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UNIVERSITY OF SAINT LOUIS

Tuguegarao City
SCHOOL OF ACCOUNTANCY, BUSINESS and HOSPITALITY

First Semester
Academic Year 2021-2022
ONLINE LEARNING MODULE

ACCT 1026- Financial Accounting and Reporting
Lesson 5: Adjusting Entries
REMINDERS:
 Lessons will be uploaded every Monday, and submission of assessments will be every Friday of the
week.
 Comply with all requirements (written outputs, projects/performance tasks examinations and the like.)
 Turn in learning tasks on time to avoid backlogs.
 For this week, the following shall be your guide for the different lessons and tasks that you need to
accomplish. Be patient, read them carefully before proceeding to the tasks expected of you.
Date Topics Activities or Tasks

Sept 13 I. Adjusting entries Read Lessons from books and handouts
Sept 14-16 A. Accruals of income and expense Online discussion
Sept 17-18 B. Depreciation and Doubtful Accounts Accomplish the drills and exercises
C. Deferrals of income and expense
Sept 20 Submission of Assessments
D. Preparation of adjusted trial balance
Sept 21 Participate in the scheduled Quiz
Learning At the end of this module, you are expected to:
Outcomes: 1. Identify the types of adjustments and their purposes.
2. Prepare the adjusting entries
3. Interpret the effects of omission of adjusting entries in the Financial Statements
4. Prepare a properly classified Adjusted Trial Balance
LEARNING CONTENT
Let us continue our study of the accounting cycle.
Steps in the Accounting Cycle:
1. Identifying and Analyzing – finished

2. Journalizing - finished
3. Posting – finished
4. Preparing the Unadjusted
Trial Balance – finished
5. Preparing the Adjusting Entries - now showing
6. Preparing the Adjusted Trial Balance – coming next
ACCT 1026 – Financial Accounting and Reporting | 1
WARNING: No part of this E-module or LMS contentcan be reproduced or transported or shared

to others without permission from the University of Saint Louis. Unauthorized use of the
materials, other than personal learning use, will be penalized. Please be guided accordingly.
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Adjusting Entry is a mandatory procedure for businesses using the accrual basis of accounting. It is
prepared at the end of the year just before the financial statements are finalized to:
 Take up unrecorded income and expenses for the accounting period and
 Split mixed accounts into real and nominal accounts.
https://www.writework.com/essay/cash-and-accrual-paper-1
I hope you still remember the topic on cash basis and accrual basis of accounting? If not, go over your
Journal of Learning for a refresher. This diagram says everything about adjusting entries. Pay close
attention.
Regrouping the items for adjusting journal entries in another way is:
 Accruals – accrued expense and accrued income

 Deferrals – prepaid expenses and unearned income
 Estimates – depreciation and bad debts fall under this category

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Definition of Some Terms
Real Accounts – are the accounts appearing in the Statement of Financial Position (SFP). They are also
referred to as permanent accounts. Real accounts are retained and rolls forwards its
ending balance at the end of the year to become the beginning balances in the next
period.
https://www.differencebetween.com/difference-between-nominal-account-and-vs-real-account/
Nominal Accounts – are accounts appearing in the Income Statement, also referred to as temporary
accounts. These accounts are closed at the end of the accounting period.
https://www.wallstreetmojo.com/nominal-account/
Mixed accounts – have both the components of real and nominal accounts.
The application of the accrual basis of accounting will necessitate the adjusting entries for the following:
ACCRUAL – is recognition of an expense already incurred but unpaid and recognition of a revenue already
earned but not yet collected.

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1. Accrued Expense - are expenses a company accounts for when they happen, as opposed to when
they are actually invoiced or paid for. An accrual method allows a company’s financial statements,
such as the balance sheet and income statement, to be more accurate.
https://valueinvestingphilippines.wordpress.com/2014/01/12/cash-flow-part-9-current-liability-accrued-expense/
Accrued expenses, looking at another angle, are expenses a company knows it must pay, but
cannot do so because it has not yet been billed for them. Under accrual accounting, the company
accounts for these costs anyway so that the management has a better indication of what its total
liabilities really are.
Here are some common examples of expenses that can be accrued:
Interest on loan(s) Goods received
Services received Wages for employees
Taxes Commissions
Utilities Rent
Illustration 1. Interest on Notes Payable
Assume that Dec. 31 is the end of the accounting period. And no interest has been paid for a 60-
day, 6% note for P3,000,000 issued on Nov. 11, 2020.
Take note that interest on notes payable is recorded when it is paid in cash when it matures on January 10,
2021. Following accrual system of accounting, the business should pass an adjusting entry on December
31, 2020 as follows:

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Adjusting Journal Entry:

DATE ACCOUNT TITLES DR CR COMPUTATION: I= PRT
12/31/2020 Interest Expense 25,000
Accrued Interest Payable 25,000 I = P3,000,000 x 6% x 50 / 360
accrual of interest I= P25,000
*** Interest Expense is an Income Statement account while Accrued Interest Payable is a Balance Sheet
account
2. Accrued Revenue – or Accrued Income refers to income that has been earned or is not yet
due for collection. Under accrual accounting, income is considered as earned or realized in the
period when the service is rendered.
Illustration 2. Accrued Rent Income
The business subleases a portion of the store to a Sweepstakes ticket vendor for P3,000 a month. The end
of the fiscal period is March 31, 2021. No payment has been made for the last three (3) months and no
entry has been made to record this income.
DATE ACCOUNT TITLES DR CR

3/31/2021 Rent Receivable 9,000
Rent Income 9,000
accrual of rent from Jan-March, 2020
(P3,000 x 3 months)
*** Rent Income is an Income Statement account while Rent Receivable is a Statement of Financial
Position account
Illustration 3. Accrued Interest on Notes Receivable


