EL201-Accounting For IT

1
EL201
ACCOUNTING FOR IT
Learning Module on EL201

1
STUDENT
Name:
Student Number:
Program:
Section:
Home Address:
Email Address:
Contact Number:
PROFESSOR
Name: MARK RYAN P. BARITA / JOHNCHRIS B. NATIVIDAD/EUGENIO S. OTIC
JR.
Academic Department: BUSINESS EDUCATION
Consultation Schedule:
Email Address:
markryan.barita@gmail.com/natividadjohnchris@gmail.com/eugeniootic@yahoo.com
Contact Number: 0975-567-9117/ 0932-459-4921/0945-529-9791

1
General Instructions:
Follow the sequence of the topics as they are presented. Refer to the pages assigned in
the textbook for studying and complying with the enrichment activities. Output for
enrichment activities and the quizzes for assessment shall be written in the blank pages
provided at the last part of this module and if necessary, additional paper(s) that you need
to attach properly in this module. Any clean paper will do. Make sure to attach the
additional papers properly as incomplete answers will be taken against you.
Read the other reference books and linkages for more information and presentation.
CCC BSA students maintain honesty and integrity at all times.
Learning is primarily student’s responsibility.
Periodic examination may be administered at the end of the term
Contents of this material are owned by the City College of Calamba. You may not
reproduce, distribute, publish, display, modify, create derivative works, transmit, nor
may you distribute any part of this or offer it for sale, or use it to construct any kind of
database.

1
LEARNING MODULE INFORMATION

I. Course Code EL201
II. Course Title ACCOUNTING FOR IT
III. Module Number 1 (PRELIM)
IV. Module Title INTRODUCTION TO ACCOUNTING AND FINANCIAL
INFORMATION
V. Overview of the module The topics in this module are presented by having a discussion
and application of the lesson at the same time, followed by a
summary of the lesson and enrichment and assessmen t activities
to test the knowledge and understanding of the students.
VI. Module Outcomes At the end of this module, the students should be able to:
1. Understand accounting and business concepts.
2. Have a basic knowledge on business transactions.
LESSON NUMBER 1
LESSON TITLE: INTRODUCTION TO ACCOUNTING AND BUSINESS
Lesson Objectives: At the end of the lesson, the students are expected to:
• Understand the importance of accounting, its definition and history.

• Importance of accounting in the modern global business.
GETTING STARTED
Every business organization that has economic resources, such as money, machinery, and buildings, uses accounting
information. For this reason, accounting is called the language of business. Accounting also serves as the language providing
financial information about not-for-profit organizations such as governments, churches, charities, fraternities, hospitals, etc.
Accounting is part of everyday life. As a student, you actually encounter accounting in your routine not knowing
that you are doing some accounting task. From budgeting your allowance and spending it for your personal expenses,
transportation, food and school supplies, among others.
DISCUSSION OF CONTENT / APPLICATION
HISTORY OF ACCOUNTING
The earliest bookkeeping records were used to keep track of pyramids and palaces being constructed especially in
Babylonia (present-day Iraq) and Egypt. A record was kept of the number of slaves who worked for Kings and Pharaohs.
They also recorded the materials used and the number of days it took for the work to be finished. A listing of people were
also kept and the amount of taxes were required to pay.

2
Bookkeeping records were found as early as 2000 B.C. in Assyria (modern Northern Iraq, Northeastern Syria and
Southeastern Turkey). In the 15 th century, records were also kept in the trading ports of Greece where the number of days
spent for as trading voyage were listed, and the number and value of cargoes shipped and unloaded for a particular voyage.
Servants were usually entrusted by their merchant-masters to keep track of their properties (assets) and the debts (liabilities)
they owed especially after a particular voyage.
The first accounting books was written by Cotrugli in Naples and the modern double entry bookkeeping system
could be traced from the book prepared in 1914 by an Italian mathematician, Fr. Luca Pacioli, entitled Suma de Aritmetica.
In the Philippines, bookkeeping was introduced by the Spaniards and the bookkeeper was called Tenedor de Libro.
Before the Spaniards came, trade was already flourishing between the Philippines and other Asian countries. Records of
goods being bartered were likewise kept by the traders.
FORMS OF BUSINESS ORGANIZATION
The three common forms of businesses in the Philippines are:
1. Sole Proprietorship
– This is a business, set up and managed by one person.
– The sole proprietorship has no separate legal personality from its owners.
– Examples are small businesses such as beauty parlors, dress shops, barbershops, bakeries, retail stores, etc.
Advantages:
a. Only small amount of capital is needed.
b. Its operation can be managed easily by the proprietor.
c. The owner or proprietor gets all the profits.
d. Only a minimum requirement to legally operate is needed (DTI Registration, Barangay Clearance and Mayor’s
Permit only).
Disadvantages:
a. Difficult to expand the business due to low capital
b. No indefinite life. Owner may just want to close it one day or become incapacitated or die.
c. Owner has unlimited liability. If the business is unable to pay its debt, its creditors can go after the owner’s
personal properties.
2. Partnership
– This is a business owned by two or more persons called partners who contribute money, property and profession
into a common fund for the purpose of sharing profits among themselves.
– Common examples are Professional Partnerships of CPAs, Lawyers, Engineers, Doctors, etc.
– They are registered with the Securities & Exchange Commission (SEC).
Advantages:
a. Ease in managing the business and in attracting clients because of more owners involved.
b. Management is more effective because of division of responsibilities among partners.

3
Disadvantages:
a. No indefinite life since disagreements could easily arise because of many owners involved.
b. Partners, like sole proprietor, have unlimited liability.
3. Corporation
– A business organized as a separate legal entity from the owners. It means that it can conduct business by itself
– enter into contracts, buy and sell properties and stocks. An investor simply buys shares of stocks in a
corporation and become a shareholder. It is managed by the Board of Directors (for Stock) or Trustees (for
Non-Stock) elected by the shareholders from among themselves.
– The New Corporation Code of the Philippines allows a One-Person Corporation.
– They are registered with the Securities & Exchange Commission (SEC).
Advantages:
a. More capital can be raised because of the large number of shareholders.
b. Can afford to hire experts who can efficiently manage and operate the business.
c. It has perpetual existence.
d. More stable than partnership because it is not affected by withdrawal of a shareholder. A shareholder who wants
to withdraw from the corporation simply sells the shares owned to others or can even sell the shares back to the
corporation.
e. Higher amount if profits may be obtained because of its large amounts of resources which also means higher
return of investment for the shareholders or investors.
Disadvantages:
a. A shareholder, unlike a sole proprietoror a partner, has no unlimited liability. Therefore, there is a higher risk
involved on corporate debts because in the event of insolvency (assets are not enough to cover liabilities),
corporate creditors cannot go after personal properties of shareholders or investors.
b. Has the most legal and tax requirements compared to Sole Proprietorship and Partnership.
c. Abuse of power by the Board of Directors/Trustees could certainly affect the welfare of the corporation and its
shareholders.
ACCOUNTING AS A BUSINESS LANGUAGE
Accounting is bridge between the company and the statement user. From the business activities which accounting
accumulates, reports will be prepared and vital information are communicated to the users. Accounting speaks in a language
that enables readers to understand what is happening in a business, if it is doing in terms of finances, before readers or users
make decision.
ACCOUNTING DEFINED
Accounting is a service activity whose function is to prepare financial reports that will provide relevant information
about the business. It is difficult for users to make financial decisions that are not supported by factual data. These facts are
contained in the accounting reports.
Accounting may also be defined as the process of recording, classifying and summarizing transactions and events
which are financial in nature and interpreting the result thereof.

4
USERS OF FINANCIAL INFORMATION
Users of Financial Statements are called stakeholders. A stakeholder is a person or entity who has a “stake” or
interest in the business. Aside from the owners or investors, the other stakeholders are the managers, lenders/creditors,
suppliers, employees, government and customers. The table below shows the concerns of each stakeholders:
INTERNAL STAKEHOLDERS
Owner or Investor The one who puts in capital (such as money or property) in a business endeavor. To
minimize the risk of losing money, an owner or investor must read the financial
reports and seek answers to the following questions:
1. Is the business profitable?

2. Has it accumulated sufficient financial wealth to remain stable?
Manager Responsible for running the business. Financial reports make it possible to evaluate
performance of the business.
1. Are the plans being implemented beneficial to the business?

2. Is the business operating profitably?
Remember a losing business depletes wealth and is a reflection of inefficient

management?
EXTERNAL STAKEHOLDERS
Employee The employee wants:
1. Higher wages
2. Benefits
3. Good working conditions
4. Security of tenure
The employees will evaluate the financial report to determine the ability of the
business grant these demands. Remember, a losing business cannot afford to give
higher salaries and more benefits.
Lender or Creditor A lender or creditor assesses the paying ability of the business-borrower by reading
the financial reports.
1. Will the business be able to pay its debts when it falls due?
2. Does it have liquid assets (cash assets or easily convertible to cash)?
Supplier A supplier offers goods or services on cash basis or on credit term. If it offers on
credit:

5
1. Will the business be able to pay

Government The government seeks to answer the following questions by reading the accounting
reports:
1. Is the business paying the right taxes?

2. Is it filing all the required documents?
The government through its tax agents, the Bureau of Internal Revenue investigates
tax returns and assesses truthfulness of the reported profits as well as the tax liability
paid by the business.
Customer The customer assesses the company’s ability to continuously supply the goods they
need at the right price and right quality.
SUMMARY OF THE LESSON
• Accounting is the language of business.

• Fr. Luca Pacioli is the Father of modern double entry accounting system.
• Accounting in the Philippines was introduced by the Spaniards.
• The forms of business organization are Sole Proprietorship, Partnership and Corporation.
• Accounting is a service activity that provides relevant financial information to the business’ stakeholders.
• Stakeholders are persons that have interest in the business.
ENRICHMENT ACTIVITIES
Enumerate businesses that are sole proprietorship, partnership and corporation.
ASSESSMENT
1. Explain the functions and significance of accounting in the global business world.
2. Enumerate daily activities or routine that you think are related with accounting.
REFERENCES
1. Manuel, Z.V.C, M.V.C, Simplified Accounting for Business (International Edition 2016)
2. https://courses.lumenlearning.com/wmopen-introbusiness/chapter/what-is-accounting/

6
LESSON NUMBER 2
LESSON TITLE: ANALYZING TRANSACTIONS IN STARTING A BUSINESS
Lesson Objectives: At the end of the lesson, students are expected to:
1. Define the basic elements of accounting.

2. Use the accounting equation to analyze business transactions in starting a business.
GETTING STARTED
FINANCIAL STRUCTURE OF A BUSINESS ORGANIZATION
BUSINESS
ENTITY
ASSETS Liabilities P500,000
=
P2,500,000 Owner’s Equity P2,000,000
The figure above shows how accounting views the financial structure of a business entity. The structure should
contain three values or basic elements called assets, liabilities, and owner’s equity. The structure shows the assets on one
side (left) and the liabilities and owner’s equity on the other side (right). The financial structure also shows the relationship
among these three accounting values – that the assets are claimable by the creditors (represented by liabilities) and investors
(represented by owner’s equity) and therefore should always be equal.
BASIC ELEMENTS OF ACCOUNTING
Assets refer to things of value owned by the business. They benefit the business, are being used in operating the
business and are expected to have long life. Examples include cash, investments, accounts receivable, inventory, supplies,
land, buildings, equipment, and vehicles. Initially, assets or business resources will come from investors (sole proprietor,
partner or shareholder) and secondarily from creditors (from a bank for money and from suppliers for goods and supplies
bought and services received). Therefore, assets are claimable by two parties – creditors and investors.
Liabilities refer to amounts owed to lenders and suppliers. Liabilities often have the word "payable" in the account
title. Liabilities also include amounts received in advance for a future sale or for a future service to be performed.
Owner’s Equity or Net Worth represents the residual interest of the owner in the entity’s assets. In a partnership
since there are more owners, the appropriate title is partner’s equity. In a corporation since there are many investors, it is
called shareholder’s equity.

7
THE ACCOUNTING EQUATION
An accounting equation would always have an equal left side and right side. There are no transactions where the
left side is higher than the right side and vice versa. Always keep in mind to preserve the balance in both sides in order not
to make any error in accounting and recording transactions. Say all assets are invested solely by the owner, the accounting
equation is simply:
Assets = Owner’s Equity
If the assets came from the mixture of investors and creditors, the equation will look like:
Assets = Liabilities + Owner’s Equity
ILLUSTRATIVE PROBLEM:
The following transactions pertaining to the travel business owned by Mr. N showing how the transactions in the
formation of his business can affect the accounting equation:
Jan 1, 2020 Mr. N opened a tour and travel agency by investing cash of P50,000. He has three cars worth P1,000,000
but decided to invest only two of these cars worth P750,000.
Analysis: The assets of the business will increase in the form of cash P50,000 and cars P750,000 with a
corresponding increase in owner’s equity.
Increase in ASSETS = LIABILITIES + Increase in Owner’s Equity

Cash P50,000 Mr. N, capital P800,000
Cars 750,000
Jan 3, 3030 Mr. N borrowed P100,000 cash from a bank for use in his business.
Analysis: The assets of the business will increase again in cash by P100,000 with a corresponding increase
in liability.
Increase in ASSETS = Increase in LIABILITIES + Owner’s Equity

Cash P100,000 *Loans Payable P100,000
*Loans Payable is an account used for borrowings made in a bank. Other accounts in the liabilities section include
Accounts Payable, Note Payable, Income Tax Payable, among others.
Jan 7, 2020 Mr. N bought tables and chairs from a local supplier and paid cash of P45,000.
Analysis: The assets of the business will increase in the form of furniture and decrease in the form of cash.
Total assets will remain unchanged since both accounts in part of the assets. Note that even if there is no
change in the right side of the equation (liabilities and owner’s equity), the accounting equation will remain
its balance since the transaction involves increasing and decreasing the asset by the same amount.

8
Increase and Decrease in ASSETS = Liabilities + Owner’s Equity

Cash (-) P45,000
Furniture (+) 45,000
Jan 15, 2020 Various equipment were purchased on account from National Winners for P55,000.
Analysis: The assets of the business will increase in the form of equipment with a corresponding increase
in liabilities.
Increase in ASSETS = Increase in LIABILITIES + Owner’s Equity

Equipment P55,000 *Accounts Payable P55,000
*The account “Accounts Payable” is used for short-term borrowings not evidenced by a promissory note usually
from a known supplier. The account ‘Notes Payable” is the one used for borrowings where a promissory note is
given by the borrower.
Jan 18, 2020 Mr. N made a cash withdrawal of P5,000 for personal use
Analysis: The assets of the business will decrease in the form of cash P5,000 with a corresponding decrease
in the owner’s equity since the owner recovered his investment by withdrawing cash.
Decrease in ASSETS = LIABILITIES + Decrease in Owner’s Equity

Cash P5,000 *Mr. N, Drawing P5,000
*The “Mr. N, Drawing” account is considered as a deduction to the total owner’s equity section. This account is the
opposite of the capital account which we recorded as “Mr. N, capital” which represents the total investments made
by the owner whereas the drawing account represents the total deductions to the investments made by the owner.
Jan 20, 2020 The account due to National Winners was paid in cash.
Analysis: Assets of the business will decrease in the form of cash with a corresponding decrease in
liabilities.
Decrease in ASSETS = Decrease in LIABILITIES + Owner’s Equity

Cash P55,000 Accounts Payable P55,000
The following table summarizes the effect of these transactions on the accounting equation with balances given
after each transaction to prove the accounting equation:

9
Date ASSETS LIABILITIES OWNER'S EQUITY

January Cash Cars Equipment Furniture Loans Payable Accounts Payable Mr. N, capital Mr. N, drawings
1 50,000 750,000 800,000
3 100,000 100,000
Bal. 150,000 750,000 - - 100,000 - 800,000 -
7 - 45,000 45,000
Bal. 105,000 750,000 - 45,000 100,000 - 800,000 -
15 55,000 55,000
Bal. 105,000 750,000 55,000 45,000 100,000 55,000 800,000 -
18 - 5,000 - 5,000
Bal. 100,000 750,000 55,000 45,000 100,000 55,000 800,000 - 5,000
20 - 55,000 - 55,000
Balances 45,000 750,000 55,000 45,000 100,000 - 800,000 - 5,000
*Getting the totals, the total assets will be P895,000, total liabilities at P100,000 and total owner’s equity at P795,000. The
total of the right side of the equation (Assets) will be P895,000 and the left side (Liabilities & Owner’s equity) will have
the same total. The accounting equation retained its balance after accounting several accounting transactions.
STATEMENT OF FINANCIAL POSITION
The first three basic elements: assets, liabilities and owner’s equity are presented in a report called the Statement of
Financial Position where a user will be able to determine the following information:
1. Wealth accumulated by the business,
2. Its net worth
3. Its liquidity and solvency
It was previously called Balance Sheet before PAS 1 was revised in 2007 because it shows the balances of each
account and the grand total shows a balance between the assets (business resources) on one hand and the liabilities and
owner’s equity (claim over the assets) on the other.
The Statement of Financial Position, often called the Balance Sheet, is a financial statement that reports the
assets, liabilities, and equity of a company on a given date. In other words, it lists the resources, obligations, and ownership
details of a company on a specific day. You can think of this like a snapshot of what the company looked like at a certain
time in history.
Presented below is the interim statement showing the financial position of the previous illustration for Mr. N’s
Travel and Tours business. Note that this statement is not prepared every time there is a transaction or a change in the
accounting equation. This statement is usually prepared every accounting year-end and interim statements are prepared as
needed by the statement users.

