Accounting Cycle of A Merchandising Business

Financial Accounting and Reporting Accounting Cycle for Merchandising
Module 10: THE ACCOUNTING CYCLE OF A

MERCHANDISING BUSINESS
Learning Objectives:
At the end of the module, you will be able to:
a. Complete the accounting cycle for merchandising business

b. Prepare trial balance and financial statements
Presentation of Content
The Accounting Cycle of Merchandising Business

Let us again complete the accounting cycle but this time for a merchandising
business. Recall the following steps in the accounting cycle:
Steps in the Accounting Cycle:
1. Identifying and analyzing

2. Journalizing
3. Posting
4. Unadjusted trial balance
5. Adjusting entries
6. Adjusted trial balance (and/or
worksheet)
7. Financial Statements
8. Closing entries
9. Post-closing trial balance
10.Reversing entries
In our first illustration below, we will apply the accounting cycle under a perpetual
inventory system, and in the next, under a periodic inventory system.
Illustration 1: Perpetual inventory system

You opened a souvenir store called “My Souvenir" on November 1, 20x1. The
following were the transactions during the period:
Nov
. Transactions
1 Provided P50,000 cash as initial investment to the business.
Acquired equipment for P36,000 cash. The equipment has a useful life of 4
1 years.
28
1 Paid a one-year insurance premium of P12,000. (Use asset method)

12 Purchased inventory costing P15,000 for cash.
14 Sold goods for P15,000 cash. The cost of sales is P2,000
Dec
. Transactions
1 Sold goods with sale price of P12,000 in exchange for a P12,000, 10%, one-
year note receivable. Principal and interest are due at maturity. The cost of
sales is P1,500
5 Purchased inventory for P2,000 on account.
26 Sold goods for P17,000 on account. The cost of sales is P3,000
27 Paid P1,000 account payable.
29 Collected P10,000 account receivable.
Requirement: Complete the accounting cycle.
Solutions:
Step 1 & 2: Identifying and analysing & journalizing

The transactions are recorded in the journal as follows:
November transactions:
Nov. 1,
20x1 Cash 50,000.00
Owner's equity 50,000.00

to record the owner's investment to the
business
Nov. 1,
20x1 Equipment 36,000.00
Cash 36,000.00

to record the acquisition of equipment for
cash
Nov. 1,
20x1 Prepaid insurance 12,000.00
Cash 12,000.00

to record the prepayment of insurance
Nov. 12,
20x1 Inventory 15,000.00
Cash 15,000.00

to record the acquisition of inventory for
cash
Nov. 14, Cash
29
20x1 15,000.00
Sales 15,000.00

to record cash sales

Cost of goods sold 2,000.00
Inventory 2,000.00

to record the cost of inventory sold as
expense
December transactions:
Dec. 1,
20x1 Notes payable 12,000.00
Sales 12,000.00

to record sale in exchange for note

Inventory 1,500.00

expense
Dec. 5,
20x1 Inventory 2,000.00
Accounts payable 2,000.00

to record the acquisition of inventory on
account
Dec. 26,
20x1 Accounts receivable 17,000.00
Sales 17,000.00

to record sale on account

Inventory 3,000.00

30
expense
Dec. 27,
20x1 Accounts payable 1,000.00
Cash 1,000.00

to record the payment of account payable
Dec. 29,
20x1 Cash 10,000.00
Accounts receivable 10,000.00

to record the collection of account
receivable
Step 3: Posting
The journal entries are posted to the ledger as follows:
ASSETS
Cash Inventory
1-Nov 50,000 12-Nov 15,000
36,000 1-Nov 2,000 14-Nov
12,000 1-Nov 1,500 1-Dec
14-Nov 15,000 15,000 12-Nov 5-Dec 2,000 3,000 26-Dec
29-Dec 10,000 1,000 27-Dec
Bal. 11,000 Bal. 10,500
Accounts Receivable Notes receivable

26-Dec 17,000 10,000 29-Dec 1-Dec 12,000
Bal. 7,000 Bal. 12,000
Prepaid insurance Equipment

