MERCHANDISING

ADJUSTING TO REVERSING ENTRIES

FINANCIAL ACCOUNTING AND REPORTING (FIRST TERM; AY 2022-2023)
ADJUSTING THE BOOKS
Just in a service business, there is a need to adjust the accounts of a merchandiser at the cut-off
date (end of the accounting period). The following are adjustments prepared for a merchandiser:
1. Accrued income and accrued expenses;
2. Separating the expired expense from the unexpired expense for advance payments made.
3. Separating earned income from unearned income from advance collections received.
4. Depreciating properties to recognize decrease in its utility.
5. Separating cost of goods sold from the merchandise still on hand.
6. Recognizing doubtful accounts expense based on sales and based on customer’s accounts.
MERCHANDISE INVENTORY END
• Under the periodic inventory system, the cost of sales is not determined every time
merchandise is handed over to a customer, only when physical count is made, after which cost
of sales will be determined.
MERCHANDISE INVENTORY END
Assume you are given the following information: (1) merchandise inventory at the start of the
year, P50,000; (2) total purchases during the year, P100,000 and (3) closing stock at the end of
the year per inventory count P30,000. Analysis and entries will appear as follows:
ANALYSIS ENTRIES DEBIT CREDIT
1. Beginning inventory brought Included in the Opening entry for all real
forward in the general ledger accounts based on post closing trial
from previous period balance
2. Decrease in owner’s equity Purchases 100,000
and assets for purchases made Cash 100,000
during the year To record purchases.
3. To adjust for the change in Merchandise Inventory 30,000
inventory recorded from an Income Summary 30,000
expense in No. 2 to an asset in To set up closing stock.
No. 3
MERCHANDISE INVENTORY END
To compute for the cost of sales:
Merchandise inventory, Jan 1 P50,000
Add Purchases 100,000
Total Goods Available for Sale 150,000
Less: Merchandise Inventory Dec 31 30,000
Cost of sales P120,000
METHODS OF ESTIMATING BAD DEBTS
TWO METHODS

1. Allowance method
a. Bad Debt as a Percentage of Receivables - also known as balance sheet approach (aging
of receivables is also included under the balance sheet approach)

2. Direct write off method

METHODS OF ESTIMATING BAD DEBTS
Illustration
Assume that the trial balance of Philipp Mart’s as of Dec 31, 2021 shows among others, the
following account balances:

Debit Credit
Accounts Receivable P300,000
Allowance for Doubtful Accounts P7,500
Sales 500,000
Sales Returns and Allowances 15,000
Sales Discounts 9,000
METHODS OF ESTIMATING BAD DEBTS
ALLOWANCE METHOD
a. Bad Debts as a Percentage of Accounts Receivable

Assume it is the policy to increase allowance by 3% of accounts receivable.

Bad Debts Expense = 300,000 x 3% = 9,000

Entry:
Dr. Bad Debt Expense 9,000
Cr. Allowance for Doubtful Accounts 9,000
METHODS OF ESTIMATING BAD DEBTS
ALLOWANCE METHOD
a. Aging of Receivables
Assume that the company below sells on credit on a term of 60 days. A review of the outstanding
balance showed the following:
Balances of AR Experience Rate Required Allowance
Assume P10,000 beginning
90,000 not yet due 0% P0 allowance, P11,100 will be the bad
80,000 1-30 days past due 2% 1,600 debts expense for the period
70,000 31-60 days past due 5% 3,500 AJE:
30,000 61-90 days past due 10% 3,000 Bad Debt Exp 11,100
Allow for DA 11,100
20,000 91-180 days past due 40% 8,000
10,000 181-360 days past due 50% 5,000
P300,000 P21,100
METHODS OF ESTIMATING BAD DEBTS
ALLOWANCE METHOD
b. Bad Debts as a Percentage of Accounts Receivable

Assume it is the policy to increase allowance to 3% of accounts receivable.

