Comprehensive Accounting Cycle and Merchandising Operations Notes

Accounting Cycle and Operations of a Merchandising Business

  • Institutional Framework: Mangaldan National High School, Pangasinan, Senior High School Department (Fundamentals of Accounting, Business, and Management 1, Quarter 4, Week 9, Worksheet No. 1).

  • Core Learning Objectives:

    • Describe the precise nature of transactions in a merchandising business.

    • Record merchandising transactions in both general and special journals.

    • Prepare an accurate trial balance.

    • Prepare required adjusting entries.

    • Execute and complete the full accounting cycle of a merchandising business.

  • Definition of a Merchandising Company: An enterprise whose primary operational activity is buying goods and selling them to customers to earn a profit.

  • Community Examples of Merchandising Entities:

    • Mercury Drug (Pharmacy)

    • Puregold (Supermarket / Grocery)

    • ACE Hardware (Hardware store)

    • Local Grocery Stores

  • Definition of Merchandise (Merchandise Inventory): Refers specifically to goods held for sale to customers in the ordinary course of business. This includes all inventory purchased with the intent of resale.

    • Merchandise Examples: Candies, canned goods, and noodles in grocery stores; juices and biscuits in grocery stores; medicines sold in pharmacies.

  • Distinction Between Merchandise Inventory and Fixed Assets (Property and Equipment):

    • Grocery Store Computer Sale: If a grocery store sells an old computer previously used in its office, this computer is NOT merchandise because the store does not ordinarily deal in computers; it is simply disposing of old office equipment (fixed asset).

    • Computer Store Computer Sale: For a specialized computer store, a computer is classified as merchandise inventory because the core business involves buying and reselling computers.

    • Pharmacy Table Sale: If a pharmacy sells a table from its display area, that table is classified as property and equipment. Conversely, for a retail furniture store, the same table is classified as merchandise inventory.

  • Primary Revenue Source: The primary source of revenue for a merchandising firm is sales revenue (commonly referred to simply as Sales).

Income Measurement and the Merchandising Operating Cycle

  • Expense Categories in Merchandising:

    • Cost of Goods Sold (COGS): The total cost of the specific merchandise sold to customers during a given accounting period.

    • Operating Expenses (OP): Expenses incurred in the ongoing process of earning sales revenue, which are deducted from gross profit on the income statement. Examples include sales salaries, advertising, rental expense, and insurance expenses.

  • Gross Profit Formula:

    • Gross Profit=Sales Revenue−Cost of Goods Sold\text{Gross Profit} = \text{Sales Revenue} - \text{Cost of Goods Sold}

  • Income Measurement Process Flow:

    • Sales−Cost of Goods Sold=Gross Profit\text{Sales} - \text{Cost of Goods Sold} = \text{Gross Profit}

    • Gross Profit−Operating Expenses=Net Income (or Net Loss)\text{Gross Profit} - \text{Operating Expenses} = \text{Net Income (or Net Loss)}

  • The Operating Cycle (Cash-to-Cash Sequence):

    • Step 1: Buy merchandise inventory.

    • Step 2: Sell merchandise inventory.

    • Step 3: Obtain Accounts Receivable (if sold on credit).

    • Step 4: Receive cash from collections.

Transaction Identification and Record-Keeping Framework

  • Step 1 of the Accounting Cycle (Identification and Measurement):

    • Source documents are systematically analyzed to establish whether transactions have a financial impact.

    • Rule of Recognition: Only financial transactions are recorded in the accounting records, and only if their monetary value can be quantified objectively.

    • Definition of Financial Transactions: Activities that directly change the value of an asset, liability, or equity account.

  • Step 2 of the Accounting Cycle (Preparation of Journal Entries / Journalization):

    • Merchandising businesses record financial transactions using a combination of Special Journals and the General Journal.

Structure and Function of Special Journals

  • Purpose: High-volume businesses encounter large quantities of repetitive, recurring transactions. Recording these repeatedly in a single general journal creates severe congestion. Special journals eliminate congestion by grouping similar transactions into dedicated ledgers.

  • The Four Common Special Journals:

    • Cash Receipts Journal: Used to record all transactions involving the receipt of cash.

    • Cash Disbursements Journal: Used to record all transactions involving cash payments.

    • Sales Journal (Sales on Account Journal): Used exclusively to record sales of merchandise on credit (on account).

    • Purchase Journal (Purchase on Account Journal): Used exclusively to record purchases of inventory on credit (on account).

Inventory Accounting Systems: Perpetual vs. Periodic

  • Perpetual Inventory System:

    • Mechanism: Detailed records of the cost of each individual inventory item are continuously updated. The cost of each item sold is recorded immediately at the moment the sale occurs.

    • Historical Application: Traditionally utilized by businesses selling low-volume goods with high unit values (e.g., automobile dealerships, retail furniture stores, major home appliances). Modern computer technology and barcode scanners now enable widespread adoption across general retail.

