Emergency Remote Learning

Module III
SUMMER 2020

Prepared by:

Wee Lu Gee D. Amora, CPA

Accountancy Department

AE 101
FINANCIAL ACCOUNTING & REPORTING
COURSE PLAN

Module 1 Accounting Fundamentals

Lesson 1: Introduction to Accounting
Lesson 2: Accounting Concepts and Principles
Lesson 3: The Accounting Equation
Lesson 4: Types of Major Accounts

Module 2 Accounting for Service Business

Lesson 1: Books of Accounts and Double-Entry System
Lesson 2: Accounting Cycle: Analysis to Unadjusted Trial Balance
Lesson 3: Accounting Cycle: Adjustments to FS Preparation

Module 3 Accounting for Merchandising Business

Lesson 1: Inventory Systems
Lesson 2: Special Journals
Lesson 3: Accounting Cycle

Midterm Examination

Module 4 Accounting for Partnership

Lesson 1: Formation
Lesson 2: Operations
Lesson 3: Dissolution
Lesson 4: Liquidation

Module 5 Accounting for Corporation

Lesson 1: Components of Equity
Lesson 2: Dividends

Final Examination

FACILITATOR/TUTOR AND TUTORIALS

You are free to work on each module at your convenient time, in your own pace. However,
you are expected to finish one Module each week. You need not worry because you are
not alone in your journey through this course. Your teacher will be available online to
guide and assist you from 2pm to 3pm, Tuesdays and Thursdays. Please make sure you
utilize this opportunity to raise questions so difficult concepts may be clarified. Just make
sure you have read the course materials very well so you will be able to identify the issues
that need to be sorted out with your teacher during the scheduled tutorial time.
 MODULE 3
ACCOUNTING FOR MERCHANDISING BUSINESS
Lesson 3: Accounting Cycle of a Merchandising Business

Let us again complete the accounting cycle but this time for a merchandising business,
recall the following steps in the accounting cycle:

Steps in Accounting Cycle

1. Identifying and analyzing
2. Journalizing
3. Posting
4. Unadjusted trial balance
5. Adjusting entries
6. Adjusted trial balance (and/or worksheet)
7. Financial statements
8. Closing entries
9. Post-closing trial balance
10. Reversing entries

In our first illustration below, we will apply the accounting cycle under perpetual
inventory system, and in the next, under a periodic inventory system.

Illustration 1: PERPETUAL INVENTORY SYSTEM

The accounts of “My Souvenir” store owned by Gisel Figaro had the following balances
on November 1, 2019:

My Souvenir
Trial Balance
November 1, 2019

Accounts Debit Credit

Cash ₱51,400
Accounts receivable 1,650
Inventory 2,250
Accounts payable ₱5,300
Figaro, Capital 50,000
Totals ₱55,300 ₱55,300

Nov. Transactions
3 Acquired equipment for P36,000 cash. The equipment has a useful life of 4 years.
8 Paid a one-year insurance premium of P12,000. (Use asset method.)
12 Purchased inventory costing P15,000 on account.
14 Sold goods for P15,000 cash. The cost of sales is P2,000.
21 Returned defective merchandise purchased on Nov. 12 costing P1,500.
Dec. Transactions
1 Sold goods with sale price of P12,000 in exchange for a P12,000, 10%, one-year
note receivable. Principal and interest are due at maturity. The cost of sales is
P1,500.
5 Paid P5,000 on the Nov. 12 purchase.
9 Purchased inventory for P2,000 cash.
15 Sold goods for P13,500 on account. The cost of sale is P3,000.
19 Received returned merchandise from Dec. 15 sale costing P500 and credited the
customer’s account for P2,250.
27 Collected P6,000 account receivable.

Additional information:
The following information was identified on December 31, 2019:
a. Of the total accounts receivable, P1,000 is doubtful of collection.
b. Salaries earned by employees during the period but were not yet paid amounted to
P10,000.

Step 1: Identifying and Analyzing

Step 2: Journalizing
Step 3: Posting
Since we have already discussed the whole accounting cycle in the previous module,
these preliminary steps will be left as a drill for you. Afterwards, assess if the amounts in
your ledger would match to the figures in the unadjusted trial balance below. If not, try to
review your answers.