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Assume that June 30, 2021 is the end of the accounting period. And no interest has been paid for a 120-
day, 12% note for P5,000,000 issued on April 16, 2021.
COMPUTATION: I= PRT
Interest = 5,000,000 x 12% x 75/360
DATE ACCOUNT TITLES DR CR Interest = P125,000
6/30/2021 Interest Receivable 125,000
Interest Income 125,000 COMPUTATION: NUMBER OF DAYS
accrual of Interest from May 16-June 30 16-Apr 30-16 15
May 31
June 30
TOTAL days 75
*** Interest Income is an Income Statement account while Interest Receivable is a Balance Sheet account.
3. Depreciation of Fixed Assets

Fixed assets also referred to as Plant, Property and Equipment and Non- Current Assets are those long-
lived and permanent in nature. They are acquired by the business used by the business in its operation and
are not intended for sale. Common examples are:
Although durable and permanent in nature, with the exception of Land, these properties decrease in value
due to
https://www.slideshare.net/AshaA9/unit-v-depreciation-70547272
The gradual decrease in the value of a fixed asset attributable to reasons stated above is called
depreciation.

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https://www.slideshare.net/TarekAElsherif/fixed-assets-and-depreciation-methods
There are several methods of computing depreciation but the Straight Line Method will be used in our
discussion. Other methods of computation will be introduced in higher accounting subjects.
The following factors are considered in the computation of depreciation:
Original Cost – refers to the invoice price less discounts plus incidental costs such as installation
and freight.
Estimated Useful Life – the length of time expressed in years during which a depreciable fixed asset
is expected to contribute to operations.
Estimated Scrap or Salvage Value – refers to the estimated amount to be realized when the asset
sold after its serviceable life.
Illustration 4 – Depreciation of Fixed Assets
Problem: The following items appear on the pre-adjusted trial balance on June 30, 2021:
The Delivery Equipment was bought on May 04, 2021 estimated to last for 5 years with estimated scrap
value of P120,000. As a matter of company policy, May 4 to 31 is considered a month.
Computation of Annual Depreciation

Original Cost 1,200,000
Less: Estimated Salvage Value 120,000
Depreciable Cost 1,080,000
Divided by: Estimated Useful
Life 5

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Depreciation Expense per year 216,000
6/30/2020 Depreciation Expense (216,000 x 2/12) 36,000

Accumulated Depreciation, Delivery Equipment 36,000
depreciation expense from May 04 to June 30
How much is the Net Book Value of the Delivery Equipment as of June 30, 2021?
Original Cost 1,200,000

Less: Accumulated Depreciation 252,000
Net Book Value/Carrying Amount 948,000
Accumulated depreciation is the sum of all recorded depreciation on an asset to a specific

date. Accumulated depreciation is presented on the balance sheet just below the related capital asset line.
It is also called a contra asset account.
4. Bad Debts or Estimated Uncollectible Accounts
Bad debts or Uncollectible accounts is an inevitable risk of doing business on credit terms. Not all
customers availing credit will be able to pay for varied reasons. Some of the reasons for the failure of
collection are bankruptcy of the debtor, unwillingness to pay due to unsettled disputes. Regardless of the
reason, accounting practitioners must be able to reflect the estimated uncollectible account in the current
period.
There are several methods being used in the computation of estimated uncollectible accounts. Please refer
to the diagram below:
Illustration 5 – Estimated uncollectible accounts or bad debts

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a) Assume that Accounts Receivable has a balance of P240,000. It is estimated that 5% of this will be
uncollectible.
Adjusting Entry:
Bad Debts Expense (P240,000 x 5%) P12,000

Allowance for Bad Debts P12,000
b) Experience shows that 7% of accounts receivable will be uncollectible. The balance of accounts
receivable is P190,000 and the balance of the allowance for doubtful accounts is P5,800.
Adjusting Entry:
Doubtful Accounts Expense P7,500

Allowance for Doubtful Accounts P7,500
Computation:
Estimated doubtful accounts (190,000 x 7%) P13,300
Less: Amount already setup for allowance 5,800
Doubtful Accounts Expense P 7,500
DEFERRAL – is the postponement of the recognition of an expense already paid but not yet incurred or of a
revenue/income already collected but not yet earned. This adjustment deals with an amount already
recorded as of balance sheet date.
5. Prepaid Expense are assets of the current period but expenses of the future. It may include
unused supplies and services which have already been paid for but the benefits apply to future
periods.
There are two (2) acceptable methods of accounting for Prepaid Expenses:
 Asset Method debits (DR) an asset account upon the payment of cash
 Expense Method debits (DR) an expense upon the payment of cash
Adjustments related to Prepaid Expenses depend on whether the Asset or Expense method was
used in its original entry.
https://www.slideserve.com/long/adjusting-entries-prepayments

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Illustration 1: Prepaid Rent
On December 01 2020, the business paid rent for three (3) month in advance amounting to P60,000
to cover six month rent commencing in December.
EXPENSE METHOD ASSET METHOD

Journal Entry Journal Entry
ACCOUNT
DATE TITLES DR CR DATE ACCOUNT TITLES DR CR
12/1/2020 Rent Expense 60,000 12/1/2020 Prepaid Rent 60,000
Cash 60,000 Cash 60,000
payment of rent payment of Rent
On Dec. 31, 2020, the end of the calendar year, the composition of the Rent paid is as follows:
Expense portion: rent for December P10,000

Asset portion prepaid rent Jan-May 50,000
There is now a need to split the asset and expense portion to present correct amount Prepaid Rent
and Rent Expense in the financial statements. Farther to the example above, if we are to prepare the AJE
at the end of the calendar year:

DATE ACCOUNT TITLES DR CR DATE ACCOUNT TITLES DR CR
12/1/2020 Rent Expense 60,000 12/1/2020 Prepaid Rent 60,000
Cash 60,000 Cash 60,000
payment of Rent payment of Rent
Adjusting Journal Entry Adjusting Journal Entry

12/31/2020 Prepaid Rent 50,000 12/31/2020 Rent Expense 10,000
Rent Expense 50,000 Prepaid Rent 10,000
adjusting entries for Rent adjusting entry for Rent
To make you understand better, let me help you analyze the above transaction by way of a T-account:

