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Fundamentals ofAccountancy, Business andManagement 1Quarter 4 - Module 2Accounting Cycle of aMerchandising Business####### Fundamentals of Accountancy, Business and ManagementAlternative Delivery Mode Quarter 4 – Module 4: Accounting Cycle of a Merchandising BusinessFirst Edition, 2020Republic Act 8...

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Fundamentals of Accountancy, Business and Management 1 Quarter 4 - Module 2 Accounting Cycle of a Merchandising Business

Fundamentals of Accountancy, Business and Management Alternative Delivery Mode Quarter 4 – Module 4: Accounting Cycle of a Merchandising Business First Edition, 2020 Republic Act 8293, section 176 states that: No copyright shall subsist in any work of the Government of the Philippines. However, prior approval of the government agency or office wherein the work is created shall be necessary for exploitation of such work for profit. Such agency or office may, among other things, impose as a condition the payment of royalties. Borrowed materials (i.e., songs, stories, poems, pictures, photos, brand names, trademarks, etc.) included in this module are owned by their respective copyright holders. Every effort has been exerted to locate and seek permission to use these materials from their respective copyright owners. The publisher and authors do not represent nor claim ownership over them. Published by the Department of Education Secretary: Leonor Magtolis Briones Undersecretary: Diosdado M. San Antonio

Development Team of the Module Writers: Rhoslyn M. Sagpang, Lawang Bato National High School Editor: Marilyn B. Soriano Reviewer: Darwin O. Fullo Illustrator: Layout Artist: Maricel R. Diones, Maysan Elementary School, Maila B. Solian Management Team: Meliton P. Zurbano, Schools Division Superintendent, OIC Filmore R. Caballero, Chief-Curriculum Implementation Division Jean A. Tropel, Education Program Supervisor –Learning Resource Marilyn Soriano Division Math Coordinator

Printed in the Philippines by ________________________ Department of Education – National Capital Region Office Address: Pio Valenzuela Street, Telefax: E-mail Address:

Marulas, Valenuzuela City, 1440 (02) 292 – 32 – 47 [email protected]

What I Need to Know This module was designed and written with you in mind. It is here to help you master the nature of Accounting. 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 is divided into three lessons, namely: 

Lesson 1 – Nature of transactions in a merchandising business

What I Need to Know After going through this module, you are expected to:       

Describes the nature of transactions in a merchandising business Records transactions of a merchandising business in the general and special journals Posts transactions in the general and subsidiary ledgers Prepares a trial balance Prepares adjusting entries Completes the accounting cycle of a merchandising business Prepares the Statement of Cost of Goods Sold and Gross Profit What I Know

Check the appropriate column (YES or NO) depending on your knowledge or capability to perform based on the questions given.

1. 2. 3. 4. 5.

Can you…. describes the nature of transaction in a merchandising business journalize and posts transactions of a merchandising business prepare a trial balance prepare adjusting entries complete and prepare the complete accounting cycle for a merchandising business

YES

NO

3

Lesson

1

Accounting Cycle of a Merchandising Business

This lesson provides information, activities and exercises about accounting cycle of a merchandising business. Upon completion of this lesson, you must be able to identify nature of transaction and the complete accounting cycle of the merchandising business. What’s In

Identify the following account titles by checking the appropriate column for assets, liabilities and owner’s equity. Account Titles 1. 2. 3. 4. 5.

Assets

Liabilities

Owner’s Equity

Account receivables Notes payable Owner’s, capital Office supplies Plant, property & equipment

What’s New

Accounting Cycle of a Merchandising Business On this section, we will focus on the accounting concepts and principles for merchandising businesses. We begin our discussion by highlighting the nature of transactions in a merchandising business activities from service business. A merchandising entity earns its revenue by selling products, called merchandise or merchandising inventory. A merchandising firm may be a wholesaler, which buys goods for resale to retailers, or a retailer, which buys goods for resale to find customers. The goods purchased and held for resale, whether wholesale or retail, are known as merchandise and held apart from all other inventories Income Measurement Process for a Merchandiser Gross Profit = Sale – Cost of Good Sold (COGS) Net Income (Loss) = Gross Profit – Operating Expense

