MERCHANDISE

 Refers to goods commodities bought by the business for resale at a certain amount of
profit.

TWO METHODS OF MERCHANDISE

1. PERIODIC INVENTORY METHOD- is used, cost of goods sold and ending inventory is determined
by physically counting the items and multiplying the number of items counted by its cost.
2. PERPETUAL INVENTORY MEHOD- cost of goods sold and ending inventory may be determined
from the accounting records without a physical counting of goods.

PERIODIC INVENTORY METHOD

Purchase xx
Cash or Accounts Payable xx
To record purchases

COST OF GOODS SOLD is computed using this formula

Beginning Merchandise Inventory P XX

Add: Net Purchases
Purchases xx
Add: Freight In xx
Total xx
Less: Purchase Discount xx
Sales Returns and Allowances xx
Total GOODS AVAILABLE FOR SALE XX
Less: Ending Inventory XX
COST OF GOODS SOLD XX

MERCHANDISING ACCOUNT

1. SALE is an income account which is credited when the goods or merchandise are sold either by
cash or on account basis.
2. SALES RETURNS AND ALLOWANCES result from the return of any unsatisfactory merchandise;
this account is deduction from sales and debited when defective goods are returned by the
buyer.
3. SALES DISCOUNT is an account off the regular price of goods that is granted for early payment.
This is debited when an amount of discount is granted to the buyer. This account can be
deducted from sales or may be considered as other expenses.
4. REVENUE FROM SALES OR NET SALES consist of gross sales less returns and allowances and
discounts.
5. GROSS PROFIT gross profit from sales is divided by subtracting cost of sales from net sales.
6. PURCHASES merchandise bought for resale for the accounting period; either cash or on account.
 7. PURCHASE RETURNS AND ALLOWANCES a deduction from purchases. This is credited when
defective merchandise is returned to the supplier.
8. PURCHASE DISCOUNT this account is credited when the supplier granted the buyer an amount
of discount. Deduction from purchases.
9. FREIGHT IN this debited if the business shoulders the payment for the delivery of goods bought.
10. FREIGHT OUT this id one of the operating expense of the business.
11. MERCHANDISE INVENTORY goods for sale
12. COST OF GOODS SOLD it consist of the cost of merchandise on hand at the beginning of the
accounting period, net cost of merchandise purchased including cost of transporting of goods
bought during the period.

SALES DISCOUNTS

1. TRADE DISCOUNT which is percentage reduction from a published list price may be granted to
retailers or wholesalers for buying large quantities or regularly patronizing the business.

Example: Assuming that the furniture and fixtures with a list price off P40,000.00 was given a
trade discount of 4% and 3%

List price P40,000.00

Less:4% of P40,000.00 1,600.00
38,400.00
Less:3% of 38,400.00 1,152.00
Gross Invoice Price P 27,936.00

2. CASH DISCOUNTS
 n/30 (means that gross amount is payable within 30 days from the date of the sale)
 2/10, n/30 (which means that the account is payable within 30 days with a 2% discount
within 10 days’ settlement from the day of the sale)
 3/EOM, N/60 (which means that 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 the sale)
 2/10, 1/15, n/30 (which means that the account is payable within 30 days with a 2%
discount given if the account is paid within 10 days from the date of the sale, but only a
1% discount if the account is paid after ten days but within fifteen days from the sale)

STEPS IN THE ACCOUNTING CYCLE

1. Analyzing the business documents or transactions
2. Journalizing
3. Posting
4. Preparing the unadjusted trial balance
5. Preparing the adjusting entries
6. Preparing financial statements
7. Preparing closing entries
8. Preparing Post-Closing Trial Balance
9. Preparing the reversing entries
 I. ANALYZING THE BUSINESS DOCUMENTS OR TRANSACTIONS this evidential matters support the
objectivity of accounting record.
 Official Receipt
 Check voucher
 Check
 Promissory notes
 Commercial invoice
 Bank deposit slip
 Debit Memorandum
 Credit memorandum
 Billing or statement account

II. JOURNALIZING analyzing and recording transactions

The journal provides chronological records of transactions with explanation and clear references
to their supporting documents with corresponding debits and credits.

Journal Entry Contains:

 Date
 The Account title and amount to be debited
 The Account title and amount to be credited
 Explanation

Simple Entry- with one credit and one debit

Compound Entry- more than one debit and more than one credit
III. POSTING FROM THE GENERAL LEDGER is the process of transferring figures from the journal to
the LEDGER.
GENERAL LEDGER- is the collection of all assets, liability, owners’ equity, revenue and expense
account.
LEDGER-is a tool used for summarizing information about increase, decrease and balances of
items in the chart of accounts.

Needs for LEDGER:

1. Items of similar items are grouped together
2. It is easier to locate the item if information about it is needed.

The rules of T-Account

Title

Left side Right side

Debit Credit
 ASSETS

DEBITS CREDIT
INCREASES DECREASE

LIABILITIES

DEBITS CREDIT
DECREASE INCREASES

CAPITAL

DEBITS CREDIT
INCREASES

WITHDRAWAL

DEBITS CREDIT
INCREASES

REVENUE/SALES

DEBITS CREDIT
INCREASES

EXPENSES/COST OF GOODS SOLD

DEBITS CREDIT
INCREASES

IV. PREPARING THE TRIAL BALANCE/ UNADJUSTED TRIAL BALANCE

A trial balance is a list of accounts with open balances in the general ledger. It proves the quality
of debits and credits in the general ledger.

