Review of the Accounting Cycle, Introduction to Merchandising Business, Recording the Purchase and Sale of Merchandise in General Journal

ACTBAS2

DOMINGUEZ, CPA

Topic Overview
MIDTERM QUIZ I Review of the accounting cycle Introduction to Merchandising Business Recording the purchase and sale of merchandise in general journal

Objectives
Revisit the accounting cycle, review its principles and procedures and know how does it relate to a merchandising business Introduce the merchandising business, understand its assumptions and accounting rules Record the purchase of merchandise in general journal Record the sale of merchandise in general journal

Accounting Cycle
Identifying/ Analyzing Recording/Journalizing Posting to the general ledger Preparing the unadjusted trial balance Preparing adjusting entries Preparing closing entries Preparing the financial statements Preparing reversing entries

Accounting Cycle
Identifying/ Analyzing is to ascertain if the transaction affects the assets, liabilities and equity of the entity Recording/Journalizing is the process of recording a business transaction in a journal using the normal balances of accounts. A journal entry has the following parts: Date The accounts debited and credited Posting reference showing the code of the destination ledger account The monetary values A brief explanation of the transaction
2011
1 2 3 4

Account title/Explanation

PR

Debit

Credit

1-Jan Cash Juan Dela Cruz, Capital Original investment

JE1 JE1

1 0 0 0 0 0 0 1 0 0 0 0 0 0

Accounting Cycle
Posting to the general ledger is the segregation of the accounts prior to the preparation of the unadjusted trial balance Cash
Debit Side Credit Side

Preparing the unadjusted trial balance is done to ensure that debits equal credits Preparing adjusting entries is performed to reflect the correct values of the accounts as of end of year. Items for adjustment are as follows:
Accrued/unrecorded expenses Accrued/unrecorded income Prepaid expenses Unearned/deferred income Depreciation expense Doubtful accounts/ bad debts

Accounting Cycle

Accounting Cycle
Preparing closing entries is done to close nominal accounts to arrive at net income/net loss; to close real accounts to signify the end of the current year Closing Nominal (Income Statement)Accounts:
Date Service Income Interest Income Gains PR PR PR Expenses PR Losses PR Balancing figure is Income Summary Account
PR PR

XXXXXX XXXXXX XXXXXX

XXXXXX XXXXXX XXXXXX XXXXXX

Date Income Summary Capital Assuming profit is realized

Closing Real (Statement of Financial Position )Accounts:

Date Liabilities Capital Assets PR PR PR XXXXXX XXXXXX XXXXXX

Accounting Cycle
Preparing the financial statements is performed to report the results of operations and financial capacity to the users of financial information Preparing reversing entries is done at the start of the reporting period

Reversing Entries (for Statement of Financial Position only)

Date Assets

Liabilities Capital

PR PR PR

XXXXXX

XXXXXX XXXXXX

Accounting Cycle Exercise

A few years ago, Jojo Aquino organized JA Merchandising. At December 31, 2011, end of the calendar year, the trial balance of JA Merchandising is as follows JA Merchandising Trial Balance As of December 31, 2011 Cash Accounts Receivable Merchandise Inventory Supplies Prepaid Insurance Office Equipment Accumulated Depreciation Accounts Payable Unearned Revenue Cost of Goods Sold J. Aquino Capital J. Aquino Drawing Revenue Wages Expense Rent Expense Utilities Expense Miscellaneous Expense P 302,500 700,000 110,000 127,000 62,000 5,165,000 970,000 92,500 125,000 2,000,000 2,900,000 450,000 7,912,500 2,241,500 420,000 271,500 150,500 12,000,000 -

12,000,000

Additional information are as follows: a.Supplies on hand at December 31 are P38,000 b.Insurance premiums expired during the period P31,500 c.Depreciation of equipment is P495000 d.Wages accrued but not paid are P44,000 e.Accrued income but not recorded at December 31 are P100,000 f.Unearned income on December 31 are P75,000 REQUIRED: a.Prepare adjusting journal entries b.Prepare a 10-column worksheet c.Prepare Income Statement and Statement of Financial Position Prepare closing and reversing entries d.To be submitted on Friday, June 3, 2011

Introduction to Merchandising Business

A merchandising business acquires merchandise from suppliers and sells the same to customers at a profit. Suppliers are usually manufacturers or wholesalers Operating Cycle of a Merchandising/Trading business consists of the following transactions:
Purchase of merchandise on cash or credit basis Sale of merchandise on cash or credit basis Collection of accounts receivable from customers

Activities of a Merchandising Business

Purchase of merchandise process flow from warehouse to treasury. Considerations for purchase:
Trade discount is usually given to wholesale buyers and is generally not recorded in the books
List price P30,000; 5%, 8%, 10% trade discount = invoice price P23,598 Journal entry to record purchase (Periodic vs. Perpetual Inventory system)

Cash Discount is a form of sales discount that is given to customers who pay within the discount period
Invoice price P23,598; Terms: 2/10, n/30 Journal entry to record collection within discount period/ beyond discount period

Purchase returns and allowances is given to customers for unsatisfactory merchandise or low quality goods received
Journal entry to record returns

Purchases/Merchandise Inventory (Asset Account)

Cost of Goods Sold (Expense Account)

Activities of a Merchandising Business

Sale of merchandise process flow from sales order to order fulfillment. Considerations for sale:
Sales/revenue is computed as quantity sold multiplied by sales price per unit Sales discount is given to customers who pay within the discount period

Collection if accounts receivable from customers process flow from order fulfillment to collection from customers
Journal entry upon collection

Income Statement Presentation

Sales (quantity X price) Less: Sales deductions Sales discounts Returns and allowances Net Sales P xx xx xx

xx

Less: Cost of Goods Sold Beginning inventory Add: Net Purchases Gross Purchases Less: Purchase Returns & Allowances Cost of Goods Available for Sale Less: Ending Inventory Gross Profit
Exercises: 17.1, 17.2, 17.4, 17.5, 17.6, 17.9, 17.10 Due: Tuesday, June 7

xx xx xx

xx xx xx

xx P xx

Thanks

DOMINGUEZ, CPA