1-Nov 12,000 1-Nov 36,000
Bal. 12,000 Bal. 36,000
LIABILITIES
Accounts payable
27-Dec 1,000 2,000 5-Dec
1,000 Bal.
EQUITY
Owner's equity
50,000 1-Nov
50,000 Bal.
31
INCOME EXPENSES
Sales Cost of goods sold
15,000 14-Nov 14-Nov 2,000
12,000 1-Dec 1-Dec 1,500
17,000 26-Dec 26-Dec 3,000
44,000 Bal. Bal. 6,500
Step 4: Unadjusted trial balance

The unadjusted trial balance is prepared as follows:
My Souvenir
Unadjusted Trial Balance
December 31, 20x1

Accounts Debit Credit

Cash 11,000
Accounts receivable 7,000
Notes receivable 12,000
Inventory 10,500
Prepaid insurance 12,000
Equipment 36,000
Acccounts payable 1,000
Owner's equity 50,000
Sales 44,000
Cost of sales 6,500
95,000 95,000

Step 5: Adjusting entries
Additional information:
The following was identified on December 31, 20x1:
a. Of the total accounts receivable, P1,000 is doubtful of collection.

b. Salaries earned by employees during the period but were not yet paid
amounted to P10,000.
c. Salaries Expense
d. Salaries Payable
Recall the following concepts:
Common adjusting entries:

1. Accruals of income and expenses
2. Recognition of depreciation expense and bad debts expense
3. Deferrals of income and expenses (splitting of mixed accounts).
32
Guide Analyses
1. Accruals of income and  You have notes receivable.
expenses Therefore, interest income shall
be recognized for the period.
 There are unpaid salaries [see
additional information (b)].
Salaries expense shall be
accrued.
2. Recognition of depreciation  You have equipment.
expense and bad debts expense Depreciation expense shall be
recognized for the period.
 A P1,000 account receivable is
doubtful of collection [see
additional information (a)]. Bad
debts expense shall be
recognized.
3. Deferrals of income and  You have prepaid insurance. A
expenses (splitting of mixed portion of this must have
accounts). already been used up. The used
portion shall be recognized ass
insurance expense. The
remaining unused portion shall
remain in prepaid insurance.
From our analyses above, we have identified adjustments for the following:
1. Interest income
2. Salaries expense
3. Depreciation expense
4. Bad debts expense
5. Recognition of the expired portion of the prepayment as insurance expense
and deferral of the unexpired portion of the prepaid insurance.
Now, let’s take up the adjustment:
AJE #1: Interest income

I=PxRxT
P= P12,000
R = 10%
T = 1 month (Dec. 1 to Dec 31, 20x1) over 12 months in a year or (1/12)
Interest = (12,000 x 10% x 1/12) = 100
The adjusting entry for the accrued interest income is as follows:
Dec. 31,
20x1 Interest receivable 100.00
(AJE 1) Interest income
100.00
33
to accrue interest income earned

but not yet paid
AJE #2: Salaries expense

The P10,000 unpaid salaries are accrued as follows:
Dec. 31, Salaries expense 10,000

20x1 Salaries payable 10,000
(AJE 2) to accrue salaries expense
incurred but not yet paid
AJE#3: Depreciation expense

The annual depreciation expense is computed as follows:
36,000.0
Cost 0
Divided by: Useful life 4
9,000.0
Annual depreciation expense 0
However, because the equipment has only been used for 2 months in 20x1
(Nov. 1 to Dec. 31, 20x1, only a 2-month depreciation expense shall be recognized.
This is computed as follows:
Annual depreciation 9,000.00

Multiplied by: 2/12
Depreciation expense 1,500.00
Shortcut: (36,000 x ¼ x 2/12) = 1,500
The adjusting entry is as follows:

Dec. 31,
20x1 Accumulated depreciation 1,500.00
(AJE 3)
to record depreciation expense
for the period
The carrying amount of the equipment on December 31, 20x1 is determined

as follows:
36,000.0
Equipment 0
Accumulated depreciation (1,500.00)
34
Equipment - net 34,500.00
AJE #4: Bed debts expense

The adjusting entry to recognize the P1,000 uncollectible account is as follows:
Bad debts expense 1,000.00

