ACCOUNTING FOR

MERCHANDISING BUSINESS
We have three types of business; the Service, the Merchandise
and the Manufacturing. Now, we are in the Merchandising
Business.

NATURE OF ACTIVITIES AND OPERATING CYCLE

OF A MERCHANDISING BUSINESS
Three factors in Merchandising Business:
Every company we have encountered up to this point has sold
a service to its costumer. None of the companies discussed in  Supplier- manufacturer, where we buy finished
the previous chapter sells a product. products
 Merchandiser- us, the one who sells the purchased
A merchandising concern, on the other hand, specialized in
goods or products
buying physical goods from one company and selling them
to costumer for a profit. In fact, most of your personal  Costumer- the one who purchases goods
business transactions are probably with merchandising
concerns such as supermarkets, candy stores, department OPERATING CYCLE FOR A MERCHANDISER
stores and the like.

The merchandising entity purchases inventory, sells the

inventory and uses the cash to purchase more inventory-
and the cycle continues.

WHAT IS A MERCHANDISE BUSINESS?

- A merchandise business is a business that sells

merchandise.
- In other words, instead of a service, a merchandise
business sells goods.
- The “goods” a business has on hand is called In cash sales, the cycle is from cash to inventory and back to
inventory. cash.
- Essentially, the accounting system differs ONLY
In Credit Sales or Sales on Accounts, the cycle is from cash
WHERE inventory is concerned.
to inventory to accounts receivable and back to cash.
- This is like a buy and sell type of business.
- This resells products.
The activities of a merchandising concern can be
illustrated as follows:

MANUFACTURING COMPANIES DIFFER?

 Merchandising Companies resell products they In merchandising, buyer means that we buy goods from the
previously bought from suppliers. supplier. Seller, on the other hand, means that we sell goods to
Examples are Target, Walmart, Grocery Stores the buyers.

Delivery includes transportation or the transport of goods.

Return of Goods happens when there’s defects, expired also known as a cash discount or early-payment
products and more. Wherein, Mr. X or the buyer will return it discount.
to the merchandiser and the merchandiser will return it to the - Terms= 2/10, n/20
supplier. This means that if you pay within 10 days, you will
receive 2% discount and if you pay in 20 days there’s
no discount anymore and beyond that day, there will
MERCHANDISING CONCERN ACCOUNTS be an interest.

 PURCHASES From the book:

- Term used when you buy goods from supplier. - Purchase discount commonly involve deduction in
- An accounts in purchase ledger where money spent purchase prices for early payment made on
on goods and services in a particular period is merchandise purchased.
recorded on the debit side:
- New inventory purchases are recorded in the Trade Discount
purchase account. - 10, 5/10 means that you have already 10% discount
From the book:
- This is a temporary account used only for goods
and merchandise purchased for resale. Purchases,  FREIGHT IN
therefore, of other assets such as equipment should be - When you pay the transportation or delivery of
recorded under the appropriate asset accounts. goods from the supplier to you, merchandiser.
- Net Purchases consists of gross purchases plus freight (Ikaw nagbayad nung fee ng goods papunta sayo)
in cost minus purchase discount and allowance. - The shipping cost to be paid by the buyer of
merchandise purchased when the terms are FOB
shipping point. Freight in is considered to be part of
 PURCHASE RETURNS AND ALLOWANCES the cost of the merchandise and should be
- Term used when merchandiser returns goods to included in inventory if the merchandise has not
supplier. been sold.
- The temporary contra purchases account used in a
periodic inventory system which represents the From the book:
amounts of merchandise that were returned to - Freight-in is used if the buyer answers or pays for
suppliers and the amounts allowed as deductions the expenses of transporting the merchandise from
by suppliers for goods not returned. When the the seller’s point to the buyer’s place and is an
credit balance of this account is combined with the addition to purchase account. Other account name for
other purchases accounts, the result is the amount of this is transportation in.
net purchases.

