General and Subsidiary Journals

Record transactions of a
merchandising business in the
general and special journals.
Commonly used Special Journals:
1. Cash Receipt Journal - used to
record all cash that had been
received.
2. Cash Disbursement Journal -
used to record all transactions
involving cash payments.
 Commonly used Special Journals:
3. Sales Journal (Sales on Account
Journal) - used to record all sales
on credit (on account).
4. Purchase Journal (Purchase on Account
Journal) - used to record all purchases
of inventory on credit (on account)
 Inventory System
1. Perpetual System - detailed
records of the cost of each item are
maintained, and the cost of each
item sold is determined from records
when the sale occurs. For example, a
car dealership has separate inventory
 Inventory System
• Record purchase of inventory.
• Record revenue and record cost
of goods sold when the item is
sold.
• At the end of the period, no entry is
needed except to adjust inventory for
losses, etc.
 Inventory System
2. Periodic System - Cost of goods sold is
determined only at the end of an accounting
period. This system involved:
• Record purchase of Inventory.
• Record revenue only when the item is
sold.
• At the end of the period, you must
compute cost of goods sold (COGS):
 Inventory System
1. Determine the cost of goods on hand at the
beginning of the accounting period (Beginning
Inventory =BI),
2. Add it to the cost of goods purchased (COGP),
3. Subtract the cost of goods on hand at the end of
the accounting period.
4. (Ending Inventory = EI) illustrated as follows:
BI + COGP = Cost of goods available for sale - EI = COGS
 Inventory System

Additional Considerations:
• Perpetual systems have traditionally been
used by companies that sell merchandise with
high unit values such as automobiles, furniture
and major home appliances. With the use of
the computers and scanners, many companies
now use the perpetual inventory system.
 Inventory System
Additional Considerations:
• The perpetual inventory system is named
because the accounting records
continuously - perpetually - show the
quantity and cost of the inventory that
should be on hand at any time. The
periodic system only periodically updates
the cost of inventory on hand.
 Inventory System
Additional Considerations:
• A perpetual inventory system provides
better control over inventories than a
periodic inventory, since the records always
show the quantity that should be on hand.
Then, any shortages from the actual
quantity and what the records show can be
investigated immediately.
 Periodic Inventory System
Recording purchases and related transactions under the
Periodic Inventory System
Purchases of Merchandise: Periodic System
1. When merchandise is purchased for resale to
customers, the account, Purchases, is debited for
the cost of goods purchased.
2. Like sales, purchases may be made for cash or
on account (credit)
 Periodic Inventory System
3. The purchases is normally recorded by the
purchaser when the goods are received from
the seller.
• Each credit purchases should be supported
by a purchase invoice.
• A purchase invoice received by the buyer is
actually a sales invoice or a charge invoice
prepared by the supplier or vendor.
 Periodic Inventory System

• Note that only purchases of merchandise

are debited to the “Purchase” account.
Acquisition (purchases) of other assets:
supplies, equipment, and similar items
are debited to their respective accounts.
 To Illustrate:
Magalling Computer Store started its
operations on January 2, 2019. The store is
located in Sikat Mall in Bicol. The owner
invested P500,000 to start the business. On
January 3, 2019, Magaling purchased 20 units
of computers on account for P10,000 each.
Upon delivery of the units, the supplier, the
Delta, Inc., issued Charge Invoice No. 145 to
 Entry:
General Journal
Date Account Title and Re Debit Credit
Explanation f
1/3/19
Purchases 200,000
Accounts payable 200,000
To record purchase of 20
units of computers at
PHP10,000 per unit from
Delta, Inc., as per Charge
Invoice 145.
Day 2
 Purchase Returns and
Allowances
• A purchaser may find the merchandise
received to be unsatisfactory because the
goods are:
• damaged or defective
• of inferior quality
• not in accord with the purchaser's
specifications
 Purchase Returns and
• Allowances
The purchaser initiates the request for a
reduction of the balance due through
the issuance of a debit memorandum.
The debit memorandum is a document
issued by a buyer to inform a seller that
the seller's account has been debited
because of unsatisfactory goods.
 Purchase Returns and
• Allowances
A return of a merchandise (a deduction
from the purchase price when
unsatisfactory goods are kept) is shown
by the entry where Accounts Payable is
debited and Purchase Returns and
Allowances is credited to show that the
purchases reduced with a return or an
allowance.
 Purchase Returns and
Allowances
• The Purchase Returns and
Allowances account is a “contra
purchases” account when
merchandise is returned to a supplier.
To Illustrate:
Out of 20 computer units purchased last
January 3, 2019, it was found after
inspection on the same day that one unit
was damaged during shipment. Magaling
issued a debit memorandum (DM 01) and
informed the supplier that it will return the
one damanged item.
 ENTRY:

General Journal
Date Account Title and Explanation Ref Debit Credit
1//3/16 Accounts Payable 10,000
Purchase Returns and 10,000
Allowances
To record return of 1 unit of
computers worth Php10,000
from Delta, Inc. as per DM 01
Accounting for Freight Costs
The sales agreement should indicate
whether the sell or the buyer is to pay
the cost of transporting the goods to the
buyer's place of business. The two
most common arrangements for freight
costs are FOB Shipping Point and FOB
Destination.
 Accounting for Freight Costs
FOB Shipping Point:
• Goods place free on board (FOB) the carrier by seller.
• Buyer pays freight costs.
* Freight -In is debited if buyer pays freight.
* Cash is credited if the goods come on cash on delivery
(COD), for example, and was paid immediately. Accounts
Payable would be credited on account.
* Ownership over the goods is transferred to the buyer once
it is out of the premises of the seller.
FOB Destination
• Goods placed free on board (FOB) at buyer's
business.
• Seller pays freight costs.
• Delivery Expense is debited if seller pays freight on
outcoming merchandise to a buyer. This is an
operating expense to the seller.
• Ownership over the goods is transferred to the
buyer once the goods are delivered and received
by the buyer.
To Illustrate:
Assume the supplier of Magaling is based in
Manila. In order to bring to the 20 computer
units to Bicol, it will cost Php3,000 to deliver the
goods.

If the term is FOB Shipping Point, the entry to

record, assuming Magaling paid the common
carrier in cash in January 4, 2019:
ENTRY:

General Journal
Date Account Title and Ref Debit Credit
Explanation
1/4/16
Freight - In 3,000

Cash 3,000

To record freight costs

for the purchase of 20
units of computers.
 Purchase Discounts
• Credit terms (specify the amount of cash
discount and time period during which a
discount is offered) may permit the buyer to
claim a cash discount for the prompt payment of
a balance due. If the credit terms show 2/10,
n/30 means a 2% discount is given if paid within
10 days (called the discount period); otherwise,
the invoice is due in 30 days.
 Purchase Discounts
• The buyer calls this discount a
purchase discount.
• A purchase discount is normally
based on the invoice cost less
returns and allowances, if any.
 Purchase Discounts
To Illustrate:
The credit terms for the purchase of 20
computer units (total cost Php200,000) is
2/10, n/30. This means that if Magaling
pays on or before January 13, 2019, it is
entitled to a 2% discount, otherwise
Magaling will have to pay the
full amount on or before
February 4, 2016 (30 days after
purchase). On January 20,
2016, Magaling paid the
account in full with Delta.
ENTRY:
General Journal
Date Account Title and Explanation Ref Debit Credit

