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Fundamentals of SENIOR
Accountancy, Business HIGH
and Management 1 (FABM 1) SCHOOL

Self-Learning

Preparing of Adjusting Entries

Module

of a Merchandising Business
14
666
Quarter 4
Fundamentals of Accountancy, Business and Management 1
Quarter 4 – Self-Learning Module 1: Preparing of Adjusting Entries of a
Merchandising Business
First Edition, 2020

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 Fundamentals of
SENIOR
Accountancy, Business HIGH
and Management 1 SCHOOL

(FABM 1)

Self-Learning
Module
Preparing of Adjusting Entries of
14
a Merchandising Business
12
Quarter 4
Introductory Message

For the facilitator:

Welcome to the Senior High School – Fundamentals of Accountancy,

Business, and Management 1 Quarter 4 of Self Learning Module on Preparing of
Adjusting Entries of a Merchandising Business!

This Self-Learning Module was collaboratively designed, developed, and

reviewed by educators from the Schools Division Office of Pasig City headed by its
Officer-in-Charge Schools Division Superintendent, Ma. Evalou Concepcion A.
Agustin, in partnership with the City Government of Pasig through its mayor,
Honorable Victor Ma. Regis N. Sotto. The writers utilized the standards set by the K
to 12 Curriculum using the Most Essential Learning Competencies (MELC) in
developing this instructional resource.

This learning material hopes to engage the learners in guided and independent
learning activities at their own pace and time. Further, this also aims to help learners
acquire the needed 21st-century skills especially the 5 Cs, namely: Communication,
Collaboration, Creativity, Critical Thinking, and Character while taking into
consideration their needs and circumstances.

In addition to the material in the main text, you will also see this box in the
body of the module:

Notes to the Teacher

This contains helpful tips or strategies that
will help you in guiding the learners.

As a facilitator, you are expected to orient the learners on how to use this
module. You also need to keep track of the learners' progress while allowing them to
manage their learning. Moreover, you are expected to encourage and assist the
learners as they do the tasks included in the module.
For the learner:

Welcome to Fundamentals of Accountancy, Business and Management 1

Quarter 4 of Self Learning Module on Preparing of Adjusting Entries of a
Merchandising Business!

This module was designed to provide you with fun and meaningful
opportunities for guided and independent learning at your own pace and time. You
will be enabled to process the contents of the learning material while being an active
learner.

This module has the following parts and corresponding icons:

Expectations - This points to the set of knowledge and skills

that you will learn after completing the module.

Pretest - This measures your prior knowledge about the lesson

at hand.

Recap - This part of the module provides a review of concepts

and skills that you already know about a previous lesson.

Lesson - This section discusses the topic in the module.

Activities - This is a set of activities that you need to perform.

Wrap-Up - This section summarizes the concepts and

application of the lesson.

Valuing - This part integrates a desirable moral value in the

lesson.

Posttest - This measures how much you have learned from the
entire module.
 EXPECTATIONS

After going through this module, you are expected to:

1. recognize the need for a physical count and analyze the effects of omitting the
procedure;

2. prepare to adjust entries for a merchandiser; and

3. define the entries for merchandise inventory using the closing entry or
adjusting entry method.

PRETEST

Directions: Write TRUE if the statement is correct and FALSE if it is incorrect.

1. Adjusting entry consists of one permanent account and a temporary account.

2. Preparing of adjusting entries at the end of the accounting period is supported

by the matching principles as well as the accrual basis of accounting.

3. Recording the expired portion of a prepaid expense results in an increase to

the expense account and a decrease in the related prepaid expense account.

4. Under the expense method of recording prepayment, the initial entry is a debit
to a prepaid expense account.
5. If no adjusting entries are prepared, then the accounting process would
generate corrected financial statements.

RECAP
Directions: Identify the term that best suits each statement.

_______________1. The schedule of all balances to prove the equality of the debit and
credit.
_______________2. Occurs when order of two numbers are reversed.
For numbers 3-5
Write true if the statement is correct and false if it incorrect.
_______________3. Generally, a currency sign is shown only for the first item in the
column and for the total of that column
_______________4. The first step in locating errors is to determine the amount of the
difference between the two columns of the trial balance
_______________5. In locating errors, if the error is P1, P10, P100, or P1,000, deduct
the trial balance columns and recompute the account balances.

LESSON

Each of the steps in the accounting cycle described in the prior modules for a
service company applies to a merchandiser. Adjusting entries are normally the same
for merchandising companies and service companies, including those for prepaid
expenses (including depreciation), accrued expenses, unearned revenues, and
accrued revenues. However, a merchandiser using a perpetual inventory system is
usually required to make another adjustment to update the Merchandise Inventory
account to reflect any loss of merchandise, including theft and deterioration.
Shrinkage is the term used to refer to the loss of inventory, and it is computed by
comparing a physical count of inventory with recorded amounts. A physical count
has usually performed at least once annually. To illustrate, J-Mart’s Merchandise
Inventory account at the end of the year 2020 has a balance of Php21,250, but a
physical count reveals that only Php21,000 of inventory exists. The adjusting entry
to record this Php250 shrinkage is debit Shrinkage Expense and credit Inventory.

