Module 2

Completing the Accounting Cycle of a

Merchandiser
 Service and Merchandising-
Difference
 Merchandise, Inventory , Purchases, Sales
Manufacturer Wholesaler Retailer Consumer

Wholesaler- one who buys in bulk from

the manufacturer and sells them to other
wholesalers or retailers
Retailer- buys goods from the
manufacturer or wholesaler and sells
them to ultimate consumers
Sales, Purchases, Merchandise Inventory-
are the major component of determining
net profit in a merchandising business
 Financial Statements (pages 167-171)
1. Income Statement
2. Statement of Changes in Equity
3. Statement of Financial Position
4. Statement of Cash Flows
 Merchandising Concern
1. Inventory System (pages 185-187)
- difference between service and merchandising is the current
asset account called Merchandise Inventory for goods available
for sale.
Two Methods of Accounting for Inventory:
a. Perpetual method-there is complete or continuous recording
of the merchandise from the time it is purchased to the time it is
sold. This is usually adopted by a business which sells high
priced- low volume goods such as car dealers and real estate
companies.
b. Periodic method- merchandise bought is recorded as Purchase
representing goods available for sale. This is used by business
selling low price high volume goods like supermarket and
hardware stores where it is difficult to track down every item
sold.
 Merchandising Concern
2. Sales Discount ( A contra-revenue account)
a) Trade Discount- a percentage reduction from a published list price to
retailers or wholesalers buying large quantities or for regularly
patronizing the business
b) Cash Discounts –when goods are sold on credit, termsof payment
depends on the custom of industry. Cash discount is meant to
encourage a customer to pay immediately.
c) Ex. 2/10, n30 means, 2% cash discount if paid within 10 days, and due
date is within 30 days , but on Day 11, no discount is granted.
Entries:
Mar . 1 Dr. Accounts Receivable 4,000
Dr. Cash on Hand 2,000
Cr. Sales 6,000
Mar. 8 Dr. Cash on Hand 3,920
Dr. Sales Discount 80
Cr. Accounts Receivable 4,000
 Merchandising Concern
3. Returns & Allowances
a) A customer returning a merchandise if it is
defective . This is a contra revenue account.
Entries:
May 1Dr. Cash on Hand 15,000
Cr. Sales 15,000
May 8Dr. Sales Returns & Allowances 4,500
Cr. Cash 4,500
 Merchandising Concern
Sales 120,000
Less: Sales Discount 3,500
Sales Returns & Allo. 8,500 12,000
Net Sales 108,000
 Merchandising Concern
4. Purchases
Dr. Purchases 50,000
Cr. Accounts Payable 50,000

5. Purchase Returns & Allowances

Dr. Accounts Payable 5,000
Cr. Purchase Returns & Allo. 5,000

6. Purchase Discount
Dr. Accounts Payable 50,000
Cr. Purchase Discount 1,000
Cr. Cash in Bank 49,000

7. Freight –in –cost of transporting goods by the seller to the buyer.

FOB Shipping point-title of ownership passed to the buyer as soon as seller turns over the goods to a common carrier.
FOB Destination- Free on Board (FOB)- the seller is liable for the freight and is still considered owner of the goods until it
reaches the buyer.
 Income Statement of Merchandising Concern
Pages 200-201
Gross Sales xxx
Less: Cost of Sales (xxx)
Gross Profit xxx
Less: Operating Expenses
Selling Expenses (xxx)
Admin.Expenses (xxx) (xxx)
Operating Income xxx
Add: Other Revenues & gains xxx
Less: Other Expenses & Losses (xxx)
Net Income xxx
 Delta Hardware
Computing Cost of Sales
Sales 253,000
Less: Sales Ret. & Allowances (8,000)
Net Sales 245,000
LESS: Cost of Sales
Beginning Merchandise Invty, Jan.1 134,000
Add: Freight-in 8,500
Add: Purchases 126,000
Less: Purchase Discount (4,000)
Purchase Ret.&Allo. (2,000)__ (120,000)
Less: Ending Merchandise Inv, Dec.31 (80,000)
Gross Profit 45,000
Gross Profit Ratio = 45,000/245,000 x 100= 18.37%
 Exercise
Page 209, #1 Supply the missing item.
 Post-Closing Trial Balance (pages 170-
171).
This is the final trial balance to prove the
equality of debits and credits after the
closing entries are done.
In ERP softwares like Quickbooks, SAP,
closing entries are done in a simple
process (or a click).
Financial Statement Analysis (pages 172-
174).
1.Profitability-ability of the entity to
provide adequate profit for the business.
2. Liquidity- ability of the business to pay
for its short-term obligations.
3. Solvency- ability of the business to pay
for its long-term obligations
Acquisition & Sale of Properties
Acquisition & Sale of Properties
 Interest Bearing Note
(per month)
Interest= Principal x Interest Rate x Time
=P5,000 x 18% x 30/360
=P 75.00
Maturity Value= Principal + Interest
=P5,000 + P75
=P5,075.00
Entry: (Creditor-nagpautang) Entry (Debtor-nangutang)
Dr. Cash 5,075 Dr. Notes Payable 5,000
Cr. Notes Receivable 5,000 Dr. Interest Expense 75
Cr. Interest Income 75. Cr. Cash on Hand 5,075
To record collected note plus interest To record payment for note.
 Adjusting Entries
Adjusting entries- are journal entries needed to update accounts and ensure accuracy of information in
the financial statements, mostly based on accrual principle.
1.Accrued Income- income already earned but uncollected (ex. Interest-bearing note).
Dec 31 Dr. Interest Receivable
Cr. Interest Income
2. Accrued Expense- expense already used up but unpaid such as utility bill from PLDT.
Dec 31 Dr. Salaries Expense
Cr. Salaries Payable

