C CHAPTER 10:

ACCOUNTING CYCLE OF
MERCHANDISING
BUSINESS
 LERNING OBJECTIVE:
At the end of this chapter, students must be
C
able to:

• Prepare the statement of cost of goods sold

and gross profit
• Complete the accounting cycle of a
merchandising business
C

NOMINAL ACCOUNTS
MERCHANDISING BUSINESS:

- A company that buys and sells goods without changing their physical form.
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TWO INVENTORY SYSTEM IN PRACTICE:
1. PERIODIC SYSTEM- The periodic inventory system is called as such
because under this system, the “inventory” account is updated only
when a physical count of inventory is performed. Thus, the amounts of
inventory and cost of goods sold are determined only periodically.

2. PERPETUAL SYSTEM- The perpetual inventory system is called as

such because under this system, the “inventory” account is updated each
time a purchase or sale is made. Thus, the “inventory” account shows a
continuing or running balance of goods on hand.
 PERPETUAL SYSTEM PERIODIC SYSTEM

1. You purchased goods worth ₱10,000 on account

Inventory ₱ 10,000 Purchases ₱ 10,000

C Cash ₱ 10,000 Accounts Payable ₱ 10,000

2. You paid shipping costs of ₱ 1,000 on the purchase above.

Inventory ₱ 1,000 Freight- in ₱ 1,000

Cash ₱1,000 Cash ₱ 1,000

3. You returned damaged goods worth ₱ 2,000 to the supplier

Accounts Payable ₱ 2,000 Accounts Payable ₱ 2,000

Inventory ₱ 2,000 Purchase Return ₱ 2,000
 PERPETUAL SYSTEM PERIODIC SYSTEM
4. You sold goods costing ₱ 5,000 for ₱ 20,000 on account
Accounts Receivable ₱ 20,000 Accounts Receivable ₱ 10,000
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Sales ₱ Sales ₱
20,000 10,000

Cost of good sold ₱ 5,000

Inventory ₱ 5,000
5. A customer returned goods with sale price of ₱ 800 and cost of ₱
200
Sales Returns ₱ 800 Sales Returns ₱ 800
Accounts Receivable ₱800 Accounts Receivable ₱ 800

Inventory ₱200
Cost of good sold ₱ 200 NO ENTRY
NET PURCHASE

Purchases ₱ 3,600
Add:
Freight in ₱ 765
Less:
Purchase Discount -
Purchase Returns ₱ 100 _____

Net Purchase ₱ 4,265

NET SALES

Sales ₱ 5,550
Less:
Sales Discount -
Sales Returns ₱ 450 ₱ 450
___
Net Sales ₱ 5,100
 COGS/ COST OF GOOD SOLD FOR INVENTORY OF MERCHANDISING
BUSINESS

Beginning Inventory ₱ 150

Add: Purchases ₱ 3,600
C Less:
Purchase Returns ₱100
____
3,500
Add: Freight- in 765
____
Net Purchase 4,265
Total Cost for Goods Available for Sale 4,415
Less:
End. Inventory 750
____
Cost of Goods Sold ₱ 3,665
GROSS PROFIT

Gross Sales ₱ 5,550

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Less:
Sales Discount -
Sales Returns ₱ 450 450
____
Net Sales ₱ 5,100
Less: Cost of Good Sold ₱ 3,665
____
Gross Profit ₱ 1,435
SHORTAGE OVERAGE
Or “kulang” in Or “sobra” in
tagalog, indicates tagalog, indicates
that there is less that the amount of
inventory than there inventory is higher
should be. than it should be.
 T- ACCOUNT ANALYSIS
- Easier method of solving accounting problems

C Inventory
Beginning balance xx

Net purchase xx xx COGS

xx Ending Balance

The beginning balance is placed

on the debit sided because
“inventory” is an asset, and assets
have a normal debit balance
 T- ACCOUNT ANALYSIS
- Easier method of solving accounting problems

C Inventory
Beginning balance xx

Net purchase xx xx COGS

xx Ending Balance

Net purchases is placed on the

debit side because purchases
increase the balance of inventory
 T- ACCOUNT ANALYSIS
- Easier method of solving accounting problems

C Inventory
Beginning balance xx

Net purchase xx xx COGS

xx Ending Balance

Cost of good sold is placed on the

credit side because the goods sold
decrease the balance of inventory.
 T- ACCOUNT ANALYSIS
- Easier method of solving accounting problems

C Inventory
Beginning balance xx

Net purchase xx xx COGS

xx Ending Balance

Ending Balance is placed on the

credit side (opposite of the
beginning balance) in order to
facilitate the “squeezing” of
amounts
 Case #1: Ending
Inventory

Inventory
C
Beginning balance ₱150

Net purchase ₱ 4,265 ₱ 3,665 COGS

₱ 750 Ending Balance
 Case #2: Cost of Good
Sold

Inventory
C
Beginning balance ₱150

Net purchase ₱ 4,265 ₱ 3,665 COGS

₱ 750 Ending Balance
 Case #3: Net Purchase

Inventory
C
Beginning balance ₱150

Net purchase ₱ 4,265 ₱ 3,665 COGS

₱ 750 Ending Balance
 Case #4: Beginning
Inventory

Inventory
C
Beginning balance ₱150

Net purchase ₱ 4,265 ₱ 3,665 COGS

₱ 750 Ending Balance
 Case #5: Total Goods Available for
Sale

Inventory
C
Beginning balance ₱150

Net purchase ₱ 4,265 ₱ 3,665 COGS

₱ 750 Ending Balance

TGAS = ₱ 4,415
 Case #6: Increase in Inventory-
COGS

Inventory
C
Beginning balance ₱0

Net purchase ₱ 4,265 ₱ 3,515 COGS

₱ 750 Ending Balance
 Case #7: Decreased in Inventory- Minus
COGS

Inventory
C
Beginning balance ₱150

Net purchase ₱ 4,265 ₱ 4,415 COGS

₱0 Ending Balance
The beginning inventory of ACK Company consists of 100 units costing ₱60 pesos each. The following transaction
occurred during March:
• On March 5, the company purchased 300 units costing ₱60 each on account.
• On March 6, out of 300 purchased on March 5, 10 units were return on account to supplier due to
defect.
• On March 28, the company sold 250 units costing ₱ 100 each.
• On March 31, 140 units were found by a physical count.

C PERPETUAL SYSTEM PERIODIC SYSTEM

March 5 Inventory ₱18,000 March 5 Purchases ₱18,000
Accounts Payable Accounts Payable ₱18,000
₱18,000
March 6 Accounts Payable ₱600 March 6 Accounts payable ₱600
Inventory ₱600 Purchases Return ₱600
March 28 Cash ₱25,000 March 28 Cash ₱25,000
Sales ₱25,000 Sales
₱25,000
March March
28 Inventory ₱15,000
31- Posting Entry. Create cost of good sold account and update inventory.
COGS ₱15,000
Ending Inventory ₱8,400
Purchase Return ₱600
COGS ₱15,000
Purchases ₱18,000
Beginning Inventory ₱6,000
 ASSET- Perpetual System

Inventory
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March 5- ₱18,000
₱600 March- 6
March 28- ₱15,000

Bal. ₱32,400
 ASSET- Perpetual System

Cash
C
March 28- ₱25,000

Bal. ₱25,000
 LIABILITIES- Perpetual System

Accounts Payable
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₱18,000 March- 5
March 6- ₱600

Bal. ₱17,400
 INCOME- Perpetual System

Sales
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₱25,000 March- 28

Bal. ₱25,000
 EXPENSES- Perpetual System

Inventory
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₱15,000 March- 28

Bal. ₱15,000
 ASSET- Periodic System

Cash
C
March 28- ₱25,000

Bal. ₱25,000
 LIABILITIES- Periodic System

Accounts Payable
C
₱18,000 March- 5
March 6- ₱600

Bal. ₱17,400
 EXPENSES- Periodic System

Purchases
C
March 5- ₱18,000

Bal. ₱18,000
 EXPENSES- Periodic System

Purchases
C
₱600 March- 6

Bal. ₱600
 INCOME- Periodic
System

Sales
C
₱25,000 March- 28

Bal. ₱25,000
UNADJUSTED TRIAL BALANCE- Perpetual System

ACK Company
Unadjusted Trial Balance
As of December 31, 2021
C ACCOUNT Dr. Cr.

Cash ₱25,000

Inventory ₱32,000

Accounts Payable ₱17,400

Sales ₱25,000

COGS ₱15,000

TOTAL ₱57,400 ₱57,400

UNADJUSTED TRIAL BALANCE- Periodic System

ACK Company
Unadjusted Trial Balance
As of December 31, 2021
C ACCOUNT Dr. Cr.

Cash ₱25,000

Inventory ₱32,000

Accounts Payable ₱17,400

Sales ₱25,000

COGS ₱15,000

TOTAL ₱57,400 ₱57,400

C

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