RENT EXPENSE PREPAID RENT
1-Dec 60,000 50,000 31-Dec 1-Dec 60,000 10,000 31-Dec
BAL BAL
12/31 10,000 12/31 50,000

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Either the expense or the asset method is used, both options will give you the same result.
On Dec. 31, 2020, the end of the calendar year, the composition of the Rent paid is as follows:
Expense portion: rent for December P10,000

Asset portion : prepaid rent Jan-May 50,000
Notes on the Asset and Expense Method:
 The expense method debits (DR) an expense in the Original Entry

 The Asset method debits (DR) an asset account in the Original Entry
 The expense method credits(CR) or reverses the expense account in the AJE and debits an Asset
account
 The Asset Method credits (CR) or reverses the asset account in the AJE and debits an expense
account
 Regardless of the method used the results after adjustment are the same
 In all AJEs, no cash is involved and no supporting documents are required.
2. Unearned Revenue or Income – cash is received in the current accounting period and earned in future
accounting period. It is considered as a liability because it represents obligation to render services for
the amount collected in advance.
https://learn.canvas.net/courses/37/pages/study-deferred-revenues-cash-is-received-before-revenue-is-recognized
There are 2 methods of accounting for Deferred Income
 Liability Method credits (CR) a liability account upon receipt of Cash in advance
 Income Method credits (CR) an income account upon receipt of Cash in advance
Illustration 2: Unearned Interest Income
On December 16, 2020, a business received a P1,000,000 60-day note, discounted at 6% from
Marvelous Industries to fund its incoming checks. Assume a calendar period.
How do you determine if the Interest is referring to a Note Payable or to a Note Receivable?

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In analyzing these types of transactions:

 Be attentive to the technical terms being used
 Discounting is a technical term to indicate advance payment of interest
 You are analyzing the transaction from the point of view of the business, hence the term receive
means that the business is the Creditor
 Since business is Creditor, the interest received in advance is an Interest Income
 Unless specified on monthly basis, Interest rates are normally on a per annum, hence it is divided
by 360 days (I = PRT)
Applying the two methods in accounting for Interest received in advance:
LIABILITY METHOD INCOME METHOD

12/16/2020 Notes Receivable 1,000,000 12/16/2020 Notes Receivable 1,000,000
Unearned Interest 10,000 Interest Income 10,000
Cash 990,000 Cash 990,000
discounting of Notes Receivable discounting of Notes Receivable
At the end of the accounting period, an adjusting entry is necessary to separate the liability from the earned
portion of Interest Income.
On Dec. 31, 2020, the end of the calendar year, the composition of the Interest Income is as follows:
Income portion: Interest for December 16-31 (15/60 x P10,000) P2,500

Liability portion: Interest for January to Feb 14 (45/60 x P10,000) 7,500
(P7,500 will be earned next accounting period)
TOTAL P10,000
By way of T-account analysis, we will get the same result, viz:
LIABILITY METHOD INCOME METHOD

UNEARNED INTEREST INTEREST INCOME
10,000 16-Dec 10,000 16-Dec
31-Dec 2,500 12/31 7,500
BAL BAL
AJE 7,500 12/31 AJE . 2,500 12/31
Very Important Note:
If adjusting entries are to be prepared with the aid of a pre-adjusted trial balance, the adjustment of
DEFERRALS depends on the related account which appears on such trial balance.

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Illustration 3 – Adjusting Entries with the aid of an Unadjusted Trial Balance
Problem: The following item appears on the unadjusted Trial Balance Dec. 31:
Credit
Rent Income P90,000
Required: Prepare the adjusting journal entry if rentals were received on Dec. 01 for three (3) months in
advance.
On Dec. 31, the composition of the total amount received of P90,000 is as follows:
Income portion : Rental for December (90,000/3) P30,000

Liability portion : Rental for Jan and Feb (90,000 x2/3) 60,000
The liability portion of P60,000 should be transferred from the Rent Income to the Unearned Rent account.
Dec. 31 Rent Income P90,000

Unearned Rent P90.000
To record unearned rentals for January and February
What is the method used? Income Method. How did I know? The Rent Income account says it all!
Below is a summary of the pro-forma adjusting entries that you have just learned. I hope this will
come handy:
1. Unpaid or Accrued expenses (expenses already incurred but not yet paid)
Dr. _________ expense Pxxx

Cr. (Expense) Payable Pxxx
2. Prepaid Expenses (expenses already paid but not yet incurred)
a) Expense Method:
Dr. Prepaid (Expense) >> for the asset portion at the end of the period
Cr. _________ Expense
b) Asset Method:
Dr. _________ Expense >>>to record the expense portion at the end of the period
Cr. Prepaid (Expense)
3. Uncollected or Accrued Income (income already earned but not yet collected)
Dr. (Income) Receivable Pxxx

Cr. ________ Income Pxxx

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4. Unearned or Deferred Income (income already received but not yet earned)
a) Income Method:
Dr. _________ Income >>> for the unearned portion at the end of period
Cr. Unearned (Income)
b) Liability Method:
Dr. Unearned (Income) >>> for income earned during present period
Cr. __________ Income
5. Depreciation of Non-Cash or Fixed Assets
Dr. Depreciation Expense Pxxx

Cr. Accumulated Depreciation – (Fixed Asset) Pxxx
6. Estimated Loss on Uncollectible accounts or bad debts
Dr. Bad Debts Expense Pxxx

Cr. Allowance for Bad Debts Pxxx
Posting the Adjusting Entries:
After the adjusting journal entries are recorded in the General Journal, they must be necessarily [posted in
the General Ledger so that the general ledger account balances will be adjusted accordingly. An adjusted
trial balance may then be prepared to prove posting accuracy of the adjusting entries.
***** END OF LESSON ****
REFERENCES
Textbooks
1. Ballada, W. (2019). Basic Financial Accounting and Reporting. Manila: DomDane Publishers.
2. Cabrera, E.(2017) Fundamentals of Accounting Volume I, GIC Enterprises & Co., Inc., Manila
3. Millan, Z. V. (2020). Financial Accounting and Reporting (Fundamentals). Baguio City: Bandolin
Enterprise.