    • Key Characteristics: Continuous updating provides real-time information on quantities and costs. Offers superior internal control over inventory because discrepancies between actual physical stock and ledger records can be identified and investigated immediately.

    • Accounting Workflow: Record purchase of inventory directly to Merchandise Inventory; record sales revenue and Cost of Goods Sold simultaneously upon sale; at period end, no entries are needed except to adjust for physical inventory shortages or losses.

  • Periodic Inventory System:

    • Mechanism: Does not maintain a continuous ledger record of physical stock on hand. Cost of Goods Sold is determined exclusively at the conclusion of an accounting period through a physical count.

    • Accounting Workflow: Record purchase of inventory in the Purchases account; record sales revenue when items are sold; at period end, calculate Cost of Goods Sold using the inventory formula.

    • Periodic Cost of Goods Sold Formula:Beginning Inventory (BI)+Cost of Goods Purchased (COGP)=Cost of Goods Available for Sale\text{Beginning Inventory (BI)} + \text{Cost of Goods Purchased (COGP)} = \text{Cost of Goods Available for Sale}\text{Cost of Goods Available for Sale} - \text{Ending Inventory (EI)} = \text{Cost of Goods Sold (COGS)}\n\n# Recording Purchases and Related Transactions Under the Periodic System\n\n* **Purchases of Merchandise:**\n * When merchandise is bought for resale, the nominal account **Purchases** is debited for the full cost.\n * Purchases may be made for cash or on credit (on account).\n * Purchases are recorded when physical ownership/goods are received from the seller, supported by a **Purchase Invoice** (which is the supplier's sales or charge invoice).\n * *Critical Restriction:* Only purchases of inventory intended for resale are debited to Purchases. Acquisitions of other business assets (e.g., office supplies, store equipment) are debited directly to their specific asset accounts.\n* **Illustration — Magaling Computer Store Initial Purchase:**\n * *Business Details:* Magaling Computer Store opened January 2, 2016, in Sikat Mall, Bicol. Owner invested PHP\,500,000.00.\n * *Transaction:* On January 3, 2016, purchased 20 computer units on account at PHP\,10,000.00 per unit from supplier Delta, Inc. (Charge Invoice No. 145).\n * *Journal Entry (01/03/2016):*\n * Debit: Purchases — PHP\,200,000.00\n * Credit: Accounts Payable — PHP\,200,000.00\n * *Explanation:* To record purchase of 20 units of computer at PHP\,10,000.00 per unit from Delta, Inc. as per Charge Invoice 145.\n* **Purchase Returns and Allowances:**\n * *Causes:* Merchandise received is damaged or defective, of inferior quality, or fails to meet buyer specifications.\n * *Documentation:* The buyer initiates a request for a balance reduction by issuing a **Debit Memorandum** to inform the seller that the seller's account has been debited.\n * *Account Nature:* **Purchase Returns and Allowances** is a contra-purchases account with a normal credit balance.\n * *Illustration:* On January 3, 2016, Magaling Computer Store inspected the 20 units and discovered 1 unit was damaged during shipment. Issued Debit Memorandum DM 01 to Delta, Inc.\n * *Journal Entry (01/03/2016):*\n * Debit: Accounts Payable — PHP\,10,000.00\n * Credit: Purchase Return and Allowance — PHP\,10,000.00\n * *Explanation:* To record return of 1 computer unit worth PHP\,10,000.00 to Delta, Inc. as per DM 01.\n\n# Freight Costs and Transportation Terms\n\n* **FOB Shipping Point:**\n * *Freight Responsibility:* Goods are delivered Free On Board to the carrier by the seller. The **buyer** pays all freight charges.\n * *Accounting Entry for Buyer:* Debits **Freight-In** (an adjunct purchases account added to COGS); credits Cash (if cash on delivery) or Accounts Payable (if billed on account).\n * *Transfer of Ownership:* Title and ownership of goods transfer to the buyer the moment the carrier receives the goods at the seller's premises.