From the book:  SALES

- Purchase Return is when goods bought are returned - Term used when we sell goods to buyer or the sold
to the supplier or creditor; a reduction to the goods.
purchases account is affected. A contra account to - A record of the total cash or credit sales for a
Purchases Account. particular period.
- Purchase Allowances is when goods bought are - Enter it in the books as a credit to the sales accounts.
retained by the buyer but a certain amount is
deducted from the purchase price of goods. From the book:
When returns and allowances on purchases are of - Gross Sales consists of total sales for cash and on
insignificant amounts they may be recorded under the account during an accounting period.
account- PURCHASE RETURNS and - Net sales consists of gross sales minus sales discount
ALLOWANCES and sales returns and allowances.
- As a revenue account, sales is credited whether sales
on accounts or cash sales are made. Only sale of
 PURCHASE DISCOUNTS merchandise held for resale are recorded in Sales
- This is the cash discount. Account. Therefore, if the merchandising firm sells
- A purchase discount is a deduction that a company one of its equipment, the credit would be made to the
may receive if the supplier offers it and the equipment account and not to Sales account.
company pays the supplier’s invoice within a
specified period of time. The purchase discount is
  SALES RETURN AND ALLOWANCES  MERCHANDISE INVENTORY BEGINNING
- Term use when the good is returned to us, - Term used when the goods is counted after being
merchandisers from costumer or buyer. bought from supplier and still unsold.
- Sales returns occur when costumers return - This is the recorded cost of inventory in a
defective, damage, or otherwise undesirable company’s accounting records at the start of an
products to the seller. accounting period.
- Sales Allowances occur when costumer agree to - The beginning inventory is the recorded cost of
keep such merchandise in return for a reduction inventory at the end of the immediately preceding
in the selling price. accounting period, which then carries forward into
the start of the next accounting period.
From the book:
- Sales Returns is when the costumer may From the book:
physically return the merchandise if dissatisfied - This is the merchandise inventory at the start of
because products are damaged, or defective or of the accounting period.
inferior quality to the seller for cash refund if in case,
of cash sales or credit the sale made on account.  MERCHANDISE INVENTORY END
- Sales Allowances is when buyers are dissatisfied - Term used for the count of goods after being sold.
because orders were not delivered according to - Ending Inventory is the value of goods available for
specifications, are damaged or defective or of inferior sale at the end of an accounting period.
quality the seller may grant an allowance or - It is the beginning inventory plus net purchases
deduction from the selling price. minus cost of goods sold. Net purchases refer to
inventory purchases after returns or discounts have
been taken out.
Note: A high sales return and allowances figure is not
commendable because this could be a signal of poor quality From the book:
goods and may result to dissatisfaction of costumers. - This is the merchandise inventory at the end of the
accounting period.
*Where returns and allowances on sales are insignificant in
amounts, only one account is maintained which is sales
return and allowance. PURCHASING

Merchandise bought and received is accompanied by a

business from called Purchase Invoice.
 SALES DISCOUNT
- This is the discount for costumers. Example Transactions:
- A sales discount is a reduction in the price of a o Aug 4- Purchased goods P50,000 on cash from Cebu
product or service that is offered by the seller, in Trading.
exchange for early payment by the buyer.
- A sales discount may be offered when the seller is
short of cash, or if it wants to reduce the recorded
amount of its receivables outstanding for other
reasons.
- Terms: 5/10, n/40
o Aug 7- Purchased goods P70,000 from Bacolod
Trading 5/10, 3/15, n/45.
 FREIGHT OUT
- The delivery of goods to buyer.
- Freight out is the transportation cost associated
with delivery of goods from a supplier to its
costumer. This cost should be charged to expense as
incurred and recorded within the cost of goods sold
classification on the income statement.
o Aug 9- Returned goods to Cebu Trading P2,000
- Freight out is not an operating expense, since the
supplier only incurs this cost when it sells goods to a
costumer (rather than incurring it as part of day-to-
day company operating activities).
o Aug 10- Returned goods to Bacolod P7,000 PURCHASING

o 3- Purchased goods P70,000 from Bacolod Trading

10 & 5, 5/10, 3/15, n/45

o Aug 12- Paid Bacolod in full

SELLING

A sale may be in cash (cash sale) or on account or credit

(account sale or charge sale). Every sale is supported by an
invoice. The Sales Invoice of the seller is the Purchase Invoice
of the buyer. When a sale is made on account, the seller
acquires a receivable and has the right to collect from buyer.

Example Transactions:

o Aug 12- Paid Bacolod P30,000 o Aug 6- Sold goods P20,000 on cash to Mr. AAA.

o Aug 10- Sold goods P40,000 to Mr. BBB- 3/10, 2/15,

n/45

o Aug 12- Received returns from Mr. AAA worth

o Aug 15- Paid Bacolod in full P2,000

o Aug 16- Received return from Mr. BBB worth

P5,000
 o Aug 16- Received full payments from Mr. BBB costumers. This is reflected as an expense in the books of the
party, who, as per contract, should shoulder the expense.

 Free on Board

- From the supplier store to the terminal or port is paid

by the seller. Example, you are in Tanauan and you
bought goods from Cebu. Thus, the supplier will pay
the transportation until Cebu Port then Cebu to
Tanauan is now paid by the costumer.
- The supplier should record a sale at the point of
departure from its shipping dock.
- “FOB origin” means the purchaser pays the
o Received 15,000 from Mr. BBB
shipping cost from the factory or warehouse and
gains ownership of the goods as soon as it leaves
its point of origin.
- “FOB destination” means the seller retains the risk
of loss until the goods reach the buyer.

