Documenti di Didattica
Documenti di Professioni
Documenti di Cultura
Module No. 11
Learning Objectives:
After studying this chapter, we should be able to:
Previous modules deal mainly on sole proprietor engaged in service providing. However, some business may buy and sell goods
rather than perform services to earn profit.
The accounting process does not differ whether it is a service provider or a merchandising operation, although some account
titles may differ. In a service provider, the main source of income is service revenues, while in merchandising operations; the
primary source of income is the sales of merchandise or simply Sales. In addition, in merchandising operations, expenses are
categorized into two: (1) Cost of goods sold and (2) operating expenses.
In short, additional income statement accounts are added and income statement is presented differently compared to service
concern entities.
Merchandising Accounts
Specific accounts used in merchandising operations will be presented below:
Sales on Account:
Accounts Receivable xx
Sales xx
Module for Fundamentals of Accountancy, Business and Management 1, Lehnard R. Gellor, CPA Page 1 | 29
Cash sale:
Cash xx
Sales xx
Alternatively, some customer may choose to keep the merchandise if the seller is willing to grant an allowance (deduction) from
the selling price, this is known as Sales Allowance.
To give the customer a sales return or allowance, the seller normally prepares a credit memorandum. This document informs a
customer that a credit has been made to the customer’s accounts receivable for a sales return or allowance. Pro-forma entries are
presented below.
For accounting purposes, sales returns and sales allowances are combined in one account, Sales Returns and Allowances. This
account is a contra-revenue account. Pro-forma entries are presented below.
Different credit terms may be agreed by the seller and buyer, these terms will be shown in a way of examples presented below.
2/10, n/30
This term is read as “2% cash discount if paid within ten days, payable in 30 days”.
Be aware that the cash discount, discount period, and the maximum time period for paying the balance due may depend on the
agreement of the buyer and the seller. Also, any cash discount is based on the invoice price less any sales returns and
allowances.
When a seller prefers not to offer a cash discount for prompt payment, credit terms will specify only the maximum time period
for paying the balance due. For example, the time period may be stated as n/30, n/60, or n/10 EOM.
Illustration: Assume Domicel store has an Accounts Receivable balance of P3,500 from Mr.Sevilla with credit terms of 2/10,
n/30. On May 15, the last day of discount period, Domicel store received payment from Mr. Sevilla. The journal entry on May
Module for Fundamentals of Accountancy, Business and Management 1, Lehnard R. Gellor, CPA Page 2 | 29
15 Domicel (seller) store will be:
Cash 3,430
Sales Discounts 70
Accounts Receivable 3,500
(To record collection within 2/10, n/30 discount period)
If payment was made beyond the discount period, the entry of the seller would be:
Cash 3,500
Accounts Receivable 3,500
Purchase on account
Purchases xx
Accounts Payable xx
Cash Purchases
Purchases xx
Cash xx
Illustration: Assume Domicel store has an Accounts Receivable balance of P3,500 from Mr. Sevilla with credit terms of
2/10, n/30. On May 15, the last day of discount period, Domicel store received payment from Mr. Sevilla. The journal
entry on May 15 by Mr. Sevilla (buyer) will be:
Module for Fundamentals of Accountancy, Business and Management 1, Lehnard R. Gellor, CPA Page 3 | 29
Purchase Discounts 70
Cash 3,430
If payment was made beyond the discount period, the entry of the buyer would be:
Assume the catalog price of merchandise purchased is P700,000 less 30%, 10%, credit terms of 4/10, n/30.
Purchases 441,000
Accounts Payable 441,000
Note that trade discounts are not recorded, rather deducted to the list price to compute the invoice price.
When a purchaser directly incurs freight cost, the account freight-in (or Transportation-in) is debited. Freight-in as an example of
an adjunct account, which is an account, added to other account (specifically purchases). In contrast, freight costs incurred by the
seller on outgoing merchandise are operating expenses to the seller. The costs are debited to Freight-out (or Delivery Expense).
Pro-forma entries are presented below.