\n* **FOB Destination:**\n * *Freight Responsibility:* Goods are delivered Free On Board to the buyer's place of business. The **seller** pays all freight charges.\n * *Accounting Entry for Seller:* Debits **Delivery Expense** (an operating expense account); credits Cash or Accounts Payable.\n * *Transfer of Ownership:* Title and ownership remain with the seller until the goods physically reach and are accepted by the buyer.\n * *Buyer's Books:* No entry is made on the buyer's accounting records for freight.\n* **Illustration — Magaling Computer Store Freight:**\n * *Scenario:* Supplier based in Manila; delivery cost to Bicol is PHP\,3,000.00.\n * *If FOB Shipping Point (Paid cash January 4, 2016):*\n * Debit: Freight-In — PHP\,3,000.00\n * Credit: Cash — PHP\,3,000.00\n * *Explanation:* To record freight costs for the purchase of 20 computer units.\n * *If FOB Destination:* Magaling Computer Store records no entry; the PHP\,3,000.00 is paid directly by Delta, Inc.\n\n# Purchase Discounts and Credit Terms Mechanics\n\n* **Credit Terms Definition:** Terms specifying cash discount percentages and the applicable discount period (e.g., 2/10, n/30meansameans a2\% discount if paid within 10 days; full invoice balance due within 30 days).\n* **Computation Base:** Purchase discounts are computed on the net invoice cost after subtracting purchase returns and allowances.\n* **Illustration — Magaling Computer Store Payment:**\n * *Terms:* Purchase of 20 units (PHP\,200,000.00total)carriedcredittermstotal) carried credit terms2/10, n/30.\n * *Event:* Magaling paid Delta, Inc. in full on January 10, 2016 (within the 10-day discount window ending January 13, 2016).\n * *Discount Amount:* PHP\,200,000.00 \times 2\% = PHP\,4,000.00\n * *Net Cash Paid:* PHP\,200,000.00 - PHP\,4,000.00 = PHP\,196,000.00\n * *Journal Entry (01/10/2016):*\n * Debit: Accounts Payable — PHP\,200,000.00\n * Credit: Purchases Discount — PHP\,4,000.00\n * Credit: Cash — PHP\,196,000.00\n * *Explanation:* To record full payment of Delta, Inc. Charge Invoice No. 145 net of 2\% discount.\n\n# Recording Sales and Revenue Entries Under the Periodic System\n\n* **Revenue Recognition Principle:** Revenue is recognized and reported when earned — specifically when control and title of merchandise transfer from seller to buyer.\n* **Supporting Source Documents:** Cash register tapes, cash receipts, or official receipts (OR) for cash sales; Charge Invoices (ChI) for credit sales.\n* **General Journal Structure for Sales:**\n * Debit: Cash (for cash sales) or Accounts Receivable (for credit sales).\n * Credit: Sales (credited exclusively for goods held for resale).\n * *Asset Sales Note:* Sales of non-inventory assets (e.g., office equipment, land) are credited directly to the respective asset account, never to Sales.\n* **Illustrations — Magaling Computer Store Sales:**\n * *Transaction 1 (01/10/2016):* Sold 2 units for cash to Marie Cruz for PHP\,36,000.00((PHP\,18,000.00/unit), Official Receipt No. 001, FOB Destination.\n * Debit: Cash — PHP\,36,000.00\n * Credit: Sales — PHP\,36,000.00\n * *Freight Transaction (01/10/2016):* Paid MM Express PHP\,500.00 cash to deliver Marie Cruz's units under FOB Destination terms.\n * Debit: Delivery Expense — PHP\,500.00\n * Credit: Cash — PHP\,500.00\n * *Transaction 2 (01/15/2016):* Sold 5 units on account to Rafael Reyes for PHP\,97,500.00((PHP\,19,500.00/unit),ChargeInvoiceNo.001,terms/unit), Charge Invoice No. 001, terms3/10, n/30, FOB Shipping Point.\n * Debit: Accounts Receivable — PHP\,97,500.00\n * Credit: Sales — PHP\,97,500.00\n * *Freight Note:* No freight entry made by seller as terms were FOB Shipping Point.\n\n# Sales Returns, Allowances, and Sales Discounts\n\n* **Sales Returns and Allowances:**\n * *Definitions:* Sales Returns occur when customers return unsatisfactory merchandise for cash or credit. Sales Allowances occur when customers agree to keep unsatisfactory goods in exchange for a reduction in selling price.