 Sales Returns and Allowances 350.00

Cash in Bank
350.00
23 Cash in Bank 82,000.00
Sales Discount 8,200.00

26 Accounts Receivable 450,000.00

Sales 450,000.00

28 Salaries Expense 14,000.00

Taxes and Licenses 7,200.00
Rental Expense 12,000.00
Cash in Bank 33,200.00

Accounts Receivable 90,200.00

Instruction: To aid you in posting the entries to the General Ledger, you are
to prepare T-accounts for Cash in Bank, Accounts Payable, Sales, Purchases
and Accounts Receivable. Refer to General Journal entries in Activity 1 and
additional entries provided in this activity.

41
Required: Base on the T-account you prepared, answer the following
requirements.

1. Cash in Bank balance

2. Accounts Payable balance
3. Sales balance
4. Purchases balance
5. Accounts Receivable balance

Let Us Remember
Instruction: This is a multiple-choice question with four choices. Choose the
letter with the best answer and explain why you choose that answer. Every
correct explanation is equivalent to one point. Write it in a separate sheet of
paper.

1. The difference between net sales and ________ is gross margin.

a. profit
b. cost of goods sold
c. operating expenses
d. cost of goods sold plus operating expenses.
2. When does a physical count of inventory usually done?
a. at the start of the fiscal year
b. at the end of the fiscal year
c. in the middle of the fiscal year
d. at the peak of the busy season

3. An operating income of exactly zero will be earned by a merchandise if

a. cost of goods sold will equal net sales
b. net sales will equal to operating expenses
c. gross margin will equal cost of goods sold
d. operating expenses will equal gross margin

4. The following activities are components of the operating cycle. Which one
is not?
a. Merchandise is sold
b. Merchandise is ordered
c. Merchandise is purchased
d. Cash collection from a sales of merchandise

5. Companies who used the periodic inventory system are those that sell
a. low volume, low-priced merchandise
b. low volume, high-priced merchandise

42
 c. high volume, high-priced merchandise
d. high volume, low-priced merchandise

6. Which of the following is not a merchandising company?

a. pharmacy c. beauty saloon
b. grocery store d. automotive parts dealer

12. When is the sale on April 21 with terms of n/10 eom due?
a. May 1 c. May 10
b. May 30 d. April 30

13. The following goods are merchandise inventory. Which one is not
included for a purchasing company?
a. Goods received from the supplier
b. Goods in transit, FOB destination
c. Goods on hand in the display room
d. Goods in transit, FOB shipping point

8. Three of the terms mean the same as the others. Which one is not?
a. Gross profit c. Operating profit
b. Bottom line d. Profit from operations

9. If gross margin exceeds __________, operating income will result.

a. purchases
b. cost of goods sold
c. operating expenses
d. cost of goods sold plus operating expenses

10. The following are operating expenses. Which one is not?

a. Freight out c. Advertising expense
b. Cost of good sold d. Administrative expense

11. Which of the following activities would cause the merchandise

inventory to become part of cost of goods sold? When the company
a. pays the inventory
b. sells the inventory
c. purchases the inventory
d. receives payment from a customer

12. What does the entry includes to record the return of goods from a
customer?
a. debit Sales
b. credit Sales
c. debit Sales Returns and Allowances
d. credit Sales Returns and Allowances

43
14. Which of the following accounts will not be used in a perpetual
inventory system?
a. Sales
b. Purchases
c. Cost of goods sold
d. Merchandise Inventory

15. An additional entry will be made by the company after making an entry
to record sales under the perpetual inventory system. What would that entry
be?
a. Debit Cost of goods sold and credit Purchases
b. No need of additional entry until the end of the period
c. debit Cost of goods sold and credit Merchandise Inventory
d. debit Merchandise Inventory and credit Cost of goods sold

Let Us Assess
Instruction: Write your answer on a separate sheet of paper. Write TRUE if
the statement is true. Write FALSE if the statement is false but provide the
statement or word that will make the sentence true. Every correct statement
or word that will make the statement true is equivalent to two (2) points.

1. The chart of accounts for a service entity is different from

that of a merchandising entity.
2. The term is stated as FOB destination if the seller is to shoulder
the cost of delivery.
3. Under the perpetual inventory system, there is no need for a
physical inventory count.
4. An extra computer table owned and sold by ABC pharmaceuticals
who is engage in selling medicine, forms part of the inventory.
5. The primary distinction of between service and merchandising
business is the existence of merchandise inventory.
6. An advantage of using the periodic inventory system over the
perpetual inventory system is that it requires less recordkeeping.
7. For cash sales, the operating cycle is from cash to inventory to
accounts receivable and back to cash.
8. The difference between net sales and operating
expenses in a merchandising company is called gross
margin.
9. What makes the set up of merchandising company unique is how it
keeps track on its inventories.
10. The periodic inventory system is characterized using the
inventory account as an asset.

44
 11. The perpetual inventory system calls for physical count of inventory
while the periodic inventory system does not need to establish ending
inventory since it is already reflected in the stock cards.
12. Equipment purchased not for resale should be debited to the
purchases account.
13. Cash discounts from the seller’s point of view is called purchase
discounts.
14. The two main systems for accounting for merchandise are
perpetual and periodic.
15. The merchandise inventory, beg. Represents the cost of merchandise
sold.