Dec. 31,
20x1 Allowance for bad debts 1,000.00
(AJE 4)
to record bad debts expense for
the period
The carrying of accounts receivable on December 31, 20x1 is determined as

follows:
7,000.0
Accounts receivable 0
allowance for bad debts (1,000.00)
Accounts receivable - net 6,000.00
AJE #5: Prepaid insurance/ insurance expense
Previous transaction:
Nov. 1 Paid a one-year insurance premium of P12,000.
Year-end analysis:
 P12,000 1-year insurance prepaid on Nov. 1, 20x1

 Expired portion (insurance expense): 2 mos. – Nov 1 to Dec 31, 20x1
(12,000 x 2/12) = P2,000
 Unexpired portion (Prepaid insurance): 10 mos. – Jan. 1 to Oct. 31, 20x2
(12,000 x 10/12) = P10,000
The adjusting entry to record the used up portion of the prepaid insurance
as expense is as follows:
Insurance expense 2,000.00

Dec. 31,
20x1 Prepaid insurance 2,000.00
(AJE 5)
to record insurance expense
35
Step 6: Adjusted trial balance (worksheet)

The adjustments are placed on the worksheet as follows:
My Souvenir
Worksheet
For the two months ended December 31, 20x1
Unadjusted trial Adjusted trial

Accounts balance Adjustments balance
Dr. Cr. Dr. Cr. Dr. Cr.
Cash 11,000 11,000
Accounts
receivable 7,000 7,000
Notes receivable 12,000 12,000
Inventory 10,500 10,500
Prepaid insurance 12,000 2,000 10,000
Equipment 36,000 36,000
Accounts payable 1,000 1,000
Owner's equity 50,000 50,000
Sales 44,000 44,000
Cost of goods sold 6,500 6,500
Totals 95,000 95,000
Adjustments:
Interest receivable 100 100
Interest income 100 100
Salaries expense 10,000 10,000
Salaries payable 10,000 10,000
Depreciation
expense 1,500 1,500
Accum.
Depreciation 1,500 1,500
Bad debts expense 1,000 1,000
Allow. for bad
debts 1,000 1,000
Insurance expense 2,000 2,000
Totals 14,600 14,600 107,600 107,600
36
A summary of the adjusting entries is provided below to facilitate your

understanding of the partial worksheet above:
Interest receivable 100.00

AJE 1
Interest income 100.00
Salaries expense 10,000.00

AJE 2
Salaries payable 10,000.00

AJE 3
Accumulated depreciation 1,500.00
Bad debts expense 1,000.00

AJE 4
Allowable for bad debts 1,000.00
Insurance expense 2,000.00

AJE 5
Prepaid insurance 2,000.00
Step 7: Financial statements

The income statement and balance sheet columns of the worksheet are completed
as follows:
37
Step 8: Closing entries
Recall the following concepts:
Closing entries are prepared as follows:

1. All income accounts are debited and all expense accounts are credited. The
resulting balance is recorded in a clearing account called the income
summary.
2. The balance of income summary is closed to the owner’s equity account.
3. Any balance in the owner’s drawings account is closed to the Owner’s
equity account.
The closing accounts are prepared as follows:
Closing entry #1: Income summary
Dec. 44,000.0
31, Sales 0
20x1 100.0
Interest income 0
6,500.0
Cost of goods sold 0
10,000.0
Salaries expense 0
1,500.0
Depreciation expense 0
1,000.0
Bad debts expense 0
2,000.0
Insurance expense 0
23,100.0
Income summary (squeeze) 0
to close income and expense accounts to
income summary
Closing entry #2: Income summary closed to equity
Income summary
23,100.00
Dec. 31, Owner's equity
20x1 23,100.00
to close the income summary to

equity
38
Step 9: Post-closing trial balance
The worksheet is completed as follows:
39
The Balance sheet and Income statement are prepared as follows:

My Souvenir
Balance Sheet
As of December 31, 20x1

ASSETS
Cash 11,000.00
Allowance for bad debts (1,000.00)
Interest receivable 100.00
Note receivable 12,000.00
Inventory 10,500.00
Prepaid insurance 10,000.00
Equipment 36,000.00
Accumulated depreciation (1,500.00)
TOTAL ASSETS 84,100.00