The following are the bases for billing the merchandise to the
purchase:

1. F.O.B Destination, Freight Collect

2. F.O.B Shipping Point, Freight Prepaid
3. F.O.B Shipping Point, Freight Collect
4. F.O.B Destination, Freight Prepaid

o Aug 21- Received full payment from Mr. BBB FREE on BOARD- SHIPPING POINT

(yung nasa ppt ni sir same meaning lang sa free on board na

nauna, so ito yung sa book)

- Means that the goods are free on board up to the

shipping point. (buyer ata dito)
- If a supplier is in Batangas and the buyer is in
Zamboanga, the supplier or seller answers for all the
transportation expenses up to the port of Batangas
while the buyer shoulders all freight and handling
expenses from Batangas to Zamboanga. The title or
ownership of the goods passes to the buyer upon
loading of the goods into the carrier at Batangas.

FREE on BOARD- DESTINATION

FREIGHT IN, FREIGHT OUT, AND FOB
- All the expenses until the destination of goods are
Accounting for Freight-in
free and handled by the seller.
Some enterprises maintain an account titled “freight in” or - Conversely, with FOB destination, the title of
“transportation in” for accumulating all separately charged ownership is transferred at the buyer’s loading dock,
delivery costs on merchandise purchased for resale to post office box, or office building. Once the goods
are delivered to the buyer’s specified location, the
 title of ownership of the goods transfers from the Example Transactions:
seller to the buyer. Consequently, the seller legally
owns the goods and is responsible for the goods 3- Purchased goods P70,000 from Bacolod Trading 5/10,
during the shipping process. 3/15, n/45. FOB Shipping Point, Freight Prepaid P2,000.
- F.O.B Destination means that the merchandise is free
on board up to the destination.
- Therefore, in our foregoing example, the seller
absorbs all transportation expenses from Batangas to
Zamboanga and title of goods passes to the purchaser
only upon unloading of goods in Zamboanga.
FOB Shipping Point Freight Prepaid

FREIGHT PREPAID (seller)

3- Purchased goods P70,000 from Bacolod Trading 5/10,
- The seller/shipper pays all the shipping costs until
3/15, n/45. FOB Shipping Point, Freight Collect P2,000.
the cargo arrives at the buyer’s store.
- The buyer does not pay any shipping costs.
- The seller has paid for the transportation expenses
up to the point of destination.

FREIGHT COLLECT (buyer)

- Used to state that the person or company that

receives goods will pay the cost of transporting the FOB Shipping Point Freight Collect
goods at the time they are received:
- All freight and charges billed on
- A freight collect basis MUST BE PAID IN FULL
prior to release of the cargo 3- Purchased goods P70,000 from Bacolod Trading 5/10,
- The buyer should answer for all transportation 3/15, n/45. FOB Destination, Freight Prepaid P2,000.
expenses up to the point of destination.

o FOB- Free on Board

o FOB- Shipping Point Freight Prepaid
o FOB- Shipping Point Freight Collect FOB Destination Freight Prepaid
o FOB- Destination Freight Prepaid
3- Purchased goods P70,000 from Bacolod Trading 5/10,
o FOB- Destination Freight Collect
3/15, n/45. FOB Destination, Freight Collect P2,000.
Freight Terms Who shoulder the Who pays the
Transportation Shipper?
Costs?
FOB Shipping
Point, Freight Buyer Seller
Prepaid
FOB Shipping
Point, Freight Buyer Buyer
Collect
FOB
Destination, Seller Seller
Freight Prepaid
FOB
Destination, Seller Buyer
Freight Collect
THE SPECIAL JOURNALS ADVANTAGES OF SUBSIDIARY LEDGERS:

