2nd QTR SLM FundamentalsABM1 Complete

Senior High School
FUNDAMENTALS OF ACCOUNTANCY,
BUSINESS AND MANAGEMENT 1
Quarter 2
Self – Learning Module

SELF LEARNING MODULE
FUNDAMENTALS OF ABM1
SECOND QUARTER
MODULE 1:
Nature Transaction of Merchandising
Business
Writer: RANDY M. DAVID

Calamba Bayside Integrated School
Reviewer: ISABELITA R. HIZON
Department of Education│R4A│Division of Calamba City

Office Address: DepEd Bldg., City Hall Compound, Brgy. Real, Calamba City
Landline: 049–554 9830 loc. 14
Email Address: [email protected]
Introductory Message
For the facilitator:
Welcome to the Fundamentals of Accountancy, Business and Management 1.

Alternative Delivery Mode (ADM) Module on Accounting Cycle of Merchandising
Business.
This module was collaboratively designed, developed and reviewed by educators

both from public and private institutions to assist you, the teacher or facilitator in
helping the learners meet the standards set by the K to 12 Curriculum while
overcoming their personal, social, and economic constraints in schooling.
This learning resource hopes to engage the learners into guided and independent
learning activities at their own pace and time. Furthermore, this also aims to help
learners acquire the needed 21st century skills while taking into consideration their
needs and circumstances.
In addition to the material in the main text, you will also see this box in the body of the
module:
As a facilitator you are expected to orient the learners on how to use this module. You
also need to keep track of the learners' progress while allowing them to manage their own
learning. Furthermore, you are expected to encourage and assist the learners as they do
the tasks included in the module.
For the learner:
Welcome to Fundamentals of Accountancy, Business and Management 1 Alternative

Delivery Mode (ADM) Module on Accounting Cycle of Merchandising Business.
The hand is one of the most symbolized parts of the human body. It is often used to depict
skill, action and purpose. Through our hands we may learn, create and accomplish.
Hence, the hand in this learning resource signifies that you as a learner is capable and
empowered to successfully achieve the relevant competencies and skills at your own
pace and time. Your academic success lies in your own hands!
This module was designed to provide you with fun and meaningful opportunities for
guided and independent learning at your own pace and time. You will be enabled to
process the contents of the learning resource while being an active learner.
The following are some reminders in using this module:
1. Use the module with care. Do not put unnecessary mark/s on any part of
the module. Use a separate sheet of paper in answering the exercises.
2. Read the instructions carefully before doing each task.
3. Observe honesty and integrity in doing the tasks and checking your
answers.
4. Finish the task at hand before proceeding to the next.
5. Return this module to your teacher/facilitator once you are through with it.
6. If you encounter any difficulty in answering the tasks in this module, do not
hesitate to consult your teacher or facilitator. Always bear in mind that you
are not alone.
7. We hope that through this material, you will experience meaningful learning
and gain deep understanding of the relevant competencies. You can do it!
WEEK
1 Nature Transactions of
Merchandising Business
I
This module was written for you to accomplish at home. It was carefully designed so
that you can work at your own pace and allow self-discovery of the concept through activities
that you will perform. Activities were also selected to allow independent learning which also
aims to develop students’ reading comprehension skills through understanding written texts.
This is designed for you learners so to be able to:
1. Describes the nature of transactions in merchandising business.
PRE-TEST:
Directions: Write T if the statement is true and F if it is false.
__________ 1. In Perpetual inventory system the inventory records are updated periodically
base on physical inventory counts.
__________ 2. In Periodic inventory system cost of goods sold is calculated only at the end of
the accounting period.
__________ 3. The perpetual system is a more suitable system for companies selling high-
priced products.
__________ 4. In periodic inventory system, cost of goods sold is calculated at the time of each
sale.
__________ 5. Purchase invoice should support each cash purchase.
__________ 6. A business engaging in the purchasing and sale of products or goods is