LIABILITIES
Salaries payable 10,000.00
TOTAL LIABILITIES 11,000.00

EQUITY
Owner's equity 73,100.00

TOTAL LIABILITIES &
EQUITY 84,100.00

40

My Souvenir
Income Statement
For the two months ended December 31, 20x1

Sales 44,000.00
(6,500.00
Cost of goods sold )

GROSS PROFIT 37,500.00

Interest income 100.00
(10,000.00
Salaries expense )
(1,500.00
Depreciation expense )
(1,000.00
Bad debts expense )
(2,000.00
Insurance expense )

PROFIT 23,100.00

Illustration 2: Periodic inventory system

The account of Jim Boy Trading Co. has the following balances on January 1,
20x1:

Jim Boy Trading Co.
Trial Balance
January 1, 20x1

Account Dr. Cr.
Cash 50,000.00
Inventory 30,000.00
Equipment 200,000.00
Jim Boy, Capital 300,000.00

Totals 400,000.00 400,000.00
41

The following were the transactions during the year:
1. Sales on cash basis amounted to P80,000.
2. Sales on account amounted to P130,000.
3. Purchases on account amounted to P70,000.
4. Freight paid on purchases amounted to P5,000.
5. Purchase returns amounted to P10,000.
6. Salaries paid amounted to P60,000.
7. Utility bills paid amounted to P20,000.
8. Collections of accounts receivable amounted to P200,000.
9. Payments of accounts payable amounted to P60,000.
10.Owner drawings during the year totalled P80,000.
a. The annual depreciation on the equipment is P20,000.
b. The physical count of inventory on December 31, 20x1 revealed a P60,000
balance of goods on hand.
Requirement: Complete the accounting cycle.
Solution:
Step 1 & 2: Identifying and analysing & journalising

The transactions are recorded in the journal as follows:
1
Cash 80,000.00

Sales 80,000.00
to record cash sales
2 Accounts receivable 130,000.00
Sales 130,000.00
to record sales on account
3
Purchases 70,000.00

Accounts Payable 70,000.00
to record purchases on account
4
Freight-in 5,000.00

Cash 5,000.00
to record freight-in cost incurred on
purchases
5

Purchase returns 10,000.00
42
to record purchase returns

6

Cash 60,000.00
to record payment of salaries
7
Utilities expense 20,000.00

Cash 20,000.00
to record payment of utility bills
8 Cash 200,000.00
to record collection of accounts
receivable
9

Cash 60,000.00
to record payment of accounts
payable
10
Jim Boy, Drawings 80,000.00

Cash 80,000.00
to record withdrawals of owner from
the business
Step 3: Posting
The transactions are posted to the ledger as follows:
ASSETS
Cash Accounts receivable
beg beg
. 50,000 . 120,000
1 80,000 5,000 4 2 130,000 200,000 8
60,000 6
8 200,000 20,000 7
60,000 9
80,000 10
Bal Bal
. 105,000 . 50,000
Inventory Equipment
beg beg
. 30,000 . 200,000

Bal Bal
. 30,000 . 200,000
43
Accumulated
Depreciation
beg
80,000 .

Bal
80,000 .
Notice that the balance of the Inventory account represents the beginning
balance. This is because, under the periodic inventory system, purchases, freight-
in and purchase returns and discounts during the period are not recorded in the
Inventory account.
After the physical count, we will update this account through an adjusting
entry.
LIABILITIES
Accounts payable
20,000 beg.
5 10,000 70,000 3
9 60,000

20,000 Bal.
EQUITY
Jim Boy,
Jim Boy, Capital Drawings
300,000 beg.
10 80,000
300,000 Bal. Bal. 80,000
INCOME
Sales
80,000 1
130,000 2
210,000 Bal.
EXPENSES
Purchases Freight-in
3 70,000 4 5,000

Bal. 70,000 Bal. 5,000
Purchase returns Salaries expense
44
10,000 5 6 60,000

10,000 Bal. Bal. 60,000
Utilities expense
7 20,000

Bal. 20,000
Step 4: Unadjusted trial balance

The unadjusted trial balance on December 31, 20x1 is prepared as follows:

Jim Boy Trading Co.
Unadjusted Trial Balance
December 31, 20x1

Accounts Dr. Cr.
Cash 105,000.00
Inventory 30,000.00

Jim Boy, Drawings 80,000.00
Sales 210,000.00
Purchases 70,000.00
Freight-in 5,000.00

Utilities expense 20,000.00

Totals 620,000.00 620,000.00
45

Step 5: Adjusting entries
Guide Analyses
1. Accruals of income and  None
expenses
2. Recognition of depreciation  Depreciation expense on the
expense and bad debts expense equipment
3. Deferrals of income and  See discussion below.
expenses (splitting of mixed
accounts)
Under the periodic inventory system, changes in goods on hand during the
period are recorded in the purchases, freight-in, purchase returns, and purchase
discounts accounts, as appropriate. These are nominal accounts that are closed at
the end of the period.
At the end of the period, a physical count is conducted to determine any
unsold goods which are recognized as asset, i.e., Inventory – end through
adjusting entry.
Periodic inventory system
a. Inventory, beg.
b. Purchases
c. Freight-in
d. Purchase returns & discounts
 Unsold portion: recognized as asset – Inventory, end.

 Sold portion: recognize as expense.
From our analyses above, we have identified adjustments for the following:
1. Depreciation expense
2. Ending inventory
Now, let’s take up the adjustments:
AJE #1: Depreciation expense

The problem states that the annual depreciation is P20,000. The adjusting entry is
as follows:
Dec. Depreciation expense 20,000.00

31, Accumulated depreciation 20,000.00
20x1 to record depreciation expense for the
(AJE 1) year
AJE #2: Ending inventory

The problem states that the physical count of inventory on December 31, 20x1
revealed a P60,000 balance of goods on hand.
The adjusting entry is as follows:
46
Dec. Inventory, end. 60,000.00

31, Income summary 60,000.00
20x1
(AJE 2) to recognize the ending inventory
Notes:
 The account Inventory, end is debited in order to segregate the ending
inventory from the beginning inventory. The credit is recorded in the Income
summary account.
 In the worksheet, we will label the beginning inventory as Inventory, beg.
This will be closed later in the closing entries, also to the Income summary
account.
 This manner of recording simplifies the adjusting and closing entries for the
ending inventory and beginning inventory.
Step 6: Adjusted trial balance (worksheet)

A partial worksheet is prepared as follows:
47
Notice that the worksheet prepared under the periodic inventory system includes
the following accounts: Inventory, beg, Inventory, end, and Income summary.
These accounts are not used under the perpetual inventory system.
Step 7: Financial Statements

The income statement and balance sheet columns of the worksheet are completed
as follows:
 Notice that Inventory, beg. And Income summary are extended to the
income statement. This is necessary so that the amount the amount of cost
of goods sold is properly reflected in the income statement.
 The Inventory, end. Is extended to the Balance sheet.
48
Cost of goods sold Analysis:
Formula:
Beginning inventory 30,000

Purchases 70,000
Freight-in 5,000
(10,000
Purchase returns )
Total goods available for sale 95,000
(60,000
Ending inventory )
Cost of goods sold 35,000
Income statement columns of Worksheet:
Accounts Income statement

Dr. Cr.
Inventory, beg, 30,000.00
Purchases 70,000.00
Freight-in 5,000.00
Income summary 60,000.00

Totals 105,000.00 70,000.00
Difference - COGS 35,000.00
Step 8: Closing entries
Closing entry #1: Beginning inventory

The beginning inventory is closed to income summary:
Dec. 31,
Income summary
20x1 30,000.00
(Cl.E 1)
Inventory, beg.
30,000.00
to close the beginning inventory to

income summary
Notice that the above closing entry is peculiar to the periodic inventory
system. This closing entry is not needed under the perpetual inventory system.
Closing entry #2: Income summary
49
The income and expense accounts are closed to the Income summary account as
follows:
Dec. Sales 210,000.00