Allowance for Doubtful Accounts, end = 300,000 x 3% = 9,000

Allowance for Doubtful Accounts, beg = 7,500
Bad Debt Expense
= 1,500

Entry:
Dr. Bad Debt Expense 1,500
Cr. Allowance for Doubtful Accounts 1,500
ILLUSTRATION: LAST FIVE STEPS IN THE
ACCOUNTING PROCESS
1. Preparing the worksheet as a basis for the adjustments and the financial statements.
2. Journalizing and posting the adjustments and preparing the adjusted trial balance.
3. Preparing the financial statements.
4. Journalizing and posting the closing entries and preparing the post closing trial balance.
5. Reversing some of the adjusted accounts.
ILLUSTRATION
Regal Sales Company started its operations in 2021. It has just finished its second year of
operation. The following is the trial balance of Regal Sales Company owned and managed by
Roger Cases:
Regal Sales Company
Trial Balance
Dec 31, 2022
Accounts Debit Credit Accounts Debit Credit
Cash P50,575 Sales Returns and Allowances 2,500
Accounts Receivable 18,500 Sales Discount 1,500
Allow for Bad Debts P1,200 Purchases 75,145
Merchandise Inventory 27,250 Freight in 1,890
Unused Supplies 750 Purchases Returns and Allowances 475
Furniture & Fixtures 27,000 Purchase Discount 305
A/D – Fur and & Fixtures 2,700 Advertising Expense 3,000
Office Equipment 15,000 Freight out 2,900
A/D – Office Equipment 1,900 Rent Expense 20,000
Notes Payable 20,000 Salaries Expense 17,500
Accounts Payable 5,770 Taxes Expense 2,000
Withholding Taxes Payable 875 Utilities Expense 6,600
SS Premiums Payable 525 Rent Income 1,500
PhilHealth Premiums Payable 350 Total P273,110 P273,110
Cases, Capital 117,010
Cases, Drawings 1,000
Additional Information:
1. Allowance for doubtful accounts should be increased to 10% of the accounts receivable.
2. Supplies on hand, P250.
3. Furniture & Fixtures were acquired Jan 1, 2021 with an estimated useful life of 10 years.
4. Office Equipment consists of:
P10,000 acquired Jan 1, 2021, estimated useful life of five years, P500 salvage value.
P5,000 acquired on Jul 1, 2022, estimated useful life of five years, no salvage value.
5. Notes payable is for 30 days, 6% dated Dec 10, 2022.
6. Unpaid salaries amounted to P2,500.
7. Advertising expense was paid on Dec 1, 2022to Malaya Journal for six consecutive Sundays,
starting Dec 2.
8. Accrue 3% percentage tax on net sales of P10,000.
9. A lessee, who is a food and drink stall owner, occupying a corner of the store gave an
advance rental for four months amounting to P1,500 on Oct 1, 2022.
10. Physical inventory count showed unsold merchandise on Dec 31, 2022 amounting to
P47,755.
Supporting Computations for Adjustments:
(1) Required allowance (10% x 18,500) 1,850Bad Debt Expense 650
Allowance per books 1,200
Allow. For Bad Debts 650
Provision for doubtful accounts 650

(2) Unused supplies per book 750 Supplies Expense 500

Unused Supplies
Still on hand 500
250
Expense 500
Depn Exp F/F 2,700
(3) Cost / Est. life = 27,000 / 10 = 2,700 per year A/D F/F
2,700
(4) 10,000 – 500 = 9,500 / 5 1,900
Depn Exp O/E 2,400
5,000 / 5 x 6/12 500
A/D O/E
Total 2,400 2,400
Interest expense 70
(5) P20,000 x 6% x 21/360 70 Interest payable
70
Salaries expense 2,500
(6) Record salaries payable P2,500 Salaries payable
Prepaid Ad 2,500 500
(7) 3,000 / 6 P500
Adv. Expense 500
Supporting Computations for Adjustments:
Taxes expense 300
(8) Taxes payable (10,000 x 3%) P300
Taxes payable 300

