ST.

THOMAS ACADEMY
Poblacion 3, City of Sto. Tomas, Batangas
School Year 2021-2022
First Semester

Fundamentals of Accountancy, Business, and Management 2

Grade 12 - ABM (Specialized Subject)
Module 1

Review of Financial Statement Preparation

Overview
Fundamentals of Accountancy, Business, and Management 2 deals with the preparation and analysis of
financial statements of a service business and merchandising business using horizontal and vertical analyses
and financial ratios. Knowledge and skills in the analysis of financial statements will aid future entrepreneurs
in making sound economic decisions. Therefore, it is but proper to have a review first of the accounting cycle
for merchandising operations that we discussed last semester, which will serve as your refresher module for
this semester’s course.

Learning Objective
At the end of this module, you will be able to perform the complete accounting cycle in merchandising type
of businesses.

Content
Summary of Important Merchandising Entries

Purchase of Merchandise Return of Merchandise Purchased

Purchases xxx Cash xxx
Cash xxx Purchase Returns and Allowances xxx
Purchases xxx
Accounts Payable xxx Accounts Payable xxx
Purchases xxx Purchase Returns and Allowances xxx
Cash xxx
Accounts Payable xxx
Freight-In xxx
Cash xxx

Partial Payment Full Payment

Beyond the Discount Within the Discount Period
Period
Accounts Payable xxx Accounts Payable xxx Accounts Payable xxx
Cash xxx Cash xxx Purchase Discount* xxx
Cash xxx

*Consider the following conditions before recognizing a discount:

1. Payment made should be in full (no remaining balance); and
2. The payment was made within the discount period.
3. Purchase Discount is equivalent to the valid purchases times the given discount rate.
Purchases ₱xxx
Less: Purchase Returns and Allowance xxx
Valid (Actual) Purchases Made xxx
x Discount Rate %
Purchase Discount ₱xxx

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 Sale of Merchandise Return of Merchandise Sold
Cash xxx Sales Returns and Allowances xxx
Sales xxx Cash xxx
Accounts Receivable xxx
Sales xxx Sales Returns and Allowances xxx
Cash xxx Accounts Receivable xxx
Accounts Receivable xxx
Sales xxx
Freight-Out xxx
Cash xxx

Partial Collection Full Collection

Beyond the Discount Within the Discount Period
Period
Cash xxx Cash xxx Cash xxx
A/R xxx A/R xxx Sales Discount* xxx
A/R xxx

*Consider the following conditions before recognizing a discount:

1. Payment received should be in full (no remaining balance); and
2. The payment was received within the discount period.
3. Sales Discount is equivalent to the valid sales times the given discount rate.

Sales ₱xxx
Less: Sales Returns and Allowance xxx
Valid (Actual) Sales Made xxx
x Discount Rate %
Sales Discount ₱xxx

Merchandise Inventory at the End of the Period

At the end of the period, entries are made to reflect in the inventory account the ending balance. The
objectives of these entries are as follows:

a. to remove the beginning balance from the merchandise inventory account and to transfer it
to income summary.
b. to enter the ending balance in the merchandise inventory account and to establish it in the
income summary.

Example:
Merchandise Inventory

Jan. 1 Beginning Balance P 528,000.00 Dec. 31 Effect A (Beg. Bal) P 528,000.00

Dec. 31 Effect B (Ending Bal) 483,000.00

Income Summary

Dec. 31 Effect A P 528,000.00 Dec. 31 Effect B P 483,000.00

In this example, merchandise inventory was P528,000.00 at the beginning of the year and P483,000.00 at
the end of the year.

Effect A removed the P528,000 from the merchandise inventory account and transferred it to income
summary. In income summary, the P528,000 is in effect added to net cost of purchases because, like
expenses, the balance of the purchases account is debited to income summary by a closing entry.

Effect B established the ending balance of merchandise inventory of P483,000 and entered it as a credit in
the income summary account. The credit entry in income summary has effect of deducting the ending

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inventory from goods available for sale because both purchases and beginning inventory are entered on the
debit side.