Module for Fundamentals of Accountancy, Business and Management 1, Lehnard R. Gellor, CPA Page 4 | 29
Freight-out xx
Cash xx
Module for Fundamentals of Accountancy, Business and Management 1, Lehnard R. Gellor, CPA Page 5 | 29
When expounded, the Cost of Goods Sold could be computed as follows:
Module for Fundamentals of Accountancy, Business and Management 1, Lehnard R. Gellor, CPA Page 6 | 29
Work sheet presentation
An illustrative problem will be provided below to serve as a guide. The trial balance is already provided, assuming that
journalizing and posting are correct. In merchandising, there are two methods of work sheet preparation, Closing entry method
and adjusting entry method. The closing entry method will be presented first, since this is the one commonly used by
accountants.
The trial balance of Gensan Enterprises for its first year operation ending December 31, 2008, is shown below.
GENSAN ENTERPRISES
Trial Balance
December 31, 2008
Debit Credit
Cash P28,000
Accounts Receivable 55,000
Merchandise Inventory 55,000
Prepaid Insurance 3,600
Store Equipment 84,000
Accumulated Depreciation-Store Equipment P18,000
Accounts Payable 62,000
Disay, Capital 130,600
Disay, Drawing 30,000
Sales
Sales Returns and Allowances 9,200
Sales Discounts 7,800
Purchases 344,000
Freight-in 10,000
Purchase Returns and Allowances 2,400
Purchase Discounts 4,000
Salaries Expense 55,400
Utilities Expense 12,200
P664,400 P664,400
Other data:
Before starting the work sheet, the adjusting entries are presented below:
1. The merchandise inventory is ignored in the adjustment column. This account will be shown in the preparation of closing
entries. Compare this approach with adjusting entry method which will be presented later.
Note that asset method is used given that in the trial balance, the insurance is presented as an asset rather than expense. The
P1,600 is already the expense to be recorded since it is the amount representing the expired portion.
Module for Fundamentals of Accountancy, Business and Management 1, Lehnard R. Gellor, CPA Page 8 | 29
Trial Balance Adjustments Adjusted Trial Balance Income Statement Balance Sheet
Account Ttiles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Additional Accounts
Insurance Expense (2) 1,600 1,600 1,600
Depreciation Expense (3) 6,000 6,000 6,000
Totals 7,600 7,600 700,400 700,400 501,200 560,600 276,400 217,000
Net Income 59,400 59,400
Balances 560,600 560,600 276,400 276,400
Module for Fundamentals of Accountancy, Business and Management 1, Lehnard R. Gellor, CPA Page 9 | 29
After preparing the work sheet, the Income Statement, Owner’s Equity and Balance sheet should be prepared:
GENSAN ENTERPRISES
Income Statement
For the Year Ended December 31, 2008
Sales revenues
Sales P477,000
Less: Sales returns and Allowances P9,200
Sales Discounts 7,800 17,000
Net sales: 460,000
Cost of goods sold
Inventory, January 1 55,000
Purchases P344,000
Less: Purchase Returns & Allowances P2,400
Purchase Discounts 4,000 6,400
Net purchases 337,600
Add: Freight-in 10,000
Cost of goods purchased 347,600
Cost of goods available for sale 102,600
Less: Inventory, December 31 72,200
Cost of goods sold 325,400
Gross Profit 134,600
Operating expenses
Salaries Expense 55,400
Utilities Expense 12,200
Insurance Expense 1,600
Depreciation Expense 6,000
Total operating expense 75,200
Net income P59,400
Module for Fundamentals of Accountancy, Business and Management 1, Lehnard R. Gellor, CPA Page 10 | 29
GENSAN ENTERPRISES
Owner’s Equity Statement
December 31, 2008
GENSAN ENTERPRISES
Balance Sheet
As of December 31, 2008
Cash
Accounts Receivable P28,000
Merchandise Inventory 55,000
Prepaid Insurance 77,000
Store Equipment P840,000 2,000
Less: Accumulated Depreciation-
Store Equipment 24,000 60,000
Total Assets P222,400
Liabilities
Accounts Payable P62,400
Owner’s Equity
Disay Capital 160,000
Total liabilities and owner’s equity P222,400
The closing entries for Gensan Enterprises using closing entry method as follows:
Module for Fundamentals of Accountancy, Business and Management 1, Lehnard R. Gellor, CPA Page 11 | 29
Income Summary 59,400
Disay, Capital 59,400
After the closing entries, the post-closing trial balance will be presented as follow:
GENSAN ENTERPRISES
Post-Closing Trial Balance
December 31, 2008
Debit Credit
Cash P 28,000
Accounts Receivables 55,000
Merchandise Inventory 77,200
Prepaid Insurance 2,000
Store Equipment 84,000
Accumulated Depreciation – Store Equipment P 24,000
Accounts payable 62,400
Disay Capital 160,000
P246,400 P246,400
Using Adjusting Entry method will produce the same effect; however, it has a different presentation in the adjusting entries,
work sheet preparation and closing entries. The financial statements in both methods are the same.