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4. Valencia, E. and Roxas, G. (2017), Basic Accounting, Valencia Educational Supply

5. Valix, C. and Peralta, J. (2018). Financial Accounting Volume I GIC Enterprises & Co., Inc., Manila
Online Reference
1. Introduction to accounting, https://courses.lumenlearning.com/sac-finaccounting/chapter/chapter-1/

2. Accounting Basic https://www.accountingcoach.com/accounting-basics/explanation
3. Basic Accounting. https://www.bizfilings.com/toolkit/research-topics/finance/basic-accounting/the-
accounting-system-and-accounting-basics
4. Basic accounting and bookkeeping lessons, http://www.moneyinstructor.com/accounting.asp
5. Financial Accounting. https://www.accountingcoach.com/financial-accounting/explanation
6. Accounting Tutorials for Beginners. https://www.guru99.com/accounting.html

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UNIVERSITY OF SAINT LOUIS

Tuguegarao City
SCHOOL OF ACCOUNTANCY, BUSINESS and HOSPITALITY

First Semester
Academic Year 2021-2022
ONLINE LEARNING MODULE

ACCT 1026- Financial Accounting and Reporting
Lesson 7: Accounting Cycle of a Merchandising Company
REMINDERS:
 Lessons will be uploaded every Monday, and submission of assessments will be every Friday of the
week.
 Comply with all requirements (written outputs, projects/performance tasks examinations and the like.)
 Turn in learning tasks on time to avoid backlogs.
 For this week, the following shall be your guide for the different lessons and tasks that you need to
accomplish. Be patient, read them carefully before proceeding to the tasks expected of you.
Date Topics Activities or Tasks

Oct 11 Accounting for Merchandising Entity Read Lessons from books and handouts
Oct 12-13 A. Inventory Online discussion
Oct 14 B. Inventory System Accomplish the drills and exercises
Oct 15 C. The Accounting Cycle Submission of Assessments
Oct 16 D. Accounting for freight, shipping Participate in the scheduled Quiz
terms and freight requirements
E. Sales and Purchases subject to
Value Added Tax
F. Accounting for Payroll
Learning At the end of this module, you are expected to:
Outcomes: 1. Elaborate the different inventory systems
2. Explain the accounting treatment for various peculiar transaction for a
merchandising business
3. Explain the basic steps in the accounting process of a Merchandising Business.
4. Identify and explain the different shipping terms
5. Analyze sales and purchases transactions subject to VAT
6. Prepare payroll-related journal entries
LEARNING CONTENT
We are now done with the accounting cycle for a service company. The accounting process for the various
forms of business organizations are almost similar except for a few accounts. In this module, we will be
delving on the peculiar transactions for a merchandising or trading business entity,

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WHAT IS A MERCHANDISING BUSINESS?

A merchandising business, sometimes called merchandisers, is
one of the most common types of businesses we interact with
daily. It is a business that purchases finished products and resells
them to consumers.
Merchandising is the promotion of goods and/or services that are
available for retail sale. Merchandising includes the determination
of quantities, setting prices for goods and services, creating
display designs, developing marketing strategies, and
establishing discounts or coupons.
Merchandising companies purchase goods that are ready for sale
and then sell them to customers. Merchandising companies
include auto dealerships, clothing stores, and supermarkets, all of
which earn revenue by selling goods to customers.
In a merchandising sales transaction, the seller sells a product
and transfers the legal ownership (title) of the goods to the buyer.
A business document called an invoice (a sales invoice for the
seller and a purchase invoice for the buyer) becomes the basis
for recording the sale.

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SERVICE BUSINESS VS. MERCHANDISING BUSINESS
 Inventory is the term for the goods available for sale and raw materials
used to produce goods available for sale. Inventory represents one of
the most important assets of a business because the turnover of
inventory represents one of the primary sources of revenue
generation.
 Inventory refers to all the items, goods, merchandise, and materials

held by a business for selling in the market to earn a profit.
Inventories are assets:
 held for sale in the ordinary course of business
 in the process of production for such sale, or
 in the form of materials or supplies to be consumed in the
production process or in rendering of services
Inventory types:
 raw materials
 work in progress
 finished goods inventory
 merchandise inventory
The cost of inventories comprises:

 costs of purchase
 costs of conversion
 other costs incurred in bringing the inventories to their
present location and condition.

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INVENTORY SYSTEMS
There are two main types of inventory systems, the
perpetual inventory system and the periodic inventory
system. The main difference between the two systems
is how often inventory data is updated.
The perpetual inventory method is one in which
inventory data is updated continuously. When an order is
placed or received, that data immediately is entered into
the system to update the quantity and inventory
availability right away. This is where the term perpetual
comes from. Data is entered perpetually, or continuously,
as opposed to the periodic system, where data is updated
according to a set interval of time.
A periodic inventory system only updates the ending
inventory balance in the general ledger when a physical
inventory count is conducted. Since physical inventory
counts are time-consuming, few companies do them
more than once a quarter or year. In the meantime, the
inventory account in the accounting system continues to
show the cost of the inventory that was recorded as of the
last physical inventory count.
Under the periodic inventory system, all purchases made between physical inventory counts are recorded in
a purchases account. When a physical inventory count is done, the balance in the purchases account is then
shifted into the inventory account, which in turn is adjusted to match the cost of the ending inventory.

