Fundamentals of Accountancy, Business

and Management 1
Module 12:
Accounting Cycle of a Merchandising Business

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 – Records Transactions of a Merchandising Business in the
General and Special Journals

After going through this module, you are expected to:

1. define general and special journals;
2. identify the use of general and subsidiary ledgers; and
3. journalize merchandising business transactions in the general and
special journals.
 What I Know

Directions: Write J if the following transactions require a journal entry and

NJ if not.

1. Sale of merchandise to a customer

2. Collection of accounts receivable

3. Increase in inflation rate

4. Hiring of office secretary

5. Election of new company president

6. Return of purchased goods

7. Payment of freight cost

8. Canvass of office equipment

9. Purchase of inventory

10. Grant of sales discount

Lesson Journalizing the
1 Transactions of a
Merchandising Business

Transactions having effects on the company’s books require journal

entries. These journal entries are recorded in either the general journal or
special journal. This is the second step in the accounting cycle.

What’s In

Activity 1. Determine the normal balances of the following accounts by

putting an up arrow ( ) for increase and a down arrow ( ) for decrease in the
debit and credit column.

Account Classification Debit Credit

Asset

Liabilities

Owner’s Equity

Revenue

Expense
 Notes to the Teacher
Business transactions are recorded in the journals using debits
and credits.

What’s New

Directions: Read and answer the following questions.

Assume that #WeHealAsOne Drugstore experiences thousands of

transactions each day, what will be your initial step to compile and
summarize these financial transactions?

Questions:
 1. Where business owners do records their identified transactions?
2. What are the tools that being used to document these transactions?
3. How important are these records in accounting?

What is It

Businesses initially record transactions and events in chronological

order. Thus, the journal is referred to as the book of original entry. There
are two types of journals, the general journal and the special journal.
1. General Journal – contains all journal entries of a company.

2. Special Journals – to eliminate the problem of congestion of recording

repeating business transactions in the general journal, other
businesses use special journals. The following are the example of
special journals:

a. Cash Receipts Journal –used to record all cash that had been
received

b. Cash Disbursements Journal –used to record all transactions

involving cash payments

c. Sales Journal (Sales on Account Journal) –used to record all

sales on credit (on account)

d. Purchase Journal (Purchase on Account Journal) –used to

record all purchases of inventory on credit (or on account)

INVENTORY SYSTEMS
Perpetual Inventory System – updating of inventory is done every time
there are changes in the quantity of the goods. (High Price – Low Volume)

Periodic Inventory System – updating of inventory is done periodically

which is usually one or twice a year through physical counting. (Low price –
High Volume)

PURCHASES
 Perpetual Periodic
a) Purchase of merchandise on cash basis
Inventory xx Purchases xx
Cash xx Cash xx
b) Purchase of merchandise on account
Inventory xx Purchases xx
Accounts xx Accounts xx
Payable Payable
c) Purchase returns and allowances (cash basis)
Cash xx Cash xx
Inventory xx Purchase xx
returns and
allowances
d) Purchase returns and allowances (on account)
Accounts xx Accounts xx
Payable Payable
Inventory xx Purchase xx
returns and
allowances
e) Purchase Discount
Accounts Payable xx Accounts Payable xx
Cash xx Purchase xx
Discount
Cash xx

SALES REVENUE

Perpetual Periodic
a) Sale of merchandise on a cash basis
Cash xx Cash xx
Sales xx Sales xx
Cost of Goods Sold xx
Inventory xx
b) Sale of merchandise on account
Accounts Receivable xx Accounts Receivable xx
Sales xx Sales xx
Cost of Goods Sold xx
Inventory xx
c) Sales returns and allowances (cash basis)
Sales xx Sales returns and allowances xx
Cash xx Cash xx
Inventory xx
Cost of Goods xx
Sold
d) Sales returns and allowances (on account)
Sales xx Sales returns and allowances xx
Accounts xx Accounts xx
Receivable Receivable
Inventory xx
Cost of Goods xx
Sold
e) Sales discount
Cash Cash xx
xx Sales Discount xx
Accounts xx Accounts xx
Receivable Receivable

TRANSPORTATION/FREIGHT COSTS

Perpetual Periodic
a) Payment of freight on merchandise purchased (FOB Shipping Point)
Inventory xx Freight-In xx
Cash xx Cash xx
b) Payment of freight on merchandise sold (FOB Destination)
Transportation Expense xx Freight-Out xx
Cash xx Cash xx

What’s
More

Directions: Prepare the journal entries of the following transactions for

#LearnAsOne Bookstore using perpetual and periodic inventory systems.