Module 1 discussed the adjusting entries for a service provider and these are
accrued income and accrued expenses, deferred income and deferred expenses,
depreciation, and bad debts. These adjustments are also applicable for a
merchandiser but there is an additional adjusting entry to be made, which is the
merchandise inventory.

At the end of the accounting period, good internal control requires that the
business should conduct an inventory physical inventory.

Internal controls over a company’s inventory are meant to ensure that

management has an accurate count of what materials and goods it has available for
sale and to protect those goods from being spoiled, stolen, or otherwise made
unavailable for sale. In short, inventory internal controls are meant to ensure that a
company always has sufficient resources to produce and sell goods to meet its
customers’ needs without having oversupply. In doing so, a physical inventory count
must be performed by the business either monthly, quarterly, or yearly depending
on the nature of the company and at the end of the reporting period.
ADJUSTING THE BOOKS

There is a need to adjust the accounts at the end of the accounting period
whether a business is a service provider or a merchandiser. The following are the
adjustments prepared for a merchandising business:

1. Accrued income and accrued expenses.

2. Separating the expired portion of expense from the unexpired for the
advance payments made.
3. Separating the earned portion of unearned income from the advance
collections received.
4. Depreciating properties to recognize a 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.

The adjusting entries of a merchandising business are practically the same as

those of a servicing business, except for adjusting merchandise inventory.

WHAT IS A PHYSICAL INVENTORY COUNT?

➢ Is a process where a business physically counts its entire inventory.

BENEFITS OF DOING A PHYSICAL INVENTORY COUNT

1. Keeping the inventory records accurate and current up-to-date inventory

records provide for better forecasts of sales and purchases and ensure you
always have the right amount of product on hand.

2. Performing physical inventory benefits your customers, and accurate physical

inventory counts are a necessity. No end-user, be it consumer, reseller, or
wholesaler, wants to deal with uncertain stock levels in this modern day of
instant gratification. Customer satisfaction is paramount. Updated inventory
levels ensure that you can fulfill your orders for your customers promptly or
tell them when they can be fulfilled.

3. Ensure you understand and can plan for loss. Loss can come from theft or
breakage. Every day that an item remains in inventory, its value decreases.
As the value lessens, the risks of the cost to stock the item outweighing its
value becomes very real.

4. Improves your profits overall. You can classify certain products in your
warehouse as obsolete inventory, which is a valuable method for identifying
which items to market and merchandise for quick sale. This process also
reduces the liability and breaks even, at least, for questionable products.
 If you understated the ending inventory, your COGS will be overstated by
the error amount, and net income and gross profit are understated. If you overstated
beginning inventory, then COGS is overstated, and gross profit and net income are
understated.

MERCHANDISE INVENTORY END

Recall module 8 that under the periodic method of recording merchandise cost
of sales is not determined every time merchandise is handed over to a customer. After
making a physical count at the end of the accounting period, this is recorded and
deducted from total goods available for sale to arrive at cost of sales.

Under the perpetual method, this is not recorded anymore since the amount of
unsold or on hand at the end of the accounting period, say one year, immediately
appears in the ledger as the balance of the merchandise inventory.

To illustrate, assume that 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) the closing stock at the end of the year per inventory
count, P30,000. Analysis and entries will appear as follows;

The merchandise inventory debited for P30,000 is shown in Statement of

Financial Position as current asset. The income summary credited is shown in the
income statement as a deduction from the total goods available for sale to arrive at
the cost of sales. Thus:

Merchandise Inventory, Jan. 1 P 50,000

Add: Purchases 100,000
Total Goods Available for Sale 150,000
Less: Merchandise Inventory, Dec. 31 30,000
Cost of Sales P120,000
ADJUSTING AND CLOSING ENTRIES

The adjusting and closing entries of a merchandising business are practically the
same as those of a servicing business, except for the adjusting and closing of
merchandise inventory.

The format for recording the adjustment of unsold inventory under the periodic
inventory system is as follows:

GENERAL JOURNAL Page No. ______

DATE PARTICULARS PR DEBIT CREDIT
2020
Dec. 31 Merchandise inventory, end x x x x -
Income Summary x x x x -
To adjust unsold inventory.

Note that the inventory should be described as ending merchandise in order

not to be confused with merchandise inventory beginning.

The income summary account is used as a temporary opposite account in

adjusting inventory accounts. The ending merchandise inventory is debited to
establish the asset account. The credit to the income summary account presupposes
an increase to the capital account.