- Special journals record the transactions specified to In the earlier chapters, we processed transactions by recording
the nature of transactions. them in the general journal and then, posting them to ledger
- This divide the transactions based on nature. accounts. At this point, we would be using two additional
ledgers- an account receivable ledger and an accounts payable
ledger- to simplify the posting process.
THE NEED FOR SPECIAL JOURNALS There are several advantages in using these ledgers:
The first part of our lesson attempted to simplify the  Lesser details in the General Ledger- Information
accounting process through the use of the account receivable which would ordinarily appear in a limited number of
and payable subsidiary ledgers. general ledger accounts or when there are a
We continue this process by turning our attention to the way substantial number of individual accounts with a
transactions are recorded in the GENERAL JOURNAL. common characteristic, it would be beneficial to
transfer the same to subsidiary accounts, more so, if
It is not particularly difficult to write a few general journal their inclusion in general ledger with all the other
entries, but when business expands and the very slow and accounts would cause to become unwieldy.
cumbersome when hundreds or thousands of similar  Lessen the likelihood of the posting errors- The
transactions are recorded over month’s time. dispersal of information helps keep the general ledger
accounts uncluttered and makes it easier for the
The major advantage of special journal is that their use
bookkeeper to maintain the accounts.
permits division of labor, since the recording step in the
 Encourage division of labor- The use of multiple
accounting cycle can be divided among several persons, each
ledgers allows the bookkeeper to work on the
of whom is responsible for particular types of transactions.
General Ledger while others work on the subsidiary
The use of Special Journals often reduces recording time ledgers.
because special journals need no routine explanations for
The individual accounts with suppliers and/or creditors are
each entry. Also because special journal column headings are
arranges in subsidiary ledger called Account Payable
used, account files need not to be repeated unlike in the
Ledger or Creditors Ledger. The related controlling account
General Journal.
in the general is Account Payable.
The tabular arrangement of special journals often permits
The Account Receivable Ledger or Costumer Ledger on
all entries to a given account in a specific journal to be added
the other hand, contains individual accounts of credit
and posted as a single aggregate posting.
costumers. The controlling account in the general ledger,
Example, if there are 500 sales on account transactions in Account Receivable, summarizes the debits and credits to the
general journal, you will make 500 debit posting to the individual costumers accounts.
accounts receivable and another 500 posting to the sales
The Controlling Account may be defined as a general
account. Using the special journal which is the sale journal,
ledger account, which shows in summary the same
there will only be two posting- one Accounts Receivable and
information shown in detail in subsidiary ledgers.
another to Sales.
A subsidiary is a group of accounts showing in detail the
same information shown in summary by the controlling
accounts.

SALES JOURNAL

The Sales Journal is designed to handle only one type of

repetitive transaction: the sales of merchandise on credit.

To reiterate, merchandise refers specifically to the product a

company buys and/or sells to earn a profit. Therefore, a firm
that purchases calculators from a manufacturer and resells
them to retail stores would classify its calculators as
Merchandise. A sale of P 30, 000.00 worth of calculators
would result in a credit to the Sales account and should be
recorded in the Sales Journal. On the other hand, if the
company sold one of its typewriters of P 700.00, this would
not be considered a sale of merchandise and would not be
recorded in the Sales Journal because the firm is in the The detailed steps for recording and posting in the Purchase
calculator business. The credit in the transaction would be the Journal are:
Office Equipment Account.
1. Record the date, creditor’s name, cash discount,
Only credit sales of merchandise should be recorded in the terms, date and amount of invoice.
Sales Journal. A sale of merchandise for cash would be 2. Post the amount as a credit to the creditor’s account
recorded in the Cash Receipts Journal, not in the Sales in the Accounts Payable ledger and enter the posting
Journal. reference.
3. On the last day of the month, add and post the total
Example: amount as a debit to Purchases and a credit to
Transactions: Accounts Payable.

Example:

Transactions:

In Journal:
In Journal:

PURCHASE JOURNAL CASH RECEIPTS JOURNAL

This journal handles only purchases of merchandise on credit. The journal is designed to handle all receipts of cash. The
A cash purchase of merchandise would be recorded in the Cash Receipts Journal is different from the other special
Cash Payment Journal. Every transaction involving credit journals because it has several columns, not just one. A multi-
purchases of merchandise has the same basic entry when column journal is necessary because although the debit is
recorded in the General Journal. always to the Cash Account, the credit may be to a variety of
accounts. The General Journal entry format will illustrate the
Purchases xxx fixed and variable positions of the typical cash receipts entry.
Accounts Payable xxx Cash xxx
The debit to Purchases account and the credit to the Accounts (One more credits) xxx
Payable account are constant and do not vary from entry to
entry. Acquisitions of things other than merchandise are not Since cash is involved in each transaction, one of the columns
recorded in this book. must be used to record this debit. Also, because frequent
sources of cash include cash sales and receipts from customers Example:
who pay their accounts, a credit column is established for each
of this frequently occurring event. Transactions:

Example:

Transactions:

In Journal:

In Journal:

GENERAL JOURNAL

CASH PAYMENT JOURNAL Transactions:

All transactions involving the payment of cash are recorded in

the Cash Payments Journal. A General Journal entry to record
the payment of cash would be:

(One more debits) xxx

Cash xxx

The cash account is always credited, but there may be a debit

to one or more accounts. Therefore, a Cash Payments Journal
should have cash credit column and debit columns for those
entries that occur most often. Payments to creditors on
accounts are usually sufficiently frequent to require columns
for Account Payable Dr. and Purchase Discounts Cr. The Cash
Payments Journal may include a Sundry Accounts Dr. Column
to record debits to any account for which there is no special
column.
 ADJUSTING, WORKSHEET AND FINANCIAL
STATEMENT