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Perpetual or periodic?
 Choice is merely a record-keeping choice, not a reporting choice
 Nature of inventory
 Computer system technology, e.g. optical scanners.
 Management objectives
 Cost
Perpetual Inventory Method Periodic Inventory System

A method of controlling inventory that maintains A method of calculating inventory that uses data on
continuous records on the flow of units of inventory beginning inventory, additions to inventory, and an
for all transactions. end-of-period count to deduce the COGS.
Provides better control and is more costly than the Purchases account:
periodic method. used to record purchases of inventory.
Stock losses more easily determined. Purchase returns and allowances account:
purchasing company returns goods to supplier or
receives a price reduction.
MARCH 6 Purchased inventory on credit P750.

PERPETUAL 750 PERIODIC
Dr INVENTORY 750 Dr PURCHASES 750
Cr ACCOUNTS PAYABLE 750 Cr ACCOUNTS PAYABLE 750

MARCH 11 Received a credit note for inventory returned P50.
PERPETUAL 750 PERIODIC
Dr ACCOUNTS PAYABLE 50 Dr ACCOUNTS PAYABLE 50
Cr INVENTORY 50 Cr PURCHASE RETURNS

and ALLOWANCES 50
Recording of payments are the same for either inventory method (assume P7 discount)
Accounts payable 700

Cash 693
Purchase Discount 7

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Sale- MARCH 20 Sold inventory on credit for P1050. Cost of inventory sold, P525.
PERPETUAL PERIODIC
Dr Accounts receivable 1 050 Dr Accounts receivable 1 050
Cr Sales 1 050 Cr Sales 1 050
Dr Cost of goods sold 525 NO ENTRY
Cr Inventory 525
Differences in Valuing Cost of Goods Sold
What Is Inventory Cost?
 Inventory costs comprise of all expenditures both direct and indirect, relating to acquisition,
preparation, and placement for sale.
 Discounts can change the total inventory costs.
 Trade Discounts
 Convert the catalog price to the actual price.
 Record inventory at discounted price.
 Cash Discounts
 Granted for payment of invoices within a limited time period.
 Record inventory using the net method or gross method.

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FINANCIAL STATEMENT PRESENTATION
 All inventory is in a saleable condition (e.g. supermarket).

 One Statement of Financial Position called ‘inventory’ is sufficient.
Error in Measuring Inventory
• Overstatement of ending inventory leads to:

– understatement of cost of goods sold
– overstatement of profit.
• Understatement of ending inventory leads to:

– overstatement of cost of goods sold
– understatement of profit.
PROBLEM 1
Eversoll Inc. uses the periodic inventory system.
June 1 On hand, 50 units @ P15.00 each P 750.00

5 Purchased 115 units @ P15.00 each 1,725.00
14 Purchased 75 units @ P15.00 each 1,125.00
Total cost of goods available for sale P3,600.00
30 On hand, 90 units
How many units did Eversoll, Inc. sell during June? ANSWER: 50+115+75-90= 150 UNITS
PROBLEM 2
Adam Inc. uses a perpetual inventory system.
Jan. 1 On hand, 10 units at P8 each P 80.00

4 Sold 8 units for P10 each 80.00
22 Purchased 50 units at P8 each 400.00
26 Sold 48 units for P10 each 480.00
How much is the ending inventory on January 31? ANSWER: 10-8+50-48= 4 UNITS
PROBLEM 3
During the current period, Audix Corp. sold products to customers for a total of P76,000. Due to defective
products, customers were given P2,800 in refunds for products that were returned and another P3,500 in
reductions to their account balances. Discounts in the amount of P5,500 were given for early payment of
account balances.
Prepare the Net Sales section of Audix’s income statement.


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ANSWER:
Sales revenue P 76,000

Less: Sales returns and allowances (6,300)
Sales discounts (5,500)
Net sales P 64,200
PROBLEM 4
Based upon the following data, determine the cost of merchandise sold for April.
Merchandise Inventory April 1 P 85,560

Merchandise Inventory April 30 96,330
Purchases 373,880
Purchases Returns & Allowances 14,760
Purchases Discounts 10,900
Freight In 4,135
ANSWER:
Cost of merchandise sold:

Merchandise Inventory April 1 P85,560
Purchases P373,880
Less: Purchases Returns and Allowances P14,760
Purchases Discounts 10,900 (25,660)
Net Purchases P348,220
Add Freight-In 4,135
Cost of merchandise purchased 352,355
Merchandise available for sale 437,915
Less merchandise inventory, April 30
(96,330)
Cost of merchandise sold P341,585
Purchases Returns and Allowances- is an account that is paired with and offsets the purchases account in
a periodic inventory system. The account contains deductions from purchases for items returned to suppliers,
as well as deductions allowed by suppliers for goods that are not returned.
Purchases Discounts- is a deduction that a company may receive if the supplier offers it and the company
pays the supplier's invoice within a specified period of time. The purchase discount is also known as a cash
discount or early-payment discount.
Freight-in- The shipping cost to be paid by the buyer of merchandise purchased when the terms are FOB
shipping point.
When you are shipping freight to your customers, the cost of making that delivery is an expense that comes
out of your ledger as a debit. This is considered a selling expense and is known as freight-out. When you
make a purchase and the supplier bills you for shipping that is referred to as freight-in.

PDFelement
PROBLEM 5
Hound Dog Bisquits reported the following financial data for 2019 and 2020:
2019 2020
Sales P700,000 P600,000
Sales returns and allowances (10,000) (D)
Net sales 690,000 580,000
Cost of goods sold:
Inventory, January 1 30,000 E
Net purchases A 340,000
Goods available for sale 250,000 380,000
Inventory, December 31 (40,000) (30,000)
Cost of goods sold B F
Gross profit C G
====== ======
Provide the answer for each missing letter above.
ANSWER:
A) P220,000 (P250,000 - P30,000)

B) P210,000 (P250,000 - P40,000)
C) P480,000 (P690,000 - P210,000)
D) P20,000 (P600,000 - P580,000)
19 P40,000 (from 2013 ending inventory)
F) P350,000 (P380,000 - P350,000)
G) P230,000 (P580,000 - P350,000)
PROBLEM 6
The following data are available for Carlton Products
Beginning Ending Operating

Year Sales Inventory Inventory Expenses
2018 P 93,600 P16,000 P24,000 P 8,000
2019 124,800 24,000 34,000 18,000
2020 156,000 34,000 26,000 12,000
Compute the purchases and the net income of Carlton for 2018, 2019, and 2020, assuming that the firm
sells its merchandise at 25 percent above cost.