10
Mr. N Travel and Tours

Statement of Financial Position
January 20, 2020
ASSETS LIABILITIES AND OWNER'S EQUITY
Cash 45,000 Loans Payable 100,000
Cars 750,000 Mr. N, Capital 795,000
Equipment 55,000
Furnitures & Fixtures 45,000
Total 895,000 Total 895,000
*The capital account is already presented net of drawings (P800,000 – P5,000), P795,000.

• The three basic accounting elements are: assets, liabilities and owner’s equity.
• In a business transaction, there must be an: a. EXCHANGE OF VALUES; b. between TWO PARTIES; c. in terms
of MONEY.
• An account is a brief description of items representing each of the accounting elements.
• The accounting equation is: Assets = Owner’s Equity OR Assets = Liabilities + Owner’s Equity.
• The Statement of Financial Position contains the assets accumulated by the business, liabilities it owed and its net
worth. From this information you will be able to determine if business is liquid and solvent.
Multiple Choice: Encircle the letter of your choice.
1. Which of the following is an asset of a firm?

a. The capital of the firm
b. Computer equipment owned by the firm
c. Money owed by the firm to one of its suppliers in respect of goods purchased on credit.
d. An overdrawn balance on the firm’s bank account.
2. Which of the following equations is correct?

a. Assets + Capital = Liabilities
b. Liabilities – Capital = Assets
c. Capital = Assets + Liabilities
d. Capital = Assets – Liabilities
3. Which of the following is a liability for the firm?

a. A building owned by the firm.
b. Cash in the firm’s safe
c. Money which the firm has borrowed and has not yet paid
d. Money owed to the firm by its debtors

11
4. Over a period of time, if total assets increase by P270,000 and total liabilities increase by P70,000, then owner’s
equity will be increased by
a. P70,000
b. P340,000
c. P270,000
d. P200,000
5. A business received P6,000 cash from charge customers to apply on account. The effect of the transaction is
a. An increase in an asset and an increase in revenue
b. An increase in an asset and a decrease in capital
c. An increase in an asset and a decrease in a liability
d. An increase in an asset and a decrease in an asset
e. An increase in an asset and an increase in capital
6. Withdrawals by the proprietor has all of the following effects except:

a. Reduction of total assets
b. Reduction of owner’s equity
c. Reduction of profit for the period
d. Reduction of cash balance
7. In the accounting equation, an increase in asset can be associated with

a. An increase in liability
b. A decrease in owner’s equity
c. A decrease in liability
d. An increase in another asset
8. When an entity acquires computer equipment for cash,

a. Assets and owner’s equity are increased
b. An asset is increased and a liability is decreased
c. One asset is increased and another is also increased
d. One asset is increased while another is decreased
9. The accounting equation

a. Is used to determine the amount of liabilities owed.
b. Is used to determine the amount of income earned during the period
c. Shows the claims on the entity’s assets by both creditors and owner
d. Shows the claims on the owner’s equity by the creditors
10. The components of the balance sheet equation are

a. Assets, income and owner’s equity
b. Income, expense and profit
c. Assets, liabilities and owner’s equity
d. Investments, withdrawals and profit

12
ASSESSMENT
Sam Kilby, a business graduate student who was working as a mere employee in a company called Think Computer,
decided to become an entrepreneur and put up an internet café. The following are the transactions for the start up transactions
for March:
1 Sam started an internet shop called “Dotahan” by investing his savings of P50,000 and the proceeds from the sale
of his car which amounted to P300,000.
5 Sam hired two workers to assist him in the shop for a monthly salary of P6,000 each worker
10 Lessor (owner) of the property where the shop is located required Sam to pay two months rent deposit in cash
15 He paid cash of P8,000 for furniture bought from Alexis Furniture Store
18 He bought an aircon unit from Abbe Appliances for P45,000 promising to pay the account within three months
20 He purchased supplies and paid cash of P1,500
25 The shop was ready for the installation of the computed units. Sam purchased 12 units of computer hardware from
Think PC. He paid 50% cash P125,000 and a note for the balance payable in 24 monthly installments starting April
25.
Required:
a. Analyze the transactions using the following accounts and provide a money column for each one: Cash, Supplies, Rent
Deposit, Furniture and Fixtures, Equipment, Accounts Payable, Notes Payable, and Kilby, Capital. Use the format in the
illustrative problems of this lesson (Mr. N’s travel business)
b. Prove the accounting equation. (In your own illustration, show the accounting equation’s equality)
c. Prepare a Statement of Financial Position
REFERENCES
1. Vera Cruz-Manuel. Simplified Accounting for Business: Basic Concepts and Procedures. 2016.
2. https://www.accountingcoach.com/terms/L/liabilities
3. https://www.myaccountingcourse.com/financial-statements/statement-of-
financialposition#:~:text=What%20is%20the%20Statement%20of%20Financial%20Position%3F%20The,details
%20of%20a%20company%20on%20a%20specific%20day.
4. Warren, Reeve, Duchac. Accounting 2E (2 nd Edition)
5. Ballada, Win. Basic Accounting Made Easy (18th Edition)
LESSON NUMBER 3
LESSON TITLE: INTERRELATIONSHIP OF FINANCIAL STATEMENTS
1. Define and know the importance of the financial statements.

2. Understand how the financial statements are interrelated.

13
FINANCIAL STATEMENTS
Generally, the term financial statement could be referring to:

➢ General-purpose, external financial reports that are distributed by a company to people outside of the company
➢ A more-detailed, internal financial report that remains inside of the company for use by the company's
management.
The general-purpose financial statements are those that are made available to users outside the company. These
consist mainly of income statement, statement of changes in owner’s equity, statement of financial position an d statement
of cash flows.
Statement of Comprehensive Income
For the month ended January 31, 2020
Service Income P 51,000
Less: Operating Expenses:
Rent Expense P 10,000
Salaries Expense 9,000
Repairs Expense 1,000
Gas & Oil Expense 500
Utilities Expense 500 21,000
NET INCOME P 30,000

Capital Statement
Mr. N, Capital Jan. 1 P800,000
Add: Net Income 30,000
Total 830,000
Less: Drawings 5,000
Mr. N, Capital Jan. 30 P825,000

Statement of Cash Flows
Cash flows from operating activities:
Cash received from customers P33,000
Cash paid for expenses - 21,000
Net cash provided by operating activities P 12,000
Cash flows from investing activities:
Acquisition of furnitures & fixtures - 45,000
Acquisition of equipment - 55,000
Net cash used by investing activities - 100,000
Cash flows from financing activities:
Contribution by Mr. N 50,000
Withdrawal by Mr. N - 5,000
Loan from bank 100,000
Net cash provided by financing activities 145,000
Cash balance January 31 P 57,000

January 31, 2020
Cash P 57,000 Loans Payable P100,000

Accounts Receivable 18,000 Mr. N, capital 825,000
Cars 750,000
Equipment 55,000
Furnitures & Fixtures 45,000
Total P 925,000 Total P925,000

14
Shown in our illustration above are the financial statements derived from our illustrative problems in the travel and tours
business of Mr. N as of January 31, 2020. The illustration shows the relationship of the revenues and expenses appearing in
the income statement to the assets, liabilities and owner’s equity appearing in the statement of financial position. The arrows
points to the amounts computed in one financial statement that is carried forward to another financial statement to be used
in its computation.
Statement of Comprehensive Income/ Income Statement is also known as the statement of operations, profit and loss
statement, and statement of earnings. It is one of a company's main financial statements. The purpose of the income
statement is to report a summary of a company's revenues, expenses, gains, losses, and the resulting net income that occurred
during a year, quarter, or other period of time.
Examples of Items Appearing in the Income Statement
1. Revenues, which are the amounts earned through the sale of goods and/or the providing of services
2. Expenses, which include the cost of goods sold, SG&A expenses, and interest expense
3. Gains and losses, such as the sale of a noncurrent asset for an amount that is different from its book value
4. Net income, which is the result of subtracting the company's expenses and losses from the company's revenues
and gains. Corporations with shares of common stock that are publicly traded often refer to net income as
earnings and their income statements must include the earnings per share of common stock.
The income statement for Mr. N’s business shows total revenues earned of P51,000 and total expenses incurred of P21,000
resulting in a net income of P30,000 which is carried forward to the capital statement or the statement of
comprehensive income.
Statement of Changes in Owner's Equity shows the changes in the capital account due to contributions, withdrawals, and
net income or net loss.
The Capital Statement shows the starting capital of Mr. N of P800,000 which increased by P30,000 because of net income
and decreased by P5,000 because of owner’s personal drawings. The ending capital became P825,000 which is carried
forward to the statement of financial position as claim over the net assets.
The Statement of Financial Position is already explained in Lesson Number 2 of this module. ☺
The Statement of Financial Position shows the assets owned by the business of P925,000 of which P100,000 represented as
claim of the creditors and P825,000 as claim of the owner. Note that the cash balance is supported by the cash balance end
in the statement of cash flows.
Statement of Cash Flows shows the changes (cash flows) in the business activities: starting with the operating activities
appearing in the income statement, and the investing and financing activities appearing in the statement of financial position.
Like the income statement, this is prepared for a certain period of time.
Of what use is this statement?

1. To evaluate cash stewardship of the finance officer,
2. To guide the planning of future cash flows, and
3. To assess ability of the business in generating cash from operation

15
Date Cash Operating Activities Investing Activities Financing Activities

1 50,000 Contribution of Mr. N
3 100,000 Loan from bank
7 - 45,000 Furniture Paid
18 - 5,000 Cash withdrawn by Mr. N
20 - 55,000 Equipment Paid
21 15,000 Collected from clients
22 - 1,500 Paid for expenses
25 - 500 Paid for expenses
31 - 19,000 Paid for expenses
The company obtained cash from three sources: contribution of the owner (March 1), loan from bank (March 3),
and collection from clients (March 21, 27, and 30). The business becomes financially strong and stable when more cash
comes from its operation rather than from loans borrowed (risky) and from contribution of the owner (safe but very
conservative). The business must grow on its own.
The cash flows from investing activities represent payments from acquisition of assets. The effect is a decrease in
cash of P100,000 or a net cash outflow for investing activities for furniture and equipment purchased and paid for.
Cash flows from financing activities represent increase in cash coming from the owner’s contribution and from the
amount borrowed from the bank against a cash decrease because of the owner’s personal drawings. The effect is a net cash
inflow of P145,000 or net cash provided by financing activities.
Comparing the net income of P30,000 against the net cash inflow from operation of P12,000, gives us a
difference of P18,000 representing customer’s uncollected account, again a proof that information found in one financial
statement is related to another financial statement.
➢ The accrual concept recognizes revenues and expenses based on their occurrence regardless of whether cash is
collected or paid. The cash concept recognizes revenues and expenses only at the time of collection or payment.
➢ Revenues are cash INFLOWS resulting from the services rendered or merchandise sold.
➢ Expenses are cash OUTFLOWS resulting from the use of asset or service in generating income.
➢ Revenues > Expenses = Net Profit/Income
➢ Revenues < Expenses = Net Loss
➢ Revenues = Expense = Breakeven
➢ Fundamentally related financial statements show the effect of revenues and expenses in the Income Statement to
the assets, liabilities and owner’s equity in the Statement of Financial Position.
➢ The four basic financial statements are: a. Statement of Financial Position; b. Income Statement; c. Statement of
Cash Flows; d. Statement of Changes in Owner’s Equity
➢ Assets are classified according to liquidity or nearness to cash while liabilities are classified according to length of
maturity.

16
➢ Accounting period, which usually is one year, is the time basis used in the preparation of financial statements. In
practice, companies present interim financial statements after a month or a quarter, as needed by the users.
Using the Evelyn Tria problem in the assessment activity in the previous chapter, prepare the statement of financial
position, income statement, statement of changes in owner’s equity and statement of cash flows as discussed in this lesson.
Show how interrelationship of the financial statements.
ASSESSMENT
Mabel Wong began a professional practice as system analyst on July 1. She p lans to prepare monthly financial
statements. During July, the owner completed these transactions:
1 Owner invested P50,000 cash along with furniture and fixtures that had a P20,000 market value two years ago but
was worth P100,000 only on investment date.
2 Paid P25,000 cash for July rent (including P500 water bill) of a fully furnished office space at the Madrigal Building.
4 Purchased P120,000 worth of state-of-the-art equipment on credit for thirty monthly installment payments.
6 Purchased office supplies for cash, P2,500.
8 Completed work for a client and immediately collected P32,000 cash.
10 Billed a client P25,000 for work completed to be collected within 30 days.
15 Paid an assistant P6,200 cash as wages for 15 days.
18 Collected P15,000 cash on the amount owed by the client serviced on the 10th .
25 Owner withdrew P5,000 cash for personal use.
28 Paid the first installment to settle the liability on the equipment purchased.
30 Paid salary of assistant
31 Paid PLDT bill, P1,800 and Meralco bill, P3,800. Used up P2,000 worth of supplies purchased on the 6 th .
Required: Analyze the above transactions in an accounting equation table using the following column headings: Cash;
Accounts Receivable; Office Supplies; Equipment; Accounts Payable; Notes Payable; Wong, Capital; Explanation of
Changes in Capital. (You can copy the table format given at the end of lesson no. 3 of this module.) Then use additions (+)
and subtractions (-) to show the effects of the transactions on the individual accounts in the accounting elements. Show
balances after all transactions are recorded.
a. Prepare an income statement for the month of July (Regarding the expense accounts that will be used, you may use an
expense account that you think will fit for each transaction.
b. Prepare a statement of changes in owner’s equity for the month of July
c. Prepare a statement of financial position as of July 31.
REFERENCES
1. Simplified Accounting for Business 2 nd Edition. Cruz-Manuel. 2016
2. https://www.accountingcoach.com/blog/what-is-a-financial-statement
3. https://www.accountingcoach.com/blog/what-is-the-income-statement
4. https://www.accountingverse.com/accounting-basics/statement-of-owners-equity.html

17

III. Module Number 2 (MIDTERM)
IV. Module Title INITIAL ACCOUNTING PROCESS AND INTRODUCTION TO
MERCHANDISING
summary of the lesson and enrichment and assessment activities
1. Record transactions, post to the ledger and prepare trial
balance.
2. Compute the sales, cost of sales and gross profit of a
merchandising business.
LESSON NUMBER 1
LESSON TITLE: THE CHART OF ACCOUNTS, THE JOURNAL, THE LEDGER AND POSTING
PROCEDURES, AND THE TRIAL BALANCE
• Analyze transactions using the debit and credit in T-accounts.