Classification of Accounts
You have learned in the previous chapter that by
designation, there are the Balance Sheet or Real
Accounts and the Revenue and Expense or Income
Statement or Nominal Accounts.
In accounting, accounts are subdivided by nature or
composition into:

I. Real or Balance Sheet Accounts

A. Assets
B. Liability
C. Capital

MISCELLANEOUS ACCOUNTS in the Special Books II. Nominal or Revenue and Expense Accounts
A. Income (temporary accounts representing increase in
Some miscellaneous transactions of a trading concern and the proprietorship)
books which they are suggested to be entered are: B. Expenses
a) Sales Return and Allowances- General Journal C. Costs
b) Sales on account with down payment D. Losses
Sales Journal- total amount of credit sales Expenses, costs and losses are all temporary accounts
Cash Receipts Journal- cash received representing decreases in proprietorship.
c) Purchase of merchandise account with a down
payment
Purchase Journal- total amount of purchases on III. Mixed Accounts (Partly Real and Partly Nominal)
accounts A. Composed of both Asset and Expense Elements
Cash Payments Journal- cash paid as down B. Composed of both Liability and Income Elements
payment
d) Purchases of fixed assets with down payment
General Journal- Assets and Receivables ADJUSTING PROCESS
Cash Payments Journal- cash paid as down
payment Entries at the end of accounting period internal transactions
e) Initial Capital Investment of Numerous Values are called Adjusting Entries, which are actually corrections
to the ledger. But since the necessity for bringing the ledger
up to date is a planned part of the accounting procedure, it is
General Journal not caused errors. Therefore, the term “adjusting entries” is
Merchandise Inventory P15,000 more appropriate than “correcting entries.”
J. Michael, Capital P15,000
Since the end goal of accounting is the preparation of the
Investment of merchandise
financial statements- the Balance sheet and Income
Cash Receipts Journal Statement,- and if these financial statements are used to be
Cash P60,000 useful to the intended users, they must be complete. By
J. Michael, Capital P60,000 completeness, we mean that the Balance Sheet must show all
the assets, liability and proprietorship as of a given date and
the Income Statement must show all the incomes, costs,
f) Purchase Returns and Allowances- General Journal expenses and losses pertaining to the period.

Need for Adjusting Entries

I. To divide mixed accounts into their real and nominal

elements
a) Adjustment of the Merchandise Inventory Account
b) Provision for bad debts or estimated uncollectible or
collectible receivables
 c) Provision for depreciation or expired cost of fixed Adjust the trial balance as of December 31, 2010 using the
assets given data:
d) Adjustment for the expiration of prepayments of
expenses
e) Adjustment for the realization of Income collected in
advance

II. To bring into the accounts unrecorded accrued items

f) Adjustment for accrual of expenses
g) Adjustment for accrual income Mas malinaw na Trial Balance, I think?

Trial Balance

Interest Rate of Accounts Receivable

PROVISION FOR BAD DEBTS OR ESTIMATED

UNCOLLECTIBLE ACCOUNTS

When merchandise or services are sold without immediate

receipt of cash, a portion of the claim against customer
ordinarily proves to be uncollectible. Therefore, in as much as
it is almost certain that the claims or accounts receivable will
not be totally collected, the business should endeavor to To get the Due date, you need to add the date sold (ex. Aug.
ascertain the portion of the accounts receivable which is 4) to the terms (ex. n/50) so it’ll Aug. 54. After that, you will
collectible and that portion which is doubtful of collection. subtract the number of days in that particular month (ex. Is
Aug which has 31 days) to get the due date.
The operating expense incurred because of the failure to
collect receivables is variously termed as Bad Debts, Loss on If the answer after you subtracted is still beyond the number of
Bad Debts, Uncollectible Accounts or Doubtful Accounts. days in the current month, you will once again subtract (but
you will use the number of days next month) until you get a
number that is not beyond the number of days in that
Two Methods: particular month.

 Allowance Method or Reserve Method Example:

- Makes advance provision for uncollectible
n/50 and Aug. 17.
receivables
 Direct Write- Off or Direct Charge-Off Method So you will add the two and it will result to Aug. 67. Since
- Recognizes the expense only when specific accounts there’s no Aug. 67, here’s the procedure:
are judged to be worthless
 In supplies, if the indicated problem is still on hand, meaning
you will subtract the given percentage from 100% to get the
used supplies.

But if the indicated problem is used, meaning the given

percentage is the one you will be using.