It consists of two:
 Trial balances of balance- consist of accounts with open balances. An account is said to
have a debit balance if the debit total is more than the credit total and is said to have a
credit balance if the credit totals is more than the debit total. If the debit side and credit
side are equal, the account is a zero balance or closed account.
  Balance of totals- in this form the total of the debits and the totals of the credits of each
accounts are listed

PROCEDURE ON TRIAL BALANCE

1. Write the heading of the trial balance

 The name of the business or the owner
 Title of the list or trail balance
 Date of the trial balance
2. Provide the column for the accounts and two money columns- a debit and a credit
3. The account should be written in just one column arranged in the following sequences:
a. Assets
b. Liabilities
c. Capital
d. Income
e. Expenses
4. Write the amount opposite corresponding accounts under the debit money column, if the
account is a debit balances and under the credit money column, if the account is a credit
balance.
5. Foot the money columns. Double rule the totals.

V. PREPARING THE ADJUSTING ENTRIES

 Adjusting entries are made in your accounting journals at the end of an accounting
period after a trial balance is prepared. After adjusted entries are made in your
accounting journals, they are posted to the general ledger in the same way as any other
accounting journal entry.
 It deals mainly with revenue and expenses. When you need to increase a revenue
account, credit it. And when you need to decrease a revenue account, debit it.
Oppositely, debit an expense account to increase it, and credit an expense account to
decrease it.
Two types of adjusting journal entry:
 Accruals
Accrual concept is the most fundamental principle of accounting which requires
recording revenues when they are earned and not when they are received in cash, and
recording expenses when they are incurred and not when they are paid.
 Deferrals- refers to money paid or received before a product or service has been
provided

Adjustments entries fall under five categories:

 ACCRUED REVENUES - is revenue that has been earned by providing a good
or service, but for which no cash has been received. Accrued revenues are
recorded as receivables on the balance sheet to reflect the amount of money that
customers owe the business for the goods or services they purchased
 ACCRUED EXPENSES- Any expense you record now but plan to pay for at a
later date creates an accrued expense account in your books
 UNEARNED REVENUES- is money received by an individual or company for a
service or product that has yet to be provided or delivered. ... As a result of this
prepayment, the seller has a liability equal to the revenue earned until the good
or service is delivered
 PREPAID EXPENSES- is a type of asset on the balance sheet that results from
a business making advanced payments for goods or services to be received in
the future. Prepaid expenses are initially recorded as assets, but their value is
expensed over time onto the income statement
 DEPRECIATION- Depreciation is an accounting method of allocating the cost of
a tangible or physical asset over its useful life or life expectancy. Depreciation
represents how much of an asset's value has been used up

There three methods commonly used to calculate depreciation:

1. Straight line method- It involves simple allocation of an even rate of depreciation
every year over the useful life of the asset. Unit of production method
Annual Depreciation expense = (Asset cost – Residual Value) / Useful life of the asset
Example:  Suppose a manufacturing company purchases a machinery for P100,000
and the useful life of the machinery are 10 years and the residual value of the
machinery is P 20,000
Annual Depreciation expense = (100,000-20,000) / 10 = 8,000

2. Unit of Production method- unlike straight line method. Here, equal expense rates
are assigned to each unit produced. This assignment makes the method very useful
in assembly for production lines. Hence, the calculation is based on output
capability of the asset rather than the number of years

The steps are:

Step 1: Calculate per unit depreciation:
Per unit Depreciation = (Asset cost – Residual value) / Useful life in units of
production
Step 2: Calculate the total depreciation of actual units produced:
Total Depreciation Expense = Per Unit Depreciation * Units Produced

Example: ABC company purchases a printing press to print flyers for P40,000 with a
useful life of 1,80,000 units and residual value of 4000. It prints 4000 flyers.

Step 1: Per unit Depreciation = (40,000-4000)/180,000 = 0.2

Step 2: Total Depreciation expense = 0.2 * 4000 flyers = 800

So the total Depreciation expense is 800 which is accounted. Once the per unit
depreciation is found out, it can be applied to future output runs.
 3. Double-declining balance method- This is one of the two common methods a
company uses to account for the expenses of a fixed asset. This is an accelerated
depreciation method. As the name suggests, it counts expense twice as much as the
book value of the asset every year.

The formula is:

Depreciation = 2 * Straight line depreciation percent * book value at the beginning

of the accounting period
Book value = Cost of the asset – accumulated depreciation
Accumulated depreciation is the total depreciation of the fixed asset accumulated
up to a specified time

Example: On April 1, 2012, company X purchased an equipment for P100,000. This

is expected to have 5 useful life years. The salvage value is P14,000. Company X
considers depreciation expense for the nearest whole month. Calculate the
depreciation expenses for 2012, 2013, 2014 using a declining balance method.