1/10/19 Accounts Payable 200,000

Purchase Discount 4,000
Cash 196,000
To record full payment of
Delta, Charge Invoice No.
145 with 2%discount
computed as
PhP200,000x2%
 Assuming that instead of paying on January 10, 2016, Magaling
paid on February 4, 2016, thus forfeiting the 2% discount, the
entry to record is:
General Journal
Date Account Title and Explanation Ref Debit Credit
1/4 /16 Accounts Payable 200,000
Cash 200,000
To record full payment of Delta,
Charge Invoice No. 145
 Recording of Sales and Related transactions
under the Periodic Inventory System
Sales Transactions: Revenue entries for a
Merchandiser
• Revenues are reported when earned in
accordance with the revenue recognition
principle, and in merchandising company,
revenues are earned when the goods are
transferred from seller to buyer.
• All sales should be supported by a document
such as a cash register tape (to provide
evidence of cash sales) or cash receipt, or
office receipt for cash sales, and charge
invoice for credit sales, or sales on account.
• Only entry is made with each sale:
Debit - Accounts Receivable (if a credit sale) or
Cash (if a cash sale) which increases
assets for the sales amount
 Credit - Sales with increases revenues.
• The sales account is credited only
for sales of goods held for resale.
Sales of assets not held for resale
(such as equipment, buildings, land,
etc.) are credited directly to the
asset account.
To Illustrate: For the month of January,
Magaling made the following sale:
1/10/2019Official Receipt (OR) No. 001 Sold two
units for cash to Marie Cruz for PHP36,000
(PHP18,000 per unit), FOB Destination
1/15/2019 Charge Invoice (Chl) No.001 Sold five
units on account to Rafael Reyes for
PHP97,500 (PHP19,500 per unit) with terms
3/10, n/30, FOB Shipping Point
ENTRY:
General Journal

Date Account Title and Explanation Ref Debit Credit

1/10 /19 Cash 36,000

Sales 36,000

To record OR No. 001 cash

sale - Marie Cruz
 General Journal
Date Account Title and Explanation Ref Debit Credit
1/15 /19 Accounts Receivable 97,500
Sales 97,500
To record Charge Invoice No.
001 Rafael Reyes on account
with terms 3/10, n/30
Freight Terms: FOB Destination- Seller pays freight

• An entry is made when seller pays the

freight to deliver goods to a customer or
buyer. If the buyer will pay for the freight,
no entry is made.
• Debit - Delivery Expense and credit -
Cash or Accounts Payable
 On Jan.10, 2019 Magaling paid MM Express,
PHP500 to deliver the two units to Marie Cruz
General Journal
Date Account Title and Explanation Ref Debit Credit

1/10/19 Delivery Expense 500

Cash 500

To record full payment of

Delta, Charge Invoice No. 145
 Sales Return and Allowances:
• Sales Returns result when customers are
dissatisfied with merchandise and are
allowed to return the goods to the seller for
credit or a refund.
• Sales Allowances result when customers are
dissatisfied, and the seller allows a
deduction from the selling price
 Sales Return and Allowances:
• To grant the return or allowance, the sesller
prepares a credit memorandum to inform the
customer that a credit has been made to the
customer's account receivable.
• Sales Return and Allowances is a contra
revenue account to the Sales account. A
contra account is a reduction to a particular
account.
 Sales Return and Allowances:
• A contra account is used, instead of debiting
sales, to disclose the amount of sales returns
and allowances in the accounts.
• This information is important to management as
excessive returns and allowances suggest
inferior merchandise, inefficiencies in filling
orders, errors in billing customers, and mistakes
in delivery or shipment of goods.
 Sales Return and Allowances:
• The normal balance of Sales Returns and Allowances
is a debit.
• One entry is made with each sasles return and
allowance:
The entry to record the sales return and allowance:
Debit - Sales Return and Allowances which
decreases revenues for the amount of the sale.
Credit - Accounts Receivable (if a credit sale) or
Cash (if a cash sale) which decreases assets.
 To Illustrate:
On Jan. 16, 2019, Rafael Reyes returned one unit
of the computers purchased last Jan. 15, 2019
under Charge Invoice 001. The unit returned was
in good condition. However, Rafael Reyes returned
the unit because it is one unit more than what they
need. The return was approved and accepted by
Magaling. The price will be deducted from the
account of rafael Reyes.
ENTRY:
General Journal
Date Account Title and Explanation Ref Debit Credit