You will subtract Aug. 67 and Aug. 31 which is the number of

days in August, resulting to 36. The next month after august is DEPRECIATION
September and so, that’s the month you will put on the
difference. Since, 36 is still beyond the number of months in
September which is only 30, you will subtract them again,
resulting to 6. The month after September is October and so
it’ll be October.

Now, to get the days due. Use this example:

So, the due date is Sept. 23. From the

due date, you will subtract the number
of days of the month in the due date.
In the example, September is the month
and there are 30 days in September so,
subtract sept. 30 to the due date which is For depreciation, in furniture you will just multiply it to
sept. 23 then the answer is 7. From that percentage given and used it in allowance method form. So
you will add the number of days of the after multiplying the cost of the furniture to the percentage, the
succeeding months until you reach answer will be then divided by 12 (number of months in a
December. year) to get the monthly rate. After that, you will count how
many months from the date of purchased until December 31.
After getting the due date and the days due, you will multiply
After getting the number of months, you will multiply it to the
the balance amount to the interest rate given. Then, the answer
amount you get from dividing it to 12.
will be divided by 360 (number of days in a year) to get the
daily rate and then the answer after dividing it by 360 will be Remember to add the depreciation expense of both the
multiplied to the number of days due. furniture and equipment but the entry of Accumulated
Depreciation must be separate.
Remember to add or get the total of Interest Receivable/
Income. ACCOUNTS PAYABLE
PREPAID RENT AND SUPPLIES

In prepaid rent, you will divide first the amount to the months
represented by it. Then, from the indicated date, you will
count until you reach December 31. The number that you can
get from counting up to December is the number you will
multiply to the quotient you get from dividing.
The same procedure as the Accounts Receivable. Get the due
The example above shows that the amount of prepaid rent is
date and the days due and then multiply it to the interest rate
40,000 then it is divided by 5 because it is represented by 5
then divide it to 360 days and multiply the quotient to the days
months. Then the answer is divided by 3 because from
due.
October 1- December 31, there are 3 months.
Don’t forget to get the sum of the interest expense/ payable.
OTHER EXPENSES the credit side of the Income Statement (also called Profit and
Loss statement) and the debit side of Balance Sheet.
3. The balances of Real Accounts (Assets, Liabilities and
Capital) are extended to the Balance Sheet columns.
4 The balances of the Nominal Accounts (Income and
Expense) are extended to the Income Statement columns.
5. If credits total of the Income Statement is more than the
debits, the difference represents profit or income. If it is
otherwise, then there is a loss.
6. The difference in step (5) is written under the column with
the lesser total so as to make the two columns equal.
7. The difference mentioned in step (6) is extended to the
THE WORKSHEET Balance Sheet under its proper column.
8. Total the Balance Sheet column
In practice, formal adjusting entries are not immediately
recorded the books. The trial balance before adjustments is
first copied on an analysis sheet called working paper c Steps followed in preparing the ten-column worksheet:
worksheet. This worksheet contains columns for 1. The trial balance is transferred as is to the Trial Balance
adjustments wherein the adjustment amounts are columns.
extended. Various forms of the worksheet are shown in the
2. Adjusting entries are entered under the Adjustments
following pages. It is easier to prepare financial statements by
preparing worksheet. columns. Debits and their corresponding credit in the
Adjustments columns should be cross-indexed to each other. It
The advantages of using working paper are the following:
should be observed from the example that adjustment for the
1. The preparation of financial statements facilitated. inventory on December 31, instead of being entered under the
2. The net income or loss for the period can be determined Adjustment columns, was extended to the credit of the Income
without the formality of preparing the adjusting entries on the Statement and to the debit of the Balance Sheet.
books.

3. The working paper serves as better guide in the preparation 1. Put the unadjusted trial balance on the first two
of the formal adjusting entries. columns and next to it is the adjustments made.
4. Analysis of the business operation is made easier because
all pertinent facts are shown on one paper only.

For single proprietorship, the working paper with adjustments

may be composed of eight columns, ten columns or twelve
columns.

PREPARATION OF WORKSHEET FOR A TRADING

CONCERN

Worksheet preparation is an aid to easy access and quick

determination of the income or loss of the business for the
accounting period.