Step 4: Unadjusted Trial Balance

My Souvenir
Unadjusted Trial Balance
December 31, 2019

Accounts Debit Credit

Cash ₱17,400
Accounts receivable 6,900
Notes receivable 12,000
Inventory 11,750
Prepaid Insurance 12,000
Equipment 36,000
Accounts payable ₱13,800
Figaro, Capital 50,000
Sales 40,500
Sales return 2,250
Cost of sales 6,000
Totals ₱104,300 ₱104,300
Step 5: Adjusting Entries

My Souvenir
Adjusting Entries Page 1
Date
2019 Account Titles and Explanation P.R. Debit Credit
Dec. 31 Interest receivable P100
Interest income P100
To accure interest income earned but not yet collected.

31 Salaries expense 10,000

Salaries payable 10,000
To accrue salaries expense incurred but not yet paid.

31 Depreciation expense 1,500

Accumulated depreciation-Equipment 1,500
To record depreciation expense for the period.

31 Bad debts expense 1,000

Allowance for bad debts 1,000
To record bad debts expense for the period.

31 Insurance expense 2,000

Prepaid insurance 2,000
To record insurance expense.
Step 6: Adjusted Trial Balance (Worksheet)

My Souvenir
Worksheet
For the year ended December 31, 2019
Unadjusted Trial
Balance Adjustments Adjusted Trial Balance
Accounts Dr. Cr. Dr. Cr. Dr. Cr.
Cash ₱17,400 ₱17,400
Accounts receivable 6,900 6,900
Notes receivable 12,000 12,000
Inventory 11,750 11,750
Prepaid Insurance 12,000 ₱2,000 10,000
Equipment 36,000 36,000
Accounts payable ₱13,800 ₱13,800
Figaro, Capital 50,000 50,000
Sales 40,500 40,500
Sales return 2,250 2,250
Cost of sales 6,000 6,000
Totals ₱104,300 ₱104,300
Interest receivable ₱100 100
Interest income 100 100
Salaries expense 1,000 1,000
Salaries payable 1,000 1,000
Depreciation expense 1,500 1,500
Accumulated depreciation-Equipment 1,500 1,500
Bad debts expense 1,000 1,000
Allowance for bad debts 1,000 1,000
Insurance expense 2,000 2,000
Totals ₱5,600 ₱5,600 ₱107,900 ₱107,900
 My Souvenir
Worksheet
For the year ended December 31, 2019
Unadjusted Trial
Balance Adjustments Adjusted Trial Balance Income Statement Balance Sheet
Accounts Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Cash ₱17,400 ₱17,400 ₱17,400
Accounts receivable 6,900 6,900 6,900
Step 7: Financial Statements

Notes receivable 12,000 12,000 12,000

Inventory 11,750 11,750 11,750
Prepaid Insurance 12,000 ₱2,000 10,000 10,000
Equipment 36,000 36,000 36,000
Accounts payable ₱13,800 ₱13,800 ₱13,800
Figaro, Capital 50,000 50,000 50,000
Sales 40,500 40,500 ₱40,500
Sales return 2,250 2,250 ₱2,250
Cost of sales 6,000 6,000 6,000
Totals ₱104,300 ₱104,300
Interest receivable ₱100 100 100
Interest income 100 100 100
Salaries expense 1,000 1,000 1,000
Salaries payable 1,000 1,000 1,000
Depreciation expense 1,500 1,500 1,500
Accumulated depreciation-Equipment 1,500 1,500 1,500
Bad debts expense 1,000 1,000 1,000
Allowance for bad debts 1,000 1,000 1,000
Insurance expense 2,000 2,000 2,000
Totals ₱5,600 ₱5,600 ₱107,900 ₱107,900 ₱13,750 ₱40,600 ₱94,150 ₱67,300
Profit 26,850 26,850
Grand Totals ₱40,600 ₱40,600 ₱94,150 ₱94,150
 My Souvenir
Income Statement
For the year ended December 31, 2019