4

Merchandising businesses operating cycle (cash to cash) involves a. buy merchandise inventory b. sell inventory c. obtain Accounts Receivable d. receive cash There are two methods of accounting for merchandise: PERPETUAL INVENTORY method and PERIODIC INVENTORY method. Under perpetual inventory method, cost of goods sold and ending inventory may be determined from the accounting records without a physical counting of goods. It requires a maintenance of records called stock cards which shows a running balance of the inventory increases and decreases. When a periodic inventory method is used, cost of goods sold and the ending inventory is determined by physically counting the items and multiplying the number of items counted by its cost. Only the periodic inventory method will be taken up in this self-learning module. The perpetual inventory method will be taken up in higher accounting courses.

What is It

A. TERMS OF PURCHASE Merchandise can be purchased on any of the following terms: 1. On Cash Basis – The buyer pays cash for the amount of merchandising purchased. Example:

On June 1, 2019, Mr. Cruz bought merchandise worth P 50,000 and paid cash, therefor.

Journal Entry: Date Account Title & Explanation 2019 June 1 Purchases Cash

F

Debit

Credit

P 50,000 P 50,000

2. On Credit Basis – The buyer receives the merchandise. The payment is on a specific future date. Example:

On July 1, Mr. Cruz bought merchandise worth P 20,000 on account.

Journal Entry: Date Account Title & Explanation 2019 July 1 Purchases Account Payable

F

Debit

Credit

P 20,000 P 20,000

5

3. On credit basis supported by a promissory notes – The buyer receives the merchandise. The payment is made through a signed promissory note. Example:

On August 1, Mr. Cruz purchased again P 30,000 worth of merchandise and issued a promissory note.

Journal Entry: Date Account Title & Explanation 2019 Aug 1 Purchases Note Payable

F

Debit

Credit

P 30,000 P 30,000

4. With a down payment and the balance on account – The buyer receives the merchandise and pays partially the amount of goods purchased. The balance will be paid on a specific date. Example:

On September 1 he bought P 40,000 merchandise by paying P 10,000 down payment and the balance on account.

Journal Entry: Date Account Title & Explanation 2019 Sept 1 Purchases Cash Accounts payable

F

Debit

Credit

P 40,000 P 10,000 P 30,000

5. With a down payment and the balance is supported by a promissory note – The buyer paid partially the amount of goods purchased and issued a promissory note for the balance. Example:

He bought P 60,000 worth of merchandise by giving a P 20,000 down payment and issued promissory note for the balance.

Journal Entry: Date Account Title & Explanation 2019 Oct 1 Purchases Cash Notes payable

F

Debit

Credit

P 60,000 P 20,000 P 40,000

6. With a down payment and part of the balance supported by a promissory note and the other part of account. Example:

On November 1, Mr. Cruz purchased P 50,000 worth of merchandise. He gave a down payment of P 15,000, issued a P 20,000 promissory note and promised to pay the balance within ten days.

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Journal Entry: Date Account Title & Explanation 2019 June 1 Purchases Cash Note payable Account payable

F

Debit

Credit

P 50,000 P 15,000 P 20,000 P 15,000

B. PURCHASE RETURN AND ALLOWANCES When goods delivered to the buyer are not within the purchase order specification, defective or damaged, the seller allows the buyer to return the goods and makes the corresponding deductions from the customer’s account or a corresponding cash refund is given. Sometimes the buyer is not required to return the goods and the seller in that case made the necessary deduction on his accounts which is called allowances. Example 1: Mrs. Abby returned P 3,500 of the goods he purchased on cash basis Journal Entry: Date Account Title & Explanation 2019 June Cash 30 Purchase return and allowances

F

Debit

Credit

P 3,500 P 3,500

Example 2: On July 1, Mrs. Abby returned P 3,500 of the merchandise he purchased on credit (if the purchase is on account). Journal Entry: Date Account Title & Explanation 2019 June 1 Account payable Purchase return and allowances

F

Debit

Credit

P 3,500 P 3,500

C. DISCOUNTS ON PURCHASES There are two discounts granted to the purchases of the goods: the cash discount and the trade discount. 1. Cash discount – is a certain percentage of the purchase price granted to the buyer if the latter pays within a specified period from the date of the purchase. Example:

On May 1, 2019, ABC Store brought P 20,000 worth of merchandise from HACE Trading on credit. Terms: 2/10, 1/20, n/60

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Discount

No Discount

2/10, 1/20, n/60 Maturity date Days The terms 2/10, 1/20, n/60 mean that 2% discount is granted if the account is paid within 10 days from the invoice date, or if not paid within the first 10 days, 1% discount is granted if paid within the next 10 days (10+10 = 20 days) from the invoice date. Otherwise, if not paid within this period, account must be settled within the next 40 days (20 + 40 = 60 days) from the invoice date without discount. Suppose ABC Store paid its account on May 8, (8 days from the invoice date) Computation: Invoice price Less: Discount (.02 x P 20,000) Amount of payment Journal Entry: Date Account Title & Explanation 2019 May 8 Account payable – HACE Trading Purchase discount Cash

P 20,000 400 P 19,600

F

Debit

Credit

P 20,000 P 400 P 19,600

2. Trade discount – is a deduction from the catalog or list price granted to purchaser of good. Unlike the cash discount, trade discount is not recorded in the books of either the seller or buyer. Example:

The list price of product A is P 5 per unit. Mr. Cruz purchased 1,000 units and was granted a 10% trade discount. The amount of purchase, therefor is as follows:

Purchase (1,000 units @ P 5/unit) Less: 10% trade discount Amount of purchase

P 5,000 500 P 4,500

The amount recorded in the books of both the buyer and the seller is P 4,500 The following are the advantages of granting trade discount: 1. It encourages customers to buy in large quantities 2. It enables the seller to establish different prices to different customers 3. It facilitates an easier changing of price without changing the printed catalog price. 8

D. TERMS OF SALES Sales is an income account which consists of gross proceeds from the merchandise sold. It is recorded at selling price of good disposed of. The selling price consist of the cost of goods and the gross profit or mark ups, or gross loss or mark downs. Terms of Sales 1. on cash basis

Transactions

2. on credit basis

3. on credit basis supported by a note 4. with down payment and the balance on account

5. with down payment and the balance is supported by a promissory note.

RMS Trading sold merchandise worth P 20,000 cash to Mr. Tan RMS Trading sold merchandise on account to Mrs. Que, P 15,000 Received a 10-days 6% note for P 13,000 from A. Zobel for merchandise sold RMS Trading sold to E. Guan P 20,000 worth of merchandise and received P 5,000 down and the balance on account Sold merchandise to A. Garcia for P 40,000. Received P 5,000 down, 15day 6% not for P 15,000 and the balance on account.

Journal Entries Cash Sales

Debit

Credit

P 20,000 P 20,000

Account receivable Sales

P 15,000

Note receivable Sales

P 13,000

Cash Account receivable Sales

P 5,000 P 15,000

Cash Note receivable Account receivable Sales

P 5,000 P 15,000 P 20,000

P 15,000

P 13,000

P 20,000

P 40,000

E. SALES RETURN AND ALLOWANCES Occasionally, goods are returned for a refund or an allowance (reduction in the original price of the goods) is granted to a customer for defective or damaged goods. Example:

On September 1, 2019, Gabby’s Store sold merchandise worth P 10,000 to Shara on account. Two days after, Shara returned P 500 worth of defective merchandise.

Journal Entry: Date Account Title & Explanation 2019 Sept 1 Account receivable Sales Sept 3

Sales return and allowances Account receivable

F

Debit

Credit

P 10,000 P 10,000 P 500 P 500 9

F. DISCOUNT ON SALES Usually, like purchase activity, customers are granted discounts for early payment of accounts, this is called cash discount. Example:

On June 19, 2019, RMS Trading sold merchandise to Z. Lopez for P20,000. Terms 2/10, n/20. On June 28, Z. Lopez paid his account.