• Journalize many sets of transactions in the general journal.
• Post the journal entries in the general ledger.
• Prepare the trial balance.
GETTING STARTED
Knowledge in accounting is important even for professionals outside the accounting profession as understanding
on how to process financial data through Accounting Information System or other orderly way of processing accounting
transactions are considered as an advantage and it is important in assisting the accounting department of businesses in order
to avoid waste of time and effort and to ensure the integrity and accuracy of financial reporting.
THE CHART OF ACCOUNTS

18
A Chart of Accounts is simply a listing of all account titles to guide the bookkeeper in recording transactions. The
accounts are properly arranged with the assets listed first, followed by the liabilities and lastly by the owner’s equity.
Account numbers are assigned for each account for easy reference. Please see illustration below:
HAPPY TOUR AND TRAVEL

CHART OF ACCOUNTS
Current Assets – 101 to 104

101 Cash
102 Accounts Receivable
102.1 Allowance for Bad Accounts
103 Notes Receivable
104 Office Supplies
Plan and Equipment – 201 to 203

201 Cars
201.1 Accumulated Depreciation – Cars
202 Equipment
202.1 Accumulated Depreciation – Equipment
203 Furniture & Fixtures
203.1 Accumulated Depreciation – Furniture & Fixtures
Current Liabilities – 301 to 303

301 Accounts Payable
302 Loans Payable
303 Utilities Payable
Long Term Liabilities – 401 to 402

401 Notes Payable
402 Mortgage Payable
Equity – 501 to 502

501 Gomez, Capital
502 Gomez, Drawings
Revenues – 601
601 Service Income
Expenses – 701 to 706

701 Gas & Oil
702 Rent Expense
703 Repair Expense
704 Salaries Expense
705 Supplies Expense
706 Utilities Expense

19
ANALYZING TRANSACTIONS USING T ACCOUNTS
The T-Account gives you a way of analyzing transactions with each account separately analyzed for increases and
decreases. It got its name because it resembles the letter “T” and is convenient to use as it has two sides – the left side and
the right side where the increases and decreases are separately placed. At the center of the T Account is the name or title
of the account. In accounting, the left side is called the debit side while the right side is the credit side. To illustrate:
Cash
Left side or Right side or

debit side credit side
DEBITS AND CREDITS
When an amount is to be recorded on the left side, we simply say debit the account, and when it is to be recorded
on the right side, we say credit the account. What happens when the amount placed on the left side or on the right side of
an account? Assets, Expenses and Drawings increase on the debit side while the Liabilities, Owner’s Equity and
Revenues increase on the credit side based on their position in the accounting equation.
Assets = Liabilities + Owner’s Equity
Or
Assets + Expenses + Drawings = Liabilities + Owner’s Equity + Revenues
For easier reference, remember the T Accounts below:
Assets/Expenses/Drawings Liabilities/Owner’s Equity/Revenues

Debit Credit Debit Credit
+ - - +
Demonstration Problems
March 1 Teddy Gomez opened a tour and travel service business by investing cash of P50,000 and two cars worth
P750,000.
Analysis: Increase in assets – cash P50,000 and cars P750,000 and increase in owner’s equity – Gomez,
Capital P800,000.
Entry: Debit Cash P50,000, Debit Cars P750,000 and Credit Gomez, Capital P800,000.
Cash Gomez, Capital

March 1 50,000 March 1 800,000

20
Cars
March 1 750,000
March 3 Borrowed P100,000 from Calambank for business use.

Analysis: Increase in assets – cash and increase in liabilities – loans payable by P100,000.
Entry: Debit Cash P100,000 and Credit Loans Payable P100,000.
Cash Loans Payable

March 1 50,000 March 3 100,000
3 100,000
Note that the Cash T account has now two entries.
March 7 Bought tables and chairs from Muebles. Paid cash P45,000.
Analysis: Increase in assets – furniture and decrease in assets – cash by P45,000.
Entry: Debit Furniture & Fixtures P45,000 and Credit Cash P45,000.
Cash Furniture & Fixtures

March 1 50,000 March 7 45,000 March 7 45,000
3 100,000
March 10 Purchased from Zace Hardware electric fan and typewriter worth P55,000 on account.
Analysis: Increase in assets – equipment and increase in liabilities – accounts payable by P55,000.
Entry: Debit Equipment P55,000 and Credit Accounts Payable P55,000.
Equipment Accounts Payable

March 10 55,000 March 10 55,000
March 18 Gomez made a cash withdrawal of P5,000 for personal use.

Analysis: Decrease in assets – cash and decrease in owner’s equity – Gomez, drawings by P5,000.
Entry: Debit Gomez, Drawings P5,000 and Credit Cash P5,000. Note that the entry always mentions the
debit side first.
Cash Gomez, Drawings

3 100,000 18 5,000
Take note that as you go on, data are accumulated on their respective T accounts either on the debit side or credit side.
March 20 Paid the account due to Zace Hardware.

Analysis: Decrease in assets – cash and decrease in liabilities – accounts payable by P55,000.

21
Entry: Debit Accounts Payable P55,000 and Credit Cash P55,000.
Cash Accounts Payable

March 1 50,000 March 7 45,000 March 20 55,000 March 10 55,000
3 100,000 18 5,000
20 55,000
March 21 P15,000 was received from a tourist for a tour in Baguio.

Analysis: Increase in assets – cash and increase in owner’s equity – service income by P15,000.
Entry: Debit Cash P15,000 and Credit Service Income P15,000.
Cash Service Income

3 100,000 18 5,000
21 15,000 20 55,000
March 22 Paid for gas and oil P500 and repair of car P1,000.
Analysis: Decrease in assets – cash P1,500 and decrease in owner’s equity – gas & oil expense P500 and
repair expense P1,000.
Entry: Debit Gas & Oil Expense P500, Debit Repair Expense P1,000 and Credit Cash P1,500.
Cash Gas & Oil Expense

March 1 50,000 March 7 45,000 March 22 500
3 100,000 18 5,000
21 15,000 20 55,000 Repair Expense
22 1,500 March 22 1,000
March 24 Mr. Gray hired the services of the agency and promised to pay P16,000 on March 31.
Analysis: Increase in assets – accounts receivable and increase in owner’s equity – service income by
P16,000.
Entry: Debit Accounts Receivable P16,000 and Credit Service Income P16,000.
Accounts Receivable Service Income

March 24 16,000 March 21 15,000
24 16,000
March 25 Paid PLDT for telephone service P500.

Analysis: Decrease in assets – cash and decrease in owner’s equity – utilities expense by P500.
Entry: Debit Utilities Expense P500 and Credit Cash P500.
Cash Utilities Expense

March 1 50,000 March 7 45,000 March 25 500
3 100,000 18 5,000
21 15,000 20 55,000
22 1,500
25 500

22
March 27 Billed Faculty Club of Angelicum P20,000 for a tour of Metro Manila.
Analysis: Increase in assets – accounts receivable and increase in owner’s equity – service income by
P20,000.
Entry: Debit Accounts Receivable P20,000 and Credit Service Income P20,000.
Accounts Receivable Service Income

March 24 16,000 March 21 15,000
27 20,000 24 16,000
27 20,000
March 30 Collected P8,000 from customer, Mr. Gray.

Analysis: Increase in assets – cash and decrease in assets – accounts receivable by P8,000.
Entry: Debit Cash P8,000 and Credit Accounts Receivable P8,000.
Cash Accounts Receivable

March 1 50,000 March 7 45,000 March 24 16,000 March 30 8,000
3 100,000 18 5,000 March 2720,000
21 15,000 20 55,000
30 8,000 22 1,500
25 500
March 31 Paid for office rent P10,000 and salaries of workers P9,000.
Analysis: Decrease in assets – cash P19,000 and decrease in owner’s equity – rent expense P10,000 and
salaries expense P9,000.
Entry: Debit Rent Expense P10,000, Debit Salaries Expense P9,000 and Credit Cash P19,000.
Cash Rent Expense

3 100,000 18 5,000
21 15,000 20 55,000
30 8,000 22 1,500 Salaries Expense
25 500
March 31 9,000
31 19,000
THE JOURNAL
In using the T-account device discussed earlier, a part of the transaction is recorded in one account and the other
part of the transaction in another account. For example, an initial transaction was recorded as debit in cash ledger 101 and
in the car ledger 201 and credit in the capital ledger 501. Considering the huge volume of transactions that occur in a day,
it would be very difficult to see the effect of the transaction at a glance because of the separate ledgers of accounts
maintained. Likewise, it would be very difficult to remember a month or so why a particular account was debited or credited
unless you trace this from one account to another account. There is therefore a need to record the transactions initially in
one place by using a journal which is also called the book of original entry. The debits and credits of each account are

23
recorded chronologically by day. The simplest form of journal is the two-column general journal and the process of
recording in this book is called journalizing. Each entry made is called a journal entry.
A journal entry contains the following items:

1. Date
2. The account title and the amount debited
3. The account title and the amount credited
4. Explanation
To illustrate how to record transactions in the general journal, we will use the transactions of Happy Tour and
Travel.
The following rules should be observed on each page of a General Journal:
1. Enter the column headings; date, accounts and explanation, F, debit and credit.
2. Enter on the date column the year and the month. The month is written only once until you move to the
next month. Enter the date in a smaller margin beside the month.
3. Enter the debit account on the accounts and explanation column and the amount on the debit column.
4. Enter the credit account on the accounts and explanation column but indent it so it will not fall on the debit
account margin. Enter the amount on the credit money column.
5. Enter a brief explanation on the accounts and explanation column. Indent it further so it will not fall on
the debit column and credit column margins. This is made for easy reading.
GENERAL JOURNAL
DATE ACCOUNTS & EXPLANATION F DEBIT CREDIT
2019
March 1 Cash P 50 000 00
Cars 750 000 00
Gomez, Capital P 800 000 00
Investment of Gomez to open the
business.
3 Cash 100 000 00

Loans Payable 100 000 00
Cash loan from Calambank.
7 Furniture & Fixtures 45 000 00

Cash 45 000 00
2019 Bought furniture from Muebles.
March 10 Equipment 55 000 00

Accounts Payable 55 000 00

24
Bought equipment from Zace Hardware

on account.
18 Gomez, Drawings 5 000 00

Cash 5 000 00
Cash withdrawal by Gomez.
20 Accounts Payable 55 000 00

Cash 55 000 00
Paid account due to Zace
Hardware.
21 Cash 15 000 00
Service Income 15 000 00
Cash received for Baguio tour.
22 Gas & Oil Expense 500 00

Repair Expense 1 000 00
Cash 1 500 00
Payment for car expenses.
24 Accounts Receivable 16 000 00

Billed Mr. Gray for tour services.
Cash 500 00
Paid PLDT bill. 500 00
Billed Angelicum Faculty Club 20 000 00
for Manila tour.
30 Cash
Accounts Receivable 8 000 00
Collected from Mr. Gray. 8 000 00
31 Rent Expense
Salaries Expense 10 000 00
Cash 9 000 00
Payment for admin expenses. 19 000 00

25
Entry with only one debit and one credit is called a simple journal entry. An entry with more than one debit or
more than one credit is called a compound journal entry.
TRIAL BALANCE
At this point, we should establish again the equality of the debits and credits in the T accounts or in the general
ledger by preparing a Trial Balance (refer to illustration below). A trial balance is a list of accounts with ledger balances.
As previously discussed, assets, owner’s drawings and expenses have normal balances on the debit side while liabilities,
owner’s equity and revenues have normal balances on the credit side. The double entry bookkeeping system extends to the
trial balance – the debit total should tally with the credit total. The trial balance of Happy Tour will appear as follows:
HAPPY TOUR & TRAVEL

TRIAL BALANCE
March 31, 2019
Acct. No. Account Titles Debit Credit
101 Cash P 47,000.00
102 Accounts Receivable 28,000.00
201 Cars 750,000.00
202 Equipment 55,000.00
203 Furniture & Fixtures 45,000.00
301 Accounts Payable P -
302 Loans Payable 100,000.00
501 Gomez, Capital 800,000.00
502 Gomez, Drawing 5,000.00
601 Service Income 51,000.00
701 Gas & Oil Expense 500.00
702 Rent Expense 10,000.00
703 Repair Expense 1,000.00
704 Salaries Expense 9,000.00
705 Utilities Expense 500.00
Totals P 951,000.00 P 951,000.00
Observe the following rules in preparing the trial balance:
1. Heading consists of three lines: Name of the business

Title of the report
Date
2. Account titles are arranged in the following order: Assets, Liabilities, Capital, Revenues and Expenses.
3. Note that even the accounts payable, although it is zero, still appears in the trial balance. It may be omitted but the
readers may wonder what happened to this account.
4. The peso sign is placed only on the first debit amount, first credit amount and on the totals.
5. The totals are ruled (one horizontal line drawn under the last amounts of the debit and credit columns) and double
ruled (two horizontal lines are drawn under the total figures).
6. If the total debit does not tally with the total credit, then errors must have been committed which should be located
before ruling and double ruling the totals.

26
Possible errors would be:
1. Posting from the journal to the ledger on the wrong side (recorded as debit instead of credit, vice versa).
2. Posting a wrong amount.
3. Ledger footing is wrong.
4. Wrong balances were copied from the ledger.
• A Chart of Accounts is simply a listing of all account titles to guide the bookkeeper in recording transactions.
• A T Account is a process of analyzing the debits and credits of an account.
• Assets, expenses and drawings are debited for increases (normal balance) while credited for decreases.
• Liabilities, owner’s capital and revenues are credited for increases (normal balance) while debited for decreases.
• A journal is called the book of original entry wherein transactions are initially recorded here in chronological order.
Each entry made is called a journal entry which contains a date, the account title and amount debited, the account
title and amount credited and an explanation.
• Trial Balance is a list of accounts with ledger balances to establish the equality of debits and credits in the T
accounts.
The following ledger accounts are used by Rachel Zane Repair Shop:
a. Cash m. Zane, Withdrawals
b. Salaries Expense n. Salaries Payable
c. Accounts Receivable o. Unearned Revenues
d. Zane, Capital p. Office Equipment
e. Service Revenues q. Rent Payable
f. Prepaid Rent r. Notes Receivable
g. Accounts Payable s. Interest Expense
h. Land t. Notes Payable
i. Supplies Expense u. Supplies
j. Prepaid Insurance v. Interest Receivable
k. Utilities Expense w. Rent Expense
l. Service Revenues
Requirement: Indicate each account’s classification and normal balance by placing (/) marks.

27
Type of Account
Normal Balance
Owner's Equity
Asset Liability
Zane, Capital Zane, Withdrawals Revenues Expenses Debit Credit
a. / /
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
l.
m.
n.
o.
p.
q.
r.
s.
t.
u.
v.
w.
ASSESSMENT
Using the chart of accounts and transactions below, prepare the General Journal and Trial Balance for Mr. Sanchez’
GGSS Beauty Salon.
GGSS BEAUTY SALON

CHART OF ACCOUNTS
Current Assets – 101 to 104

101 Cash
102.1 Allowance for Bad Accounts
103 Notes Receivable
104 Office Supplies
Plan and Equipment – 201 to 202

201 Equipment
201.1 Accumulated Depreciation – Equipment
202 Furniture & Fixtures
202.1 Accumulated Depreciation – Furniture & Fixtures

28
Current Liabilities – 301 to 303

301 Accounts Payable
302 Loans Payable
303 Utilities Payable
Long Term Liabilities – 401 to 402

401 Notes Payable
402 Mortgage Payable
Equity – 501 to 502

501 Sanchez, Capital
502 Sanchez, Drawings
Revenues – 601
601 Service Income
Expenses – 701 to 705

701 Rent Expense
702 Repair Expense
703 Salaries Expense
704 Supplies Expense
January 2020 Transactions:

• 1 – Mr. Sanchez opened up a salon by investing P50,000 cash and equipment worth P250,000.
• 3 – He borrowed P70,000 from AMBank for business use.
• 8 – Bought supplies worth P15,000 and chairs for P8,000 from National Hardware on account.
• 9 – Mr. Sanchez made a cash withdrawal of P7,000for personal use.
• 12 – Received P7,500 from customers for various hair services.
• 14 – Paid the account due to National Hardware.
• 15 – Received P1,000 from customers for haircut service.
• 20 – PNP hired the services of the salon to do haircut for their trainees and promised to pay P12,000 on January 27.
• 22 – Paid PLDT for telephone and internet service, P3,000.
• 24 – Paid P2,000 for the repair of various salon tools and equipment.
• 25 – Received P1,500 from a customer for manicure and pedicure services.
• 27 – Collected P8,000 from PNP.
• 29 – Paid Meralco and Manila Water P2,500.
• 30 – Paid for space rent P8,000 and salaries of employees P15,000.
REFERENCES

29
LESSON NUMBER 2
LESSON TITLE: INTRODUCTION TO ACCOUNTING FOR MERCHANDISING BUSINESS
• Learn the difference between the net income for a service business and for a merchandising business.
• Compute for the Cost of Goods Sold using the periodic Inventory Method.
• Differentiate the periodic system from the perpetual system of recording merchandise inventory.
GETTING STARTED
Aside from a service type of business, the most common type of business is the buying and selling of goods, also
called merchandising. The accounting principles for this type of business are the same as the service business though some
accounts are peculiar such as Purchases, Sales and Merchandise Inventory. Computation for gross income is a major
component in determining net profit for a merchandising business because of the nature of its operations.
MERCHANDISING
A person who buys and sells goods or merchandise is called a merchandiser. You buy shoes and sandals in bulk
from Liliw and put up a shoe store. Or you buy a variety of food stuff from food processing companies and put up a grocery
store. A merchandiser may be a wholesaler or a retailer. The manner of distribution depends on whether the seller is a
wholesaler or a retailer. A wholesaler is one who buys in bulk from a manufacturer or another wholesaler and sells them to
other wholesalers or retailers. A retailer buys goods from a manufacturer or wholesaler and sells them to the ultimate
consumers. Refer to the illustration:
Manufacturer Wholesaler Retailer Consumer
SERVICE BUSINESS AND MERCHANDISING BUSINESS COMPARED
The main difference between these two businesses lies in the sales and cost of sales section as shown in the
illustration below:
LUFFY DELIVERY SERVICE NAMI GROCERY STORE