(9) 1,500 / 4 P375Rent income 300

Unearned Rent
(10) Set up inventory for P47,755. 300
Merch. Inv. Dec 31 47,775
Income Summary
47,775
Account Titles Trial Balance Adjustments Adjusted Trial Balance
Debit Credit Debit Credit Debit Credit
Cash P50,575 P50,575
Accounts Receivable 18,500 18,500
Allowance for Doubtful Accounts P1,200 P650 (1) 1,850
Merchandise Inventory 27,250 27,250
Unused Supplies 750 500 (2) 250
Furniture and Fixtures 27,000 27,000
A/D Fur & Fixtures 2,700 2,700 (3) 5,400
Office Equipment 15,000 15,000
A/D Office Equipment 1,900 2,400 (4) 4,300
Notes Payable 20,000 20,000
Accounts Payable 5,770 5,770
Withholding Taxes Payable 875 875
SSS Premiums Payable 525 525
PhilHealth Premiums Payable 350 350
Cases, Capital 117,010 117,010
Cases, Drawings 1,000 1,000
Sales 120,500 120,500
Account Titles Trial Balance Adjustments Adjusted Trial Balance
Debit Credit Debit Credit Debit Credit
Purchases 75,145 75,145
Freight In 1,890 1,890
Purchases Returns & Allowances 475 475
Purchase Discounts 305 305
Freight Out 2,900 2,900
Salaries Expense 17,500 2,500 (6) 20,000
Advertising Expense 3,000 500 (7) 2,500
Utility Expense 6,600 6,600
Rent Expense 20,000 20,000
Taxes Expense 2,000 300 (8) 2,300
Rent Income 1,500 375 (9) 1,125
273,110 273,110
Adjustments
Doubtful Accounts Expense 650 (1) 650
Supplies Expense 500 (2) 500
Depn Expense – Furniture and Fixtures 2,700 (3) 2,700
Depn Expense – Office Equipment 2,400 (4) 2,400
Account Titles Trial Balance Adjustments Adjusted Trial Balance
Debit Credit Debit Credit Debit Credit
Adjustments continued
Interest Payable 70 (5) 70
Salaries Payable 2,500 (6) 2,500
Prepaid Advertising 500 (7) 500
Taxes Payable 300 (8) 300
Unearned Rent 375 (9) 375
Merchandise Inventory 47,755 (10) 47,755
Income & Expense Summary 47,755 (10) 47,755
P57,770 P57,770 P329,485 P329,485
Account Titles Income Statement Balance Sheet
Debit Credit Debit Credit
Cash P50,575
Accounts Receivable 18,500
Allowance for Doubtful Accounts 1,850
Merchandise Inventory 27,250
Unused Supplies 750
Furniture and Fixtures 27,000
A/D Fur & Fixtures 5,400
Office Equipment 15,000
A/D Office Equipment 4,300
Notes Payable 20,000
Accounts Payable 5,770
Withholding Taxes Payable 875
SSS Premiums Payable 525
PhilHealth Premiums Payable 350
Cases, Capital 117,010
Cases, Drawings 1,000
Sales 120,500
Account Titles Income Statement Balance Sheet
Debit Credit Debit Credit
Purchases 75,145
Freight In 1,890
Purchases Returns & Allowances 475
Purchase Discounts 305
Freight Out 2,900
Salaries Expense 20,000
Advertising Expense 2,500
Utility Expense 6,600
Rent Expense 20,000
Taxes Expense 2,000
Rent Income 1,125

Adjustments
Doubtful Accounts Expense 650
Supplies Expense 500
Depn Expense – Furniture and Fixtures 2,700
Depn Expense – Office Equipment 2,400
Account Titles Income Statement Balance Sheet
Debit Credit Debit Credit
Adjustments continued
Interest Payable 70
Salaries Payable 2,500
Prepaid Advertising 500
Taxes Payable 300
Unearned Rent 375
Merchandise Inventory 47,755
Income & Expense Summary 47,755
168,905 170,160 160,580 159,325
Net Income 1,255 1,255
P170,160 P170,160 P160,580 P160,580
FINANCIAL STATEMENTS PRESENTATION
Regal Sales Company
Income Statement
For the year ended December 31, 2022
Net Sales (Note 1) P116,500
Cost of Sales (Note 2) 55,750
Gross Income 60,750
Rent Income 1,125
Distribution Expenses (Note 3) (42,425)
Administration Expenses (Note 4) (18,125)
Operating Income 1,325
Interest Expense (70)
Net Income P1,255
FINANCIAL STATEMENTS PRESENTATION
Note 1
Sales P120,500
Less: Sales Returns & Allowances 2,500
Sales Discounts 1,500
116,500
Note 2
Merchandise Inventory, Jan 1 27,250
Purchases P75,145
Add: Freight in 1,890
Less: Purchase Returns & Allowances 475
Purchase Discount 305 76,255
Total Goods Available for Sale 103,505
Less: Merchandise Inventory, Dec 31 47,755
Cost of Sales P55,750
FINANCIAL STATEMENTS PRESENTATION
Note 3
Sales Salaries P15,000
Store Rent* 14,000
Store Utilities 4,950
Freight Out 2,900
Depreciation Expense – Store Furniture & Fixtures 2,700
Advertising Expense 2,500
Store Supplies 375
Total Distribution Cost P42,425

*Allocated based on floor space 70% and 30%.