31, Purchase returns 10,000.00
20x1
(Cl.E 2) Purchases
70,000.00

Freight-in
5,000.00

Salaries expense
60,000.00

Utilities expense
20,000.00

Depreciation expense
20,000.00

Income summary (squeeze)
45,000.00
to close income and expense accounts to

income summary
Closing entry # 3: Income summary closed to equity

Let us first determine the balance of the Income summary account before closing
it to owner’s equity:
Income summary

60,000 AJE 2
(Cl.E 1) 30,000 45,000 (Cl.E 2)

75,000 Bal.
The income summary is closed to the Owner’s capital account as follows:
Dec. 31, Income summary 75,000.00

20x1 Jim Boy, Capital 75,000.00
(Cl.E 3)
to close income summary to equity
Closing entry #4: Drawings account closed to Equity

The Owners drawings account is closed to the Owner’s equity account as follows:
Dec. Jim Boy, Capital 80,000.00

31, Jim Boy, Drawings 80,000.00
20x1
(Cl.E 4) to close the drawings account
Step 9: Post-closing trial balance

The worksheet is completed as follows:
50
Formal reports:

Jim Boy Trading Co.
BALANCE SHEET
As of December 31, 20x1

ASSETS
Cash 105,000.00
50,000.0
Accounts receivable 0
60,000.0
Inventory 0
(100,000.00
Accumulated depreciation )

TOTAL ASSETS 315,000.00

LIABILITIES
20,000.0
Accounts payable 0

EQUITY

TOTAL LIABILITIES & EQUITY 315,000.00

51

Jim Boy Trading Co.
Income Statement
For the year ended December 31, 20x1

Sales 210,000.00
Cost of goods sold:
Inventory, beg. 30,000
Purchases 70,000
Freight-in 5,000
Purchase returns (10,000)
Total goods available for sale 95,000
Inventory, end. (60,000) (35,000.00)
GROSS PROFIT 175,000.00
Salaries expense (60,000.00)
Utilities expense (20,000.00)
Depreciation expense (20,000.00)
PROFIT FOR THE YEAR 75,000.00

Summary:
 Inventories are assets that are held for sale in the ordinary course of
business activities,
 The two inventory systems are: (1) Perpetual system and (2) Periodic
system.
 Under the periodic inventory system, cost of goods sold is computed as
follows:
Beginning inventory xx
Add: Net purchases xx
Total goods available for sale xx
Less: Ending inventory (xx)
Cost of goods sold xx
Gross profit = Net sales minus Cost of goods sold
Gross profit (gross income, gross margin, or sales profit) is simply "Net
sales minus Cost of goods sold."
Net sales PXX

less: Cost of Goods
Sold (XX)
Gross profit PXX
52
Gross profit represents the profit a business earns after deducting the
cost of goods sold or services rendered, but before deducting other
expenses.
Profit (or Net profit) is different from gross profit. Profit is the amount
derived after deducting all other expenses from the gross profit. This is
illustrated below:
Net sales* Pxx

Cost of Goods Sold (xx)
Gross Profit** xx
Rent Expense (xx)
Depreciation
expense (xx)
Salaries expense,
etc. (xx)
Profit (Net profit)*** Pxx
** Gross profit = sales minus COGS

*** Profit = Net sales minus all expenses
* "Net Sales" is total sales minus sales returns and discounts. This is
shown in the formula below:
Sales Pxx
less: sales returns (xx)
less: sales discounts (xx)
Net sales Pxx
"Sales returns" and "sales discounts" are contra assets (deductions) to

"sales" when computing for "Net sales."
Sales - include both cash sales and credit sales.

Sales returns - the account used to record goods returned by customers.
Sales discounts - the account used to record cash discounts given to customers.
Application
1. Explain the use or importance of financial statement to the owner of a

merchandising business.
2. Why adjusting entries are necessary in the accounting cycle?
3. What type of accounts is included in the post-closing trial balance?
4. Why do we need to close temporary accounts at the end of reporting period?
53
Feedback
Name: _________________________ Section: ____________ Score:_______
1: TRUE OR FALSE
1. Inventory refers to the goods that a merchandising business has

purchased with the main intention of reselling them.
TRUE
2. The periodic inventory system is commonly used for inventories

that are normally interchangeable, have relatively low value, and
have a fast turnover rate.
TRUE
3. Under the perpetual inventory system, increases and decreases in