Service Fees Revenues P 30,000 Sales Revenue P 54,000
Operating Expenses ( 12,000) Cost of Sales ( 30,000)
Operating Profit 18,000 Gross Profit 24,000
Other Revenues and Gains 3,000 Operating Expenses ( 16,000)
Other Expenses and Losses ( 2,000) Operating Profit 8,000
Net Profit P 19,000 Other Revenues and Gains 5,000

30
Other Expenses and Losses ( 2,000)

Net Profit P 11,000
Note that side by side, you can identify the major sections of the grocery store and how it differs from the delivery
business. While the service provider uses the title Service Fees Revenues for receipts coming from clients, the merchandiser
uses the title Sales Revenue for receipts coming from goods sold to customers. It follows that a merchandiser must maintain
a stock of goods held for sale called Merchandise Inventory. Once these goods are sold or delivered to the customers, it is
recognized in the income statement as cost of goods sold or Cost of Sales. Thistitle does not appear in the books of the
merchandiser, neither does the title gross profit.
Gross Profit. The merchandiser has to sell the goods at a price higher than its cost. In the above illustration, Nami Grocery
Store purchased merchandise for 1,000 units with a unit cost of P30 and priced it at 80% above cost or plus P24. Hence,
sales price will be P54 per unit. All units were sold so total sales revenue is P54,000 while total cost of sales is P30,000.
Cost of sales is a major expense representing the cost of the merchandise sold. The gross profit of P24,000 realized by the
merchandiser represents the amount of mark-up on the cost price. Gross profit or mark-up indicates adequacy of margin
of profit set up by the merchandiser.
Operating Profit. Just like the service provider, expenses such as salaries, rent, utilities, freight and advertising are
necessary to support the operation of the merchandiser. From the gross profit, deduct the operating expenses to arrive at the
operating profit.
Non-Operating Activities. After the operating profit, non-operating activities are considered to arrive at net profit. These
are minor income and expenses not recurring and not part of regular operation. These are classified into two:
1. Other Revenues and Gains such as rent income, interest income and gain from sale of property.
2. Other Expenses and Losses such as interest expense and loss from sale of property.
If there are no other revenues and other expenses, the operating profit is recognized immediately as the net profit.
INVENTORY SYSTEM
A merchandiser’s statement of financial position is practically the same as that of a service provider except that is
has a current asset account called Merchandise Inventory for goods available for sale. There are two methods of accounting
for merchandise inventory: Perpetual and Periodic.
Under the Perpetual Method, there is a complete or continuous recording of the merchandise from the time it is
purchased to the time it is sold. This method is usually adopted by a business which sells high priced – low volume goods
such as car dealers and real estate companies. Processes involved are:
A) Record merchandise B) Record cost of sales and C) Balance at year end should
inventory sales revenue tally with inventory count
Under the Periodic Method, merchandise bought is recorded as Purchases representing goods available for sale.
No entry is made for the cost of merchandise sold. It is only at the end of the accounting period that the cost of goods sold
will be determined after making an inventory count of the goods that were not sold. This is commonly used by a business

31
selling low price – high volume goods like the supermarket and hardware stores where it is difficult to track down every
item sold. Processes involved are:
A) Record purchases B) Record only sales revenue C) Count unsold, record

inventory end
Illustration:
a. During the year, 200 chairs were bought at P250 each or a total purchases of P50,000.
b. At the end of the year, a physical count showed only 70 chairs are still on hand.
c. Merchandise is sold at 50% above cost.
Computations:
Selling Price = P250 + (P250 x 50%) = P375
Sales (130 units x P375) P 48,750

Cost of Sales (130 units x P250) 32,500
Gross Profit P 16,250
The above transactions will be recorded as:
Perpetual Method Periodic Method

Merchandise Inventory 50,000 Purchases 50,000
Cash 50,000 Cash 50,000
To record purchases To record purchases
Cash 48,750 Cash 48,750

Sales 48,750 Sales 48,750
To record sales To record sales
Cost of Sales No cost of sales entry.
Merchandise Inventory 32,500
To record cost of sales 32,500
End of month or year: End of the month or year:

Entry for goods on hand is Merchandise Inventory 17,500
not necessary. Income Summary 17,500
To record goods on hand
at year end.
At the of the accounting period, the sale of 170 chairs amounting to P48,750 and the cost of sales of P32,500 will
be reported in the income statement while the P17,500 balance of the merchandise inventory will be presented in the
statement of financial position representing goods still on hand.
To continue with the illustration: the ending merchandise inventory of 70 c hairs will be brought forward as
beginning merchandise inventory in the following year. If another 100 chairs were again purchased, the total goods available
for sale will now be 170. At the end of the year, if 50 chairs are still on hand, cost of goods so ld will be computed as follows:

32
Merchandise Inventory, Jan 1 (70 x P250) P 17,500

Add: Purchases (100 x P250) 25,000
Total Goods Available for Sales P 42,500
Less: Merchandise Inventory (50 x P250) 12,500
Cost of Goods Sold (120 x P250) P 30,000
If the 120 chairs are sold at the same selling price of P375 as last year, this will result a total gross profit of P15,000
as computed below:
Sales (120 x P375) P 45,000

Less: Cost of Goods Sold (120 x P250) 30,000
The diagram below shows the movement of the goods from one period to the next period:
Merchandise Inventory Purchases (100) P25,000

January 1 (70) P17,500 (new stock)
(old stock)
Total Available for Sale

(170) P42,500
(during the year)
Merchandise Inventory Cost of Goods Sold

December31 (50) P12,500 (120) P30,000
(on hand at year end) (sold during the year)
The Merchandise Inventory ledger account, under the perpetual method, will appear as:
MERCHANDISE INVENTORY
Balance
Date Explanation Ref Debit Credit
Debit Credit
2019 Purchased goods 50,000 50,000
Sold goods 32,500 17,500
2020 Purchased goods 25,000 42,500
Sold goods 30,000 12,500

33
Note that the running balance represents what is unsold at any given date. In contrast, the periodic method gives an
incomplete recording because it does not record the cost of goods sold. The title Purchases are only the stock bought.
• A merchandising business is a type of business that buys and sells goods/consumer products to wholesaler, retailer
or end consumer.
• The following are the differences between a service provider and a merchandiser:
Service Provider Merchandiser
Income Reported Service Fee Sales
Type of expenses Operating Expense Cost of Sales
Other Expense Operating Expense
Other Expense
Asset reporting No inventory Merchandise Inventory
• The two methods in recording merchandise inventory are Perpetual Method and Periodic Method.
• Perpetual Method is used for high priced, low volume items where it is easy to keep track of its purchases and
eventual sale to customers. No inventory count is made at the end of the accounting period. On the other hand,
Periodic Method is used by businesses selling low priced, high volume items wherein only the purchases are
recorded and an inventory count at the end of accounting period is made to determine the cost of sales.
1. How important it is to have a strong foundation in accounting for non-accounting majors like you?
2. What is your understanding on how accounting for merchandising business differs from accounting for service
business?
3. Is keeping records vital to the success of a business?
4. How can you relate accounting with your course/major?
5. Explain the basic difference between periodic and perpetual inventory system.
ASSESSMENT
Record the following transactions using: a) Perpetual and b) Periodic Method

a. During the year, 300 chairs were bought at P150 each or a total purchases of P45,000.
b. At the end of the year, a physical count showed only 140 chairs are still on hand.
c. Merchandise is sold at 50% above cost.
After recording the transactions, determine the following:

a. Cost of Goods Sold
b. Gross Profit
c. Cost of unsold chairs

34
REFERENCES

35

III. Module Number 3 (FINAL)
IV. Module Title MERCHANDISING AND INTRODUCTION TO MANUFACTURING
BUSINESS
summary of the lesson and enrichment and assessment activities
1. Prepare income statement of a merchandising business.
2. Identify and compute costs and inventories of a manufacturing
business.
3. Identify and compute costs related to different business
concerns
LESSON NUMBER 1
LESSON TITLE: ACCOUNTING FOR MERCHANDISING BUSINESS
• Have a basic understanding on the accounting process of a merchandising business.
GETTING STARTED
This is the continuation of the accounting process of a merchandising business previously introduced in the
preceding lesson. On this lesson, other components of the accounting process especially in Sales and Purchases will be
explained thoroughly to understand how a merchandising business operates.
SALES REVENUE
Sales revenue is earned when the merchandiser or seller of the goods transfers the merchandise to the customer.
Remember that revenue results an increase in assets, usually in cash or accounts receivable, which in turn increases owner’s

36
equity. The sale is supported by a source document called an Invoice. Two copies are usually prepared by the seller, the
original which is given to the buyer who uses it in recording purchases and the duplicate is kept on file by the seller who
uses it in recording sales. Refer to example below:
ROYAL FURNITURE MART SALES INVOICE

77 Taft Avenue, Manila 1008
Tel. No. 521-2120
TIN 321 000 498 888 March 1, 2019
Sold to: Jim Perez Furnishers Terms: Cash

Address:1028 Sta. Mesa, Manila
Quantity Description Unit Price Amount
4 Book Cabinets P 1,000 P 4,000
Living Room Set
Dining Set
Bed
Executive Table
Opal Chair
Total P 4,000
Received the above items in good condition.
Jim Perez
Customer’s Signature
SALES DISCOUNT
Two common discounts granted to customers are: 1) trade discounts and 2) cash discounts.
1. Trade Discounts. Merchandisers offer their goods using a catalog where the goods are listed with their prices. The
prices herein are called catalog or list prices. A trade discount which is a percentage reduction from a published list
price may be granted to retailers or wholesalers for buying large quantities or for regularly patronizing the business.
Since a trade discount is granted at the point of sale, this is immediately deducted from the list price and only the
balance called the gross invoice price will be the basis for invoicing and recording. Using the above illustration, let
us assume that a 2% trade discount was given to Perez. The invoice would now show only a unit pr ice of P980
which is the difference between the list price of P1,000 and the 2% trade discount of P20. Total invoice amount
would now be P3,920 (P980 x 4 units) which will be the basis in debiting the cash and crediting the sales.
2. Cash Discounts. When goods are sold on credit, term of payment depends on the custom of the industry. The usual
credit terms which will appear on the invoice are:
a. n/30 – the gross amount is payable within 30 days from the date of sale with no discount.
b. 2/10, n/30–the account is payable within 30 days with a 2% discount given if the account is paid within 10 days
from the date of sale.
c. 3/EOM, n/60 – the account is payable within 60 days with a 3% discount given if the account is paid until end
of the month from the date of sale.
d. 2/10, 1/15, n/30 – the account is payable within 30 days with a 2% discount given if the account is paid within
10 days from the date of sale, but only 1% discount if the account is paid within 15 days from the date of sale.

37
To illustrate: let us assume that on March 1, Royal Furniture sold goods to Jim Perez for P6,000 with a P2,000 and the
balance on term 2/10, n/30. The customer paid on March 8. Entries on the books of Royal Furniture will appear as:
Date Particulars F Debit Credit

2019
March 1 Cash on Hand 2,000
Accounts Receivable 4,000
Sales 6,000
Sold goods to J. Perez on terms of P2,000 down, balance 2/10,
n/30.
Cash on Hand 3,920

Sales Discount 80
Collected the account of J. Perez, net of discount.
The cash discount, recorded as Sales Discount, is a contra revenue account which reduces the recorded sales
when presented in the income statement. Both trade and cash discounts are reductions from sales except that trade discount
is granted at the date of the sale and is immediately deducted before the sale is recorded.
Note that every company has its own policy in granting cash discounts. Some will grant discount only when the
whole amount is paid within the discount period while others will allow discount on partial payments or even when the
account is paid outside of the discount period.
RETURNS AND ALLOWANCES
A customer may return merchandise if it is defective or if it is not as ordered. Or the customer may just request for
a reduction or allowance in the price, for the same reasons, without returning the merchandise pu rchased. Just like discounts,
returns and allowances should be debited to the title Sales Returns and Allowances since the amount to be paid by the
customer will decrease revenue. This is another contra revenue account.
To illustrate: assume that on March 1, Royal Furniture sold merchandise to Asia Miguel worth P15,000 for cash.
One week later, Asia Miguel returned a chair worth P4,500 because it was defective. Royal Furniture acknowledged the
return and issued a check to refund the customer. Entries in the books of the seller will appears as:

2019
March 1 Cash on Hand 15,000
Sales 15,000
To record cash sales.
8 Sales Returns and Allowances 4,500

Cash in Bank 4,500
Cash refund for sales return made by Asia Miguel.

38
Under the perpetual method, an entry to record the cost of sales must also be made at the time of sale. Also, the
return on March 8 requires the prior entry of cost of sales to be reversed since there is a physical movement of goods from
buyer back to the seller: debit merchandise inventory and credit cost of sales.
If the sale was made on account, instead of a cash refund, a credit memorandum will be issued by the seller to
acknowledge the return. A credit memorandum is a business document issued by the seller informing the buyer that his
account was decreased accordingly for the return made or for the reduction of price requested. Remember that the account
of a customer is recorded on the debit side. Any decrease thereto is credited, hence, a credit memo. An example of a credit
memo is shown below:
ROYAL FURNITURE MART

77 Taft Avenue, Manila
CR EDI T ME MO
No. 15
March 8, 2019
CUSTOMER: Asia Miguel
ADDRESS:1033 Ortigas, San Juan
We have credited your account for: P 4,500

1 chair @ P4,500
Due to the following reason:
Perlita Torres
Chair legs are wobbling, no more stocks
Sales Manager
available.
Based on the above document, the entries should be:

2019
March 1 Accounts Receivable 15,000
Sales 15,000
Sales on account of n/30.
8 Sales Returns and Allowances 4,500

Credit memo #15 for sales return.

39
NET SALES
At the end of the accounting period, two accounts are deducted from gross sales to arrive at the net sales revenue.
Taking all the illustrations discussed and using assumed figures, the first section of the income statement will appear as:
Sales Revenue P 120,000

Less: Sales Discount P 3,500
Sales Returns and Allowances 8,500 12,000
Net Sales P 108,000
Discounts, returns and allowances may be directly debited to Sales to decrease the sales revenue instead of using
separate account titles. However, revised PAS 1 requires proper disclosure of all relevant information in preparing the
financial statements for statement users to be able to make rational decisions.
GROSS PURCHASES
Under the periodic inventory system, a merchandiser uses the title Purchases whenever merchandise is bought for
resale. It represents an owner’s equity account for goods available for sale by the business for a particular accounting
period. To illustrate, recall that Jim Perez, the proprietor of Jim Perez Furnisher, bought P4,000 worth of furniture from
Royal Furniture on account. From the buyer’s viewpoint, the invoice received from the seller is called a purchase invoice.
The entry in the books of Jim Perez Furnisher will appear as:

2019
March 1 Purchases 4,000
Accounts Payable 4,000
Account purchases on terms of 2/10, n/30.
FREIGHT IN
In buying merchandise, the cost of transporting the goods may be paid by the buyer or by the seller depending on
the term of shipment. If the term of shipment is FOB Shipping Point, it means the title of ownership passes to the buyer as
soon as seller turns over the goods to a common carrier such as cargo ship for delivery of the goods to the buyer.
Shipping Point Destination

- buyer owns the
goods
Seller’s Buyer’s
point place
- Buyer pays freight
cost
It also means that the buyer, as the owner of the goods, should pay for the freight. The buyer records Transportation
In or Freight In which is added to Purchases to arrive at Gross Purchases. To illustrate, assume that on August 5, Royal

40
Furniture bought from Cebu Furniture Shop goods worth P50,000 to be transported by a boat at a cost of P1,000 under the
terms 2/10, n/30, FOB Shipping Point, Freight Collect. The goods were received August 5 and the freight was paid
accordingly.

Aug. 5 Purchases 50,000
Purchases on terms of 2/10, n/30.
Freight In 1,000
Cash on Hand 1,000
Freight on terms of FOB Shipping Point, freight
collect.
Freight collect means that the buyer must pay the freight in cash either before the seller ships the goods or upon
receipt of the merchandise. Suppose the term is FOB Shipping Point Freight Prepaid? It means that the freight was initially
paid by the seller and the buyer will pay the freight together with the purchased goods on account.
Entry in the buyer’s book:

Freight In 1,000
Purchases on terms of 2/10, n/30, FOB Shipping
Point, freight prepaid.
Note that the accounts payable increased by P1,000 because the buyer is still liable for the freight that was advanced
by the seller. Using the perpetual method, entry would be: debit merchandise inventory P51,000 (purchases + freight in)
and credit accounts payable P51,000.
Entry in seller’s book:

Aug. 5 Accounts Receivable 51,000
Sales 50,000
Cash 1,000
To record sales on terms of 2/10, n/30, FOB Shipping Point,
freight prepaid charged to the buyer.
Note that although the freight increased the accounts receivable because it is collectible by the seller from the buyer
who is liable under the term FOB Shipping Point, it did not increase the sales revenue.

41
FREIGHT OUT
Freight is not always an obligation of the buyer. If the term is FOB Destination which means free on board
destination, the seller is liable for the freight and is still considered the owner of the goods until it reaches the buyer.
Shipping Point Destination

- seller owns the goods until
the buyer accepts it
Seller’s Buyer’s
point place
- seller pays freight cost
This time, the freight should be debited by the seller to the account Freight Out or Transportation Out which is
a selling expense. Using prior illustration, if the term is FOB Destination freight prepaid, seller’s entry will be:

Aug. 5 Accounts Receivable 50,000
Sales 50,000
To record sales on terms of 2/10, n/30, FOB
Destination.
Freight Out 1,000

Cash on Hand 1,000
Paid freight for goods sold.
Upon receipt of the goods, the buyer makes an entry only for the cost of the goods bought: debit purchases (periodic)
or merchandise inventory (perpetual) P50,000 and credit accounts payable P50,000.
PURCHASES RETURNS AND ALLOWANCES
Similar to sales returns, goods may be returned to the seller for being defective or not as ordered. Instead of
returning, buyer may just ask that the price be reduced. This will decrease the cost of the purchases and likewise decrease
the liability to be paid. A contra account called Purchase Returns and Allowance is credited with a corresponding debit
to cash or accounts payable depending on the purchase transaction. This can also be directly credited to Purchases account
but maintaining a separate account enables management to control operations more effectively. Excessive returns due to
defective goods may mean, for example, that the management should look for other suppliers. Using the preceding
illustration, assume that when the P50,000 goods bought on account were received, P5,000 were found defective and were
returned. Entries in buyer’s book will be:

Purchases made on terms of 2/10, n/30.

42
7 Accounts Payable 5,000

Purchase Returns and Allowances 5,000
Returned defective chairs.
Recall that a credit memo will be received by the buyer from the seller as an acknowledgment of the returned goods.
If it was a cash purchase, the return or an allowance would require a cash refund. Furthermore, using perpetual method,
merchandise inventory is debited instead of purchases and merchandise inventory is credited instea d of purchase returns
and allowances.
PURCHASE DISCOUNTS
Remember that a trade discount given to the buyer is immediately deducted from the list price and only the
balance appears in the invoice. On the other hand, a cash discount is offered when one buys on account and is granted
only when the account is paid within the discount period. A discount is recorded by debiting the liability and crediting the
contra purchase account called Purchase Discount which decrease the value of the merchandise purchased.
Illustration 1. Assume that on May 1, Alonzo Shoes of Cebu bought goods from Marikina Shoe Factory for P20,000. A 2%
trade discount was granted and the term of the purchase was 2/15, n/30, FOB Shipping Point, Freight Collect P1,000. Alonzo
paid for the freight upon receipt of the shipment and paid for the account on May 15. Entries in the books of Alonzo will
appear as follows:

May 1 Purchases 19,600
Purchases on terms of 2/15, n/30.
Freight In
Cash on Hand 1,000
Paid on terms FOB Shipping Point, freight collect. 1,000

Purchase Discount 392
Cash in Bank 19,208
Issued a check for the account.
Take note of the purchases and accounts payable recorded at the gross invoice price net of trade discount on May
1. On May 15, which is 14 days after the purchase but still within the 15 -day discount period, a 2% cash discount of P392
was given. Using perpetual method, Purchases, Freight In and Purchase Discount accounts will be substituted by
Merchandise Inventory account.
If the term is FOB Shipping Point, Freight Prepaid, the entries will be:

Freight In 1,000

43

Goods bought on terms of 2/15, n/30, FOB Shipping Point,
freight prepaid by Marikina.

Purchase Discount 392
Cash in Bank 20,208
Paid the account in full, net of discount.
Detailed computation is shown below:
List Price P 20,000

Less: Trade Discount (2% x P20,000) 400
Invoice Price P 19,600
Freight Prepaid 1,000
Gross Invoice Price P 20,600
Less: Cash Discount (2% x 19,600) 392
Net Invoice Price to be paid within the discount period P 20,208
Illustration 3: Using illustration 1, but Alonzo paid P10,000 and retuned P2,000 as defective on May 10 and paid the
remaining balance on May 15. Entries will be:

Freight In 1,000
Goods bought on terms of 2/15, n/30, FOB Shipping
Point.

Cash in Bank 10,000
Partial payment of account and freight.

Purchase Returns and Allowances 2,000
Returned defective goods.

Purchase Discount 352*
Cash in Bank 8,248
Full payment of account.
*The purchase discount of P352 is computed based on the actual amount of goods purchased less purchase returns and
allowances [(P19,600 – P2,0000 x 2%].
Let us review all the rules for cash discounts:

44
1. It is given only when sales or purchase is on credit term.

2. Freight, returns and allowances should be deducted before computing for the discount.
3. Companies may take up discounts differently depending on their policies for partial payments.
NET COST OF PURCHASES
At the end of a given period or the accounting period, the Net Cost of Purchases will be computed in the income
statement when presenting the Cost of Goods Sold. The calculation based on the latest Alonzo illustration will be:
Purchases P 19,600
Add: Freight In 1,000
Total cost of goods delivered P 20,600
Less: Purchase Returns & Allowances P 2,000
Purchase Discounts 352 2,352
Net Cost of Purchases P 18,248
• Trade discounts are usually given to loyal customers or those who buy in bulk and is an outright deduction from the
list price while cash discounts are given for items sold on account, depending on the “terms of payment” and are
recorded as sales discount (deducted to gross sales to arrive at net sales) from the viewpoint of the seller and as
purchase discount (deducted to gross purchases to arrive at net cost of purchases) from the viewpoint of the buyer.
• Sales returns are made when defective items are returned or when the items arrived were not as ordered. It is a
contra sales account (deducted to the gross sales to arrive at net sales) from the viewpoint of the seller.
• Freight is the cost of transporting the goods from the seller to the buyer. Freight In is when the buyer assumes the
cost while Freight Out is when the seller assumes the cost. Freight Collect means that the buyer pays for the freight
upon receipt of goods while Freight Prepaid is when the seller pays for the freight in advance but is ultimately
shouldered by the buyer.
On April 1, Banzai Interior Designs purchased 500 units of dining tables at a unit cost of P1,500 with freight cost of P5,000
on terms of 2/10, n/30, FOB Shipping Point. Banzai paid its account in full on April 8.
Requirement:
1. Compute for Gross and Net Purchases.
2. Who pays for the freight cost?
3. Compute for the total amount paid by Banzai.
ASSESSMENT
Chopper Co. distributes backpacks to retail stores at a price of P1,600 each and extends credit terms of 1/10, n/30 to all
customers. It sold 100 units to Toothless Store on June 1 and 200 units to Hiccup Botique on June 8. Toothless paid its
account in full on June 13 while Hiccup paid on June 16.

45
Requirement:
1. Compute for Gross and Net Sales.
2. Who has availed the sales discount?
3. Compute for the total amount received by Chopper.
REFERENCES
LESSON NUMBER 2
LESSON TITLE: INCOME STATEMENT FOR MERCHANDISING BUSINESS
Lesson Objective: At the end of the lesson, the students are expected to prepare income statement for merchandising
business using the function of expense form.
GETTING STARTED
In order to determine whether a business is successful or not, its performance must be assessed and regularly
reviewed. The information that will be used in the assessment is provided by the income statement which summarizes the
operating activities of the business. This particular lesson will define and make the students understand revenues and
expenses and will show how these items will affect the accounting elements.
DISCUSSION AND APPLICATION
Income Statement is also known as the statement of operations, profit and loss statement, and statement of
earnings. It is one of a company's main financial statements. The purpose of the income statement is to report a summary
of a company's revenues, expenses, gains, losses, and the resulting net income that occurred during a year, quarter, or
other period of time.
Examples of Items Appearing in the Income Statement:
1. Revenues, which are the amounts earned through the sale of goods and/or the providing of services.
2. Expenses, which include the cost of goods sold, selling, general & administrative expenses, and interest expense.
3. Gains and losses, such as the sale of a noncurrent asset for an amount that is different from its book value.
4. Net income, which is the result of subtracting the company's expenses and losses from the company's revenues
and gains.
The illustration below is an example of an Income Statement.
Mugiwara General Merchandise

46
Income Statement
For the period ended December 31, 2019
Sales P 120,000
Cost of Sales ( 70,000)
Selling Expenses ( 15,000)
Administrative Expense ( 12,000)
Interest Expense ( 10,000)
Net Income P 13,000
The presentation of the income statement above is called the “Function of Expense Form”, which shows the costs
and expenses according to function: cost of sales, selling expenses, administrative expense and finance cost. Computation
of Net Sales and Net Purchases were already discussed in the prior lesson, components of costs and expenses are presented
below:
1. Cost of Sales
Merchandise Inventory, beginning P xxx

Net Purchases ( xxx)
Cost of Goods Available for Sales P xxx
Merchandise Inventory, ending ( xxx)
Cost of Sales P xxx
2. Selling Expenses – these are all distribution-related expenses which includes Sales Salaries, Advertising, Rent
Expense – Warehouse, Freight Out, Store Supplies Expense, etc.
3. Administrative Expenses – these includes Office Salaries, Rent Expense – Office, Bad Debts, Depreciation –
Office Equipment, Office Supplies Expense, etc.
Illustration. Alonzo Shoe Store sells different kinds of shoes in their store in Calamba City. At year-end 2019, their books
showed the following balances:
Particulars Amount
Gross Sales P 1,750,000
Sales Returns & Allowances 7,500
Sales Discount 20,000
Merchandise Inventory, Jan. 1 30,000
Purchases 950,000
Freight In 5,000
Purchase Returns & Allowances 3,000
Purchase Discount 7,000

47
Sales Salaries 54,000

Advertising 50,000
Rent – Warehouse 20,000
Freight Out 5,000
Store Supplies Expense 3,000
Office Salaries 30,000
Rent – Office 20,000
Depreciation – Office Equipment 5,500
Office Supplies Expense 3,600
Interest Expense 2,000
Computations:
1. Net Sales
Gross Sales P 1,750,000
Less: Sales Returns & Allowances P 7,500
Sales Discount 20,000 27,500
Net Sales P 1,722,500
2. Cost of Sales
Merchandise Inventory, Jan. 1 P 30,000
Add Net Purchases:
Purchases P 950,000
Add Freight In 5,000
Total Cost of Goods Delivered P 955,000
Less: Purchase Returns & Allowances P3,000
Purchase Discount 7,000 10,000 945,000
Total Goods Available For Sale P 975,000
Less: Merchandise Inventory, Dec. 31 40,000
Cost of Sales P 935,000
3. Selling Expenses
Sales Salaries P 54,000
Advertising 50,000
Rent – Warehouse 20,000
Freight Out 5,000
Store Supplies Expense 3,000
Total P 132,000
4. Administrative Expenses
Office Salaries P 30,000
Rent – Office 20,000

48
Depreciation – Office Equipment 5,500

Office Supplies Expense 3,600
Total P 59,100
Thus, the Income Statement will be presented as follows:
Alonzo Shoe Store

Income Statement
For the period ended December 31, 2019
Net Sales P 1,722,500

Cost of Sales ( 935,000)
Selling Expenses ( 132,000)
Administrative Expense ( 59,100)
Interest Expense ( 2,000)
Net Income P 594,400
The advantage of using the Function of Expense Form is that it facilitates assessment of operating performance of
the different departments or functions in a business organization.
• Income Statement is also known as the statement of operations, profit and loss statement, and statement of earnings.
• The purpose of the income statement is to report a summary of a company's revenues, expenses, gains, losses, and
the resulting net income that occurred during a year, quarter, or other period of time.
• Items appearing in an Income Statement are revenues, expenses, gains and losses and net income.
• Income Statement of a merchandising business is recommended to be presented using the “Function of Expenses
Form” wherein costs and expenses are classified according to their functions such as cost of sales, selling,
administrative and finance cost.
ENRICHMENT ACTIVITY
Using the following accounts, classify each of them as part of cost of sales (COS), selling expense (SE), administrative
expense (AE) or finance cost (FC).
1. Depreciation Expense – Office Equipment

2. Freight In
3. Rent Expense – Warehouse
4. Sales Discount
5. Taxes & Licenses
6. Freight Out

49
7. Pag-ibig Premium Expense

8. Sales Returns & Allowances
9. Commission Expenses
10. Purchase Discount
11. Interest Expense
12. Rent Expense – Admin Office
ASSESSMENT
The following information were taken from the books of Fishman Island Sport Store that sells different kinds of swimming
gears and accessories:
Sales Returns & Allowances 4,000 Purchase Discount 6,000

Freight In 8,000 Communication Expense 45,000
Commission Expense 30,000 Sales 540,000
Purchase Returns & Allowances 7,500 Purchases 112,000
Merchandise Inventory, Dec. 31 95,000 Sales Discount 25,000
Freight Out 11,000 Rent Expense – Showroom 20,000
Merchandise Inventory, Jan. 1 78,500 Sales Salaries Expense 91,300
HDMF Premium Expense 1,826 Taxes & Licenses 10,170
SSS Premium Expense 3,088 Depreciation Expense – Office Furniture 16,500
PHIC Premium Expense 1,200 Interest Expense 3,500
Requirement:
1. Compute for Cost of Sales, Selling Expenses and Administrative Expenses.
2. Present the Income Statement using Function of Expense method.
REFERENCES
LESSON NUMBER 3
LESSON TITLE: ACCOUNTING FOR MANUFACTURING OPERATIONS
• Identify and compute costs and inventories related to manufacturing business.
• Identify and compute different kinds of costs related to business concerns.

50
GETTING STARTED
In a conceptual sense, manufacturing encompasses much more than just firms in the industrial sector of our
economy. It also encompasses many organizations that are typically viewed as being service in nature, such as movie,
studios and fast-food outlets. Organizations such as those are involved in manufacturing in the sense that they create a
distinct product for customers or patrons. In this lesson, we will be focusing on the basic accounting for manufacturing
operations. The costing of the products of manufacturing businesses will be emphasized as an understanding of the cost
structure of a manufacturing company therefore provides a broad, general understanding of costing that can be very helpful
in understanding the cost structures of other types of organizations.
DISCUSSION OF CONTENT AND APPLICATION
COMPARING MERCHANDISING AND MANUFACTURING ACTIVITIES
Merchandising and manufacturing companies earn revenues by selling goods. A merchandiser normally buys a
product that is ready for resale when it is received. A manufacturer buys raw materials and processes them into finished
goods that it sells to customers. Therefore, the main difference between the two is the way they acquire inventory for resale.
To illustrate, consider the distinction between the athletic shoes section of PureGold Duty Free Inc. in Clark, Pampanga –
the merchandiser and the companies that manufacture athletic shoes such as Nike, Reebok, Adidas, Puma and Converse –
the manufacturers.
Like other merchandisers, PureGold buys ready-made inventory for resale to customers. Determining PureGold’s
cost of the shoes is relatively easy. Cost is the price that the merchandiser paid for the shoes plus incidental costs. Companies
that supply athletic shoes to merchandisers utilize their laborers and factory assets to convert raw materials into finished
products. Their manufacturing processes begin with materials such as cloth, rubber and plastics. These materials are cut,
glued, stitched, and formed into athletic shoes. The process of converting materials into finished products makes it more
difficult to measure the inventory cost of a manufacturer.
COSTS IN MANUFACTURING ACTIVITIES
Accounting for manufacturing operations focuses mainly on accounting for the costs incurred in producing the
product. In accounting, cost is defined as the cash amount (or the cash equivalent) given up for an asset. Cost includes all
costs necessary to get an asset in place and ready for use. For example, the cost of an item in inventory also includes the
item's freight-in cost. The cost of land includes all costs to get the land ready for its use. Costs are incurred to produce future
benefits in a profit-making firm, future benefits usually mean revenue. We will be discussing the different classification of
costs that are relevant in accounting for manufacturing operations.
CLASSIFICATION OF COSTS
Costs classified as to relation to a product
1. Manufacturing costs or Product costs

51
• Direct materials
• Direct labor
• Factory Overhead
2. Non-manufacturing costs or Period Costs

• Marketing or Selling Expense
• General or Administrative Expense
Costs classified as to variability

• Variable costs
• Fixed costs
• Mixed costs
Costs classified as to relation to manufacturing departments

• Direct Departmental Charges
• Indirect Departmental Charges
Costs classified to their nature as common or joint

• Common costs
• Joint costs
Costs classified as to relation to an accounting period

• Capital expenditures
• Revenue expenditures
Costs for planning, control, and analytical processes

• Standard costs
• Opportunity costs
• Differential costs
• Relevant costs
• Out-of-pocket costs
• Sunk costs
• Controllable costs
MANUFACTURING/PRODUCT/INVENTORIABLE COSTS – these are costs that are included as part of the cost of
the product.
Manufacturing costs include all costs related to the production process such as:
A. DIRECT MATERIALS

52
All manufactured products are made from basic direct materials. The basic material may be iron ore for steel, sheet
steel for automobiles, or flour for bread. These examples show the link between a basic raw material and a final product.
The way a company buys, stores, and uses materials is important. Timely purchasing is important because if the company
runs out of materials, the manufacturing process will be forced to shut down. Buying too many direct materials, on the other
hand, can lead to high storage costs.
Direct materials are materials that become part of a finished product and can be conveniently and economically
traced to specific product units. The costs of these materials are direct costs. In some cases, however, even though a material
becomes part of a finished product, the expense of actually tracing the cost of a specific material is too great. Some examples
of this include nails in furniture, bolts in automobiles, and rivets in airplanes. These minor materials and other production
supplies that cannot be conveniently or economically traced to specific products are accounted for as indirect materials.
Indirect material costs are part of factory overhead.
B. DIRECT LABOR
Labor services are, in essence, purchased from employees working in the factory. In addition, other types of labor
are purchased from people and organizations outside the company. The labor costs usually associated with manufacturing
include machine operators; maintenance workers; managers and supervisors; support personnel; and people who handle,
inspect, and store materials. Because these people are all connected in some way with the production process, their wages
and salaries must be accounted for as production costs and, finally, as costs of products. However, tracing many of these
costs directly to individual product is difficult.
To help overcome this problem, the wages on machine operators and other workers involved in actually shaping
the product are classified as direct labor costs.
Direct labor costs include all labor costs for specific work performed on products that can be conveniently and
economically traced to end products. Labor costs for production related activities that cannot be conveniently and
economically traced to end products are called indirect labor costs. These costs include the wages and salaries of such
workers as machine helpers, supervisors, and other support personnel. Like indirect material costs, indirect labor costs are
accounted for as factory overhead costs. Payroll related costs, such as payroll taxes, group insurance, sick pay, vacation and
holiday pay, and other fringe benefits can be considered as part of direct labor costs, but are usually included as factory
overhead.
Prime costs = Direct Materials + Direct Labor

Conversion costs = Direct Labor + Factory Overhead
The diagram below shows the three costs that comprise the product costs. Prime costs and conversion costs are also
shown below:

53
Prime Costs
Direct Materials Direct Labor Factory Overhead
Conversion Costs
C. FACTORY OVERHEAD
The third manufacturing cost element is a catchall for manufacturing costs that cannot be classified as direct
materials or direct labor costs. Factory overhead costs are a varied collection of production-related costs that cannot be
practically or conveniently traced directly to end products. This collection of costs is also called manufacturing overhead,
factory burden, and indirect manufacturing costs.
Examples of the major classifications of factory overhead costs are:
Indirect materials and supplies: nails, rivets, lubricants, and small tools.
Indirect labor costs: lift-truck driver’s wages, maintenance and inspection labor, engineering labor, machine helpers, and
supervisors.
Other indirect factory costs: building maintenance, machinery and tool maintenance, property taxes, property insurance,
pension costs, depreciation on plant and equipment, rent expense, and utility expense.
NON-MANUFACTURING COSTS/PERIOD COSTS – these are costs that are not considered as part of the cost of the
product. These are recorded as expense as they are incurred.
A. MARKETING OR SELLING EXPENSES
Marketing or selling expenses include all costs necessary to secure customer orders and get the finished product or service
into the hands of the customer. Since marketing expenses relate to contacting customers and providing for their needs, these
expenses are often referred to as order-getting and order-filling costs.
Examples of marketing expenses include advertising, shipping, sales travel; sales commissions, sales salaries, and expenses
associated with finished goods warehouses. All organizations have marketing costs, regardless of whether the organizations
are manufacturing, merchandising, or service in nature.
B. ADMINISTRATIVE OR GENERAL EXPENSES

54
Administrative expenses include all executive, organizational, and clerical expenses that cannot be logically included under
either production or marketing.
Examples of such expenses include executive compensation, general accounting, secretarial, public relations, and similar
expenses having to do with the overall, general administration of the organization as a whole. As with marketing expenses,
all organizations have administrative expenses.
COSTS CLASSIFIED AS TO VARIABILITY
One of the most important cost classifications involves the way a cost changes in relation to changes in the activity
of the organization. Activity refers to a measure of the organization’s output of products or se rvices. In specifying cost
behavior, the managerial accountant often limits the description to a specific range of activity. This is called the relevant
range.
FIXED COST
Items of cost which remains constant in total, irrespective of the volume of production. Fixed costs are not related
to activity within the relevant range. If activity increases or decreases by 20 percent, total fixed cost remains the same. Cost
per unit decreases as volume increases, and increases as volume decreases.
Fixed costs are assignable to departments based on difference allocation methods. Examples are salaries of
production executives, deprecation of equipment computed on a straight-line basis, periodic rent payments, and insurance.
Fixed costs may be classified into two categories, depending on the ability of management to influence the levels
of these costs in the short-term.
1. Committed Fixed Costs – costs that represent relatively long-term commitments on the part of management as a result
of a past decision. Example – depreciation of equipment.
2. Managed Fixed Costs (also known as discretionary, programmed, or planned fixed costs) – costs that are incurred on a
short-term basis and can be more easily modified in response to changes in management objectives. Ex amples – advertising,
research and development and costs of employee training programs.
Shown below is the graph of fixed cost. It is clearly shown that total fixed cost remains unchanged as activity
changes. When activity triples, from 10 to 30 units, total fixed cost remains constant at P1,500. If activity level is only 1
unit, then the fixed cost per unit is P1,500. If the activity level is 10 units, then the fixed cost per unit declines to P150 per
unit. Hence, we can conclude that fixed cost per unit will decrease as we increase the volume or units of production and
fixed cost per unit will increase as we decrease the volume of production.

55
Total Fixed Cost
P1,500
10 20 30 Activity
Activity Fixed Cost per unit Total Fixed Cost

1 ₱ 1,500 ₱ 1,500
2 750 1,500
5 300 1,500
10 150 1,500
20 75 1,500
30 50 1,500
VARIABLE COSTS
Items of cost which vary directly, in total, in relation to volume of production. If activity increases by 20 percent,
total variable cost increases by 20 percent also. Cost per unit remains constant as volume changes within a relevant range.
Examples are: direct materials, direct labor, royalties, and commission of salesmen.
Shown below is a graph of total variable cost. As this graph shows total variable cost increases proportionately with
activity. When activity doubles from 10 to 20 units, total variable cost doubles, from P1,000 to P2,000. However, the
variable cost per unit remains the same as activity changes. The variable cost associated with each unit of activity is P100,
whether it is the first unit, the fourth, or the tenth.
Total Variable Cost

3,000
2,000
1,000
10 20 30 Activity

56
Activity Variable Cost per unit Total Variable Cost

1 ₱ 100 ₱ 100
10 100 1,000
20 100 2,000
30 100 3,000
To summarize, as activity changes, total variable cost increases or decreases proportionately with the activity
change, but unit variable cost remains the same.
MIXED COST
Items of cost with fixed and variable components. Mixed costs vary with the level of production, though not in
direct relation to it, probably because part of the cost is fixed while the rest is variable.
COMMON COST vs. JOINT COST
COMMON COST
Costs of facilities or services employed in two or more accounting periods, operations, commodities, or services.
Just like indirect costs, these costs are subject to allocation.
JOINT COST
Cost of materials, labor, and overhead incurred in the manufacture of two or more products at the same time. A
major difficulty inherent to joint costs is that they are indivisible and they are not specifically identifiable with any of the
products being simultaneously produced. These costs are also subject to allocation.
CAPITAL EXPENDITURE vs. REVENUE EXPENDITURE
CAPITAL EXPENDITURE
Expenditure intended to benefit more than one accounting periods and is recorded as an asset. The allocation of
the cost to the different periods is – depreciation for fixed tangible asset, amortization for intangible assets and depletion
for wasting assets.
REVENUE EXPENDITURE
Expenditure that will benefit current period only and is recorded as an expense.
DIRECT vs. INDIRECT DEPARTMENTAL CHARGES
DIRECT DEPARTMENTAL CHARGES

57
Costs that are immediately charged to the particular manufacturing department(s) that incurred the costs since the
costs can be conveniently identified or associated with the department(s) that benefited from said costs.
INDIRECT DEPARTMENTAL CHARGES
Costs that are originally charged to some other manufacturing department(s) or account(s) but are later allocated
or transferred to another department(s) that indirectly benefited from said costs.
COST FOR PLANNING, CONTROL AND ANALYTICAL PROCESSES
STANDARD COSTS
Predetermined costs for direct materials, direct labor, and factory overhead. They are established by using
information accumulated from past experience and data secured from research studies. In essence, a standard cost is a budget
for the production of one unit of product or service. It is the cost chosen by the managerial accountant to serve as the
benchmark in the budgetary control system.
OPPORTUNITY COST
The benefit given up when one alternative is chosen over another. Opportunity costs are not usually recorded in the
accounting system. However, opportunity costs should be considered when evaluating alternatives for decision-making. If
an asset can be used to perform only one function and cannot be sold or used in other ways, the opportunity cost of that
asset is zero.
Example 1: Kageyama has a part-time job that pay him P1,000 per week. He would like to spend a week in Baguio during
summer vacation from school, but he has no vacation time available. If he takes the trip anyway, the P1,000 in lost wages
will be an opportunity costs of doing so.
Example 2: Hinata is employed with a company that pays him a salary of P20,000 a month. He is thinking about leaving
the company and returning to school. Since returning to school would require that he giv e up his P240,000 salaries, the
forgone salary would be an opportunity cost of seeking further education.
DIFFERENTIAL COST
Cost that is present under one alternative but is absent in whole or in part under another alternative.
An increase in cost from one alternative to another is known as incremental cost, while a decrease in cost is known
as decremental cost. Differential cost is a broader term, encompassing both increases (incremental cost) and decreases
(decremental cost) between alternatives.
The accountant’s differential cost concept is basically the same as the economist’s marginal cost concept. In
speaking of changes in cost and revenue, the economist employs the terms marginal cost and marginal revenue. The revenue

58
that can be obtained from selling one more unit of product is called marginal revenue, and the cost involved in producing
one more unit of product is called marginal cost.
Differential costs can be either fixed or variable. To illustrate, assume that Avon Corp. is thinking about changing
its marketing method from distribution through retailers to distribution by direct sale. Present costs and revenues are
compared to projected costs and revenues in the table below.
Retailer Direct Sale Differential

Distribution Distribution
Cost and Revenues
(present) (proposed)
Revenues (V) ₱ 900,000 ₱ 1,200,000 ₱ 300,000
Cost of Goods Sold (V) 450,000 600,000 150,000
Advertising (F) 80,000 45,000 - 35,000
Commission (V) 40,000 40,000
Warehouse Depreciation (F) 50,000 80,000 30,000
Other Expenses (F) 60,000 60,000 0
Total 640,000 825,000 185,000
Net Income ₱ 260,000 ₱ 375,000 ₱ 115,000
V – Variable
F – Fixed
Interpreting the table above, the owner should choose the proposed plan (Direct Sale) because he/she will have an
additional income of P115,000, as shown as the differential net income. The differential revenue is P 300,000, and the
differential costs total P 185,000, leaving a positive differential net income of P115,000 under the proposed marketing plan.
As noted earlier, those differential costs representing cost increases could have been referred to more specifically as
incremental costs, and those representing cost decreases could have been referred to more specifically as decremental costs.
RELEVANT COST
A future cost that change across the alternatives. In the example above, the relevant costs are cost of goods sold,
advertising, commissions, and warehouse depreciation.
OUT-OF-POCKET COST
Cost that requires the payment of money (or other assets) as a result of their incurrence.
SUNK COST

59
A cost for which an outlay has already been made and it cannot be changed by present or future decision. Since
sunk costs cannot be changed by any present or future decision, they are not differential costs, and therefore they should be
used in analyzing future courses of action.
CONTROLLABLE AND NON-CONTROLLABLE COSTS
A cost is considered to be a controllable cost at a particular level of management if that level has power to authorize
the cost. For example, entertainment expense would be controllable by a sales manager if he or she had power to authorize
the amount and type of entertainment for customers. On the other hand, depreciation of warehouse facilities would not be
controllable by the sales manager, since he or she would have no power to authorize warehouse construction.
In some situations, there is a time dimension to controllability. Costs that are controllable over the long run may
not be controllable over the short run. A good example is advertising. Once an advertising program has been set and a
contract signed, management has no power to change the amount of spending. But once the contract expires, advertising
costs can be renegotiated, and thus management can exercise control over the long run.
ACCOUNTING FOR MANUFACTURING OPERATIONS
MANUFACTURING INVENTORY ACCOUNTS
Most manufacturing companies use the perpetual inventory approach. In the remaining sections of this module, you
are to assume that a company uses the perpetual inventory system unless otherwise indicated. Accounting for inventories is
the more difficult part of manufacturing accounting compared with merchandising accounting. Instead of dealing with one
account (Merchandise Inventory), three accounts must be used: Materials Inventory, Work in Process Inventory, and
Finished Goods Inventory.
MATERIALS INVENTORY
The Materials Inventory account, also Materials Inventory Control account, is made up of the balances of materials
and supplies on hand. This account is maintained in much the same way as the Merchandise Inventory account. The main
difference is the way that the costs of items in inventory are assigned. For the merchandising company, goods taken out of
inventory are items that have been sold. When a sale is made, an entry is needed to debit Cost of Goods Sold and to credit
Merchandise Inventory for the cost of the item. Materials, on the other hand, are usually not purchased for resale but for use
in manufacturing a product. Therefore, an item taken out of Materials Inventory and requisitioned into production is
transferred to the Work in Process Inventory account (not Cost of Goods Sold).

60
Merchandise Inventory Cost of Goods Sold

Bal. 1/1 24,600 45,300 Sold Sold 45,300
Purchases 53,200
Bal. end. 32,500

Goods costing P45,300 were sold.
Figure 1. Merchandise Inventory vs. Materials Inventory
Materials Inventory Work in Process

Bal. 1/1 24,600 45,300 Issued Bal. 1/1 25,100 45,300 Sold
Purchases 53,200
Mat. Used 45,300
Bal. end. 32,500 Bal. end. 32,500
Materials costing P45,300 were

issued to production.
The amounts used above are assumed. The difference lies on where the inventory will go after it is issued to
production or if it is already sold. In manufacturing, the materials are issued to production and will not readily be sold to
customers as it will have to undergo production process before it will be finally be sold to customers.
WORK IN PROCESS INVENTORY
All manufacturing costs incurred and assigned to products being produced are classified as Work in Process Inventory costs.
This inventory account has no counterpart in merchandise accounting. A thorough understanding of the concept of Work in
Process Inventory is vital in manufacturing accounting. Figure 2 below shows the various costs that become part of Work
in Process Inventory and the way costs are transferred out of the account.
Work In Process Inventory Account Finished Goods Inventory

Bal. 1/1 25,100 201,600 Completed Bal. 1/1 70,000
Materials 45,300 Completed 201,600
Labor 79,700
Overhead 65,000 Products costing P201,600 were
competed and transferred to
Bal. End. 13,500 Finished Goods Inventory
Figure 2. The Work In Process Inventory Account
The issuance of material production, shown in Figure 1, begins the production process. These materials must be
cut, molded, assembled, or in some other way changed into a finished product. To make this change, people, machines, and
other factory resources (buildings, electricity, supplies, and so on) must be used. All of these costs are manufacturing cost
elements (product costs), and all of them enter into accounting for Work-In-Process Inventory.