To summarize, beginning merchandise inventory and purchases are DEBITS to income summary; while
ending merchandise inventory is a CREDIT to income summary.

Thus, the objectives stated above are accomplished if effects A & B concurred. The question then arises as
to how to achieve these effects. Two acceptable methods are available - the adjusting entry method and the
closing entry method. Each method produces exactly the same effect.

The Closing Entry Method

The closing entry method makes a debit and the credit to merchandise inventory by including them among
the closing entries as follows:

Dec. 31 Income Summary xxx

Merchandise Inventory, Beginning 528,000.00
Temporary Accounts with DEBIT Balances xxx
To close temporary accounts with debit balances and to
remove beginning inventory.

Dec. 31 Merchandise Inventory, Ending 483,000.00

Temporary Accounts with CREDIT Balances xxx
Income Summary xxx
To close temporary accounts with credit balances and to
establish ending inventory.

Notice that in both methods, merchandise inventory is credited for the beginning balance and debited for the
ending balance and that the opposite entries are made to the income summary.

ACCOUNTING PRACTICE SET (Student-Led Discussion):

Comprehensive Problem: The following Chart of Accounts for Journalizing, Posting, Trial Balance, Closing
Entries and Posting Closing Trial Balance of THOR General Merchandise.

Code Account Title Code Account Title

10 Cash 61 Sales Discount
11 Accounts Receivable 62 Sales Returns and Allowances
12 Notes Receivable 70 Cost of Goods Sold
13 Merchandise Inventory 71 Purchases
14 Office Supplies 72 Freight In
20 Office Equipment 73 Purchase Discounts
21 Furniture & Fixtures 74 Purchase Returns and Allowances
30 Accounts Payable 75 Freight Out
50 Thor, Capital 76 Salaries Expense
51 Thor, Drawing 77 Utilities Expense
52 Income Summary 78 Advertising Expense
60 Sales

Mr. ULYSSES owned a business named THOR GENERAL MERCHANDISE and has the following
transactions for October 2020. On October 1, Ulysses received an inheritance from VAMCO
CALINAWAN worth 1,500,000 and invested 75% of which in the business.
October 05 Purchased furniture and fixtures for office use worth P86,400 on account.
07 Purchased P97,000 worth of goods from ROLLY Inc. on credit, with terms 4/10,
3/15, 2/25, n/30, and paid freight worth 2,450.
09 Sold goods to PEPITO Management worth P521,400. Terms 2/10, 1/20, n/30.
11 PEPITO found out that P89,580 worth of goods bought from ULYSSES were
defective and returned it.
14 The said defective goods were received by ULYSSES. The cost of which is
P42,000 which also returned to ROLLY Inc.

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 16 Paid the following expenses: salaries - P41,300, utilities - P63,700
and advertising P75,400.
19 Sold Merchandise to TONYO Management, P280,400 in Cash.
Collected amount due from PEPITO’s account.
21 Purchased merchandise worth P65,800 in Cash.
Paid ROLLY Inc. of its account.
Bought office supplies in cash, P8,500.
24 Ulysses has taken P25,445 in the business.
27 Purchased goods worth P112,200 in cash.
31 Sold goods to SIONY in Cash, P390,500.
Upon checking of the products sold, SIONY notice that 27,900 of the said goods
were defective and returned the items to Thor.

Additional information: Merchandise inventory at the end of the month amounted to P58,600.

Required:
1. General Journal (including the closing entries, no adjustments)
2. General Ledger (no required worksheet)
3. Financial Statements
4. Unadjusted and Post-Closing Trial Balances

References
Rabo, J.S., et al (2016-R2). Fundamentals of Accountancy, Business, and Management 1. Quezon City,
Philippines. Vibal Group, Inc.

Ballada, W.B. (2020). Fundamentals of Accountancy, Business, and Management 2 (2nd ed.). Sampaloc,
Manila, Philippines: DomeDane Publishing House Inc.

Lecture Notes in Bookkeeping NCIII by Mr. Krist Mark Q. Macapugay, MBA

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