Feb. 01 Purchase merchandise from Beng Book costs P30,000 on which

cash has been paid immediately.

05 Returned P2,000 worth of defective merchandise. Cash is received

upon return of merchandise.

15 Sale on account has been made to School Office Supplies. Goods

sold are worth P10,000. Selling price is 20,000.

18 Sales worth P5,000 were returned by School Office Supplies as

wrong products have been delivered

20 The remaining balance of the receivable related to School Office

Supplies was collected
 What I Have Learned

Mind Mapping. Complete the mind map below by linking the sub-related
topics to the relevant subheadings.
 What I Can Do

Activity: Answer the following questions:

1. Give three examples of businesses that use the perpetual inventory
system within your community.

2. Give three examples of businesses that use the periodic inventory

system within your community.
Rubrics for Essay:
Content Organization Conventions
3 Substantial, specific, Sophisticated Evident control of
points and/or illustrative arrangement of grammar,
content content with evident mechanics,
demonstrating strong and/or subtle spelling, usage
development and transitions. and sentence
sophisticated ideas. formation.
2 Sufficiently developedFunctional Sufficient control
points content with adequate arrangement of of grammar,
elaboration or
content that mechanics,
explanation. sustains a logical spelling, usage
order with some and sentence
evidence of formation.
transitions.
1 Limited content with Confused or Limited control of
point inadequate inconsistent grammar,
elaboration or arrangement of mechanics,
explanation. content with or spelling, usage
without attempts at and sentence
transition. formation.

Assessment

I. Directions: Journalize the transactions in the general journal. Use

periodic inventory system.

Mr. Malakas Ko started a merchandise business on December 1, 2019.

He named the business #KayaKoTo Computer Store. The Store is located in
the biggest mall in Pampanga. Transactions that occurred in December were
as follows:
Dec. 1 Mr. Ko invested P300, 000 to start the business.

2 Purchased office equipment P20,000.

3 Purchased 10 units of computers on account for P10,000 each

 from Maliksi Company and it will cost P2,000 to deliver the goods.
Under the terms: FOB Shipping Point, 2/10, n30.

4 Purchased office supplies worth P2,000 using cash.

7 Returned one computer unit damaged during shipment.

9 Full payment to Maliksi Company was made.

12 Sold one unit for cash to Marie Cruz for P20,000 (PHP10,000 per
unit), FOB Shipping Point.

15 Sold two units on account to Ms. Reyes for P40,000 (PHP10,000

per unit) with terms 3/10, n/30, FOB Shipping Point.

17 Ms. Reyes returned one unit of the computers because it is more

than what they need.

23 Ms. Reyes paid the said account in full.

27 Mr. Ko withdrew P5,000 for personal use.

30 Paid various expenses for the month: Salaries – P2,000, Utilities-

P2,000, Rent-P3,000.

Chart of Accounts

Assets Revenue
101 Cash
102 Accounts Receivable 401 Sales
103 Office Supplies 402 Sales Return And Allowances
104 Office Equipment 403 Sales Discount

Liabilities Expenses

201 Accounts Payable 501 Purchases

502 Purchase Return and Allowances
Equity 503 Purchase Discount
504 Freight-In
301 Ko, Capital 505 Rent Expense
302 Ko, Drawing 506 Utilities Expense
507 Salaries Expense
601 Income Summary
 Additional Activities

Directions: Classify the business transactions of #KayaKoTo Computer

Store owned by Mr. Malakas Ko as to what special journal is applicable.

Cash Receipts Cash Disbursements

Sales Journal Purchase Journal
Journal Journal