Following is a list of procedures to be observed in the

preparation of worksheet for a Merchandising Business.
1. Copy the Trial Balance as is, writing the amounts in the first
pair of money columns.
2. The Merchandise Inventory is written on the line following
the Trial Balance totals, extending the amount of inventory to
2. Adjusted Trial Balance 4. Income Statement

In income statement, remember to use the difference of the

debit and credit side and put in on the Merchandise Inventory
In adjusted trial balance, you will just combine the unadjusted (DR).
and the adjustments.
In income statement, you will include Sales, Sales Return and
If a certain amount in an account title is in the same side (cr Allowances, Sales Discount, all the expenses and other
and cr or dr and dr), the amount will be added together. income (such as Interest Income).
On the other hand, if a certain amount in an account title is in Subtract the debit to the credit and the answer will be added to
different side (dr and cr or cr and dr), it’ll be subtracted. the debit side so it’ll be balance.
But if there’s no adjustment made, then the amount will be the
same. 5. Balance Sheet
3. Cost of Sales

In cost of sales, you will include both the Merchandise

Inventory Beginning (DR) and Merchandise Inventory End
(CR), purchases (DR), Purchase Return and Allowance Here, you will include all the account titles that aren’t
(CR), Purchase Discount (CR) and Freight In (CR). included in the cost of sales and income statements.

Get the total of the DR side and CR side then subtract the CR You will also use here the Merchandise Inventory End but it
side to the DR side and the difference will be added to the CR will be on the DR side now.
side so it’ll be balance.
Subtract the credit to the debit side and the difference will be
added to the credit side. Remember that the difference when
you subtract debit from credit in both income statement - Cash- DR
and balance sheet must be the same. - Name, Capital- CR

GJ (General Journal)  Sold goods on cash

- Cash- DR
 Initial Inventory - Sales- DR
- Merchandise Inventory- DR
- Name, Capital- CR
 Returned goods na purchased on cash
 Bought assets (such as furniture n fixtures, supplies, - Cash- DR
equipment, etc.) na paying only ganito ganyan or - Purchase Return and Allowances (Sundry Items)- CR
may downpayment
- AccountTitle ng Assets (like Equipment)- DR
- Accounts Payable- (name)- CR
 Collected in Full (from the Accs. Receivable mga
pautang)
- Cash- DR
 Bought Assets purely on accounts (lahat utang) - Sales Discount- DR
- Account Title ng Assets (like Furniture)- DR
- Accounts Receivable (NAME)- CR
- Accounts Payable- (name)- CR

 Collected partial payments

 Received returns from sold goods on accounts (or
- Cash- DR
with terms)
- Sales Discount- DR
- Sales Return and Allowances- DR
- Accounts Receivable (NAME)- CR
- Accounts Receivable (NAME)- CR

CPJ (Cash Payment Journal)

 Return goods to the purchases on accounts (or with
terms)  Paid rent in advance (Prepaid Rent)
- Accounts Payable (NAME)- DR - Prepaid Rent (Sundry Items)- DR
- Purchase Returns and Allowances- CR - Cash- CR

 Freight- FOB Shipping Point Freight Prepaid  Bought assets (like furniture, supplies, equipment) on
- Freight In- DR cash
- Accounts Payable- CR - Assets- ex. Furniture (under assets)- DR
- Cash- CR

SJ (Sales Journal)
 Bought assets (such as furniture n fixtures, supplies,
 Sold Goods on Accounts (or with terms)
equipment, etc.) na paying only ganito ganyan or
- Accounts Receivable (NAME)- DR
may downpayment
- Sales- CR - Assets- ex. Equipment (under assets)- DR
- Cash- CR

PJ (Purchase Journal)

 Purchase Goods on Accounts (or with terms)  Purchase goods on cash

- Purchases- DR - Purchases- DR
- Accounts Payable (NAME)- CR - Cash- CR

CRJ (Cash Receipt Journal)  Paid partial payments (sa accounts payable or utang)
- Accounts Payable (NAME)- DR
 Capital - Cash- CR
 General Journal is done the same way as how we usually do it
in the past lessons
 Bought assets (such as supplies, furniture) purely on
cash The sales Journal:
- Assets- ex. Supplies (under assets)- DR
- Cash- CR

 Paid expense (such as utility, advertising, etc.)

- Expense- ex. Utility (under expense)- DR In sales journal, the sales which is the credit and the accounts
- Cash- CR receivable which is the debit are the ones which are only used
in this journal.

The Purchase Journal:

 Paid in full (sa accts. Payable or utang)
- Accounts Payable (NAME)- DR
- Cash- CR
- Purchase Discount- CR

 Received returns from sold goods on cash In purchase journal, the purchases which is the debit and
accounts payable which is the credit are the ones which are
- Sales Returns and Allowances (Sundry Items)- DR
only used in this journal.
- Cash- CR

The Cash Receipt Journal:

 Withdrew for personal use or drawing
- Name, drawing (sundry items)- DR
- Cash- CR

Explanations for Merchandising:

The transactions with label kung saan sila ilalagay na journal:

In cash receipt journal, mostly dito ung mga nagbayad ng
utang nila so included here is ung pagdagdag ng cash which is
on the debit side along with the sales discount based on the
terms and ung accounts receivable on the credit side meaning
nabawasan na ung marereceive naten since nagbayad na sila.