Net Sales
Gross Sales ₱40,500
Less: Sales returns 2,250
Net Sales ₱38,250
Cost of Sales 6,000
Gross Profit ₱32,250
Less: Operating expenses
Salaries expense ₱1,000
Depreciation expense 1,500
Bad debts expense 1,000
Insurance expense 2,000
Operating expenses 5,500
Add: Interest income 100
Net Profit ₱26,850

My Souvenir
Statement of Changes in Equity
For the month ended December 31, 2019

Figaro, Capital, 12/01/2019 ₱50,000

Add: Profit 26,850
Total ₱76,850
Less: Figaro, Withdrawals -
Figaro, Capital, 12/31/2019 ₱76,850
 My Souvenir
Balance Sheet
As of December 31, 2019

ASSETS
Current Assets
Cash ₱17,400
Accounts receivable (net) 5,900
Notes receivable 12,000
Inventory 11,750
Prepaid Insurance 10,000
Interest receivable 100
Total Current Assets ₱57,150
Non-current Asset (net)
Equipment ₱36,000
Accumulated depreciation-Equipment 1,500 34,500
Total Assets ₱91,650

LIABILITIES
Current Liabilities
Accounts payable ₱13,800
Salaries payable 1,000
Total Liabilities ₱14,800

OWNER'S EQUITY
Figaro, Capital, 12/31/2019 76,850
Total Liabilities and Equity ₱91,650

Step 8: Closing Entries

Step 9: Post-Closing Trial Balance
Step 10: Reversing Entries
These concluding steps will also be part of your drill. 

Illustration 2: PERIODIC INVENTORY SYSTEM

Using the same transactions of My Souvenir, complete the accounting cycle using
periodic inventory system.

Step 1: Identifying and Analyzing

Step 2: Journalizing
Step 3: Posting
These, again, will be left as your drill.
Step 4: Unadjusted Trial Balance

My Souvenir
Unadjusted Trial Balance
December 31, 2019

Accounts Debit Credit

Cash ₱17,400
Accounts receivable 6,900
Notes receivable 12,000
Inventory, beg. 2,250
Prepaid Insurance 12,000
Equipment 36,000
Accounts payable ₱13,800
Figaro, Capital 50,000
Sales 40,500
Sales return 2,250
Purchases 17,000
Purchase returns 1,500
Totals ₱105,800 ₱105,800

Notice that the beginning amount of the “Inventory” account is still reflected in the
preparation of the Unadjusted Trial Balance. It is as if there was no movement (no
purchase or no sale) of inventory. But we all know that purchase and sale transactions
took place. But those transactions are not reflected yet in the Inventory account because
we are using the periodic inventory system, in which transactions that affect our
merchandise or our stocks are recorded temporarily in other accounts, e.g. “Purchases”
account, and will later be closed to the Inventory account.

Step 5: Adjusting Entries

There are two ways to adjust the Inventory account to its proper amount. We could either
use Adjusting Entry Method or Closing Entry Method.
 In adjusting entry method, we prepare and adjusting entry to bring the inventory
account to its proper amount using the Income summary account. That is debit
Inventory, end and credit Income Summary, P11,750. This entry will be reflected in
the Adjustment column of the worksheet.
 In closing entry method, the inventory beginning is first closed to the Income
Summary. That is debit Income Summary and credit Inventory, beginning, P2,250.
After this entry, Inventory account now will have a zero balance. Then record the
ending balance of the inventory account by debiting Inventory, end and credit Income
Summary, P11,750. These closing entries will not be reflected in the adjustment
column of the worksheet, only in the income statement column.
For this problem, we will use the Adjusting Entry Method. Therefore, adjusting entries
will be the same as the adjusting entries in the perpetual inventory system, PLUS:
Page 1
Date
2019 Account Titles and Explanation P.R. Debit Credit
Dec. 31 Inventory, end P11,750
Income summary P11,750
To recognize the ending inventory.