61
Direct Labor earned by factory employees is also product costs. Since these people work on specific products, their
labor costs are assigned to those products by including the labor peso earned as part of the Work-In-Process Inventory
account.
Overhead Costs are product costs and must be assigned to specific products. Thus, they too are included in the
Work-In-Process Inventory account. As discussed earlier, there are many overhead costs to account for on an individual
basis. To reduce the amount of work needed to assign these costs to products, they are accumulated and accounted for less
than one account title: Factory Overhead Control. These costs are then assigned to products by using an overhead rate.
Using this rate, called a predetermined overhead rate, costs are charged to Work In Process Inventory account. In the
example above, factory overhead costs of P65,000 were charged to the Work In Process Inventory account.
As products are completed, they are put into the finished goods storage area. These products now have materials,
direct labor, and factory overhead costs assigned to them. When products are completed, their costs no longer belong to
work-in-process. Therefore, when the completed products are sent to the storage area, their costs are transferred from the
Work In Process Inventory account to the Finished Goods Inventory. The balance remaining in the Work In Process
Inventory account (P13,500 in Figure 2) represents the costs that were assigned to products partly completed and still in
process at the end of the period.
FINISHED GOODS INVENTORY
The Finished Goods Inventory account, like Materials Inventory, has same characteristics of the Merchandise
Inventory account. We have already seen how costs are moved from the Work In Process Inventory account to the Finished
Goods Inventory account. At this point, Finished Goods Inventory takes the characteristics of Merchandise Inventory.
Finished Goods Inventory Cost of Goods Sold

Bal. 1/1 70,000 240,500 Sold Sold 240,500
Completed 201,600
Bal. End. 31,100

Products costing P240,500 were
sold during the period
Figure 3. The Finished Goods Inventory account
If we compare the Merchandise Inventory account in Figure 1 with the accounting for Finished Goods Inventory in
Figure 3 we will see that the credit side of both accounts is handled in the same way. Both examples show that when goods
or products are sold, the costs of those goods are moved from the Finished Goods Inventory account to the Cost of Goods
Sold account. However, the accounting procedures affecting the debit side of the Finished Goods Inventory account differ
from those for the Merchandise Inventory account. In a manufacturing firm, salable products are produced rather than
purchased. All costs debited to the Finished Goods Inventory account represent transfers from the Work In Process Inventory

62
account. At the end of the accounting period, the balance in the Finished Goods Inventory account is made up of the cost of
products completed but unsold as of that date.
For the merchandising concern, the Cost of Goods Sold is computed as follows:
Beginning Merchandise Inventory xx

Plus: Purchases(merchandise) xx
Merchandise Available for Sale xx
Less: Ending Merchandise Inventory - xx
Cost of Goods Sold xx
The amount of purchases represents the cost of goods which were acquired during the period for resale. Since the
manufacturing concern makes rather than buys the product it has available for sale, the term “finished goods inventory”
replaces “merchandise inventory” and the term “cost of goods manufactured” replaces “purchases” in determining the cost
of goods sold.
Beginning Finished Goods Inventory xx

Plus: Cost of Goods Manufactured xx
Total Goods Available for Sale xx
Less: Ending Finished Goods Inventory xx
Cost of Goods Sold xx
Regardless of which costing system is used, a Cost of Goods Manufactured (CofGM) Statement is prepared to
summarize the manufacturing activity of the period. Cost of Goods Manufactured for a manufacturing firm is equivalent to
purchases for a merchandising firm. Although it may take different forms, essentially the CofGM Statement is a summary
of the direct materials, direct labor, factory overhead, and work-in-process (WIP) account.
ELEMENTS OF MANUFACTURING COST
Manufacturing or production costs are classified into three basic elements: (1) Direct Materials, (2) Direct Labor,
and (3) Factory Overhead. We have previously discussed these elements.
MANUFACTURING COST FLOW
Product costing, inventory valuation, and financial reporting depend on a defined, structured flow of manufacturing
costs. This manufacturing cost flow was outlined in the discussion of the three manufacturing inventory accounts that was
presented earlier. Figure 4 summarizes the entire cost-flow process as it relates to accounts in the general ledger. The journal
entries to make this cost flow operational will be illustrated in the later part of this lesson.

63
Materials Inventory Work In Process Inventory Account

Bal. 1/1 24,600 45,300 Issued Bal. 1/1 25,100 201,600 Completed
Purchases 53,200 Materials 45,300
Labor 79,700
Bal. end. 32,500 Overhead 65,000
Bal. End. 13,500
Factory Payroll Factory Overhead Control

DL 79,700 79,700 Overhead 65,000 65,000
Finished Goods Inventory Cost of Goods Sold

Bal. 1/1 70,000 240,500 Sold Sold 240,500
Completed 201,600
Figure 4. Manufacturing Cost Flow
Here, we concentrate on the general pattern of manufacturing cost flow, as shown in Figure 4 above. The cost flow
begins with costs being incurred. Manufacturing costs start in many ways. They may be cash payments, incurred liabilities,
fixed asset depreciation, or expired prepaid expenses. Once these costs have been incurred, they are reco rded as direct
materials, direct labor, or factory overhead costs. As the resources are used up, the company transfers its costs to the Work
In Process Inventory account. When production is completed, costs assigned to finished units are transferred to the Finished
Goods Inventory account. In the same way, costs attached to units sold are transferred to the Cost of Goods Sold account.
THE MANUFACTURING STATEMENT
Financial Statements of manufacturing companies differ little from those of merchandising companies. Depending
on the industry, the account titles found on the balance sheet are the same in most corporations. Examples include Cash,
Accounts Receivable, Buildings, Machinery, Accounts Payable and Share Capital) Even the income statements for a
merchandiser and a manufacturer are similar. However, a closer look shows that the head Cost of Goods Manufactured is
used in place of the Purchases account. Also, the Merchandise Inventory account is replaced by Finished Goods Inventory.
The key to preparing an income statement for a manufacturing company is to determine the cost of goods sold. The
amount is the end result of a special manufacturing statement, the statement of cost of goods manufactured, which is
prepared to support the figure on the income statement.
STATEMENT OF COST OF GOODS MANUFACTURED
The flow of manufacturing costs, shown in Figures 1 through 4, provides the basis for accounting for manufacturing
costs. In this process all manufacturing costs incurred are considered product costs. They are used in to compute ending
inventory balances and cost of goods sold. The costs flowing from one account to another during the year have been

64
combined into one number in the illustrations to help show the basic idea. In fact, hundreds of transactions occur during a
year, and each transaction affects part of the cost flow process.
At the end of the year, the flow of all manufacturing costs incurred during the year is summarized in the statement
of cost of goods manufactured and sold. The statement gives the peso amount of costs for products completed an d moved
to Finished Goods Inventory during the year. The amount of cost of goods manufactured should be the same as the amount
transferred from the Work In Process Inventory account to the Finished Goods Inventory account during the year. In the
same way, the amount of cost of goods sold should be the same as the amount transferred from the Finished Goods Inventory
account to the Cost of Goods Sold account during the year.
The statement of cost of goods sold for figure 4 is shown below.
Name of Company
Cost of Goods Sold Statement
For the year ended December 31, 2020
Direct Materials Used

Materials Inventory, beginning P 24,600
Add: Purchases 53,200
Total Materials Available for Use 77,800
Less: Materials Inventory 32,500 P 45,300
Direct Labor 79,700
Factory Overhead 65,000
Total Manufacturing Costs 190,000
Add: Work In Process, beginning 25,100
Cost of Goods Put Into Process 215,100
Less: Work In Process, ending 13,500
Cost of Goods Manufactured 201,600
Add: Finished Goods, beginning 70,000
Total Goods Available For Sale 271,600
Less: Finished Goods, ending 31,100
Cost of Goods Sold – normal P 240,500
Even though this statement is rather complex, it can be pieced together in four steps:
1. Compute the cost of materials used. Add the materials for the period to the beginning balance in the Materials
Inventory account. This subtotal represents the cost of materials available for use during the year. Then subtract the
balance of the ending Materials Inventory from the materials available for use. The difference is the cost of materials
used during the accounting period.
2. Computation of the total manufacturing costs for the year. The costs of materials used and direct labor are added to
total factory overhead costs applied during the year.

65
3. Charge total manufacturing costs into total manufacturing cost of goods manufactured for the year. Add the
beginning Work In Process Inventory balance to total manufacturing costs for the year to arrive at the total cost of
work in process during the year. From this amount, subtract the ending Work In Process Inventory balance for the
year to get the cost of goods manufactured.
The term total manufacturing costs must not be confused with the cost of goods manufactured. Total manufacturing costs
are the total costs for materials used, direct labor, and factory overhead incurre d and charged to production during an
accounting period. Total manufacturing costs of P190,000 incurred during the current year are added to the beginning
balance of the Work-In-Process Inventory costing P25,100. The P25,100 beginning balance, by definitio n, are costs from
an earlier period. The costs of two accounting periods are now being mixed to arrive at the total cost of goods put into
process during the year. The cost of ending products still in process (P31,100) are then subtracted from the total co st of
goods put into process during the year. The remainder, P201,600, is the cost of goods manufactured (completed) during the
year. It is assumed that the items in beginning inventory were completed first. Cost attached to the ending Work-In-Process
Inventory are part of the current period’s total manufacturing costs. But they will not become part of the cost of goods
manufactured until the next accounting period when the products are completed.
4. Compute the cost of goods sold for the year. The cost of goods manufactured is added to the beginning balance of
the Finished Goods Inventory to get the total cost of goods available for sale during the period. The cost of goods
sold – normal is then compared by subtracting the ending balance in Finished Goods In ventory (cost of goods
completed but unsold) from the total cost of goods available for sale. Cost of goods sold is considered an expense
for the period in which the related products were sold.
ILLUSTRATION OF COST ACCOUNTING CYCLE (MANUFACTURING OPERATIONS)
The Specter Products Company, a small, newly organized company that manufactures dining tables and chairs. The
company’s products are sold to jobbers or wholesale distributors, who in turn sell them to retailers. The basic steps in the
company’s manufacturing process are as follows:
Lumber is cut to size for table tops, legs, seats, arms, and backs.
The individual pieces of cut lumber are painted in various bright colors.
The pieces are assembled into tables and chairs.
The beginning balance sheet for the company on January 1, 2020 is presented below.

66
Specter Products Company

January 1, 2020
ASSETS LIABILITIES AND OWNER'S EQUITY
Cash ₱ 80,000 Liabilities ₱ -
Building 750,000
Equipment 150,000 Specter, capital 980,000.00
Total ₱ 980,000 Total ₱ 980,000
To make things simple, let us assume that the company for the month of January makes only one style of table and
no chairs. The following transactions are completed for January and recorded, in summary form as follows:
1. Materials (lumber, paint, screws, lubricants, and solvents) are purchased on account at a cost of P50,000.
Materials 50,000
Entry: Accounts Payable 50,000
To provide for purchases of materials on account.
This procedure differs in two ways from the recording of purchases for a merchandising firm. First, the debit is to
a Material Inventory account instead of a Purchases account because the inventory system is perpetual. Second, the
inventory account is used is a control account. Some companies have hundreds of items in inventory. To keep a separate
account for each item in the general ledger would crowd the ledger and make it hard to work with. At the time that the entry
above is posted to the general ledger, the individual stock cards are also updated.
2. During the month, direct materials (lumber and paint) costing P40,000 and indirect materials (screws, lubricants for
machine, and solvents for cleaning) costing P1,900 are issued to the factory.
Materials 40,000
Factory Overhead Control 1,900
Entry:
Materials 41,900
To record the issuance of materials to production.
This entry shows that P40,000 of direct materials and P1,900 of indirect materials were issued. The debit to the
Work-In-Process account records the cost of direct materials issued to production. Such costs can be directly traced to
specific job orders. As the direct materials costs are charged to work in process, the amounts for individual jobs are entered
on the job order cost sheets. Indirect materials are debited to the Factory Overhead Control account.
3. Total payroll for the month amounted to P36,000, consisting of P20,000 earned by laborers working on the product;
P7,000 for factory supervision; P9,000 for sales and administrative employees.

67
The entry to record the payroll and the payment to employees (ignoring payroll deductions) would be:
Payroll 36,000
Accrued Payroll 36,000
To record incurrence of payroll payment to laborers.
Entry:
Accrued Payroll 36,000
Cash 36,000
To record payment of payroll to laborers.
Recording labor costs for a manufacturing company requires three journal entries. The first labor entry records the
total payroll liability of the company. The second entry records the payment of the payroll liability established in the first
entry. The third entry (No.4 below) is now needed to account properly for labor costs. The P36,000 debited to the Payroll
account must be moved to the production accounts. Gross direct labor costs are debited to Work In Process account, and
total indirect labor costs (factory supervision) are debited to Factory Overhead Control. Payroll is credited to show that the
total account has been distributed to the production accounts.
4. The entry to record distribution or classification of the payroll would be:
Work In Process 20,000

Entry: Selling and Administrative Expense Control 9,000
Payroll 36,000
To record the distribution or classification of payroll.
The wages earned by laborers working directly on the product are charged to Work In Process, while the salaries
and wages of the factory supervisor, who do not work directly on the product, are charged to factory Overhead Control.
Sales salaries and administrative salaries are charged to Selling and Administrative Expense Control.
5. Depreciation expense for the building is 6% per year. The office occupies one-tenth of the total building, and the factory
operation is in the other nine-tenths. The depreciation expense for one month is recorded as follows:

Selling and Administrative Expense Control 375
Entry:
Accumulated Depreciation - Building 3,750
To record depreciation expense for one month.
Depreciation for the portion of the building used for factory operations = 750,000 x 6% x 1/12 x 9/10; for the portion
used by the office = 750,000 x 6% x 1/12 x 1/10. *1/12 represent that the depreciation is only for 1 month out of 12 months.
**1/10 and 9/10 represent the allocation based on occupancy of the office and factory operation. This allocation is important

68
because the amount allocated to the factory is considered as cost of the product while the amount allocated to the office is
considered as period costs only.
6. Depreciation expense for machinery and equipment is 20% per year. All machinery and equipment is used in the factory
for production purposes, so the depreciation expense is charged to Factory Overhead Control.

Entry: Accumulated Depreciation - Mach. & Equip. 2,500
To record depreciation expense for one month.
Using the explanation given above regarding depreciation, use the same procedure except allocating the amount
based on usage because I already highlighted above that all machinery and equipment is used in the factory for production
purposes, hence no need to allocate for period cost.
7. The cost of heat, light and power for the month was P3,000. Usage of these utilities expenses are 9/10 for production,
1/10 for administrative purposes.

Selling and Administrative Expense Control 300
Entry:
To record incurrence of utilities expense.
The explanation for the allocation is the same reason given in number 5 above.
8. Miscellaneous expenses for telephone, office supplies, travel, and rental of office furniture and equipment totaled P1,500.
Selling and Administrative Expense Control 1,500

Entry: Accounts Payable 1,500
To record incurrence of utilities expense.
Many other expenses may be incurred by a manufacturing organization, but for purposes of simplicity, it is assumed
there are no other expenses during the month. After posting journal entries to the appropriate ledger accounts, the factory
overhead control account will reflect the following debits:
Transaction Description Amount

(2) Indirect materials ₱ 1,900
(4) Indirect labor 7,000
(5) Depreciation of building 3,375
(6) Depreciation of machinery and equipment 2,500
(7) Heat, light, and power 2,700
Total ₱ 17,475

69
9. Factory overhead is charged to production at 85% of direct labor cost:
Work In Process 17,000

Entry: Factory Overhead Applied 17,000
To record the amount of factory overhead applied.
It is to be noted that the costs charged the direct materials used and direct labor were based in an actual cost
incurred. Due to the fact that an estimate is needed for the factory overhead in order to determine the total manufacturing
costs, an estimate is made based on different company policy (in Specter’s case, it was based on the amount of direct
labor) to prematurely determine the total manufacturing costs. An adjustment will be made after determining the actual
factory overhead costs (will be discussed later).
The three elements of manufacturing cost – direct materials, direct labor, and factory overhead – are now
accumulated in Work-In-Process, and the debits in the account are as follows:
Transaction Description Amount

(2) Direct Materials ₱ 40,000
(4) Direct Labor 20,000
(9) Factory Overhead 17,000
Total ₱ 77,000
10. Assuming that all goods started in process have been finished, the following entry is recorded:
Finished Goods 77,000

Entry: Work In Process 77,000
To record the amount of factory overhead applied.
Assuming that 1,000 tables were produced during the month, the unit cost is P77.00. The unit cost for each cost
element of manufacturing costs is calculated as in the computation below:
Total Units Produced Unit Cost

Direct Materials ₱ 40,000 1,000 ₱ 40.00
Direct Labor 20,000 1,000 20.00
Factory Overhead 17,000 1,000 17.00
₱ 77,000 ₱ 77.00
If the same type of table is produced in future periods, the unit costs of those periods can be compared with the unit
costs determined above, and any difference can be analyzed so that management might take appropriate action. The unit
cost also serves as a basis for establishing the selling price of the tables. After considering the anticipated selling and

70
administrative expenses, a selling price can be established that should provide a reasonable profit. If management determines
that a 40% gross profit percentage is necessary to cover the product’s share of selling an d administrative expenses and earn
a satisfactory profit, the selling price per unit, rounded to the nearest cent, would be computed as follows: (Manufacturing
cost of P77.00 x 40% = P30.80 (Gross Profit). Adding the gross profit per unit to the manufacturing cost per unit of P77.00,
the selling price will be set at P107.80 per table. ☺
To continue with the example, assume that the following transactions take place in January in addition to those
already recorded.
11. Costs of materials, utilities, and selling and administrative expenses paid amounted to P34,000.