\n * *Documentation:* Seller issues a **Credit Memorandum** to inform the buyer that their accounts receivable balance has been reduced.\n * *Account Classification:* Contra-revenue account with a normal debit balance.\n * *Managerial Significance:* Tracking returns in a contra account (rather than debiting Sales directly) informs management of inferior stock, order-filling errors, or transit damage.\n * *Illustration (01/16/2016):* Rafael Reyes returned 1 unit in good condition (excess unit bought Jan 15 under ChI 001). Price credited: PHP\,19,500.00\n * Debit: Sales Return & Allowance — PHP\,19,500.00\n * Credit: Accounts Receivable — PHP\,19,500.00\n* **Sales Discounts:**\n * *Definition:* Cash discounts offered to credit customers to induce prompt payment within a specified period.\n * *Account Classification:* Contra-revenue account with a normal debit balance.\n * *Illustration — Jun Cruz Transactions:* \n * *Jan 17, 2016 Purchase:* Magaling bought 5 units cash at PHP\,10,000.00each(each (PHP\,50,000.00).\n * Debit: Purchases — PHP\,50,000.00\n * Credit: Cash — PHP\,50,000.00\n * *Jan 18, 2016 Credit Sale:* Sold 5 units on account to Jun Cruz under ChI No. 002 for PHP\,90,000.00((PHP\,18,000.00/unit),terms/unit), terms2/10, 1/30, FOB Shipping Point.\n * Debit: Accounts Receivable — PHP\,90,000.00\n * Credit: Sales — PHP\,90,000.00\n * *Jan 23, 2016 Full Collection Within Discount Period (Jan 19–Jan 28):*\n * Discount Amount: PHP\,90,000.00 \times 2\% = PHP\,1,800.00\n * Cash Received: PHP\,90,000.00 - PHP\,1,800.00 = PHP\,88,200.00\n * Debit: Cash — PHP\,88,200.00\n * Debit: Sales Discount — PHP\,1,800.00\n * Credit: Accounts Receivable — PHP\,90,000.00\n * *Alternative Scenario (Payment on Jan 30, 2016 - After Discount Period):*\n * Debit: Cash — PHP\,90,000.00\n * Credit: Accounts Receivable — PHP\,90,000.00\n\n# Periodic Inventory Cost of Goods Sold Computation Schedule\n\n* **Standard Computation Layout:**\n * Merchandise Inventory, Beginning: PHP\,100,000.00\n * Add: Purchases: PHP\,250,000.00\n * Less: Purchase Returns and Allowances: PHP\,5,000.00\n * Less: Purchase Discounts: PHP\,2,000.00\n * Total Purchase Deductions: PHP\,7,000.00\n * Net Purchases: PHP\,243,000.00\n * Add: Freight-In: PHP\,6,000.00\n * Cost of Goods Purchased: PHP\,249,000.00\n * Cost of Goods Available for Sale: PHP\,349,000.00\n * Less: Merchandise Inventory, Ending: PHP\,118,570.00\n * **Cost of Goods Sold:** PHP\,230,250.00\n\n# Complete Accounting Cycle: Agila Merchandising Case Study\n\n* **Entity Profile:** Agila Merchandising (Owner: Lito Agila), sells ready-to-wear shirts and dresses. Commenced operations January 1, 2016.\n* **Primary Source Documents Used:**\n * *Official Receipts:* Issued for all cash collections.\n * *Charge Sales Invoice:* Issued for all sales on account.\n * *Check Voucher:* Issued for all cash disbursements.\n\n* **Special Journals Activity (January 2016):**\n * **Sales Journal Summary (Sales on Account):**\n * 01/05/2016 — Dax (Inv 1): PHP\,2,102.00\n * 01/07/2016 — Marie (Inv 2): PHP\,3,060.00\n * 01/09/2016 — Astro (Inv 3): PHP\,1,475.00\n * Invoice 4: CANCELLED\n * 01/11/2016 — PNSC (Inv 5): PHP\,8,960.00\n * 01/15/2016 — PECO (Inv 6): PHP\,7,125.00\n * 01/16/2016 — Ipedcare (Inv 7): PHP\,4,560.00\n * 01/19/2016 — Te (Inv 8): PHP\,1,250.00\n * 01/21/2016 — Joshua (Inv 9): PHP\,3,125.00\n * 01/22/2016 — Joseph (Inv 10): PHP\,4,510.00\n * 01/24/2016 — Jesper (Inv 11): PHP\,2,080.00\n * 01/28/2016 — Nelcie (Inv 12): PHP\,1,180.00\n * 01/29/2016 — Ryan (Inv 13): PHP\,900.00\n * 01/30/2016 — Arlen (Inv 14): PHP\,3,450.00\n * 01/30/2016 — Art (Inv 15): PHP\,1,478.00\n * *Sales Journal Totals:* Debit Accounts Receivable PHP\,45,255.00;CreditSales; Credit SalesPHP\,45,255.00\n\n * **Cash Receipts Journal Summary:**\n * Cash Sales Transactions: Ana (OR 1) PHP\,1,000.00;Maria(OR2); Maria (OR 2)PHP\,1,890.00;Peter(OR3); Peter (OR 3)PHP\,1,289.00;Jun(OR4); Jun (OR 4)PHP\,3,456.00;Karen(OR5); Karen (OR 5)PHP\,1,290.00;Jane(OR6); Jane (OR 6)PHP\,3,876.00;May(OR7); May (OR 7)PHP\,4,561.00;April(OR8); April (OR 8)PHP\,5,600.00;Ana(OR10); Ana (OR 10)PHP\,4,235.00;Juan(OR11); Juan (OR 11)PHP\,2,010.00;Rafael(OR12); Rafael (OR 12)PHP\,3,410.00;Ray(OR13); Ray (OR 13)PHP\,893.00;Geo(OR15); Geo (OR 15)PHP\,3,452.00;Angela(OR17); Angela (OR 17)PHP\,1,000.00;Clyde(OR18); Clyde (OR 18)PHP\,345.00.