inventory are recorded through the purchases, freight-in,
purchase returns, and purchase discounts accounts.
FALSE
4. Under the perpetual inventory system, cost of goods sold is

debited when inventory is sold and credited when there is a sales
return.
TRUE
5. Purchase returns and discounts are deducted from gross

purchases when computing for net purchases.
TRUE
6. Ending inventory is added to Total Goods Available for Sale when

computing for Cost of Goods Sold.
FALSE
7. Under the perpetual inventory system, the business does not

maintain records that show the running balances of inventory on
hand and cost of goods sold as at any given point of time.
FALSE
8. Under the periodic inventory system, all increases and decreases

in inventory, such as purchases, freight-in, purchase returns,
purchase discounts, cost of goods sold, and sales returns are
recorded in the Inventory account.
FALSE
9. Beginning inventory less Net purchases less Ending inventory

equals Cost of goods sold.
FALSE
54
10.No entry is made to recognize cost of goods sold when inventory is

sold under periodic inventory system.
TRUE
2: IDENTIFICATION
1. The account used to record cash discounts availed of on

purchased goods.
PURCHASE DISCOUNTS
2. The account used under the periodic system to record

the shipping costs incurred on purchases of inventory.
FREIGHT IN
3. The type of business that buys and sells goods without

changing their physical form.
MERCHANDISING BUSINESS
4. The account used under periodic system to record

returns of purchased goods to the supplier.
PURCHASE RETURNS
5. The account used to record purchases of inventory

under the periodic system.
PURCHASES
6. Under this inventory system, the “Inventory” account is

updated each time a purchase or sale is made.
PERPETUAL
7. Under this inventory system, the “Inventory” account is

updated only when a physical count is performed.
PERIODIC
8. This account is used to recognize the cost of an

inventory that is sold as expense.
COST OF GOODS SOLD
9. It is the sum of beginning inventory and net purchases

during the period.
TOTAL GOODS AVAILABLE FOR SALE
10.It is computed by deducting ending inventory from total

goods available for sale.
COGS
3: MULTIPLE CHOICE
1. If debits do not equal credits, the first step to find the error is to
a. call your manager and ask for advice.
55
b. add the debit and credit columns again.

c. review the journal entries for errors.
d. make correcting entries rather than adjusting entries.
2. Entity A has a beginning inventory of ₱280,000. During the period Entity A

purchased inventories costing ₱890,000. Freight paid on the purchase totaled
₱30,000. If the ending inventory is ₱220,000, how much is the cost of goods
sold?
a. 1,360,000
b. 980,000
c. 950,000
d. 920,000
3. Entity A has gross purchases of ₱360,000. Freight paid on the purchases

amounted to ₱50,000. Purchase discounts totaled ₱20,000 while purchase
returns totaled ₱15,000. How much is the net purchases?
a. 375,000
b. 390,000
c. 410,000
d. 445,000

₱40,000. The ending inventory was ₱360,000. If the net sales were ₱1,200,000,
how much is the gross profit?
a. 1,010,000
b. 1,200,000
c. 190,000
d. 260,000

₱10,000. The ending inventory was ₱60,000. Gross sales were ₱1,800,000
while sales returns and discounts totaled ₱220,000. How much is the gross
profit?
a. 680,000
b. 700,000
c. 780,000
d. 880,000
4: STATEMENT OF COST OF GOODS SOLD AND GROSS PROFIT
The accounts of Entity A on December 31, 20x1 show the following balances:
Gross sales 5,800,000
56
Sales returns 116,000
Sales discounts 1,160,000
Gross purchases 2,200,000
Freight-in 110,000
Purchase discounts 66,000
Purchase returns 22,000
Inventory, beg. 460,000
Inventory, end. 320,000
Requirement: Prepare a statement of cost of goods sold and gross profit.
5: WORKSHEET AND FINANCIAL STATEMENTS
Entity A started its operations on November 1, 20x1. The following were the
transactions during the period:
Nov. Transactions
1 Provided ₱100,000 cash as initial investment to the business.
1 Acquired equipment for ₱72,000 cash. The equipment has a useful life
of 4 years. Entity A records depreciation expense only at year-end.
1 Paid a one-year insurance premium of ₱24,000. (Use ‘asset method’)
12 Purchased inventory costing ₱30,000 for cash. (Use periodic inventory