Step 6: Adjusted Trial Balance

My Souvenir
Worksheet
For the year ended December 31, 2019
Unadjusted Trial
Balance Adjustments Adjusted Trial Balance
Accounts Dr. Cr. Dr. Cr. Dr. Cr.
Cash ₱17,400 ₱17,400
Accounts receivable 6,900 6,900
Notes receivable 12,000 12,000
Inventory, beg. 2,250 2,250
Prepaid Insurance 12,000 ₱2,000 10,000
Equipment 36,000 36,000
Accounts payable ₱13,800 ₱13,800
Figaro, Capital 50,000 50,000
Sales 40,500 40,500
Sales return 2,250 2,250
Purchases 17,000 17,000
Purchase return 1,500 1,500
Totals ₱105,800 ₱105,800
Interest receivable ₱100 100
Interest income 100 100
Salaries expense 1,000 1,000
Salaries payable 1,000 1,000
Depreciation expense 1,500 1,500
Accumulated depreciation-Equipment 1,500 1,500
Bad debts expense 1,000 1,000
Allowance for bad debts 1,000 1,000
Insurance expense 2,000 2,000
Inventory, end 11,750 11,750
Income Summary 11,750 11,750
Totals ₱17,350 ₱17,350 ₱121,150 ₱121,150
 My Souvenir
Worksheet
For the year ended December 31, 2019
Unadjusted Trial
Balance Adjustments Adjusted Trial Balance Income Statement Balance Sheet
Accounts Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Cash ₱17,400 ₱17,400 ₱17,400
Accounts receivable 6,900 6,900 6,900
Notes receivable 12,000 12,000 12,000
Inventory, beg. 2,250 2,250 ₱2,250
Prepaid Insurance 12,000 ₱2,000 10,000 10,000
Equipment 36,000 36,000 36,000
Step 7: Financial Statements

Accounts payable ₱13,800 ₱13,800 ₱13,800

Figaro, Capital 50,000 50,000 50,000
Sales 40,500 40,500 ₱40,500
Sales return 2,250 2,250 2,250
Purchases 17,000 17,000 17,000
Purchase return 1,500 1,500 1,500
Totals ₱105,800 ₱105,800
Interest receivable ₱100 100 100
Interest income 100 100 100
Salaries expense 1,000 1,000 1,000
Salaries payable 1,000 1,000 1,000
Depreciation expense 1,500 1,500 1,500
Accumulated depreciation-Equipment 1,500 1,500 1,500
Bad debts expense 1,000 1,000 1,000
Allowance for bad debts 1,000 1,000 1,000
Insurance expense 2,000 2,000 2,000
Inventory, end 11,750 11,750 11,750
Income Summary 11,750 11,750 11,750
Totals ₱17,350 ₱17,350 ₱121,150 ₱121,150 ₱27,000 ₱53,850 ₱94,150 ₱67,300
Profit 26,850 26,850
Grand Totals ₱53,850 ₱53,850 ₱94,150 ₱94,150

Note that “Inventory, beg.” and “Income Summary” The “Inventory, end” is
are extended to the Income Statement. This is extended to the balance sheet.
necessary so that the amount of Cost of Goods Sold is
properly reflected in the income statement.
 My Souvenir
Income Statement
For the year ended December 31, 2019

Net Sales
Gross Sales ₱40,500
Less: Sales returns 2,250
Net Sales ₱38,250
Cost of Sales
Merchandise inventory, beginning ₱2,250
Purchases ₱17,000
Less: Purchase returns 1,500
Net Purchases 15,500
Goods Available for Sale 17,750
Less: Merchandise inventory, end 11,750
Cost of Sales 6,000
Gross Profit ₱32,250
Less: Operating expenses
Salaries expense ₱1,000
Depreciation expense 1,500
Bad debts expense 1,000
Insurance expense 2,000
Operating expenses 5,500
Add: Interest income 100
Net Profit ₱26,850

Observe how the income statement under periodic inventory system differ from that under
the perpetual inventory system. However, they still have the same Cost of Sales, Gross
Profit and Net Profit. Statement of Changes in Equity and Balance Sheet are just the same
with those produced using the perpetual inventory system.

Step 8: Closing Entries

Step 9: Post-Closing Trial Balance
Step 10: Reversing Entries
These concluding steps will also be part of your drill. 