\n * Collections on Account Transactions:\n * 01/15/2016 — PNSC (OR 9): Accounts Receivable PHP\,8,960.00,SalesDiscount, Sales DiscountPHP\,900.00,NetCash, Net CashPHP\,8,060.00\n * 01/23/2016 — Te (OR 14): Accounts Receivable PHP\,1,250.00,NetCash, Net CashPHP\,1,250.00\n * 01/24/2016 — Dax (OR 16): Accounts Receivable PHP\,2,102.00,NetCash, Net CashPHP\,2,102.00\n * 01/30/2016 — Joseph (OR 19): Accounts Receivable PHP\,4,510.00,SalesDiscount, Sales DiscountPHP\,510.00,NetCash, Net CashPHP\,4,000.00\n * *Cash Receipts Journal Totals:* Debit Cash PHP\,53,719.00;DebitSalesDiscount; Debit Sales DiscountPHP\,1,410.00;CreditSales; Credit SalesPHP\,38,307.00;CreditAccountsReceivable; Credit Accounts ReceivablePHP\,16,822.00\n\n * **Purchase Journal Summary (Purchases on Account):**\n * 01/02/2016 — XYS (SI102): PHP\,228,560.00\n * 01/10/2016 — RTW Super Store (SI611): PHP\,133,070.00\n * 01/29/2016 — Dresses Unlimited (SI341): PHP\,9,812.00\n * *Purchase Journal Totals:* Debit Purchases PHP\,371,442.00;CreditAccountsPayable; Credit Accounts PayablePHP\,371,442.00\n\n * **Cash Disbursements Journal Summary:**\n * 01/02/2016 — St Realty (CV01): Rental for Jan–Feb 2016, Debit Rental Expense PHP\,10,000.00,CreditCash, Credit CashPHP\,10,000.00\n * 01/05/2016 — Del supplies (CV02): Office supplies, Debit Supplies Expense PHP\,3,500.00,CreditCash, Credit CashPHP\,3,500.00\n * 01/15/2016 — XYS Clothing (CV03): Account payment, Debit Accounts Payable PHP\,228,560.00,CreditPurchaseDiscount, Credit Purchase DiscountPHP\,8,560.00,CreditCash, Credit CashPHP\,220,000.00\n * 01/16/2016 — Jean Guzman (CV04): Salary Jan 1–15, Debit Salaries Expense PHP\,7,500.00,CreditCash, Credit CashPHP\,7,500.00\n * 01/16/2016 — Sonic Promo (CV05): Advertising, Debit Advertising Expense PHP\,4,800.00,CreditCash, Credit CashPHP\,4,800.00\n * 01/25/2016 — Goldmic Supply (CV06): Store supplies, Debit Supplies Expense PHP\,1,990.00,CreditCash, Credit CashPHP\,1,990.00\n * *Cash Disbursements Journal Totals:* Debit Accounts Payable PHP\,228,560.00;DebitSalariesExpense; Debit Salaries ExpensePHP\,7,500.00;DebitSuppliesExpense; Debit Supplies ExpensePHP\,5,490.00;DebitAdvertisingExpense; Debit Advertising ExpensePHP\,4,800.00;DebitRentalExpense; Debit Rental ExpensePHP\,10,000.00;CreditCash; Credit CashPHP\,247,790.00;CreditPurchaseDiscount; Credit Purchase DiscountPHP\,8,560.00\n\n * **General Journal Entries:**\n * 01/02/2016: Debit Cash PHP\,500,000.00;CreditAgila,Capital; Credit Agila, CapitalPHP\,500,000.00 (Owner initial investment).\n * 01/02/2016: Debit Transportation Equipment PHP\,150,000.00;CreditCash; Credit CashPHP\,150,000.00 (Vehicle purchase).\n\n# General Ledger Ledger Posting Summary: Agila Merchandising\n\n* **Cash (Account No. 1000):**\n * Initial Investment (GJ): Debit PHP\,500,000.00∣Balance:| Balance:PHP\,500,000.00\n * Vehicle Purchase (GJ): Credit PHP\,150,000.00∣Balance:| Balance:PHP\,350,000.00\n * Cash Receipts Journal: Debit PHP\,53,719.00∣Balance:| Balance:PHP\,403,719.00\n * Cash Disbursements Journal: Credit PHP\,254,290.00∣Balance:| Balance:PHP\,149,429.00\n* **Accounts Receivable (Account No. 1200):**\n * Sales Journal Posting: Debit PHP\,45,255.00∣Balance:| Balance:PHP\,45,255.00\n * Cash Receipts Journal Posting: Credit PHP\,16,822.00∣Balance:| Balance:PHP\,28,433.00\n* **Transportation Equipment (Account No. 1680):**\n * Purchase Posting: Debit PHP\,150,000.00∣Balance:| Balance:PHP\,150,000.00\n* **Accounts Payable (Account No. 2000):**\n * Purchases Journal Posting: Credit