system)
14 Sold goods for ₱30,000 cash.
Dec. Transactions
1 Sold goods with sale price of ₱24,000 in exchange for a ₱24,000, 10%,
one-year note receivable. Principal and interest are due at maturity.
57
5 Purchased inventory for ₱4,000 on account.
26 Sold goods for ₱34,000 on account.
27 Paid ₱2,000 account payable.
29 Collected ₱20,000 account receivable.
 There is no beginning inventory. The ending inventory per physical count is

₱21,000.
 Entity A determines at year-end that accounts receivable of ₱2,000 is doubtful
of collection.
 Salaries earned by employees during the period but were not yet paid
amounted to ₱20,000.
Requirements:
a. Provide the journal entries for the transactions.

b. Post the entries to the ledger using T-accounts.
c. Prepare the unadjusted trial balance using a worksheet.
d. Prepare the adjusting entries.
e. Complete the worksheet.
f. Prepare the closing entries.
g. Prepare the balance sheet and income statement.
References:
Millan, Zeus Vernon B. (2019). Financial Accounting and Reporting Baguio City,
Philippines: Bandolin Enterprise Publishing and Printing
Teaching Guide for Senior High School, Fundamentals of Accountancy, Business

and Management I, Published by Commission on Higher Education (2016)
58

Accounting Cycle of A Merchandising Business

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Accounting Cycle of A Merchandising Business

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Financial Accounting and Reporting Accounting Cycle for Merchandising

Module 10: THE ACCOUNTING CYCLE OF A

a. Complete the accounting cycle for merchandising business

The Accounting Cycle of Merchandising Business

Steps in the Accounting Cycle:

1. Identifying and analyzing

Illustration 1: Perpetual inventory system

1 Paid a one-year insurance premium of P12,000. (Use asset method)

Requirement: Complete the accounting cycle.

Step 1 & 2: Identifying and analysing & journalizing

Owner's equity 50,000.00

Cost of goods sold 2,000.00

Cost of goods sold 1,500.00

Accounts payable 2,000.00

Cost of goods sold 3,000.00

Accounts receivable 10,000.00

Accounts Receivable Notes receivable

Prepaid insurance Equipment

Step 4: Unadjusted trial balance

Step 5: Adjusting entries

a. Of the total accounts receivable, P1,000 is doubtful of collection.

Recall the following concepts:

Common adjusting entries:

Now, let’s take up the adjustment:

AJE #1: Interest income

Interest = (12,000 x 10% x 1/12) = 100

The adjusting entry for the accrued interest income is as follows:

to accrue interest income earned

AJE #2: Salaries expense

Dec. 31, Salaries expense 10,000

AJE#3: Depreciation expense

Annual depreciation 9,000.00

Depreciation expense 1,500.00

Shortcut: (36,000 x ¼ x 2/12) = 1,500

The adjusting entry is as follows:

Depreciation expense 1,500.00

The carrying amount of the equipment on December 31, 20x1 is determined

Equipment - net 34,500.00

AJE #4: Bed debts expense

Bad debts expense 1,000.00

The carrying of accounts receivable on December 31, 20x1 is determined as

AJE #5: Prepaid insurance/ insurance expense

 P12,000 1-year insurance prepaid on Nov. 1, 20x1

Insurance expense 2,000.00

to record insurance expense

Step 6: Adjusted trial balance (worksheet)

Unadjusted trial Adjusted trial

A summary of the adjusting entries is provided below to facilitate your

Interest receivable 100.00

Salaries expense 10,000.00

Depreciation expense 1,500.00

Bad debts expense 1,000.00

Insurance expense 2,000.00

Step 7: Financial statements

Step 8: Closing entries

Recall the following concepts:

Closing entries are prepared as follows:

The closing accounts are prepared as follows:

Closing entry #1: Income summary

Closing entry #2: Income summary closed to equity

Step 9: Post-closing trial balance

The worksheet is completed as follows: