TOPIC: ADJUSTING ENTRIES Effect:

are entries prepared at the end of the accounting period to Asset - Overstated, Equity - Overstated
update some accounts and ensure their accuracy before
Asset - Understated, Equity - Understated
preparing the financial statements.
5. Bad Debts/Doubtful Accounts Expense - client
1. Accrued Income - income already earned but were not
accounts that may not be collected anymore or are doubtful
collected nor recorded. (Asset – Receivable)
of collection.
Entry: Receivable Account
Basis:
Revenue/Income Account
 Aging
Effect: Asset - Understated, Equity - Understated  % of Accounts Receivable
 % of Credit Sales
2. Accrued Expenses - expenses already expired but were
not paid nor recorded. (Liability – Payable) Aging Uncollectible %
Entry: Expense Account 1 – 15 days x 2%
Payable Account 16 – 20 days x 5%
Effect: Liability - Understated, Equity - Overstated 21 – 30 days x 10%
3. Unearned Income - advance collection recorded as a
liability, but a portion of which has already been earned.
(Liability – Unearned Income) Entry: Doubtful Accounts Expense

Liability Method Income Method Allowance for Doubtful Accounts – contra asset

Original Entry: Effect: Asset - Overstated, Equity – Overstated

Cash Cash

Liability Income Allowance Method

% of Accounts Receivable

Adjusted Entry: Total Allowance for Bad Debts

Liability Income

Income Liability Beginning Balance of Allowance for Bad Debts 10,000

Effect: Bad Debts Expense 2,000

Liability - Overstated, Equity - Understated Ending Balance of Allowance for Bad Debts 12,000

Liability - Understated, Equity - Overstated

4. Prepaid Expense - advance payment recorded as an Bad Debts Expense 2,000

asset but a portion of which has already expired. Allowance for Bad Debts 2,000
Asset Method Expense Method

Original Entry: % of Credit Sales

Prepaid/Asset Account Expense Account Given:
Cash Cash Bad Debts Expense 12,000

Adjusted Entry: Beginning Balance of Allowance for Bad Debts 10,000

Expense Account Prepaid/Asset Account Bad Debts Expense 12,000
Prepaid/Asset Account Expense Account Ending Balance of Allowance for Bad Debts 22,000
Direct Write-Off Method 6. Balance Sheet

Entry: o debit > credit

o debit - credit = difference will be added to credit side
Bad Debts Expense
7. Closing Entries - temporary/nominal account
Accounts Receivable
 Revenue/Income
Income Summary
6. Depreciation Expense - transfer of asset cost to
expense based on its declining utility value.  Income Summary
Expenses
Straight Line Method
 Income Summary
Cost – RV (Residual Value/Scrap Value
Capital
Life
 Capital
Entry: Depreciation Expense Drawing
Accumulated Depreciation – contra asset 8. General Ledger
Effect: Asset - Overstated, Equity – Overstated 9. Post-Closing Trial Balance

10. Opening Entry

Aug 1 Dec 31 11. Reversing Entry
C - 100,000

RV - 2,000

Life - 3 yrs.

Solution:

100,000 - 2,000

= 98

= 32.666 annual / 12

= 2,722 monthly x 5

= 13,611

Depreciation Expense - Equipment 100,000

Accumulated Depreciation - Equipment 13,611

Book Value 86,389

WORKSHEET PROCESS

1. Unadjusted Trial Balance

2. Adjusting Entries

3. Adjustments

4. Adjusted Trial Balance

5. Income Statement

o credit > debit - net income

o credit - debit = difference will be added to debit side
TOPIC: MERCHANDISING BUSINESS

is engaged in the buying of merchandise or goods which will 1. Other Revenues and Gains
be sold in their original form at a price higher than the
purchase cost.  rent income
 interest income
3 Principle Account Titles:  gain from sale of land
 Purchases 2. Other Expenses and Losses
 Sales
 Merchandise Inventory  interest expense
 loss from sale of equipment
Merchandiser - a person who buys and sells goods or
merchandise. note: if there are no other revenues and other expenses,
the operating profit is recognized immediately as the net
 Wholesaler - one who buys in bulk from a profit.
manufacturer or another wholesaler and sells them
in bulk to other wholesaler or retailers. Inventory System

 Merchandise Inventory refers to goods purchased for

 Retailer - buys merchandise from the manufacturer or resale in the normal course of business. (current
wholesaler and sells them by piece to ultimate assets in SFP)
consumers.

Channel of Distribution  Cost of Goods Sold (in the income statement) and the
Cost of the Merchandise Inventory (in the
 Manufacturer – Wholesaler – Retailer – Consumer statement of financial position are determined using
either the Perpetual Method or the Periodic Method.
Sales Revenue - receipts coming from goods sold to
customer. It is an income received by a company from its Perpetual Method
sales of goods.
 This method records continuously or perpetually the
Merchandise Inventory - stock of goods held for sale. movement of the merchandise and shows the
inventory balance at any point of time.
Cost of Goods Sold/Cost of Sales

 It includes all the directly related to the production of  It is usually adapted by a business which sells high
goods. price – low volume of goods.

Example: car, laptop, appliances

 It is the total cost of merchandise sold during the
period. Under the Perpetual Method:
Example: cost of the materials & labor a)record merchandise inventory – b) record cost of sales
and sales revenue = c) balance at year end must be
The primary source of revenue is sales/sales revenue.
the same as cost of inventory count
Income Measurement

Sales Revenue – Cost of Goods Sold = Gross Profit –

Periodic Method
Operating Expenses = Net Income (Loss)
 Under this method there is no balance can be
How does the merchandise obtain profit?
determined at any point of time.
 Sales Revenue
 Cost of Sales  It is adapted by businesses selling low price – high
 Operating Expenses volume goods.

Operating Profit - operating expenses such as: Example: ballpen

 Salaries Expense Under the Periodic Method:

 Utilities Expense a) record purchases
 Freight
 Advertising Expense b) record sales revenue

Non-Operating Activities - minor income and expenses c) count unsold, record inventory end
not recurring and not part of regular operation. These are
classified into two:
Inventory Count Sales Returns and Allowances

 Internal control requires that a physical count be made  a customer may return merchandise if it is defective or
to determine the veracity of the closing entry. damaged or if it is not as ordered. It is a contra
revenue account.
 This is done whether the accountant uses the perpetual
method or the periodic method.  Instead of a return, the customer may request for a
reduction or allowance in the price, for the same
Inventory Sheet reasons.
 A source document containing the list of closing stocks.
 Like discounts, it should be debited since the amount
 The count is usually supervised by the staff of the to be paid by the customer will decrease revenue.
Internal Auditor who affixes signature on inventory Credit Card Sales - customers may use credit cards to
count sheet to confirm the count that was made. purchase goods. Merchandisers encourage the use of credit
FIFO Costing Method cards for the following reasons:

 It is a first-in, first-out method. a) compared to account customers, credit card companies

and banks pay more quickly.
 This method is simple to apply and flow of cost (which b) the merchandiser does not recognize bad accounts.
is what we are accounting for) follows the natural flow
of the goods. c) expenses are avoided such as those incurred to
investigate credit standing of customer, maintenance of
Gross Sales accounts of customers as well as collecting from customers.
 Sales Revenue is earned when the merchandiser Net Sales
transfers the goods to the customer.
Sales Revenue P120,000
 The sale is supported by a source document called an Less: Sales Discounts P3,500
Invoice.
Sales Returns and Allowances P8,500 12,000
Sales - an account used to record sold merchandise.
Net Sales P108,000
Sales Discounts
Credit Memorandum or Credit Memo - is a business form
 Two common discounts granted to customers are (1) used by the seller to notify the buyer that his account is
trade discounts and cash discounts. debited (the balance is reduced) for returns made or
Trade Discount allowance granted for defective merchandise.

 Merchandisers offer their goods using a catalog where Gross Purchases

the prices are listed together with the goods. The  a merchandiser uses the title Purchases whenever
prices herein are called catalog or list prices. merchandise is bought for resale.

 Trade Discount is a percentage reduction from a Freight In - the costs incurred by the buyer for transporting
published list price may be granted to retailers or the goods from the seller’s place to the buyer’s place.
wholesalers for buying large quantities of goods or
 FOB Shipping Point, it means that title of ownership
for regularly patronizing the business.
passes to the buyer as soon as seller turns over the
goods to a common carrier such as a cargo ship for
 Since a trade discount is granted at a point of sale,
delivery of the goods to the buyer. It also means that
this is immediately deducted from the list price and
the buyer of goods, should pay for the freight.
only the net amount called gross invoice price will
be the basis for invoicing and recording. Freight Out - is the expense incurred by the seller to
transport the goods to the buyer’s place when the term
Cash Discounts - is meant to encourage a customer to pay
stipulates that the seller will shoulder the freight.
immediately, speed up the seller’s cash inflow and allow him
to use the cash for another profitable operating cycle.  FOB Destination means free on board at destination,
the seller is liable for the freight and is still considered
Sales Discount - the cash discount otherwise known as
the owner of the goods until it reaches the buyer.
sales discount is a contra account which is recorded on the
debit side. This reduces the recorded revenue or sales.
OTHER MARITIME TERMS Function of Expense Form of Income Statement

 CIF - cost, insurance and freight must be paid by buyer,  Revised PAS 1 (99-103) which is based on
seller pays for loading cost. (seller) International Accounting Standards recommends the
use of either the nature of expense form or the
 FAS - free alongside means seller pays expenses to function of expense form of income statement.
deliver the goods alongside the carrier but buyer
pays for loading and shipping costs. (buyer)  The function of expense form shows the cost and
expenses according to function: cost of sales, selling
expenses, administrative expenses and finance cost.
Purchase Returns and Allowances
 It is also recommended that the income statement be
 goods may be returned to the seller for being defective, presented at the minimum using line items with
damaged or not as ordered. supporting notes for the details.

 this will decrease purchases, a contra account.

Advantage:
Purchase Discount - is a discount given to the buyer for
paying within a specified period of time which is usually earlier  It facilitates assessment of operating performance of
than the credit period. This is offered to encourage the buyer the different departments or functions.
to pay promptly. Disadvantage:
Debit Memorandum or Debit Memo - is a notification from  the difficulty in allocating some expenses between
buyer to seller that tells the seller that a debit was made in
distribution expenses and general expenses.
the seller’s account on the buyer’s books. In short, it’s a way
for a buyer to inform the seller that he wants a refund or Value Added Tax or VAT - is a tax levied by the government
discount on its purchase. to certain providers of goods and services. The revised tax
law (TRAIN ACT) effective January 2018 requires a 12% VAT
Net Cost of Purchases or Net Purchases
to be paid, aside from the income tax, the moment gross
Purchases P19,600 sales or gross receipts hit the P3,000,000 thresholds.

Add: Freight In 1,000  Input Tax. Each time a purchase is made and a 12%
VAT is included, the buyer pays two items-cost of the
Less: Purchase Returns & Allowances (2,000) merchandise purchased and the tax.
Purchase Discount (352)
 Output Tax. Each time a sale of good or service is
Net Cost of Purchases P18,248 made by a VAT registered business or practitioner, a
12% VAT is charged to the customer or client
Operating Expenses are classified into two: selling and increasing the amount to be collected which is
administrative. credited to the title output tax.
 Selling or Distribution Expenses are those incurred Illustration:
in storing, promoting, packaging, and delivering the
merchandise such as Freight Out, Sales Salaries, o Output > Input = Tax Payable/VAT Payable
Advertising, Sales Commission, and Depreciation o Output < Input = Deferred Tax
Expense for store furniture and equipment.

 General or Administrative Expenses consist of

expenses needed in the general administration of the
office other than the store such as Bad Debts
Expense, Office Supplies Expense, Office Salaries,
Utilities Expense, and Depreciation for office furniture
and equipment.

Multi-Step Form of Income Statement - show several

intermediate margin figures representing the different
activities of the business starting with the major activities and
ending with the minor activities.