PHP\,459,750.00∣Balance:| Balance:(PHP\,459,750.00)\n * Cash Disbursements Journal Posting: Debit PHP\,228,560.00∣Balance:| Balance:(PHP\,231,190.00)\n* **Agila, Capital (Account No. 3000):**\n * Initial Investment (GJ): Credit PHP\,500,000.00∣Balance:| Balance:(PHP\,500,000.00)\n* **Sales (Account No. 4100):**\n * Sales Journal Posting: Credit PHP\,45,255.00∣Balance:| Balance:(PHP\,45,255.00)\n * Cash Receipts Journal Posting: Credit PHP\,38,307.00∣Balance:| Balance:(PHP\,83,562.00)\n* **Sales Discounts (Account No. 4102):**\n * Cash Receipts Journal Posting: Debit PHP\,1,410.00∣Balance:| Balance:PHP\,1,410.00\n* **Purchases (Account No. 5100):**\n * Journal Postings: Debit PHP\,459,750.00∣Balance:| Balance:PHP\,459,750.00\n* **Purchases Discount (Account No. 5102):**\n * Cash Disbursements Journal Posting: Credit PHP\,8,560.00∣Balance:| Balance:(PHP\,8,560.00)\n* **Salaries Expense (Account No. 6100):**\n * Cash Disbursements Journal Posting: Debit PHP\,14,000.00∣Balance:| Balance:PHP\,14,000.00\n* **Supplies Expense (Account No. 6150):**\n * Cash Disbursements Journal Posting: Debit PHP\,5,490.00∣Balance:| Balance:PHP\,5,490.00\n* **Advertising Expense (Account No. 6400):**\n * Cash Disbursements Journal Posting: Debit PHP\,4,800.00∣Balance:| Balance:PHP\,4,800.00\n* **Rental Expense (Account No. 6300):**\n * Cash Disbursements Journal Posting: Debit PHP\,10,000.00∣Balance:| Balance:PHP\,10,000.00\n\n# Unadjusted Trial Balance: Agila Merchandising (Jan 30, 2016)\n\n* Cash: Debit PHP\,149,429.00\n* Accounts Receivable: Debit PHP\,28,433.00\n* Merchandise Inventory: PHP\,0.00\n* Transportation Equipment: Debit PHP\,150,000.00\n* Accumulated Depreciation — Transportation Equipment: Credit PHP\,0.00\n* Accounts Payable: Credit PHP\,231,190.00\n* Agila, Capital: Credit PHP\,500,000.00\n* Sales: Credit PHP\,83,562.00\n* Sales Discount: Debit PHP\,1,410.00\n* Purchases: Debit PHP\,459,750.00\n* Purchases Discount: Credit PHP\,8,560.00\n* Salaries Expense: Debit PHP\,14,000.00\n* Supplies Expense: Debit PHP\,5,490.00\n* Advertising Expense: Debit PHP\,4,800.00\n* Rental Expense: Debit PHP\,10,000.00\n* Depreciation Expense: PHP\,0.00\n* **Total Unadjusted Trial Balance:** Debit PHP\,823,312.00;Credit; CreditPHP\,823,312.00\n\n# Adjusting Entries Mechanics and Calculation\n\n* **Sources of Adjusting Entries:** (1) Depreciation expense, (2) Deferred/prepaid expenses, (3) Deferred/accrued income, (4) Accrued expenses/liabilities, (5) Accrued income/assets.\n* **Adjustment 1 — Depreciation of Transportation Equipment:**\n * *Asset Details:* Cost = PHP\,150,000.00;Usefullife=10years(120months);Salvagevalue=; Useful life = 10 years (120 months); Salvage value =PHP\,0.00\n * *Monthly Depreciation Formula:*\text{Monthly Depreciation} = \frac{\text{Cost} - \text{Salvage Value}}{120\text{ months}} = \frac{PHP\,150,000.00 - PHP\,0.00}{120} = PHP\,1,250.00\n * *Adjusting Journal Entry:*\n * Debit: Depreciation Expense — PHP\,1,250.00\n * Credit: Accumulated Depreciation - Transportation Equipment — PHP\,1,250.00\n* **Adjustment 2 — Prepaid Rent (Deferred Expense):**\n * *Context:* Rent payment on January 2 (PHP\,10,000.00) covered both January and February 2016. The entire amount was initially debited to Rental Expense.\n * *Correction:* One-half (\frac{1}{2})representsadvancepaymentforFebruary() represents advance payment for February (PHP\,5,000.00) and must be recognized as an asset (Prepaid Rent/Prepaid Expense).\n * *Adjusting Journal Entry:*\n * Debit: Prepaid Expense — PHP\,5,000.00\n * Credit: Rental Expense — PHP\,5,000.00\n* **Adjustment 3 — Fuel Expense (Accrued Expense):**\n * *Context:* Statement received January 30, 2016, from Gus Oil Center for unpaid fuel bill totaling PHP\,2,180.00.