Let Us Enhance

Instruction: Prepare the following schedule and statement:

1. Schedule of Cost of Goods Sold
2. Schedule of Operating Expenses
3. Statement of Comprehensive Income

Jubelle Construction Supplies is a client of Fernando delacruz

Dumandan & Co. , CPAs. The owner Jubelle needs the assistance of the firm.

Below is the Trial Balance of Jubelle Construction Supplies as of

December 31, 2020.

Jubelle Construction Supplies

Trial Balance
December 31, 2020

Cash in Bank 2,250,000

Accounts Receivable 215,000
Estimated Uncollecible Accounts 3,980
Merchandise Inventory, beg. 3,120,000
Unused Supplies 45,000
Furniture and Fixture 1,210,000
Accumulated Depreciation- Furniture and Fixture 530,000
Accounts Payable 980,000
Jubelle, Capital 2,483,050
Jubelle, Drawing 50,000
Sales 5,800,000
Sales Discounts 10,200
Sales Returns and Allowances 13,600
Purchases 2,174,571

45
Purchase Discounts 6,100
Purchase Returns and Allowances 11,000
Freight In 8,901
Sales Salaries 178,000
Office Salaries 123,000
Taxes and licenses 71,142
Rent Expense 182,000
Utilities Expense 82,000
Sales Commission 80,716
Total P 9,814,130 9,814,130

Additional Data: Merchandise Inventory, end is 1,020,000

Let Us Reflect

If you are to choose a merchandising business in the future, what

would it be and why? With the merchandising business that you have chosen,
what inventory system do you think is appropriate to use? Explain.

Write your answer in a separate sheet of paper. Please be guided with

the rubric below in answering this question.

46
 CATEGORY 5 4 3 1
Excellent Very Good Average Unacceptable
IDEAS This paper is This paper is The writer is As yet, the paper
clear and mostly focused, beginning to has no clear
focused. It holds and has some define the topic, sense of purpose
the reader’s good details and even though or central theme.
attention. quotes. development is To extract
Relevant details still basic or meaning from the
and quotes general. text, the reader
enrich the must make
central theme. inferences based
on sketchy or
missing details.
Organization The organization Paper (and The The writing lacks
enhances and paragraphs) are organizational a clear sense of
showcases the mostly organized, structure is direction. Ideas,
central idea or in order, and strong enough to details, or events
theme. The makes sense to move the reader seem strung
order, structure the reader. through the text together in a
of information is without too loose or random
compelling and much confusion. fashion; there is
moves the reader no identifiable
through the text internal
structure.
Conventions The writer The write Conventions are Errors in
demonstrates a understands sometimes spelling,
good grasp of good writing handled well and punctuation,
standard writing conventions and enhance capitalization,
conventions (e.g., usually uses readability; at usage, and
spelling, them correctly. other times, grammar and/or
punctuation, Paper is easily errors are paragraphing
capitalization, read and errors distracting and repeatedly
grammar, usage, are rare; minor impair distract the
paragraphing) touch-ups would readability. reader and make
and uses get this piece the text difficult
conventions ready to publish. to read.
effectively to
enhance
readability.
https://www.uen.org/rubric/previewRubric.html?id=20123

47
 48
Let Us Enhance Let Us Practice More
Cost of Goods Sold - P 4,248,570.00 Activity 2
Operating Expenses - P 716,858.00 1 Cash 1,201,430.00
2 Accounts Payable 202,000.00
Net Income - P 810,772.00
3. Accounts 78,100.00
Receivable
4 Sales 649,100.00
5 Purchases 180,000.00
Let Us Practice More
Activity 1
GENERAL JOURNAL
2020 Particulars Folio Debit Credit
Jan. 1 Cash in Bank 950,000.00
Merchandise Inventory 300,000.00
Transportation Equipment 1,800,000.00
Frank, Capital 3,350,000.00
Investment of Frank
2 Purchases 120,000.00
Cash in Bank 120,000.00
Purchases of merchandise for cash
Freight-in 3,000.00
Cash in Bank 3,000.00
Payment of freight
3 Cash in bank 4,000.00
Purchase Returns & Allowances 4,000.00
Return of merchandise purchased
5 Cash in bank 147,000.00
Sales 147,000.00
Sales of merchandise with a discount
Freight-out 4,200.00
Cash in Bank 4,200.00
7 Purchases 60,000.00
Accounts Payable -AR Co. 60,000.00
Sale of merchandise with a discount
Let Us Practice
Activity 1
1. A
2. B
3. B
4. D
5. B
Acitivty 2
1. Clear presentation of accounts; Cost of Sales should be in good form
2. Right column; figures are properly presented and in the
3. Sales should show the correct amount of cost of
Answer Key
 49
Let Us Remember Let Us Assess
1. B 1. True
2. B 2. True
3. D 3. False
4. B 4. False
5. D
5. True
6. C
6. False
7. C
8. B 7. False
9. A 8. False
10. C 9. True
11. B 10. False
12. B 11. False
13. C 12. False
14. B 13. False
15. C 14. True
15. False
 References

Department of Education – Bureau of Learning Resources. Basic Calculus:

Learner’s Material Pasig City: Department of Education.

Pelias, J.G.B. (2018). Basic Calculus (First Edition). Rex Book Store, Inc. REX
Knowledge Center, 109 Sen M Cuenco Sr, Quezon City, 1114 Metro
Manila, PH

50
For inquiries or feedback, please write or call:

Department of Education – Region XI Davao City Division

DepEd Davao City, Elpidio Quirino Ave., Davao City

Telefax: 224-3274

Email Address: davaocity.division@deped.gov.ph