PDFelement
ANSWER:
2018 2019 2020
Cost of goods sold (sales/1.25) . P74,880 P 99,840 P124,800
Ending inventory ................ 24,000 34,000 26,000
Goods available for sale ........ P98,880 P133,840 P150,800
Less beginning inventory ........ 16,000 24,000 34,000
Purchases ....................... P82,880 P109,840 P116,800
Sales ........................... P93,600 P124,800 P156,000

Less cost of goods sold ......... 74,880 99,840 124,800
Gross profit on sales ........... P18,720 P 24,960 P 31,200
Operating expenses .............. 8,000 18,000 12,000
Net income ...................... P10,720 P 6,960 P 19,200
Service Business Merchandising Business

Income Statement: Income Statement
Revenues Sales
Less: Operating Expenses Less Cost of Merchandise Sold
Equals: Net Income Equals: Gross Profit
Less: Operating Expenses
Equals: Net Income
Balance Sheet: Balance Sheet:

No Merchandise Inventory Account Includes Merchandise Inventory
Account in the Current Assets Section
PROBLEM 7
Truffles Company purchased merchandise on account from a supplier for P6,500, terms 2/10, net 30. Truffles returned
P1,500 of the merchandise and received full credit. Truffles Company paid for the merchandise within the discount
period.
Under a perpetual inventory system, record all of the journal entries required for the above transactions.
ANSWER:
(a) Merchandise Inventory 6,500

Accounts Payable 6,500
(b) Accounts Payable 1,500

Merchandise Inventory 1,500
(c) Accounts Payable 5,000

Cash 4,900
Merchandise Inventory 100

PDFelement
PROBLEM 8
The following data were extracted from the accounting records of Marcus Gallery for the year ended February 28,
2020.
Merchandise Inventory, March 1, 2019 P450,000

Merchandise Inventory, February 28, 2020 225,000
Purchases 175,000
Purchase Returns and Allowances 25,000
Purchase Discounts 10,000
Sales 680,000
Sales Returns 20,000
Transportation In 5,000
Prepare the cost of merchandise sold section of the income statement for the year ended February 28, 2008,
using the periodic system. Also determine gross profit.
ANSWER:
Marcus Gallery
Income Statement
For the Year Ended February 28, 2020
Sales P680,000
Less: Sales returns 20,000
Net Sales P660,000
Cost of Merchandise Sold
Merchandise inventory, March 1, 2019 450,000
Purchases 175,000
Less: Purchases returns and allowances P25,000
Purchase discounts 10,000 35,000
Net Purchases 140,000
Plus: Transportation in 5,000
Cost of Merchandise Purchased 145,000
Merchandise available for sale 595,000
Less merchandise inventory, February 28, 2008 225,000
Cost of merchandise sold 370,000
Gross profit P290,000
Accounting for Freight
What is the difference between Freight Prepaid and Freight Collect?
Freight, according to the manner of payment may either be prepaid or

collect. Prepaid means the freight must be paid before the goods maybe
transported. On the other hand, Collect if payment is expected upon delivery
of the goods.

PDFelement
The significance of shipping terms:
a. It determines when the transfer of ownership of the goods is effected

b. Ascertains who owns the goods that are in transit
c. Whoever owns the goods in transit will bear the cost of the freight
Shipping terms maybe –

a) Free on Board (FOB), shipping point or – goods to be delivered by seller to the point of shipment such
as aboard a ship, or train w/o further charge to the buyer. After the point of shipment, the seller is no longer
responsible for shipment expenses.
b) Free on Board, destination – goods are delivered by the seller aboard a train or ship up to its
destination thus, shipment expenses are the responsibility of the seller.
Very important Notes:

 If the buyer is the owner of the goods in transit, the cost of the freight paid by him is recorded in his
books as Freight-in and it is added to Purchases to form part of Cost of Sales.
 If the seller owns the goods in transit, the freight paid by the seller is recorded in his books as
Freight-out and it is treated as Operating Expense.
This diagram shows when ownership of goods in transit passes from the seller to the buyer.
Possible shipping terms and freight requirements are:

1. FOB Shipping point, freight prepaid
2. FOB Shipping point, freight collect
3. FOB destination, freight prepaid
4. FOB destination, freight collect

PDFelement
Who will shoulder for the freight

charges?
This is a very important diagram

for you –
Illustration 1: F.O.B. Shipping Point Freight Prepaid.

Seller S company sold on account to Buyer B company goods invoiced at P20,000 and paid P600 freight
charges. The goods were shipped FOB shipping point, freight prepaid.
Take note of the following entries:
Seller S Company Buyer B Company

Accounts Receivable P20,000 Purchases P20.000
Sales P20,000 Freight-in 600
Accounts Payable P20,600
To record sale to Buyer Company To record credit purchase and freight charges
Accounts Receivable P600
Cash P600
To record freight for the account of the

buyer

PDFelement
Illustration 2: F.O.B. Shipping Point Freight Collect.

Seller S company sold on account to Buyer B company at P10,000 F.O.B. Shipping point, freight collect.
Buyer B company paid the P400 freight upon receipt of the goods.

Sales P10,000 Accounts Payable P10,000
To record sale to Buyer Company To record credit purchase and freight charges
Freight – in P400
Cash P400
To record the payment of freight
Illustration 3. FOB Destination Freight Prepaid.

Seller S company sold on account to Buyer B company at P22,000, F.O.B. Destination, freight prepaid.
Seller S Company paid the shipping company bill of lading for P300.

*you may Sales P22,000 Accounts Payable P22,000
prepare a ,
compound To record sale to Buyer Company To record credit purchase and freight charges
entry for the Freight-out P300.00
seller if you Cash P300.00
want
To record payment of freight
Illustration 4. FOB Destination Freight Collect.