\n * *Adjusting Journal Entry:*\n * Debit: Fuel Expense — PHP\,2,180.00\n * Credit: Accrued Expense — PHP\,2,180.00\n* **Worksheet Adjustment Column Totals:** Debit PHP\,8,430.00;Credit; CreditPHP\,8,430.00\n* **Adjusted Trial Balance Totals:** Debit PHP\,826,742.00;Credit; CreditPHP\,826,742.00\n\n# Financial Statements Preparation: Agila Merchandising\n\n* **Schedule of Cost of Goods Sold (Month Ended January 30, 2016):**\n * Merchandise Inventory, Beginning: PHP\,0.00\n * Add: Purchases: PHP\,459,750.00\n * Less: Purchases Discount: (PHP\,8,560.00)\n * Cost of Goods Available for Sale: PHP\,451,190.00\n * Less: Merchandise Inventory, Ending (Physical Count): (PHP\,438,700.00)\n * **Cost of Goods Sold:** PHP\,12,490.00\n\n* **Income Statement (Month Ended January 30, 2016):**\n * Gross Sales: PHP\,83,562.00\n * Less: Sales Discounts: (PHP\,1,410.00)\n * **Net Sales:** PHP\,82,152.00\n * Less: Cost of Goods Sold: (PHP\,12,490.00)\n * **Gross Profit:** PHP\,69,662.00\n * Less Operating Expenses:\n * Salaries Expense: PHP\,14,000.00\n * Supplies Expense: PHP\,5,490.00\n * Advertising Expense: PHP\,4,800.00\n * Rental Expense: PHP\,5,000.00\n * Depreciation Expense: PHP\,1,250.00\n * Fuel Expense: PHP\,2,180.00\n * *Total Operating Expenses:* PHP\,32,720.00\n * **Net Income:** PHP\,36,942.00\n\n* **Worksheet Extended Totals Summary:**\n * *Income Statement Columns:* Debit PHP\,493,880.00;Credit; CreditPHP\,530,822.00(NetIncomedifference:(Net Income difference:PHP\,36,942.00)\n * *Statement of Financial Position Columns:* Debit PHP\,771,562.00;Credit; CreditPHP\,771,562.00\n\n# Closing Entries and Post-Closing Procedures\n\n* **Closing Entry Rules under Periodic System:**\n * *Beginning Inventory:* Closed to Income Summary by debiting Income Summary and crediting Merchandise Inventory (Beginning).\n * *Ending Inventory:* Established in the books by debiting Merchandise Inventory (Ending) and crediting Income Summary using the physical count figure.\n * *Revenue Accounts:* Debited in full with credit to Income Summary.\n * *Expense Accounts & Cost Accounts:* Credited in full with debit to Income Summary.\n * *Net Profit Allocation:* Balance in Income Summary represents Net Income (if credit > debit) or Net Loss (if debit > credit). Closed by debiting Income Summary and crediting Owner Capital.\n* **Agila Merchandising Journalized Closing Entries (01/30/2016):**\n * *Entry 1 (Close Nominal Revenue Accounts):*\n * Debit: Sales — PHP\,83,562.00\n * Credit: Sales Discount — PHP\,1,410.00\n * Credit: Income Summary — PHP\,82,152.00\n * *Entry 2 (Close Nominal Expenses and COGS Accounts):*\n * Debit: Income Summary — PHP\,483,910.00\n * Debit: Purchase Discount — PHP\,8,560.00\n * Credit: Purchases — PHP\,459,750.00\n * Credit: Salaries Expense — PHP\,14,000.00\n * Credit: Supplies Expense — PHP\,5,490.00\n * Credit: Advertising Expense — PHP\,4,800.00\n * Credit: Rental Expense — PHP\,5,000.00\n * Credit: Depreciation Expense — PHP\,1,250.00\n * Credit: Fuel Expense — PHP\,2,180.00\n * *Entry 3 (Set Up Ending Merchandise Inventory):*\n * Debit: Merchandise Inventory, Ending — PHP\,438,700.00\n * Credit: Income Summary — PHP\,438,700.00\n * *Income Summary Account Verification:*\n * Total Credits = 82,152.00 + 438,700.00 = PHP\,520,852.00\n * Total Debits = PHP\,483,910.00\n * Net Credit Balance = 520,852.00 - 483,910.00 = PHP\,36,942.00\n * *Entry 4 (Close Income Summary to Capital):*\n * Debit: Income Summary — PHP\,36,942.00\n * Credit: Agila, Capital — PHP\,36,942.00\n* **Post-Closing Trial Balance:** Prepared after posting closing entries to ensure all nominal accounts reflect zero balances before the subsequent accounting period begins.\n\n# Theoretical Literature and Academic Accounting References\n\n* **Vera Cruz Manuel (2016):**\n * Defines a merchandising or trading concern as a business organization dealing with buying and selling goods on a wholesale or retail basis.\n * Distinguishes Perpetual Inventory Method (cost of goods sold and ending inventory determined continuously without physical count) from Periodic Inventory Method (requires physical counting multiplied by unit costs at period end).