Fabm 11: Module 08 (Q4-Week 2-5) : Complete Accounting Cycle For A Merchandising Business - Periodic

FABM 11
Module 08 (Q4-Week 2-5): Complete Accounting

Cycle for a Merchandising Business - Periodic
Prepared by: Mr. Christian Faith C. Zebua
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Module 08 (Q4-Week 2-5): Complete Accounting Cycle for a Merchandising Business -
Periodic
I. LEARNING COMPETENCIES
1. Record transactions of a merchandising business in the general and special journals.
2. Post transactions in the general and subsidiary ledgers.
3. Prepare a trial balance.
4. Prepare adjusting entries.
5. Completes the accounting cycle of a merchandising business using periodic inventory system.
6. Prepares the Statement of Cost of Goods Sold and Gross Profit.
II. LESSON PRESENTATION
Scenario: Agila Merchandising, owned by Lito Agila, sells ready-to-wear shirts and dresses to its customers.
It started its operations on January 1, 2016. The company issues the following documents:
• Official Receipts – for all cash collections

• Charge Sales Invoice – for all sales on account
• Check Voucher – for all cash disbursements
Step 1 & 2 – Understanding and Journalizing the Transactions
For the month of January 2016, the special journals of Agila are shown below:
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In addition to the above special journals, the company maintains a general journal. The General Journal
had the following entries for January:
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Additional Information:
• The delivery vehicle purchased in January 2, 2016 is estimated to be useful for 10 years with no residual
or salvage value.
• A physical count of merchandise inventory was conducted on January 30, 2016. The cost of the inventory
on hand was PHP438,700.
• On January 30, 2016, Agila received a statement of account from Gus Oil Center reflecting a total bill of
PHP2,180, representing fuel purchases on January 2016 that were still unpaid as of the said date.
Step 3 – Posting to the General Ledger. From the summary of transactions in the special journals and
general journals, the entries will now be posted in each general ledger account:
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Step 4 & 5– Prepare the Unadjusted Trial Balance, and Preparation of Worksheet. The balances in the
general ledger for each account will be extended to the first two money columns of the worksheet. The
unadjusted trial of Agila is:
AGILA MERCHANDISING
Worksheet
For the month ending January 30, 2016
Step 6 – Prepare Adjusting Entries. Recall in Chapter 11, the five basic sources of adjusting entries:
1. Depreciation expense
2. Deferred expenses or prepaid expenses
3. Deferred income or unearned Income
4. Accrued expenses or accrued liabilities
5. Accrued income or accrued assets
Identify transactions in the books of Agila that will require adjustments:
• Depreciation of transportation equipment purchased on January 2, 2016
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• Deferred or Prepaid Expenses
In the cash disbursement journal, the rental payment made on January 2, 2016 is for the month of
January and February 2016 amounting to PHP10,000. The entire amount was charged to rental expense
which is not proper because one half (1/2) of the said payment is considered as an advance payment of
rental. Thus, an asset should be recognized. The adjusting entry is:
To Note: With this entry, the correct rental expense of PHP5,000 and a prepaid expense of PHP5,000 ( an asset account) are
recognized.
• Accrued Expenses
On January 30, 2016, fuel expenses incurred amounting to PHP2,180 should be recorded as an
expenses and liability. The entry to adjust is:
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Step 7 - Preparation of Financial Statements. The first statement prepared is the income statement. All
income statement accounts are extended to the appropriate column. Using the periodic inventory system,
the beginning balance of merchandise inventory account is also extended to the debit side, while the result
of the physical count to determine the ending inventory is reflected on the credit side. The total debit and
total credit are determined and if credit balance is higher than the debit side, the difference is added to the
debit side. The difference is actually the income for the period. However, if the total debit side exceeds the
total credit side, the difference is added to the credit side and this is the net loss of the business. The
statement of financial position is then prepared. All assets, liabilities and equity accounts are extended.
The ending merchandise inventory is extended to the debit side.
The worksheet for these two financial statements are presented below:
The proper format of the income statement and the schedule of cost goods sold of Agila for January 2016
are presented below:
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To Note: Merchandise Inventory, Ending is established by conducting a physical count at the end of the reporting date. In the
periodic inventory system, physical count is a must.
Step 8 – Closing Entries. The closing journal entries consist of the following:
• All of the nominal revenue accounts should be closed to the income summary account by a Debit to
revenue and credit to income summary.
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• All of the nominal expense and cost of goods sold accounts should be closed to the income summary by a
Credit to expense and a debit to income summary.
• The Merchandise Inventory, Beginning is closed to Income summary account by a debit to Income
Summary and a credit to Merchandise Inventory.
• The Merchandise Inventory, Ending is set up in the books by a debit to Merchandise Inventory, Ending
and a credit to Income Summary. The amount that will be used is the result of the physical count.
• The balance in the income summary account should now reflect the net income for the accounting
period. The next journal entry should close the income summary account to the equity or capital account.
If there is a net profit this entry will be a debit to income summary and a credit to owner’s capital account.
Once the closing journal entries have been entered into the general journal, the information should
be posted to the general ledger. When this is accomplished, all of the nominal accounts in the general
ledger should have zero balances. To double check on this, we prepare another trial balance based on the
new balances in the general ledger. If we have any nominal accounts with positive balances, a mistake was
made along the way and will need to be corrected before proceeding to the next accounting period.
The closing entries of Agila are:
To Note: No closing entry was made for the Merchandise Inventory, Beginning because it was the first month of operations
and the inventory beginning has zero value.
After these entries, the income summary account has a balance of:
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The last closing entry is to close the balance of income summary to the capital account:
To Note:
- The net credit balance of the income summary is equal to the net income as computed.
- The net income will result to an increase in capital of the owner.
III. SUMMARY OF LESSON

 The five basic sources of adjusting entries are depreciation expense, deferred expenses or prepaid
expenses, deferred income or unearned income, accrued expenses or accrued liabilities and accrued
income or accrued assets.
 Merchandise Inventory, Ending is established by conducting a physical count at the end of the
reporting date. In the periodic inventory system, physical count is a must.
 The net credit balance of the income summary is equal to the net income as computed. The net income
will result to an increase in capital of the owner.
IV. ENRICHMENT
Direction: Answer the following question. (10 pts.)
Question: In periodic inventory system, why is it a must to conduct a physical count at the end of the
reporting date?
V. EVALUATION
Direction: Analyze the following scenario and comply to what are required.
Scenario: Canto Merchandising sells facsimile, copiers and other types of office equipment. Transactions
during the month of September 2016 are as follows,
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Required:
1. Prepare journal entries to record the above transactions, assuming Canto uses periodic inventory
system.
2. Prepare necessary adjusting entries on September 30, 2016.
VI. RESOURCES
DepEd FABM 1 Teaching Guide
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Fabm 11: Module 08 (Q4-Week 2-5) : Complete Accounting Cycle For A Merchandising Business - Periodic

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FABM 11

Module 08 (Q4-Week 2-5): Complete Accounting

Prepared by: Mr. Christian Faith C. Zebua

II. LESSON PRESENTATION

• Official Receipts – for all cash collections

Step 1 & 2 – Understanding and Journalizing the Transactions

Identify transactions in the books of Agila that will require adjustments:

• Depreciation of transportation equipment purchased on January 2, 2016

The closing entries of Agila are:

III. SUMMARY OF LESSON

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