Seller S company sold on account to Buyer B company at P31,000, FOB. Destination, goods shipped FOB
Destination, freight collect. Buyer B Company paid P500 freight.

Accounts Receivable P 30,500 Purchases P31.000
Freight-out 500 Accounts Payable P31,000
Sales P31,000
, To record credit purchase and freight charges
To record sale to Buyer Company
Accounts Payable P500
Cash P500
To record payment of freight for the account of seller

PDFelement
Sales subject to Value-added Tax (VAT) at 12%
https://www.slideshare.net/KarlaJeanMedina/value-added-tax-taxable-sales-philippines
Illustration 5 - Sales Transaction with Value-added Tax
1) VAT Cash Sales Sales Invoice #143 was issued for P5,400 and 12% VAT was added accordingly.
Entry
Cash 6,048
Sales 5,400
Output Tax (5400 x 112%) 648
2) The company issued VAT charge Sales Invoice #144 to Gloria Labandera for P22,000, terms 3/10 n/30.
Entry Accounts Receivable 24,640

Sales 22,000
Output Tax (P22,000 x 112%) 2,640
3) The company accepted the return of defective goods and cash amounting to P2,800, VAT inclusive, was
returned by the customer in no 01 above.

PDFelement
Entry Sales Returns and Allowances 2,500

(P2,800/112%)
Output Tax (P2,500x12%) 300
Cash 2,800
4) The customer in No 2, Gloria Labandera above requested for a Sales Allowance of P672 for a slight
defect on the merchandise given to her. The seller issued a credit memorandum to acknowledge the
request. The sale was subject to VAT.
Entry Sales Returns and Allowances 600

(P672/112%)
Output Tax (P600x12%) 72
Accounts Receivable 672
5) Gloria Labandera paid her account in full within the discount period.
Entry Cash 23,248.96 Computation of Amount Subject to

Sales Sales Discount
Discount(P21,400 Original Amount of Sale 22,000
x 3%) 642.00 Less Sales Allowance 600
Output Tax (P642 x Basis of 3% Sales
12% 77.04 Discount 21,400
Accounts
Receivable 23,968.00
Purchases subject to Value-added Tax
Purchases subject to the 12% VAT has the same treatment as Sales with VAT only that you are recording
from the point of view of the buyer. The 12% VAT added to the buyer’s purchases are recorded as Input
tax.
Below is sample invoice with VAT. Observe how it is presented and computed in an actual Invoice.

PDFelement
Assume further that this is a Cash Sales invoice.
This is the amount to be paid by the customer for Cash

transactions or the amount to be recorded as Accounts
Receivable if this is on credit terms
This is the amount to be recorded as Sales (P4,490

divided by 12%)
This is the amount to be recorded as Output Tax,

representing 12% of Sales.(P4,008.92x12%)
Value-added Tax will be discussed in detail in your Income Tax subjects. The intention of this discussion is to
give the student a bird’s eyeview of a real life scenario.
The last topic for this week is Payroll Accounting

The pro-forma entries to record the compensation
and payment for employees’ services with related
deductions for agency liabilities are:
Salaries Expense xxx

SSS Premiums Payable xxx
Philhealth Contributions Payable xxx
Pag-ibig Contributions Payable xxx
Withholding Taxes Payable xxx
Cash xxx
Salaries expense is debited whenever payroll for employees’ compensationis prepared usually every 15th
and 30th of the month. Compensation for daily and weekly laborers may also be included, in which case the
account is accordingly entitled: Salaries and Wages.

PDFelement
Philhealth, Pag-ibig and SSS contributions are

government mandated deductions from the employees’
gross compensation where the employer is also mandated
to contribute.
SSS Premiums Payable are mandatory contributions deducted from the employees’ gross pay to be
remitted to the Social Security System on or before the deadline on the following month.
The SSS Premiums apply to both the employer and employees. Thus, on the same payroll day, the employer
will record his share of the employees SSS premiums with the following enty:
Dr. SSS Premiums Expense Pxxx

Cr. SSS Premiums Payable Pxxx
On the remittance date, the total of the employer and employee contribution will be remitted to the Social
Security System with the following entry:
Dr. SSS Premiums Payable Pxxx

Cr. Cash Pxxxx
Philhealth Contributions Payable is another government mandated deduction. The employer also has his
counterpart to this deduction. It is remitted to the Philippine Health Insurance Corporation as a total of the
employer and employee contribution on the following month on or before the designated due date.
Pag-ibig Contributions Payable is also a government mandated deduction. The company-employer share
is also recorded on the same payroll date. It is remitted in total to the Pag-ibig the following month after the
month of deduction.
Withholding Taxes Payable are income taxes withheld by the company- employer from the taxable
compensation of employees. Under the new Train Law, employees whose compensation and other income
exceeds P250,000 per year will be deducted every month and remitted by the employer the following month.
For computation of the withholding tax, there is a tax table provided, see this example below:

PDFelement
Again, this will be discussed in detail in your taxation subjects.
The company-employer normally provides a payslip to its employees that give details about their gross
income with their corresponding deductions for a payroll period. A sample payslip is provided below:
Sample
Payslip
End of Lesson 7
REFERENCES:
Textbooks
1. Ballada, W. (2019). Basic Financial Accounting and Reporting. Manila: DomDane Publishers.
2. Cabrera, E.(2017) Fundamentals of Accounting Volume I, GIC Enterprises & Co., Inc., Manila
3. Millan, Z. V. (2020). Financial Accounting and Reporting (Fundamentals). Baguio City: Bandolin
Enterprise.
4. Valencia, E. and Roxas, G. (2017), Basic Accounting, Valencia Educational Supply