3. Prepaid Expense- advance payment for an expense such as one yea payment for rent. Two methods
(asset & expense method). We use the asset method for a natural flow of transaction from asset to
expense.
Jan.1 Dr. Prepaid Rent 24,000
Cr. Cash 24,000
Jan 31 Dr. Rent Expense 2,000
Cr. Prepaid Rent
 Adjusting Entries

4. Deferred Revenue- advance collection for an income such as one year receipt for tuition.
Jan1. Dr. Cash on Hand 24,000
Cr. Unearned Rent Income 24,000
Jan 31 Dr. Unearned Rent Income 2,000
Cr. Rent Income 2,000
5. Bad Debts- accounts of customers that cannot be collected anymore or are doubtful of collection. (Direct write-off method and/or
Allowance Method)
Jan 1. Dr. Accounts Receivable 80,000
Cr. Service Income 80,000
To record credit sales
Feb 1 Dr. Cash 50,000
Cr. Accounts Receviable 50,000
To record collection of accounts receivable, balance of P30,000
Dec 31 Dr. Doubtful Accounts Expense 1,500
Cr. Allowance for Dountful Accounts 1,500
To record an allowance for doutsful accounts of 1.5% of accounts receivable balance.
Presentation in the Balance Sheet:
Accounts Receivable 30,000
Less: Allowance for Doubtful Accounts (1,500)
Net , Accounts Receivable 28,500
 Adjusting Entries
6. Depreciation- decrease in utility value of acquired assets subject to :
a) Wear & tear
b) Obsolescence
c) Inadequacy
Depreciation = Cost – Scrap value (if any)
Useful Life (in years)
Building (no scrap value) 1,000,000 for 10 years on Jan.1, 2023
Depreciation = 1,000,000/10 years=90,000 annually
=90,000/12 mos. = 7,500 monthly
Entry:
Jan. 31, 2023 Dr. Depreciation Exp. 7,500
Cr. Accumulated Depreciation 7,500
Presentation in the Balance Sheet:
Property, Plant & Equipment
Jan 31 -Monthly Dec 31, 2023 Annually
Building: 1,000,000 Building 1,000,000
Less: Accumulated Depreciation (7,500) Less: Accumulated Dep. (90,000)
Building, net of depreciation 992,500 Building, net of depreciation 910,000
 Adjusting Entries

Presentation in the Balance Sheet:

Property, Plant & Equipment
Jan 31 -Monthly Dec 31, 2023 Annually
Building: 1,000,000 Building 1,000,000
Less: Accumulated Depreciation (7,500) Less: Accumulated Dep. (90,000)

Building, net of depreciation 992,500 Building, net of depreciation 910,000

Entries:
Jan 31 Dr. Depreciation Expense 7,500
Cr. Accumulated Depreciation 7,500
Dec. 31Dr. Depreciation Expense 90,000
Cr. Accumulated Depreciation 90,000
 Adjusting Entries

Solve pg 142- 143 (Board Exercise)

Financial Statement Presentation
Closing the Books
Financial Analysis
Financial Statement Presentation
Closing the Books
Financial Analysis
Discuss pages 157-175
Assignment : Exercises 1 and 2 page
177