Entry: Cash 34,000
To record payment of various expenses.
12. 800 tables are sold to jobbers at a net price of P86,240.

Sales 86,240
To record sales to jobbers on account.
Entry:
Cost of Goods Sold 61,600
To record cost of 800 tables sold.
The computation of the amount charged to cost of goods sold: (800 tables multiply by P77.00 per unit) The P77/unit
is based on the manufacturing cost per unit we have computed earlier. The cost of goods sold is to be charged for the cost
of the product while the amount for Accounts Receivable/Sales is based on the sales price (in this case, the net amount is
already given so just credit Sales for that amount).
13. Cash totaling P55,000 is collected on accounts receivable
Cash 55,000
Entry: Accounts Receivable 55,000
To record collections from customers on account.
The accounts in the general ledger will reflect the entries as follows:

71
Cash Accounts Receivable

Bal. 1/1 80,000 (3) 36,000 (12) 86,240 (13) 55,000
(13) 55,000 (11) 34,000
Bal. End. 31,240
Bal. end. 65,000
Materials Inventory Work In Process Inventory

(1) 50,000 (2) 41,900 (1) 40,000 (10) 77,000
(4) 20,000
Bal. end. 8,100 (9) 17,000
Finished Goods Inventory Building

(10) 77,000 (12) 61,600 Bal. 1/1 750,000
Bal. end. 15,400
Accum. Depreciation - Building Machinery & Equipment

(5) 3,750 Bal. 1/1 150,000
Accum. Depreciation - Mach. & Equip. Accounts Payable

(6) 2,500 (11) 34,000 (1) 50,000
(7) 3,000
(8) 1,500
Bal. End. 20,500

72
Accrued Payroll Specter, Capital

(3) 36,000 (3) 36,000 Bal. 1/1 980,000
Factory Overhead Control Selling and Adm. Expense Control

(2) 1,900 (4) 9,000
(4) 7,000 (5) 375
(5) 3,375 (7) 300
(6) 2,500 (8) 1,500
(7) 2,700
Bal. End. 11,175
Bal. End. 17,475
Payroll Cost of Goods Sold

(3) 36,000 (4) 36,000 (12) 61,600
Sales Factory Overhead Applied

(12) 86,240 (9) 17,000
Now let us compare the factory overhead of the two statements, the cost of goods sold statement we have presented
earlier and the statement of cost of goods sold for this illustrative problem which is will be shown shortly. The factory
overhead of the statement on our previous illustration is total actual factory overhead incurred for the period, while the
factory overhead of the statement for Specter Products is applied at 85% of direct labor cost. The predetermined overhead
rate (85% of direct labor cost) was used to apply overhead to production.
Two overhead accounts are used in the illustrative problem: Factory Overhead Control and Factory Overhead
Applied. Factory Overhead Control was used to accumulate all actual factory overhead costs. The estimated amount charged
to production was credited to Factory Overhead Applied. After determining the balance of each general ledger account, a
trial balance is prepared to prove the equality of the debits and credits.

73

Trial Balance
January 31, 2020
Cash ₱ 65,000
Materials 8,100
Building 750,000
Accumulated Depreciation - building ₱ 3,750
Machinery & Equipment 150,000
Accumulated Depreciation - mach. & equip. 2,500
Acrcrued Payroll -
Specter, Capital 980,000
Sales 86,240
Cost of Goods Sold 61,600
Factory Overhead Applied 17,000
Selling and Adm. Expense Control 11,175
Totals ₱1,109,990 ₱1,109,990
From the trial balance, financial statements are prepared as follows:

Income Statement
Sales ₱ 86,240
Less: Cost of Goods Sold (Schedule 1) 62,075
Gross Profit 24,165
Less: Selling and Administrative Expenses
Selling and Administrative Salaries ₱ 9,000
Depreciation - Building 375
Heat, Light and Power 300
Miscellaneous 1,500 11,175
Net Income ₱ 12,990
SCHEDULE 1:
Cost of Goods Sold Statement

74
Direct Materials Used:

Purchases P 50,000
Less: Materials Inventory, January 31 P 8,100
Indirect materials 1,900 10,000 P 40,000
Direct Labor 20,000
Factory Overhead 17,000
Total Manufacturing Costs/Cost of Goods Manufactured 77,000
Less: Finished Goods, January 31 15,400
Cost of Goods Manufactured and sold – normal 61,600
Add: Under-Applied Factory Overhead 475
Cost of Goods Sold – normal P 62,075

January 31, 2020
ASSETS
Current Assets:
Cash ₱ 65,000
Prepaid Expenses 8,100
Total ₱ 119,740
Non-Current Assets:
Property & Equipment (Note 1) 893,750
Total Assets ₱ 1,013,490
LIABILITIES AND OWNER'S EQUITY

Current Liabilities:
Accounts Payable ₱ 20,500
Owner's Equity:
Specter, Capital (Note 2) 992,990
Total Liabilities & Owner's Equity ₱ 1,013,490
Note 1: Building ₱ 750,000

Less: Accumulated Depreciation 3,750 ₱ 746,250
Machinery & Equipment 150,000
Less: Accumulated Depreciation 2,500 147,500
Total ₱ 893,750
Note 2: Beginning balance ₱ 980,000

Net Income 12,990
Total ₱ 992,990

75
The cost of goods manufactured/completed divided by the number of units produced/completed will give the cost
to manufacture per unit of the product, which is equivalent to purchase price for a merchandising concern.
The format of the income statement f or a manufacturer is not significantly different from that for a merchandiser.
In the income statement of a manufacturing concern the cost of goods sold is usually shown as one figure, as supported by
the cost of goods sold statement, which is also the general procedure in a published report.
At the end of the period, we compare the total of the Factory Overhead Control account and the Factory Overhead
Applied account. In our example, the Factory Overhead Control (P17,475) is greater than the Factory Overhead Applied
(P17,000), that is why we have an under-applied factory overhead which is considered unfavorable because the tendency is
to increase the cost of goods sold. An increase in the cost of goods sold will lead to a decrease in the gross profit. However,
if the factory overhead control account is less than the factory overhead applied account, then what we have is over-applied
factory overhead which is considered favorable because the effect is a decrease in the cost of goods sold thereby increasing
the gross profit. We assume in our example that the company is closing its under-applied/over-applied account at the end
of the year, so no entry is made at the end of the month.
If the company is closing the factory overhead control and factory overhead applied account at the end of each
month, the following entry will be made at the end of the month:
Factory Overhead Applied 17,000

Under-applied Factory Overhead 475
Entry:
To record closing of over/underapplied FOH.
At the end of the year, the total under-applied (or net under/over-applied) overhead account is closed to Cost of Goods Sold
account. If the amount of the under/over-applied overhead is significant, then the amount is prorated to the Cost of Goods
Sold account, Finished Goods account, and Work-In-Process account, according to the balances at the end of the period.
From the Cost of Goods Sold Statement, the following different equations are derived:
Materials, beginning Materials Used
+ = Total Materials Available for Sale = +
Purchases Materials, ending
Work In Process, beginning Total Costs of Cost of Goods Manufactured

+ = Goods Put = +
Total Manufacturing Costs Into Process Work In Processs, ending

76
Finished Goods, beginning Cost of Goo ds Sold

+ = Total Goods Available for Sale = +
Cost of goods manufactured Finished Goods, ending
The following formulas are also of importance with regards to the costs of goods sold statement:
1. Prime Costs = Direct Materials Used + Direct Labor Cost

2. Conversion Costs = Direct Labor Cost + Factory Overhead
3. Total Manufacturing Costs = Direct Materials Used + Direct Labor Cost + Factory OH
Part 1. Classify the above items into the following categories (a) direct materials, (b) direct labor and (c) manufacturing
overhead.
Presented below is a list of costs and expenses usually incurred by Stensland Corporation, a manufacturer of furniture, in
its factory:
1. Salaries for assembly line inspectors
2. Insurance on factory machines
3. Upholstery used in manufacturing furniture
4. Wages paid to assembly line workers
5. Depreciation of factory machinery
6. Salaries of factory supervisors
7. Wood used in manufacturing furniture
8. Glue, nails, paint, and other small parts used in production
9. Property taxes on factory building
10. Factory manager’s salary
Part 2. Classify the following as either manufacturing (M), selling (S), or administrative (A).
1. Factory Supplies
2. Advertising
3. Rent on factory building
4. Freight-Out
5. President’s Salary
6. Cost of machine breakdown
7. Legal Expenses
8. Samples
9. Bad debts
10. Travel expenses of salesman

77
ASSESSMENT
Multiple Choice. Encircle the letter of your answer. In case the question requires computation, show your solutions and
write it in the space beside the number.
1. Cost of goods sold is

a. An expense
b. A period cost
c. Is an asset
d. None of the above.
2. For a manufacturing company, the cost of goods available for sale during a given accounting period is
a. The beginning inventory of finished goods
b. The cost of goods manufactured during the period
c. The sum of the above.
3. Which of the following would not be classified as manufacturing overhead?

a. Indirect labor
b. Direct materials
c. Insurance on factory building
d. Indirect materials
4. The wage of a timekeeper in the factory overhead would be classified as

a. prime cost
b. direct labor
c. indirect labor
d. administrative expense
5. As current technology changes manufacturing processes, it is likely that direct

a. labor will increase
b. labor will decrease
c. materials will increase
d. materials will decrease
6. Sales Commissions are classified as

a. Prime costs
b. Period costs
c. Product costs
d. Indirect labor

78
7. Manufacturing costs would not include

a. indirect materials used.
b. sales salaries expense
c. indirect labor costs
d. depreciation on factory equipment.
8. Each of the following is true with respect to product costs, except:

a. Product costs represent inventoriable costs.
b. Product costs are deducted from revenue when the manufacturing process is completed.
c. Product costs are not regarded as expenses of the current period.
d. Direct labor is an example of a product cost.
9. Which of the following is not likely to be treated as a product cost?

a. Depreciation on the factory
b. Portion of the cost of running the quality control department.
c. Interest paid on notes payable.
d. Wages paid to factory workers.
10. The purchases – raw materials account is debited when

a. direct materials are purchased
b. indirect materials are purchased
c. direct materials are placed into production
d. indirect materials are placed into production.
11. The direct labor account is debited

a. when related labor costs are transferred into the Work In Process Inventory account.
b. at the end of the payroll period, when employees are paid.
c. when the goods manufactured are completed.
d. when a new factory employee begins work.
12. Examples of factory overhead costs are

a. Lubricants for factory equipment
b. Depreciation of factory equipment
c. Both of the above
13. The following costs relate to Zane Industries for the last quarter:
Conversion Cost P 435,000
Direct Materials 215,000
Manufacturing Overhead 190,000
Selling and Administrative Expense 185,000

79
What is Zane’s prime cost for the quarter?

a. 460,000
b. 410,000
c. 405,000
d. 375,000
14. Zane’s total manufacturing cost is

a. 460,000
b. 645,000
c. 650,000
d. 840,000
15. Antonio’s total period cost is

a. 185,000
b. 275,000
c. 400,000
d. 620,000
Items 16 through 22 are based on the following information pertaining to Harvey Company’s manufacturing operations:
Inventories 12/1/20 12/31/20

Direct Materials P 36,000 P 30,000
Work-in-process 18,000 12,000
Finished Goods 54,000 72,000
Additional information for the month of December 2020:
Direct materials purchased P84,000
Direct labor payroll 60,000
Direct labor rate per hour 7.50
Factory Overhead rate per direct labor hour 10.00
16. For the month of December 2020, prime cost was

a. 90,000
b. 120,000
c. 144,000
d. 150,000
17. For the month of December 2020, conversion cost was

a. 90,000
b. 140,000
c. 144,000
d. 170,000

80
18. For the month of December 2020, cost of goods manufactured was
a. 218,000
b. 224,000
c. 230,000
d. 236,000
19. For the month of December 2020, total materials available for sale was
a. 110,000
b. 120,000
c. 144,000
d. 154,000
20. For the month of December 2020, total goods available for sale was
a. 300,000
b. 290,000
c. 236,000
d. 248,000
21. For the month of December 2020, total manufacturing cost was
a. 230,000
b. 248,000
c. 236,000
d. 228,000
22. For the month of December 2020, cost of goods sold was
a. 208,000
b. 218,000
c. 228,000
d. 236,000
REFERENCES
1. De Leon Jr., Guillermo M. De Leon, Norma D. Cost Accounting. (2014 Edition)

2. Ballada, Win. Basic Accounting Made Easy. (2013 Issue – 18th Edition)
3. https://www.accountingcoach.com/terms/C/cost#:~:text=cost%20definition.%20In%20accounting%2C%20cost%
20is%20defined%20as,in%20inventory%20also%20includes%20the%20item%27s%20freight-in%20cost.

81
LEARNING MODULE
EL201: ACCOUNTING FOR IT
FIRST SEMESTER SCHOOL YEAR 2020-2021
CHECKED BY
AUREA B. NATIVIDAD HAIDEE B. GONZALES
APPROVED BY
ELLEN C. ALMORO
Director
Department of Business Education

EL201-Accounting For IT

Uploaded by

Copyright:

Available Formats

EL201-Accounting For IT

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

EL201-Accounting For IT

Uploaded by

Copyright:

Available Formats

1

Learning Module on EL201

Learning Module on EL201

CCC BSA students maintain honesty and integrity at all times.

Learning is primarily student’s responsibility.

Periodic examination may be administered at the end of the term

Learning Module on EL201

LEARNING MODULE INFORMATION

LESSON TITLE: INTRODUCTION TO ACCOUNTING AND BUSINESS

• Understand the importance of accounting, its definition and history.

DISCUSSION OF CONTENT / APPLICATION

Learning Module on EL201

FORMS OF BUSINESS ORGANIZATION

The three common forms of businesses in the Philippines are:

Learning Module on EL201

ACCOUNTING AS A BUSINESS LANGUAGE

Learning Module on EL201

USERS OF FINANCIAL INFORMATION

1. Is the business profitable?

1. Are the plans being implemented beneficial to the business?

Remember a losing business depletes wealth and is a reflection of inefficient

Learning Module on EL201

1. Will the business be able to pay

1. Is the business paying the right taxes?

SUMMARY OF THE LESSON

• Accounting is the language of business.

Enumerate businesses that are sole proprietorship, partnership and corporation.

Learning Module on EL201

LESSON TITLE: ANALYZING TRANSACTIONS IN STARTING A BUSINESS

1. Define the basic elements of accounting.

FINANCIAL STRUCTURE OF A BUSINESS ORGANIZATION

DISCUSSION OF CONTENT / APPLICATION

BASIC ELEMENTS OF ACCOUNTING

Learning Module on EL201

THE ACCOUNTING EQUATION

Assets = Owner’s Equity

Increase in ASSETS = LIABILITIES + Increase in Owner’s Equity

Increase in ASSETS = Increase in LIABILITIES + Owner’s Equity

Learning Module on EL201

Increase and Decrease in ASSETS = Liabilities + Owner’s Equity

Increase in ASSETS = Increase in LIABILITIES + Owner’s Equity

Decrease in ASSETS = LIABILITIES + Decrease in Owner’s Equity

Decrease in ASSETS = Decrease in LIABILITIES + Owner’s Equity

Learning Module on EL201

Date ASSETS LIABILITIES OWNER'S EQUITY

Balances 45,000 750,000 55,000 45,000 100,000 - 800,000 - 5,000

STATEMENT OF FINANCIAL POSITION

Learning Module on EL201

Mr. N Travel and Tours

SUMMARY OF THE LESSON

Multiple Choice: Encircle the letter of your choice.

1. Which of the following is an asset of a firm?

2. Which of the following equations is correct?

3. Which of the following is a liability for the firm?

Learning Module on EL201

6. Withdrawals by the proprietor has all of the following effects except:

7. In the accounting equation, an increase in asset can be associated with

8. When an entity acquires computer equipment for cash,

9. The accounting equation