ABM Fundamentals-of-ABM-1 Module-15-Accounting-Cycle-of-a-Merchandising-Business-1 PDF

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IFundamentals ofAccountancy, Businessand Management 1Quarter 4 – Module 15:Accounting Cycle of aMerchandising BusinessSenior High SchoolWriter: ARBEL S. ICBAN T-III Sta. Cruz High Integrated School Editors: JANE P. VALENCIA, EdD – Math/ABM Supervisor CHAIRMAN ANGELINA B. CAWIGAN – Master Teacher II ...

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Senior High School

Fundamentals of Accountancy, Business and Management 1 Quarter 4 – Module 15: Accounting Cycle of a Merchandising Business

Writer:

ARBEL S. ICBAN T-III Sta. Cruz High Integrated School Editors: JANE P. VALENCIA, EdD – Math/ABM Supervisor CHAIRMAN ANGELINA B. CAWIGAN – Master Teacher II MARIZ JEAN C. SANGCAP – Teacher III

I

What I Need to Know

This module was designed and written with you in mind. It is here to help you master the Accounting Cycle of a Merchandising Business. The scope of this module permits it to be used in many different learning situations. The language used recognizes the diverse vocabulary level of students. The lessons are arranged to follow the standard sequence of the course. But the order in which you read them can be changed to correspond with the textbook you are now using. The module has one lesson, namely: Lesson 1 – prepares adjusting entries After going through this module, you are expected to: 1. 2. 3. 4.

define adjusting entries; give examples of adjusting entries; prepare adjusting entries; and give the importance of adjusting entries;

What I Know True or False. Write true if the statement is correct and false if not. Use a separate sheet of paper for your answers. 1. Adjusting entries are prepared at the end of an accounting period to unrecorded revenue that has been earned and unrecorded expenses that have been incurred during the accounting period. 2. Accrued expenses are expenses paid even before they are incurred. 3. Each entry in the preparation of adjusting entry has no cash account in either the debit or the credit side. 4. Depreciation is applied to all non-current assets. 5. Bad debts expense is a balance sheet account while allowance for Doubtful Accounts is an income statement account. 6. In adjusting entry, each entry has at least one balance sheet account and at least one income statement account. 7. In prepaid expense, cash is disbursed before the incurrence of the actual expenses. 8. The most common method of estimating bad debts is by multiplying to the amount of accounts receivable by a certain percentage. 9. Accrued expense is an expense account. 10.

Accrued income is an asset account.

Lesson

1

Preparing the Adjusting Entries of a Merchandising Business

The trial balance, which was prepared form the information found in the ledgers, reflects the effect of the various transactions entered into by the entity throughout the accounting period. However, some of the amounts are not the final amounts that would be seen in the financial statements. This is due to the presence of accounts in which there are expired and unexpired amounts. Thus, preparation of adjusting entries is a must. This is the fifth step in the accounting cycle of a merchandising business.

What’s In

Directions: Based from the unadjusted trial balance, determine what accounts will be affected by the additional transactions shown below. ACCOUNT Cash Accounts Receivables Inventory Supplies Furniture and Fixtures Delivery Truck Notes Payable Sure, Capital Sure, Drawing Sales Revenue Cost of goods sold Advertising Expense Salaries Expense Rent Expense Total

DEBIT P 9, 000 12,000 15,000 12,000 65,000 200,000

CREDIT

P

32,500 202,000

7,500 109,000 1,500 2,500 9,000 10,000 P343,500

P 343,500

Additional Transactions: On December 31, the end of the accounting period the following data were taken: 1. Delivery truck is depreciated 10% per annum. 2. Furniture and Fixtures are estimated to have a useful life of 5 years.

3. Accrual of expenses: Salaries Expense P 500; Rent 5, 000

4. The balance of the Advertising expense represents payment for five months paid on November 1 of the current year.

5. 10% of the accounts receivable are considered uncollectible.

What’s New

Directions: Read and answer the following questions

From the trial balance, the accountant still to go over some transactions of #WeHealAsOne Drugstore which may have been overlooked before financial statements can finally prepared.

Questions:

1. What will an accountant prepare to update these financial transactions? 2. What are adjusting entries?

What is It

ADJUSTING ENTRIES – journal entries made at the end of an accounting cycle to update certain revenue and expense accounts and to make sure to comply with the matching principle.

1. PREPAYMENT OF EXPENSES - expenses paid in advance. Two methods: a.

Asset Method – entry is charged to asset account

Illustration: On October 1, C. Maganda paid P20,000 for a four month rental of the office space. Original Entry Oct1.