\n* **Valencia & Roxas (2015):**\n * Defines Periodic Inventory System as non-continuous tracking where purchases are debited to Purchases. Ending inventory and COGS are derived via physical count.\n * *Formula Synthesis:*\text{Net Purchases} = \text{Purchases} + \text{Freight-In} - (\text{Purchase Discounts} + \text{Purchase Returns and Allowances})Goods Available for Sale=Beginning Inventory+Net Purchases\text{Goods Available for Sale} = \text{Beginning Inventory} + \text{Net Purchases}\text{Cost of Goods Sold} = \text{Goods Available for Sale} - \text{Ending Inventory}\n\n# Comparative Matrix: Periodic vs. Perpetual Entries\n\n* **1. Purchase of Goods:**\n * *Periodic:* Debit Purchases; Credit Cash or Accounts Payable\n * *Perpetual:* Debit Merchandise Inventory; Credit Cash or Accounts Payable\n* **2. Payment of Freight (Borne by Buyer):**\n * *Periodic:* Debit Freight-In; Credit Cash or Accounts Payable\n * *Perpetual:* Debit Merchandise Inventory; Credit Cash or Accounts Payable\n* **3. Purchase Returns and Allowances:**\n * *Periodic:* Debit Cash or Accounts Payable; Credit Purchase Returns and Allowances\n * *Perpetual:* Debit Cash or Accounts Payable; Credit Merchandise Inventory\n* **4. Purchase Discount Received:**\n * *Periodic:* Debit Cash or Accounts Payable; Credit Purchase Discount\n * *Perpetual:* Debit Cash or Accounts Payable; Credit Merchandise Inventory\n* **5. Sale of Merchandise:**\n * *Periodic:* Debit Cash or Accounts Receivable; Credit Sales\n * *Perpetual:* (a) Debit Cash or Accounts Receivable, Credit Sales; (b) Debit Cost of Goods Sold, Credit Merchandise Inventory\n* **6. Sales Returns Granted:**\n * *Periodic:* Debit Sales Returns and Allowances; Credit Cash or Accounts Receivable\n * *Perpetual:* (a) Debit Sales Returns and Allowances, Credit Cash or Accounts Receivable; (b) Debit Merchandise Inventory, Credit Cost of Goods Sold\n* **7. Sales Discount Granted:**\n * *Periodic:* Debit Cash, Debit Sales Discounts; Credit Accounts Receivable\n * *Perpetual:* Debit Cash, Debit Sales Discounts; Credit Accounts Receivable\n* **8. Payment of Freight (Borne by Seller):**\n * *Periodic:* Debit Freight-Out; Credit Cash\n * *Perpetual:* Debit Freight-Out; Credit Cash\n\n# Rules on T-Accounts for Merchandising Concerns (Periodic System)\n\n* **Accounts Debited (Normal Debit Balance):**\n * Purchases\n * Sales Returns and Allowances\n * Sales Discounts\n * Freight-In\n * Freight-Out\n* **Accounts Credited (Normal Credit Balance):**\n * Sales\n * Purchase Returns & Allowances\n * Purchase Discounts\n\n# Catalog Trade Discounts vs. Cash Discounts\n\n* **Trade Discounts:**\n * *Definition:* A percentage reduction off a published list price in a catalog, offered to wholesalers or retailers for volume purchases or regular customer patronage.\n * *Accounting Treatment:* Trade discounts are **never** recorded in general ledger accounts. Purchases and Sales are recorded net of trade discounts.\n * *Sequential Trade Discount Calculation Illustration:* Furniture and Fixture with list price PHP\,30,000.00giventradediscountsofgiven trade discounts of4\%andand3\%\n * List Price: PHP\,30,000.00\n * Less 4\%ofofPHP\,30,000.00((PHP\,1,200.00):Net=): Net =PHP\,28,800.00\n * Less 3\%ofofPHP\,28,000.00transcriptcalculationstep(transcript calculation step (PHP\,864.00):NetInvoicePrice=): Net Invoice Price =PHP\,27,936.00\n * *Recorded Amount:* PHP\,27,936.00\n* **Cash Discounts:**\n * *Definition:* Reductions offered on credit sales to prompt payment within agreed timeframes.\n * *Standard Credit Terms Conventions:* \n * n/30: Net gross invoice amount is payable within 30 days from invoice date.\n * 2/10, n/30::2\% cash discount if paid within 10 days; full net amount due in 30 days.\n * 3\text{EOM}, n/60::3\% cash discount if paid before end of month; full amount due within 60 days.\n * 2/10, 1/15, n/30::2\%cashdiscountifpaidwithin10days;cash discount if paid within 10 days;1\%$$ cash discount if paid after 10 days but within 15 days; full amount due in 30 days.