considered as trading or merchandising firm.
__________ 7. The goods that a company buys in order to resell are known as merchandise.
__________ 8. A merchandising business is an enterprise composed of a professional or team

of experts that deliver work or aid in completing a task for the benefit of its
customers.
__________ 9. Seller is a person or company that sells goods in large quantities at low prices,
typically to retailers.
__________ 10. Retailer is a person or business that sells goods to the public in relatively small
quantities for use or consumption rather than for resale.
D
Businesses are either classified as product-oriented firms, service-oriented
firms, or a combination of both. Now we're going to focus on product-oriented firms
and appreciate the essence of the merchandising business.
NATURE OF A MERCHANDISING BUSINESS
A business engaging in the purchasing and sale of products or goods is considered as

trading or merchandising firm. While a service type of business receives revenue by delivering
services to its customers, a merchandising type of business creates income by purchasing and
selling products for profit. In addition, the merchandising industry is also distinct from the
manufacturing business. The manufacturing company buys raw materials and transforms
them into finished products for sale. In the other hand, a merchandising company buys and
sells only finished products. The merchandiser orders these items either from the retailer or
from other retailers.
TYPES OF MERCHANDISERS
1. Wholesaler - a person or company that sells goods in large quantities at low prices,
2. Retailer - a person or business that sells goods to the public in relatively small quantities
for use or consumption rather than for resale.
MERCHANDISING OPERATIONS
In a merchandising business, two main activities are involved, namely, buying and selling.
There are also two points of view considered in the documentation of the merchandising
business transactions. These are the points of view of both the buyer and the seller.
Inventory Systems in a Merchandising Business
Since a merchandising company purchases products for sale in the ordinary course of its
business, the goods purchased form part of the goods available for sale. The inventory of goods
is therefore an important factor in the determination of these goods as well as the cost of sales.
The two alternative methods that can be used to document transactions relating to a
company's inventory of goods are the periodic system and the perpetual system.
1. The Periodic System
For companies selling products with various low-priced objects, the periodic system may have
a more suitable system to use. The sales transactions resulting from the selling of these low-
priced goods are high. As such, it is not possible to track from the records the cost of each
small item every time the sale is over. For example, a supermarket cannot track the cost of
every bar of soap or bottle of shampoo sold. Businesses selling low-priced products typically
calculate the cost of goods sold at the end of the accounting period.
Under the periodic system, transactions relating to the acquisition of inventories are
recorded accordingly as purchases, purchase discounts and purchase returns and allowances.
The cost of transporting the goods shouldered by the purchaser shall be recorded as freight-
in. In addition, transactions relating to the selling of inventories are reported accordingly as
sales, discounts on sales and returns on sales and allowances. The cost of shipping the goods
shouldered by the seller shall be reported as freight-out or cost of delivery.
2. The Perpetual System
The perpetual system is a more suitable system for companies selling high-priced
products. Car dealers and expensive watch stores make few sales every day. These sales are
small and, because the price per item is material, the cost of each item sold can be recorded
as the cost of the product sold per sales transaction. Thus, the running balance of
inventories on hand and the cost of sales are continuously seen. At the end of the accounting
period, the balance of the final inventory should be the same as the actual physical count,
unless there is a fraud, obsolescence or spoilage of goods.
Note: Whatever inventory system a company chooses to use, either the periodic system
or the perpetual system, it should produce the same final inventory and net revenue for
the company.
 Goods that a company buys in order to resell are known as merchandise.
 A merchandising business is one that buys and sells goods in order to make a profit
 Manufacturing company buys raw materials and transforms them into finished
products for sale.
 For companies selling products with various low-priced objects, the periodic
system may have a more suitable system to use.
 The perpetual system is a more suitable system for companies selling high-priced
products.
 Inventory records are updated periodically based on physical inventory counts.
 The perpetual inventory systems provide a continuous record of Merchandise
Inventory and Cost of Goods Sold.
 Purchase Invoice should support each credit purchase.
E
Learning Task 1: Check Your Understanding
1. What is a good?
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
2. What is a merchandising firm?
____________________________________________________________________________________
_____________________________________________________________________________________
_____________________________________________________________________________________
3. What are the two types of merchants?

a. _____________________________________________________________________
b. _____________________________________________________________________
4. Discuss the periodic inventory systems in your own words.
____________________________________________________________________________________
____________________________________________________________________________________
___________________________________________________________________________________
5. In your own words, discuss the perpetual inventory systems.