Illustration:

Assuming that the total amount of unsold merchandise on December 31, 2019, is
P30,000, the adjusting journal entry would be:

GENERAL JOURNAL Page No. ______

DATE PARTICULARS PR DEBIT CREDIT
2019

Dec. 31 Merchandise inventory, end 30 0 0 0 -

Income Summary 30 0 0 0 -
To establish ending inventory.
 When there is a beginning inventory, such items should be temporarily closed
to the income summary account. Assuming that the business has a beginning
inventory of P50,000, the closing entry would be:
GENERAL JOURNAL GJ22
DATE PARTICULARS P/R DEBIT CREDIT
2020
Dec. 31 Income Summary 50 0 0 0 -
Merchandise Inventory, beginning 50 0 0 0 -
To close inventory beginning.

As you observe on the above entry for inventory beginning is technically not
an adjusting entry but a closing entry.
Assumes that this has been sold.
That is why is credited.

The inventory beginning is credited (meaning “parted with” or “already given”)

which presumes that the beginning inventory has been sold. Hence, the account
should therefore be closed.

Alternatively, the adjustment of the ending inventory and the closing of the
beginning inventory discussed above can be journalized in a compound entry, as
follows:

GENERAL JOURNAL Page No. ______

DATE PARTICULARS PR DEBIT CREDIT
2019

Dec. 31 Merchandise inventory, end 30 0 0 0 -

Income Summary 20 0 0 0 -
Merchandise inventory, beginning 50 0 0 0 -
To update the inventory account.

The income summary account that is debited represents the value of

merchandise sold coming from the beginning merchandise inventory. If the income
summary is credited, it means that some of the purchases during the period were
unsold.
 ACTIVITIES

Activity 1 Adjusting Entry for Merchandise Inventory

Listed below is a partial trial balance of the Carlito Retailers at October 31, 2020

Merchandise Inventory P 80,000

Sales P 190,000
Sales Returns and Allowances 20,000
Purchases 60,000
Purchase Discount 3,000
Transportation-In 1,000

The merchandise inventory on October 31, P74,000

Required:
1. Prepare the adjusting entry needed for merchandise inventory
2. Prepare the partial income statement.

Activity 2 Merchandise Inventory At the end of the period

The beginning and ending merchandise inventories for Sophia Company for the year
ended December 31, 2019, are as follows:
Merchandise Inventory, 1/1/2019 P 30,000
Merchandise Inventory, 12/31/2019 23,000

Required:
Prepare the adjusting entries to update the merchandise inventory account as
of December 31, 2019.

WRAP-UP
To summarize what you have learned in the lesson, answer the following
questions:

1. Is there a need for a physical count?

2. Name the two methods used in adjusting the merchandise inventory.
 3. Give the two accounts used to adjust the merchandise inventory.

VALUING

Case 1. Mason Company finds an error was made in preparing the

merchandise inventory. One shelf of merchandise was counted twice. The value of
merchandise was P50,000. Will this error affect the financial statements? How?
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________

POSTTEST

Directions: Write T if the statement is true and F if false.

_____1. Both transportation in and transportation out accounts are closed by

crediting the accounts.
_____ 2. Under the perpetual inventory system, the ending merchandise inventory
balance is closed at the same time as the Cost of Goods Sold.
_____1. Both transportation in and transportation out accounts are closed by
crediting the accounts.
_____ 2. Under the perpetual inventory system, the ending merchandise inventory
balance is closed at the same time as the Cost of Goods Sold.
_____1. Both transportation in and transportation out accounts are closed by
crediting the accounts.
 PRETEST
1.TRUE
POSTTEST 2.TRUE
1. A 3.TRUE
2. B 4.FALSE
3. B 5.FALSE
4. A
5. B RECAP
1. Ledger
2. Posting
3. Cross Reference
4. Balance Sheet accounts
5. Income Statement accounts
KEY TO CORRECTION
References

Ballada, W. 2017. Fundamentals of Accountancy, Business, and Management 1.

VDomDane Publishers.

Banggawan, RB. Asuncion, DJ. 2017. Fundamentals of Accountancy, Business, and

Management 1. Real Excellence Publishing.

Ferrer, RC. Millan, CV. 2017. Fundamentals of Accountancy, Business, and

Management 1. Bandolin Enterprise. San Juan, DA. 2018. Fundamentals
of Accounting. Elmoer Publishing

Rabo, JS. Tugas,FC.Salendrez, HE. 2016. Fundamentals of Accountancy, Business,

and Management 1. Vibal Group Inc.

Manuel, Zenaida Vera-Cruz 18th Edition Accounting Process_Basic Concepts and

Procedures

Epstein, Lita, MBA Bookkeeping Workbook for Dummies. Wiley Publishing, Inc.

Hernane, Milagros B.,et.al 2014. Principles of Accounting. Allen Adrian Books Inc.

Valencia, Edwin G. 4th Edition. Basic Accounting (Concepts, Principles, Procedures and
Applications) Valencia Educational Supply