FINANCIAL STATEMENTS PRESENTATION
Note 4
Office Rent P6,000*
Depreciation Expense – Office Equipment 5,000
Office Utilities 2,400
Doubtful Accounts 1,650
Taxes Expense 2,300
Office Supplies 125
Total Administrative Cost P18,125
FINANCIAL STATEMENTS PRESENTATION
Regal Sales Company
Statement of Changes in Equity
For the year ended December 31, 2022
Roger Cases, Capital Jan 1 P117,010
Add: Net Income 1,255
Total 118,265
Less: Roger Cases, Drawings 1,000
Roger Cases, December 31 P117,265
FINANCIAL STATEMENTS PRESENTATION
Regal Sales Company
Statement of Financial Position
December 31, 2022
ASSETS LIABILITIES & OWNER’S EQUITY
Current Assets Current Liabilities
Cash P50,575 Trade & Other Payables (Note 3) P30,765
Accounts receivable 18,500 Owner’s Equity
Allowance for doubtful accounts (1,850) Roger Cases, Capital 117,265
Merchandise inventory 47,755 Total Liabilities & Owner’s Equity P148,030
Prepaid expenses (Note 1) 750
Total 115,730
Noncurrent Assets
Property and equipment (Note 2) 32,300
Total Asset P148,030
FINANCIAL STATEMENTS PRESENTATION
Note 1
Unused supplies 250
Prepaid advertising 500
750
Note 2
Furnitures & Fixtures 27,000
Less: Accumulated Depreciation 5,400 21,600
Office Equipment 15,000
Less: Accumulated Depreciation 4,300 10,700
32,300
FINANCIAL STATEMENTS PRESENTATION
Note 3
Accounts payable P5,770
Notes payable 20,000
Salaries payable 2,500
Taxes payable 300
Withholding taxes payable 875
SSS premiums payable 525
Phil Health premiums payable 350
Interest payable 70
Unearned rent income 375
Total P30,765
CLOSING ENTRIES
Debit Credit
(1)Sales 120,500
Purchase returns and allowances 475
Purchase discount 305
Rent income 1,125
Income & Expense Summary 122,405
To close credit balances of nominal accounts.
 Debit Credit
(2) Income & Expense Summary 168,905
Merchandise Inventory, beginning 27,250
Sales returns and allowances 2,500
Sales discounts 1,500
Purchases 75,145
Freight in 1,890
Salaries expense 20,000
Freight out 2,900
Advertising expense 2,500
Utilities expense 6,600
Rent expense 20,000
Bad debt expense 650
Supplies expense 500
Depn expense Fur/Fix & Office Equipment 5,100
Taxes Expense 2,300
Interest expense 70
 Debit Credit
(3) Income & Expense Summary 1,255
Cases, Capital 1,255
To close net income to capital

(4) Cases, Capital 1,000

Cases, Drawings 1,000
To close drawings to capital.
POST CLOSING TRIAL BALANCE
Regal Sales Company
Post Closing Trial Balance
Dec 31, 2022
Accounts Debit Credit Accounts Debit Credit
Cash P50,575 Notes Payable 20,000
Accounts Receivable 18,500 Accounts Payable 5,770
Allow for Bad Debts P1,850 Withholding Taxes Payable 875
Merchandise Inventory 47,755 SS Premiums Payable 525
Unused Supplies 250 PhilHealth Premiums Payable 350
Prepaid Advertising 500 Interest Payable 70
Furniture & Fixtures 27,000 Unearned Rent Income 375
A/D – Fur and & Fixtures 5,400 Cases, Capital 117,265
Office Equipment 15,000 P159,580 P159,580
A/D – Office Equipment 4,300
REVERSING ENTRIES
2022
Jan 1 Interest payable 70
Interest expense 70

Salaries payable 2,500

Salaries expense 2,500

Advertising expense 500

Prepaid advertising 500

Taxes payable 300

Taxes expense 300
END