Journal Entry: Date Account Title & Explanation 2019 June Account receivable 19 Sales June 28

F

Debit

Credit

P 20,000 P 20,000

Cash

P 19,600

Sales discount Account receivable

P 400 P 20,000

Invoice Price Less: Discount (.02 x P 20,000) Amount received

P 20,000 400 P 19,600

G. ACCOUNTING FOR FREIGHT The sale agreement should indicate whether the seller or the buyer is to pay the cost of transporting the goods to the buyer’s place of business. The most common arrangements for freight costs are FOB SHIPPING POINT and FOB DESTINATION (FOB means Free On Board) 1. Freight In – or transportation in account is charge if payment is made for the transportation of goods purchased. The amount is part of the cost of goods sold. Example:

TGIF Trading paid P 1,500 for the shipment of merchandise bought.

Journal Entry: Date Account Title & Explanation 2019 June 1 Freight In Cash

F

Debit

Credit

P 1,500 P 1,500

2. Freight Out – or transportation out account is charge if payment is made for the transportation of goods sold. Unlike freight in, this amount is an operating expense of the business.

Example:

NTC Merchandising sold merchandise to Z. Lopez and paid for the delivery of goods sold, P 500. 10

Journal Entry: Date Account Title & Explanation 2019 June 1 Freight Out Cash

F

Debit

Credit

P 500 P 500

What’s More

SAMPLE TRANSACTIONS (Journalizing) A. P. Tuazon purchased P 10,000 worth of merchandise on June 1, 2019. Give the entries under the following terms of purchase. a. Cash basis b. Gave P 1,000 down payment and the balance is payable within 60 days Date 2019 June 1

June 1

Account Title & Explanation

F

Purchase Cash

Debit

Credit

P 10,000 P 10,000

Purchase Cash Accounts payable

P 10,000 P 1,000 P 9,000

B. On September 5, 2019, G. Padilla sold P 28,000 merchandise to P. Rodriguez. Record the particular sale transaction under the following terms of sale. a. on cash basis b. on account basis Journal Entry: Date Account Title & Explanation 2019 Sept 5 Cash Sales Sept 5

Accounts receivable – P. Rodriguez Sales

F

Debit

Credit

P 28,000 P 28,000 P 28,000 P 28,000

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What I Have Learned Instructions: Provide answers to the incomplete sentences. After reading and discussing the lesson of accounting cycle for a merchandising business, I realize that __________________________________________________________________________________ _________________________________________________________.

I feel that __________________________________________________________________________________ _________________________________________________________. I need to learn that __________________________________________________________________________________ _________________________________________________________.

What I Can Do A. TRUE or FALSE Instructions: Read the statement carefully. correct; FALSE if it is correct. provided before the number.

Write TRUE if the statement is Write your answers on the space

_______1. Purchase returns and allowances result from instances where the business returns the merchandise purchased. _______2. The term n/30 means that the net amount of invoice is due within 30 days after the invoice date. _______3. Defective goods returned by customers are credited to merchandise account. _______4. We debit the merchandise account for the purchase of office supplies. _______5. Cash purchase of supplies increases the assets. _______6. Trade discount is not recorded in the books of either the buyer or the seller. _______7. Merchandise account is credited when defective goods are returned to the supplier. _______8. Periodic inventory method requires physical count of goods at the end of each accounting period or as need arises. _______9. Sales discount and purchased discount are cash discount. ______10. If merchandise costing P 3,000 is purchased on terms 3/15, n/30, the date for paying the merchandise is 60 days after the date of purchase.

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B. Illustrative Case. Journalizing of Merchandising Transactions Required: Journalize the following transactions in a sheet of paper. RMS Global Marketing had the following transactions in June, 2019. Assume that the company uses the periodic inventory method. June 1 4 6 9 10

Purchased merchandise for P 60,000 on credit, terms 2/10, n/30 Sold merchandise for P 10,000 on credit, terms 2/30, n/30 Returned P 5,000 of the merchandise purchased June 1 for credit. Paid for merchandise purchased June 1, less return and discount. Received payment from the customer of June 4, less discount.

Use the following accounts to record the transactions; Cash, Purchases, Account Payable, Account Receivables, Sales, Sales Discounts, Sales returns and allowances

Assessment A. GLAMORE Marketing Glamore Marketing had the following transaction in May. Required: 1. Journalize the transactions under the periodic inventory system 2. Post the journal entries to the ledger using the following account titles: Cash, Accounts receivables, Accounts payable, Sales, Sales discount, Sales returns & allowances, Purchases, Purchase discounts and Purchase returns & allowances. 3. P...