Also andito ung sold goods on cash kaya cash is the debit and
the credit is sale.

The Cash Payment Journal:

The general journal for some transactions:

Here sa cash payment journal, mostly pagacquire ng assets,

pagbabayad ng expenses, at pagbabayad ng utang natin or
payables. Andito din ung drawing and everything, you can just
base duon sa iniligay ko na mga kasama sa bawat journal sa assets in the GJ and you also need to include that and ung mga
itaas. Thank you! assets din na you bought fully on accounts (inutang mo).

GENERAL LEDGER

So sa pagleledger, laging tandaan na most of the time, total In Merchandise Inventory, kunin lang ung Merchandise
lang ung nilalagay dito. Inventory from GJ and put it on the dr side. Ang CE dyan ay
huwag pansinin….

First is the cash, so sa cash you will just get the total cash on So Furniture and Fixtures mostly from the CPJ and
the CRJ (put it on the dr side) and total cash on the CPJ sometimes, meron sa GJ ayon nga if you bought it fully on
(cr side) then subtract the amount from the CPJ in the cr accounts or like paying only ganito ganyan. So debit side, CPJ
side to the debit. and GJ add it. If wala from GJ, that’s okay.

Next equipment, so the same as furniture and fixture and

other assets, makukuha sya madalas sa CPJ especially when
you bought it in full cash and GJ din if on account ganon. So
add everything on the dr side.

Next is accounts receivable, here my tip is to get all the

accounts receivable in the SJ kasi ito lahat ung may utang sa
atin. After that, get all the accounts receivable in the CRJ
meaning ito ung mga nagbayad ng utang nila sa atin.

So the SJ amount will be on the debit side while the CRJ will
be on the credit side.

Also, don’t forget to include the returns. Mostly, nasa GJ lang

ung mga Returns and nakaindicate don ung pagkabawas sa
Accounts Receivable. So the returns will be added on the cr
side with the amount from CRJ then both the amount will be Accounts Payable, dito get all the AP sa PJ meaning ayun
added together and their sum will be subtracted to the amount ung lahat ng utang natin and then all the AP sa CPJ meaning
in the DR side from SJ. ayun ung mga utang na binayaran natin so mababawas sya sa
PJ diba.

So place the amount of AP from PJ sa CR and then ung

amount na binayaran from CPJ to the DR side.

In prepaid rent, just get the prepaid rent from CPJ and yon, Also, don’t forget the return goods. Mostly, makikita sa GJ.
put it in the dr side. So mali ung nilagay ni sir na GJ daww, So the amount of returns from GJ will be added sa DR side
CPJ naten po makukuha si prepaid rent amen. together with the amount from CPJ, then the sum will be
subtracted sa DR side whihch amount is from PJ.

Also, madadagdag sa DR side yung freight. So add lang,

mostly freight from GJ.
In supplies, mostly from CPJ lang ito, debit side and there you
go. Pwede ka rin makakuha ng supplies (or other assets such
as furniture or equipment) in the GJ, kasi duon pumasok yung
paying only ganon. So nagkakaentry ng supplies or other
Here in capital, you will just get the capital from CRJ and the
capital from GJ (because of the merchandise inventory) and
add it together. Both of the amount will be on the credit side.

Lastly, expenses which can be found sa CPJ, all expenses will

Drawing is from CPJ. Just put the amount on the DR side. be on the dr side.

Trial Balance:

Sa sales, you will just get the total sales sa SJ and CRJ if
meron then add them sa CR side.

Sa sales returns and allowance, just get it sa GJ and CPJ (if

meron man sa kanila) then add both of it sa DR side.

Sa sales discount, sa CRJ mo lang siya makukuha and just put

it sa DR side.

So ito na yung trial balance. Btw, example lang ito ni sir na

nilagyan ko lamang ng keme explanations na sana hindi
magulo ang isipan nyo. Don’t hesitate to correct me and chat
me if may questions.

Wanna add sana ung example ni sir for adjusting entries ung
kasunod ng examples nung legder pero 18 page na pala so
view niyo nalang din sa course. Meron na naman tayong
example sa taas. So yes thank you<3

For purchases, kunin lang ung total purchase sa PJ and CPJ FIGHTING, GOODLUCK!
(if meron) then add the two sa DR side parehas sila ilalagay.
“Doing the best at this moment puts you in the best place for
Purchase Returns and Allowances, kunin mo siya from GJ the next moment.”
pero may mga pagkakataon na meron din from CRJ so if
meron add lang sa cr side.

Purchase Discount from CPJ lang and then put it on the CR

side.

Kapag freight in, kunin mo lang from GJ and then put it on

the DR side.