____________________________________________________________________________________
_____________________________________________________________________________________
_____________________________________________________________________________________
A
POST-TEST:
__________ 1. A business engaging in the purchasing and sale of products or goods is

considered as trading or merchandising firm.
__________ 2. The goods that a company buys in order to resell are known as merchandise.
__________ 3. A merchandising business is an enterprise composed of a professional or team

of experts that deliver work or aid in completing a task for the benefit of its
customers.
__________ 4. Seller is a person or company that sells goods in large quantities at low prices,
__________ 5. Retailer is a person or business that sells goods to the public in relatively small
quantities for use or consumption rather than for resale.
__________ 6. In Perpetual Inventory System, the inventory records are updated periodically
base on physical inventory counts.
__________ 7. In Periodic inventory system cost of goods sold is calculated only at the end of
the accounting period.
__________ 8. The perpetual system is a more suitable system for companies selling high-
priced products.
__________ 9. In periodic inventory system, cost of good sold is calculated at the time of each
sale.
__________ 10. Purchase invoice should support each cash purchase.

Additional Activities
REFLECTIVE LEARNING SHEET
Student:
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Answer Key
SECOND QUARTER
MODULE 2:
Records Transaction of Merchandising
Business
Writers: ELMO G. BAUTISTA

KENT E. UNTALAN
Punta Integrated School

Landline: 049–554 9830 loc. 14

Alternative Delivery Mode (ADM) Module on Accounting Cycle of Merchandising Business.

In addition to the material in the main text, you will also see this box in the body of the module:
As a facilitator you are expected to orient the learners on how to use this module. You also need
to keep track of the learners' progress while allowing them to manage their own learning.
Furthermore, you are expected to encourage and assist the learners as they do the tasks
included in the module.
For the learner:

The hand is one of the most symbolized parts of the human body. It is often used to depict skill,
action and purpose. Through our hands we may learn, create and accomplish. Hence, the hand
in this learning resource signifies that you as a learner is capable and empowered to successfully
achieve the relevant competencies and skills at your own pace and time. Your academic success
lies in your own hands!
answers.
are not alone.
WEEK
Records Transactions of
2 Merchandising Business
I
This module focus on merchandising business. This is designed for you learners so to
be able to:
 Records transactions of a merchandising business in the general and special

journals.
D
A merchandising business is a type of business that buys and sells goods in order to
make a profit. The goods that they buy and sell are called merchandise.
Merchandise inventory is the key factor in determining cost of sales.
A merchandise may be accounted for under one of two inventory methods:
1. Perpetual inventory is an alternative to periodic inventory system. In this inventory

system, the inventory account is continuously updated. Since an inventory is
continuously updated, it requires that at the time of purchase and merchandise
acquisitions be recorded as debits to the inventory account and at the time of sale, the
cost of sales is determined and recorded by a debit to the cost of sales account and a
credit to the inventory account.
2. Periodic inventory is primarily used by businesses that sell relatively inexpensive goods
and that are yet to utilize computerized scanning systems for analyzing goods sold. Its
characteristic is that no entries are made to the inventory account as the merchandise is
bought and sold. Only at the end of the period, when the inventory is counted, will entries
be made into the inventory account to establish its proper balance.
For this lesson, perpetual inventory system is assumed in the examples. There are
additional accounts that must be added to a merchandising company’s chart of accounts:
 Merchandise inventory -to account for the value of merchandise held for sale
 Sales -to account for the sale of merchandise at the sales price.
 Sales returns and allowances -to account for returned and damaged merchandise
 Sales discounts -to account for discounts offered to customers for prompt payment.
 Cost of goods sold -to account for the cost of merchandise sold
 Shipping expense -to account for the cost of shipping merchandise to customers
The most common types of transactions for merchandising companies are:

1. Purchase of merchandise- a merchandise should be purchased first before it can be
sold. Source document used is a purchase invoice. Example: Avida Clothing Co.
purchased 100 pieces of assorted clothes for her boutique from Fabshoppe for the
purpose of reselling. The total purchase cost was 35,000 on account.
This is how it would look like in a journal entry:
xx Merchandise Inventory 35,000

Accounts Payable –
35,000
Fabshoppe
2. Sale of merchandise - the purpose of purchasing a merchandise is to resell it, generally

to earn a profit. Source document used is sales invoice. Two journal entries are required
to record the sale of merchandise in a perpetual inventory system - it is for the sales
price and the cost of goods sold. Example: Avida Clothing Co. sold 5 pieces of assorted
clothes on account for a total amount of 2,500 to B. Bradford . The total cost of goods
sold was 1,750.
Accounts Receivable –
xx 2,500
B.Bradford
Sales 2,500
xx Cost of Merchandise Sold 1,750
Merchandise Inventory 1,750
3. Purchase return - at times, a merchandise can be returned to the vendor where a the
goods are sold or an adjustment is made to the amount due for the merchandise
(allowance). Source document used is a debit memorandum. Example: Avida Clothing
Co. returned 10 pieces of damaged clothes to Fabshoppe for the purpose of reselling.
The total value of merchandise returned is 3,500.
xx Accounts Payable - Fabshoppe 3,500

4. Sales return - just like returning a purchased merchandise, a good sold can also be
returned to the reseller. An adjustment is made to the amount due of the merchandise
(allowance). Source document used is a credit memorandum. Two journal entries are
also required to record the sale of merchandise in a perpetual inventory system - it is
for the sales price and the cost of goods sold. Example: Bradford returned 2 pieces of
clothes for an amount of 1,000. The total cost of the clothes was 700.
xx Sales Returns and Allowances 1,000

Accounts Receivable –
1,000
B.Bradford
xx Merchandise Inventory 700

Cost of Merchandise Sold 700
Payment on account - a purchase made which has not been paid yet
Receipt on account - a sale which has not been received yet
Take note: Merchandise is often purchased on account. Many vendors offer a discount if
the invoice is paid within a specified period of time that is less than the full credit term
(payment due date).
It is usually stated like this - 3/10, n/45 - read as “Three ten, net forty-five”, means
that the buyer will get 3 percent discount if the invoice is paid within 10 days of the invoice
date, if not the total amount is due within 45 days.
The discount is deducted directly from the merchandise inventory account. The effect of
a purchase discount is to reduce the cost of the merchandise purchased. It is accomplished by
crediting Merchandising Inventory.
Example: Sample Invoice

Invoice
Date: Jan. 16, 2017
Terms: 2/10, n/30
Item:
Assorted clothes – 100
pieces @ P350 each
35,000
Total Due P 35.000
The credit term for this invoice indicates that if this invoice is paid by Jan 26 (10 days
after the invoice date), the buyer may take 2% discount on the total merchandise price.
Otherwise, the total amount must be paid by Feb. 26.
A compound journal entry is required to journalize the entry to record payment of an
invoice when the discount is taken.
Note: Discounts are calculated based on its merchandise price ONLY
Assuming that Avida Clothing Co. Pays the invoice on Jan 23 and no merchandise has
been returned or granted an allowance.
xx Accounts Payable – Fabshoppe 35,000
Cash 34,300
Merchandise Inventory 700
Now, try to make a journal entry granting that there was a purchase return in reference
to the example on purchase returns. Assuming that Avida Clothing Co. Pays the invoice on
Jan 23 with an allowance for 10 pieces of damaged clothes.
xx Accounts Payable – Fabshoppe 31,500