Instead of combining merchandise inventory beginning and ending in the closing entries, adjusting entry method prepares
adjusting entries as follows:
These adjusting entries will appear in the adjustment column with additional account title “Income Summary”. Other adjusting
entries are the same. Since the merchandise entry is already adjusted the closing entry will be prepared as follows:
Sales 477,000
Purchase Returns and Allowances 2,400
Purchase Discounts 4,000
Income Summary 483,400
2. To close beginning inventory and other temporary accounts with debt balances:
Module for Fundamentals of Accountancy, Business and Management 1, Lehnard R. Gellor, CPA Page 12 | 29
Sales Returns and Allowances 9,200
Sales Discounts 7,800
Purchases 344,000
Freight-in 10,000
Salaries Expense 55,400
Utilities Expense 12,200
Insurance Expense 1,600
Depreciation Expense 6,000
*After posting all the Income summary account, notice that the effect will result to the net income or net loss.
The worksheet of Gensan Enterprises using adjusting entry method is presented on the next page.
Module for Fundamentals of Accountancy, Business and Management 1, Lehnard R. Gellor, CPA Page 13 | 29
Trial Balance Adjustments Adjusted Trial Balance Income Statement Balance Sheet
Account Ttiles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Additional Accounts
Insurance Expense (2) 1,600 1,600 1,600
Depreciation Expense (3) 6,000 6,000 6,000
Totals 7,600 7,600 700,400 700,400 501,200 560,600 276,400 217,000
Net Income 59,400 59,400
Balances 560,600 560,600 276,400 276,400
Module for Fundamentals of Accountancy, Business and Management 1, Lehnard R. Gellor, CPA Page 14 | 29
Module for Fundamentals of Accountancy, Business and Management 1, Lehnard R. Gellor, CPA Page 15 | 29
Accounts Receivable and Inventory
In a merchandising concern entity, accounts receivable and inventory plays a vital role. These two accounts are used in the buy
and sell transactions of the business. With that, an extensive discussion for its accounting will be discussed.
When businessmen try to sell their goods, it could either be for cash or through collectibles. Due to free trade, competitors try to
win the same customers. And customers would buy to someone who can give them better terms. That is why it is more common
for merchandising companies to sell through collectibles. In addition, businessmen would provide cash discounts to their
customers to encourage prompt payment.
These are two methods of recording credit sales (sales on account): Gross Method and Net Method. Prior illustrations presented
gross method since it is common and easy to use.
1. Gross method
This method records accounts receivable and sales at gross amount of the invoice, meaning cash discount is not deducted
from the invoice price.
2. Net method
This method records accounts receivable and sales at net amount of the invoice, meaning cash discount is deducted from the
invoice price.
Gross Method
When a merchandiser sells on credit, he assumes the possibility that the customer may not pay on time or worse will not pay at
all. Thus, enterprises assess the experience of the company on whether to treat an accounts receivable as collectible or not.
1. Allowance method
When the company decides that certain accounts doubtful of collection, a journal entry is recognized. This method conforms
to the matching principle, thus commonly used than the direct writeoff method.
2. Direct writeoff method
No entry is made when accounts are only doubtful of collection. This method only recognizes an account as bad debts when
it is certain that it cannot be collected anymore.
Allowance method
Module for Fundamentals of Accountancy, Business and Management 1, Lehnard R. Gellor, CPA Page 16 | 29
Allowance for Bad Debts 20,000
Accounts Receivable 20,000
(c) Soon after, the written off account is recovered
Accounts Receivable 20,0000
Allowance for Bad Debts 20,000
Cash 20,000
Accounts Receivable 20,000
There are two ways to record inventories, namely periodic system and perpetual system.
1. Periodic
This method is used when items being sold have small peso value and have fast turnover. Businesses that usually use this
method are grocery stores, hardware and school/office supplies store. The physical counting is done every end of the
accounting period. This is the method used in the precious chapters.