1/10/16 Sales Return and Allowances 19,500

Accounts Receivable 19,500

To record return ofone unit of

computers from Rafael Reyes
under Charge Invoice 001
 Sales Discounts
• A sales discount is the offer of a cash discount to
encourage customers to pay the balance at an earlier
date.
• An example of a discount term is commonly expressed
as: 2/10, n/30, which means that the customer is given
2% discount if payment is made within 10 days. After 10
days there is no discount, and the balance is due in 30
days.
• Sales Discount is a contra revenue account with a
normal debit balance.
 To Illustrate:
Assume that Magaling purchased on cash, five
units of computers at PHP10,000 per unit from a
supplier on January 17, 2019. These units were
subsequently sold to Jun Cruz on Ja..18, 2019
under Charge Invoice (ChI) No. 002 amounting to
PHP90,000 (PHP18,000 per unit) with terms 2/10,
n/30, FOB Shipping Point. On Jan. 23, 2019, Cruz
paid the said account in full.
 General Journal
Date Account Title and Explanation Ref Debit Credit

1/17/19 Purchases 50,000

Cash 50,000

To record purchased on cash

five units of computers.
 General Journal
Date Account Title and Explanation Ref Debit Credit
1/18/19 Accounts Receivable 90,000

Sales 90,000

To record sales on account

under Charge Invoice No. 002
to Jun Cruz with terms 2/10,
n/30
 General Journal
Date Account Title and Explanation Ref Debit Credit

1/23/19 Cash 88,200

Sales Discount 88,200

To record collection of
accounts receivable from Jun
Cruz net of 2% sales discount
 Determining Cost of Goods Sold under Periodic Inventory System
Cost of goods sold:
Merchandise Inventory, Beginning 100,000
Purchases 250,000
Less: Purchase returns and allowances 5,000
Purchase discounts 2,000
Add: Freight in 7,000
Net Purchases 243,000
Cost of goods purchased 6,000
Cost of Goods available for sale 249,000
Merchandise Inventory, Ending 349,000
Cost of goods sold 230,250
In a periodic inventory system, separate ledger
accounts are maintained for various items
composing the cost of goos sold (Purchases,
Purchase Returns and Allowances, Freight -In,
Purchase Discounts). At the end of the
accounting period, a physical count of inventory
is necessary to establish the ending balance of
the inventory.
 Practice Set 1
ABM Merchandising sells facsimile, copiers and other
types of offfice equipment. Transactions during the
month of September 2019 are as follows:
Sept 1 Purchased five units pf copiers on account from
Machine Corp at a cost of PHP8,000 per unit.
Payment is due 30 days after.
Borrowed from Nation Bank, PHP50,000 at 10% interest
per annum due in three months. Canto issued a
promissory note for this borrowing.
Sept 2 Purchased 10 units facsimile machines
on cash from Tiktac Corp for a total
price of PHP20,000.
Sept 7 Sold three units of copiers to Jane Nay
on account for a total amount PHP45,
000.The terms of the sale is 2/10, n/30.
Sept 10 Paid PHP5,600 for office supplies.
Sept 14 Collected from Jane Nay the full
amount relating to September 7 sales.
Sept 15 Paid PHP10,000 salaries of office
staff
Sept 20 Sold on cash, two units of facsimile
machines to Juan for PHP5,000.
Sept 30 Purchased delivery truck worth
PHP300,000 with an estimated useful life of 10
years with no residual value. Canto paid
PHP200,000 cash and balance payble 30
days after.
Instructions:
1. Prepare journal entries to record the
above transactions, assuming ABM
use periodic inventory system.
2. Prepare necessary adjusting entries
on September 30, 2019.