Cash 30,870
Merchandise Inventory 630
E
Learning Task 1:
Prepare journal entries to record each of the merchandising transactions assuming

that the company records sales using the net method and a perpetual inventory system.
Apr. 1 Sold merchandise foe P3,000, with credit terms n/30; invoice dated April 1. The cost of the
merchandise, which had cost of the merchandise is P1,800.
Apr. 4 The customer in the April 1 sale returned P300 of merchandise for full credit. The
merchandise, which had cost P180, returned to inventory.
Apr. 8 Sold merchandise for P1,000, with credit terms of 1/10, n/30; invoice dated April 8. Cost of
the merchandise is P700.
Apr. 11 Received payment for the amount due from the April 1 sale less the return on April 4.
A
Learning Task 2:
Multiple Choice: Read and understand the following statements Write the letters of
the CORRECT answer on the separate sheet of paper.
1. Which among these types of inventory method continuously updates the inventory
account?
A. Periodic Inventory C. Yearly Inventory
B. Perpetual Inventory D. All of these are correct
2. Which of these is added in merchandising company’s chart of accounts to account for
discounts offered to customers for prompt payment?
A. Cost of goods sold C. Sales
B. Merchandise inventory D. Sales discount
3. It is the primarily used by business that sell relatively inexpensive goods.
A. Journal C. Perpetual Inventory
B. Periodic Inventory D. None of these are correct
4. Complete the journal entry with the correct account titles/names and/or amounts.
On Feb 27, G. Felicio paid 1,200.
27 Cash 1,200
? 1,200
A. Accounts Receivable-G. Felicio C. Sales

B. Owner, Capital D. none of these are correct
5. This kind of business buys and sells goods to earn a profit.
A. Manufacturing Business C. Service Business
B. Merchandising Business D. None of these are correct.
6. In 3/10, n/45 read as “Three ten, net forty-five”, 3/10 means percentage. If this is
converted to decimal, it will be 0.03. So the discount of the customer is 3%.
A. True
B. False. It means a buyer is given 3% discount within 10 days from the invoice date.
C. False. It means if buyer will add 3 more purchase, he will get 10% discount until the
due date.
D. None of these are correct
7. The first entry for the sale of merchandise should show the reduction in merchandise
should show the reduction in merchandise and the recognition of an expense for the cost
of the merchandise sold?
A. True
B. False. It should show revenue of the sale and the reduction of merchandise.
C. False. It should show the sale of merchandise and the receipt of cash or receivable.
8. A debit memorandum is a source document used for sales returns.
A. True
B. False. It is used for purchased returns.
C. False. It is used for purchased of merchandise
9. What is the key factor in determining cost of sales?
A. Capital C. Merchandise inventory
B. Cost of goods D. All of these are correct
10. A full credit term means the due date of an invoice.
A. True
B. False. It is the last day when a buyer can avail of the discount.
C. False. It is the total amount of money owing less the discount.
D. None of the above
11. Purchase of merchandise use sales invoices as source of document.
A. True C. False. It uses credit memorandum.
B. False. It uses invoices D. None of these are correct
12. What do you call the goods that are bought and sold in a merchandising business?
A. Asset C. Merchandise
B. Item D. All are correct
13. Complete the journal entry with the correct account titles/names and/or amounts.
On Feb 13, the owner discarded few expired merchandise worth 400 from his
purchase from Lily Merchandising and received an allowance from the vendor.
13 Accounts Payable-Lily’s 400
Merchandising
? 400
A. Cash C. Notes Payable