2. Perpetual
This method is used when items being sold have large peso value and usually have slow turnover. This method is commonly
used by car dealers and jewelers.
When using this method, records are maintained through the use of stock cards. Stock cards show the running balance of the
inventory flow. That means, someone looks on the stock card, he will know the inventory on hand at any particular time.
The perpetual system has greater internal control compared to Periodic Inventory System; however, it would be very costly
for small retailers to use this method. Still, it is proper to count inventories on hand at least once a yesar.
Periodic System
Module for Fundamentals of Accountancy, Business and Management 1, Lehnard R. Gellor, CPA Page 17 | 29
Accounts Receivable 200,000
Sales 200,000
(e) Received returned goods from customer 12,500
Sales Returns 12,500
Accounts Receivable 12,500
Perpetual System
The gross profit is 30%, which implies that 70% is the cost of goods sold computed as 200,000 x 70%.
(e) Received returned goods from customer 12,500. The cost of merchandise when sold is 70% or 8,750.
Sales 12,500
Accounts Receivable 12,500
Merchandise Inventory 8,750
Cost of Goods Sold 8,750
(f) At the end of the period, physical count for inventory is to be adjusted to 32,500.
If all recordings are made properly, no adjustment is necessary since inventory account will reflect the ending balance when
posted.
But there are times when the stock cards do not match with the actual physical count made. In this instance, there will either be
shortage or overage, and an adjustment should be made. Posting the merchandise inventory will reflect a debit balance of 13,750.
For example, if the physical count reflects inventory on hand amounting to 10,000 the following adjusting entry should be made.
Gross Method
(a) Goods are purchased on account, 300,000, with terms, 3/10, n/30
Purchases 300,000
Accounts Payable 300,000
(b) Assume supplier is paid within the discount period.
Accounts Payable 300,000
Cash 291,000
Purchase Discount 9,000
(c) Assume supplier is pad beyond the discount period
Accounts Payable 300,000
Module for Fundamentals of Accountancy, Business and Management 1, Lehnard R. Gellor, CPA Page 18 | 29
Cash 300,000
Net Method
(a) Goods are purchased on account, 300,000, with terms, 3/10, n/30
Purchases 291,000
Accounts Payable 291,000
(d) Assume supplier is paid within the discount period.
Accounts Payable 291,000
Cash 291,000
(e) Assume supplier is pad beyond the discount period
Accounts Payable 291,000
Purchase Discount Lost 9,000
Cash 300,000
The purchase discount lost account is to be presented as other expense.
Module for Fundamentals of Accountancy, Business and Management 1, Lehnard R. Gellor, CPA Page 19 | 29
References:
Ma. Elinita Balatbat Cabrera, BBA, MBA, CPA, CMA & Gilbert Anthony B. Cabrera, BBA, MBA, CPA (2018-2019).
Financial Accounting and Reporting Fundamentals
Win Ballada, CPA, MBA & Susan Ballada, CPA (2011). Basic Accounting Made Easy
Rafael M. Lopez, Jr., CPA (2011). Fundamentals of Accounting (Simplified Procedural Approach)
Rafael M. Lopez, Jr., CPA (2016). FUNDAMENTALS of Accountancy, Business & Management 1 (For Senior High School
Students)
Dominador Dizon, CPA, Amor Irish Dizon, CPA, Zondrex Allan Dizon, CPA, & Leandro Ador Dizon, CPA (2008). BASIC
ACCOUNTING Module 1
Module for Fundamentals of Accountancy, Business and Management 1, Lehnard R. Gellor, CPA Page 20 | 29
1-1 REVIEW QUESTIONS:
1. Compare service concern from merchandising business as far as the manner of generating revenue is concerned.
3. Under perpetual inventory system, why is there a need to conduct an inventory count at the end of the period despite of
having a stock card as a means of control?
5. Why is there a need to conduct physical inventory count under periodic inventory system?
___1. Buying and selling are the primary activities of a merchandising business.
___2. Perpetual and periodic are the two inventory systems of a merchandising inventory.
___3. Under periodic inventory system, merchandise purchased is debited to Purchases account.
___5. The entity has a sales of 100,000 with a gross profit of 30%. The cost of goods sold is 70,000.
___8. The excess of sales over cost of sales is called net income.
___9. If gross profit is bigger than the operating expense, the result is profit.
Encircle the letter of the correct answer in each of the given question.
1. The business that derives its income from rendering of services to its clients
Module for Fundamentals of Accountancy, Business and Management 1, Lehnard R. Gellor, CPA Page 21 | 29
a. Merchandising company
b. Service concern
c. Sole proprietorship
d. All of the above
2. It generates from buying and selling of inventory items
a. Partnership business
b. Merchandising business
c. Sole proprietorship
d. Grocery
3. Which of the following is cost?
a. Merchandise Inventory, End
b. Freight-out
c. Freight-in
d. Shipping term
4. Which of the following is expensed?
a. Merchandise Inventory, End
b. Freight-out
c. Freight-in
d. Shipping term
5. Merchandise left on hand and unsold at the end of period.
a. Accounts receivable
b. Supplies
c. Inventory
d. Expense
6. Cost of merchandise that are sold is referred to
a. Cost of goods manufactured
b. Merchandise inventory, beginning
c. Accounts receivable
d. None of the above
7. Which of the following is a component of Cost of sales?
a. Trade discount
b. Freight-out
c. Purchases
d. All of the above
8. The shipping term wherein the buyer shoulders the freight on shipment of merchandise
a. FOB, shipping point
b. FOB, freight collect
c. COD, freight collect
d. COD, shipping point
9. The shipping term wherein the seller shoulders the freight on shipment of merchandise
a. FOB, destination
b. FOB, shipping point
c. COD, freight collect
d. COD, freight prepaid
10. Which of the following accounts is not used under perpetual inventory system?
a. Purchases
b. Sales
c. Merchandise inventory
d. Cost of sales
Module for Fundamentals of Accountancy, Business and Management 1, Lehnard R. Gellor, CPA Page 22 | 29
3-1 Activity
Insert the missing figures in the following income statement. Note that gross profit is 40% of net sales and profit is 10% of net
sales.
Net Sales
Gross Sales
Less: Returns and allowances 45,000
Sales Discounts 15,000
Net sales
Module for Fundamentals of Accountancy, Business and Management 1, Lehnard R. Gellor, CPA Page 24 | 29
3-4 Worksheet Procedures
Required: A portion of a worksheet for a merchandising entity is presented. Put a “check mark” (✓) in the columns where
balance of the listed accounts should be extended.
Cash 31,000
Accounts Receivable 83,000
Inventory 627,000
Prepaid Insurance 54,000
Office Supplies 68,000
Office Equipment 370,000
Accumulated Depreciation 50,000
Accounts Payable 58,000
Papa, Company 517,000
Papa, Withdrawals 87,000
Sales 2,675,000
Sales Returns and Allowances 26,000
Sales Discounts 23,000
Purchases 1,512,000
Purchases Returns and Allowances 14,000
Purchases Discounts 19,000
Freight-in 38,000
Salaries Expense 327,000
Advertising Expense 61,000
Rent Expense 26,000
Total 3,333,000 3,333,000
Additional Information:
Module for Fundamentals of Accountancy, Business and Management 1, Lehnard R. Gellor, CPA Page 25 | 29
Trial Balance Adjustments Adjusted Trial Balance Income Statement Balance Sheet
Account Ttiles Dr Cr Dr Cr Dr Cr Dr Cr Dr Cr
Module for Fundamentals of Accountancy, Business and Management 1, Lehnard R. Gellor, CPA Page 26 | 29
Module for Fundamentals of Accountancy, Business and Management 1, Lehnard R. Gellor, CPA Page 27 | 29
4-1 Preparing the Income Statement
Sales 9,630,000
Purchases 4,720,000
Inventory, Beg 2,170,000
Inventory, End 1,430,000
Salaries Expense 1,140,000
Office Supplies Expense 460,000
Depreciation Expense 320,000
Sales Returns and Allowances 280,000
Insurance Expense 55,000
Sales Discounts 210,000
Freight-out 170,000
Purchases Returns and Allowances 110,000
Selling Supplies Expense 80,000
Purchase Discounts 70,000
Freight-in 50,000
Miscellaneous Expense 30,000
Module for Fundamentals of Accountancy, Business and Management 1, Lehnard R. Gellor, CPA Page 28 | 29
Module for Fundamentals of Accountancy, Business and Management 1, Lehnard R. Gellor, CPA Page 29 | 29