Prepaid Rent

20,000 Cash

Adjusting Entry Dec31 Rent Expense

20,000 15,000

Prepaid Rent

b.

15,000

Note: Dec 31 end of accounting Period Analysis: Oct – 5,000 (used) Nov – 5,000 (used) Dec – 5,000 (used) Jan –5,000 (unused)

Expense Method – expense account is charged

Illustration: On October 1, C. Maganda paid P20,000 for a four month rental of the office space. Original Entry Oct1.

Rent Expense

20,000 Cash

Adjusting Entry Dec31 Prepaid Rent

20,000 5,000

Rent Expense

5,000

Note: Dec 31 end of accounting Period Analysis: Oct – 5,000 (used) Nov – 5,000 (used) Dec – 5,000 (used) Jan –5,000 (unused)

2. UNEARNED INCOME - arises when payment is received before goods are delivered or services are rendered. Two methods: a.

Income Method – income account is credited when cash is received

Illustration: On October 1, the business received P20, 000 cash from the tenant of vacant space of the store for four month rental Original Entry Oct1.

Cash

20,000 Rent Income

20,000

Nov–5,000 (collected)

Adjusting Entry Dec31

Note: Dec 31 end of accounting Period Analysis: Oct–5,000 (collected)

Rent Income

5,000 Unearned Rent

5,000

Dec–5,000 (collected) Jan–5,000 (advance)

Liability Method- liability account is credited upon receipt of cash Illustration: On October 1, the business received P20, 000 cash from the tenant of vacant space of the store for four month rental

Original Entry Oct1.

Cash

Note: Dec 31 end of accounting Period Analysis:

20,000 Unearned Rent

Adjusting Entry Dec31 Unearned Rent

20,000

Oct–5,000 (collected) Nov–5,000 (collected) Dec–5,000 (collected)

15,000

Jan–5,000 (advance)

15,000 Rent Income

3. ACCRUAL EXPENSES - expenses already incurred during the period but are not yet paid or recorded. Adjusting Entry: Expenses Account Liability Account (Accrued Expense) Illustration: On December 31, five day’s salary of an office employee at P300 per day was accrued. Adjusting Entry Dec31 Salaries Expense

1,500 Accrued Salaries

1,500

Analysis: 300x5 = 1,500

4. ACCRUAL INCOME - arises when goods have been delivered or services have been rendered but no payment has been collected.

Adjusting Entry: Asset Account (Accrued Income) Income Account Illustration: A tenant occupying the right side of the shop space is three months delayed for his monthly rental fee of P3,000 per month. Adjusting Entry Dec31 Accrued Rent Income Rent Income

15,000

Analysis: 15,000

3,000x3= 15,000

5. BAD DEBTS - Not all credit extended or collectibles are good, a certain percentage of these collectibles are not collected. The business should provide for such losses for non-collectible of credit (Bad Debts) Adjusting Entry: Bad Debts Allowance for Bad Debts Illustration: An account receivable amounting to 70, 000 has an estimated 10% allowance for bad debts. Adjusting Entry: Dec31 Bad Debts Expense Allowance for Bad Debts

7,000 7,000

Analysis: 70,000x.10=7,000

6. DEPRECIATION - portion of the cost of the asset which is already used or consumed. Adjusting Entry: Depreciation Expense Accumulated Depreciation

Straight-line Method (Formula) D= c-s n D= Depreciation C= original cost S= salvage/scrap value (amount to which the asset can be sold after its useful life) n= number of estimated useful life/years Illustration: Office equipment was purchased for P50, 000. It is estimated to last for 5 years after which it shall have a value of P5, 000. Adjusting Entry Dec31 Depreciation Expense Accumulated Depreciation

9,000 9,000

Depreciation = (50,000-5,000)/5

What’s More

Directions: Refer to the Trial Balance of #LearnAsOne Bookstore below to answer the question that follows:

#LearnAsOne Bookstore Unadjusted Trial Balance December 31, 20xx Account Number 101 102 401 402 501 502

Account Title Cash Accounts Receivable Sales Sales Returns and Allowances Purchases Purchase Returns and Allowances Total:

Dr

Cr P13,000

20,000 40,000 5,000 30,000 P55,000

2,000 P55,000

Question: Assume that by December 31, 20xx, the accounts receivable of #LearnAsOne Bookstore increased by 20,000, however, 10% of this amount is considered uncollectible due to the insolvency of a customer. What will be the adjusting entry for the latter event? Show you solution....