PDFelement
5. Valix, C. and Peralta, J. (2018). Financial Accounting Volume I GIC Enterprises & Co., Inc., Manila
6. Porter, G. and Norton, C. (2017), Financial Accounting- The Impact on Decision Makers: Cengage
Learning.
Online Reference
1. https://corporatefinanceinstitute.com/resources/knowledge/accounting/accounting-equation/
2. https://bobsteelecpa.com/accounting-equation-account-types-and-the-double-entry-accounting-
equation/
3. https://www.bookstime.com/what-is-the-accounting-equation
4. https://www.accountingcoach.com/blog/expanded-accounting-equation
5. https://accounting-simplified.com/equity.html
6. https://www.investopedia.com/
7. https://courses.lumenlearning.com/suny-finaccounting/chapter/the-account-needed-for-a-
merchandising-business/
8. https://blog.ordoro.com/2012/01/16/types-of-inventory-systems-the-perpetual-inventory-system/
DRILLS/ ACTIVITIES/ APPLICATION
Drill No 01
On January 10, 2020, Marissa Barandino Fruits Dealer purchased P18,000 worth of merchandise from
Pascual Gener ; terms 1/10, n/30, F.O.B. shipping point. On Janaury 12, 2020, Barandino paid P360 freight
on the shipment. On January 15, 2020, Barandino returned P2,000 of merchandise on credit. Final payment
to Pascual Gener was made on January 19, 2020. Marissa Barandino uses the periodic inventory method.
Required: 1) Prepare Journal Entries for Marissa Barandino Fruits

2) Prepare the Journal Entries assuming that the terms are F.O.B. destination.
Drill No 02
Analyze and give journal entries under the periodic inventory system for these merchandising transactions of
Magdiwang Merchandising for the month of July 200A. Goods sold by the company are subject to VAT.
3-Jul Sold P23,000 goods to various customers in Cash

9-Jul Sold P34,000 goods to Sierra Store terms 3/15, n/30.
10-Jul Paid P330 freight of goods shipped to Sierra Store.
Sold P45,000 goods to Mesa Groceries, and received P20,000, the balance under terms
12-Jul 2/10, n/30.
14-Jul Paid P220 freight for the goods sold to several customers on July 03.
16-Jul Issued credit memo for goods worth P800 returned by Sierra Store.
18-Jul Received full payment of Sierra Store for the remaining balance
20-Jul Recorded P430 freight for goods sent to Mesa Groceries.
22-Jul Collected the full balance of account due from Mea Groceries.

PDFelement
Drill No 03 – Prepare Journal Entries for each unrelated number.
1. For the month of March 2021, total gross salaries of office personnel was P62,000 from which were made
deductions for SSS Contributions of P4,400; Philhealth Contributions of P2,800 and Pag-ibig Contributions of
P5,700. Net Pay was credited to Payroll Payable. (5 pts)
2. For the month of May 2021, the employer’s counterpart for SSS contributions was P6,800. SSS premiums
deducted from employees’ payroll recorded during the month was P4,500. Give the journal entry to record
the remittance to SSS. (5 pts)
3. For the end of the month payroll July 2021, the total employees’ contribution of P2,500 for the Pagibig
Fund was deducted from employees’ gross payroll amounting to P22,000. Give the journal entries to record
Salaries and Wages. (5 pts)


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UNIVERSITY OF SAINT LOUIS

SCHOOL OF ACCOUNTANCY, BUSINESS and HOSPITALITY

ONLINE LEARNING MODULE

Lesson 5: Adjusting Entries

Date Topics Activities or Tasks

Let us continue our study of the accounting cycle.

Steps in the Accounting Cycle:

1. Identifying and Analyzing – finished

ACCT 1026 – Financial Accounting and Reporting | 1

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 Accruals – accrued expense and accrued income

WARNING: No part of this E-module or LMS contentcan be reproduced or transported or shared

Definition of Some Terms

ACCT 1026 – Financial Accounting and Reporting | 3

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Here are some common examples of expenses that can be accrued:

Interest on loan(s) Goods received

Services received Wages for employees

Illustration 1. Interest on Notes Payable

ACCT 1026 – Financial Accounting and Reporting | 4

WARNING: No part of this E-module or LMS contentcan be reproduced or transported or shared

Adjusting Journal Entry:

Illustration 2. Accrued Rent Income

DATE ACCOUNT TITLES DR CR

Illustration 3. Accrued Interest on Notes Receivable

WARNING: No part of this E-module or LMS contentcan be reproduced or transported or shared

3. Depreciation of Fixed Assets

ACCT 1026 – Financial Accounting and Reporting | 6

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Illustration 4 – Depreciation of Fixed Assets

Computation of Annual Depreciation

WARNING: No part of this E-module or LMS contentcan be reproduced or transported or shared

Depreciation Expense per year 216,000

Adjusting Journal Entry:

6/30/2020 Depreciation Expense (216,000 x 2/12) 36,000

Original Cost 1,200,000

Accumulated depreciation is the sum of all recorded depreciation on an asset to a specific

4. Bad Debts or Estimated Uncollectible Accounts

Illustration 5 – Estimated uncollectible accounts or bad debts

ACCT 1026 – Financial Accounting and Reporting | 8

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Bad Debts Expense (P240,000 x 5%) P12,000

Doubtful Accounts Expense P7,500

ACCT 1026 – Financial Accounting and Reporting | 9

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Illustration 1: Prepaid Rent

EXPENSE METHOD ASSET METHOD

Expense portion: rent for December P10,000

EXPENSE METHOD ASSET METHOD

Adjusting Journal Entry Adjusting Journal Entry

EXPENSE METHOD ASSET METHOD

ACCT 1026 – Financial Accounting and Reporting | 10

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Expense portion: rent for December P10,000

Notes on the Asset and Expense Method:

 The expense method debits (DR) an expense in the Original Entry

There are 2 methods of accounting for Deferred Income

Illustration 2: Unearned Interest Income

ACCT 1026 – Financial Accounting and Reporting | 11

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In analyzing these types of transactions:

LIABILITY METHOD INCOME METHOD

* END OF LESSON