Useful life = 5
Straight line depreciation percent = 1/5 = 0.2 or 20% per year
Depreciation rate = 20% * 2 = 40% per year
Depreciation for the year 2012 = 100,000 * 40% * 9/12 = 30,000
Depreciation for the year 2013 = (100,000-30,000) * 40% * 12/12 =28,000
Depreciation for the year 2014 = (00,000 – 30,000 – 28,000) * 40% * 9/12 =16,800

FINANCIAL STATEMENT
1. INCOME STATEMENT or statement of comprehensive income- is a report which
describes how the business operated over a given period of time.

A. Statement of Cost of Goods Sold

Name of the company

Statement of Cost of Goods Sold
For the month ended xxxx

Beginning Merchandise Inventory P XX

Add: Net Purchases
Purchases xx
Add: Freight In xx
Total xx
Less: Purchase Discount xx
Sales Returns and Allowances xx
Total GOODS AVAILABLE FOR SALE XX
Less: Ending Inventory XX
COST OF GOODS SOLD XX

B. Income Statement

NAME OF COMPANY
INCOME STATEMENT
FOR THE MONTH ENDED MONTH,YEAR

Sales Pxxx
Less: Sales discount xxx
Sale Returns and Allowances xxx
Net Sales Pxxx
Less: Cost of Goods Sold xxx
Gross Profit P xxx

Less: Operating Expense

Salaries xxx
Utilities xxx
Advertising xxx
Office Supplies xxx

Total Operating Expense xxx

NET INCOME P XXX

C. Statement of Owner’s Equity- it explains the activities for the period of time that led to a
change in the owner’s shares over the net assets of the business.

Name of the company

Staement of Owner’s Equity
As of Month, date, Year

Capital, Beginning Pxxx

Add: Net Income xxx
Additional Investment xxx
TOTAL Pxxx
Less, Drawing xxx
CAPITAL END Pxxx
D. Statement of Financial Position (Balance Sheet)- gives information about the financial
position of the business by showing the list of its assets (Cash and properties) AND liabilities
(debts or obligation to pay)

Example:

NAME OF COMPANY
Statement OF Financial Position
As of Month, date, year

ASSETS

Curent Assets:
Cash & Cash Equivalents Pxxxx
Accounts receivables xxxx
Merchandise Inventory xxxx
TOTAL CURRENT ASSETS PXXX
Non-current Assets:
Property Plant And Equipment xxx
TOTAL ASSETS PXXX

LIABILITIES AND OWNER’S EQUITY

Current Liablities:
Accounts Payable xxx
Owner’s Equity:
Capital xxx
TOTAL LIABILITIES AND OWNER’S EQUITY P XXX

E. Statement of Cash Flows- is a basic component of the financial statements which summarize
the operating, investing and financing activity of an entity.
It is either an INFLOW (source or receipt) which increases cash or an OUTFLOW (uses or
disbursement) which decreases cash.
1. OPERATING ACTIVITIES an inflow of cash comes from revenue collections and an
outflow of cash comes from payment of expense.
2. INVESTING ACTIVITIES an inflow of cash comes from sale of property, plant and
equipment while outflow of cash goes to acquisition of property, plant and equipment.
 3. FINANCING ACTIVITIES cash inflow will come from loans extended by creditors, cash
contributions made by investors or owners while cash outflow will mean cash paid to
creditors or withdrawn by the owner.

NAME OF COMPANY
Statement of Cash flows
As of Month, date, year

Cash Flow from operating Activities:

Cash received from sales Pxxx
Cash received from customers xxx
Cash Payment of Accounts Payable (xxx)
Cash refund from Sales Return (xxx)
Cash purchase of goods (xxx)
Cash paid for freight for supplier (xxx)
Cash payment for salaries (xxx)
Cash payment for utilities (xxx)
Cash payment for Advertising (xxx)
Cash payment for Office supplies (xxx)
NET CASH PROVIDED BY OPERATING ACTIVITIES PXXXX

Cash Flow from Investing Activities:

Cash purchases of furniture and Equipment (xxx)
NET CASH FLOW FROM INVESTING ACTIVITIES XXXX

Cash Flow from Financing Activities:

Cash Investment made by owner xxx
Cash withdrawal made by the owner (xxx)
NET CASH FLOW FROM FINANCING ACTIVITIES XXXX
Add: Cash Beginning xxxxx
CASH BALANCE, DATE XXXX

D. Notes to financial statements- are used to report information that does not fit into the
body of the statements in order to enhance the understandability of the statement.

VI. Closing entries

Procedure IN Closing Entries

1. Close the Revenue accounts and all credit accounts and transfer its balance to Income
Summary Account.
 2. Close the Expense Accounts and all debit accounts and transfer its individual balance to the
Income Summary Account
3. Close the Owner’s Equity withdrawal or Drawing Account to the Capital Accounts.

VII. Post-closing Trial Balance- this is prepared to test if the general ledger is in balance.
This is prepared after temporary or nominal account have been closed (revenues, expenses, and
drawings). The account that are only listed this trial balance are only permanent or real
accounts.