B. Merchandise Inventory D. None of these are correct
14. Which of these added in a merchandising company’s chart of accounts to accounts for
returned and damaged merchandise?
A. Cost of goods sold C. Sales
B. Merchandise inventory D. Sales returns and allowances
15. Sales is added to a merchandising company’s chart of accounts to account for the cost
of merchandise sold.
A. True
B. False. Sales discount is added to a merchandising company’s chart of accounts to
account for the cost of merchandise sold.
C. False. Cost of goods sold is added to a merchandising company’s chart of accounts
to account for the cost of merchandise sold.
Quexhub Application of Fundamentals of ABM 1
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https://www.google.com/search?q=records+transactions+of+merchandising+business&tbm=isch&ved=2ahUKE
References
Learning 1
Learning 2 No Date General Journal Debit Credit
1 Apr 1 Accounts receivable 3,000
1. B Sales 3,000
2. D
3. B 2 Apr 1 Cost of goods sold 1,800
Merchandise inventory 1,800
4. A
5. B 3 Apr 4 Sales returns and allowances 300
6. B Accounts receivable 300
7. C 4 Apr 4 Merchandise inventory 180
8. B Cost of Goods sold 180
9. C
5 Apr 8 Accounts receivable 1,000
10. A
Sales 1,000
11. B
12. C 6 Apr 8 Cost of goods sold 700
Merchandise inventory 700
13. B
14. D 7 Apr 8 Cash 2,700
15. C Accounts receivable 2,700
Answer Key
SECOND QUARTER
MODULE 3:
Posting of Transaction of Merchandising
Business in the General and Subsidiary Ledgers
Writer: PATRICK R. NAHIAL

Camp Vicente Lim IS

Landline: 049–554 9830 loc. 14

Alternative Delivery Mode (ADM) Module on Accounting Principles and Equation.

In addition to the material in the main text, you will also see this box in the body
of the module:
As a facilitator you are expected to orient the learners on how to use this module.
You also need to keep track of the learners' progress while allowing them to manage
their own learning. Furthermore, you are expected to encourage and assist the
learners as they do the tasks included in the module.
For the learner:
Welcome to Fundamentals of Accountancy, Business and Management 1

The hand is one of the most symbolized parts of the human body. It is often used to
depict skill, action and purpose. Through our hands we may learn, create and
accomplish. Hence, the hand in this learning resource signifies that you as a learner
is capable and empowered to successfully achieve the relevant competencies and
skills at your own pace and time. Your academic success lies in your own hands!
1. Use the module with care. Do not put unnecessary mark/s on any part of the
module. Use a separate sheet of paper in answering the exercises.
3. Observe honesty and integrity in doing the tasks and checking your answers.
hesitate to consult your teacher or facilitator. Always bear in mind that you are
not alone.
Week Posting of Transactions of
3 Merchandising Business in the General

and Subsidiary Ledgers
What I need to know

At the end of this lesson, you will be able to:
 Understand and solve for the Cost of Good Sold under periodic inventory
system
 Post transactions of a merchandising business in the general and subsidiary
ledgers
What I know
ACTIVITY NO. 1:
I. TRUE or FALSE
Direction: Before each statement, write TRUE if the statement is correct or FALSE
if the statement is incorrect.
1) A merchandising business sells goods that it produces.

2) A retail business is a manufacturer or distributor of goods
that sells to retailers or large customers.
3) The two main systems for accounting for merchandise held
for sale are called periodic and perpetual.
4) In a periodic inventory system, no attempt is made to record
the cost of merchandise sold at the date of the sale.
5) The purchases returns and allowances are debited
to Merchandise Inventory
6) Expenses incurred directly and entirely in connection with
the sale of merchandise are called administrative expenses.
7 The accounting cycle for a service business is the same with
that of a merchandising business.
8) There are two methods of accounting for inventory,
namely: Perpetual Inventory System and Periodic
Inventory System.
9) In periodic system, cost of goods sold is determined only at
the end of an accounting period.
10) In perpetual inventory system, detailed records of the cost
of each item are not maintained.
11) Sales allowance result when customers are dissatisfied
with merchandise and are allowed to return the goods to the
seller for credit or a refund.
12) The Cost of Goods Sold under the perpetual inventory
system is determined by getting the running balance in the
general ledger of the account.
13) Merchandise (or merchandise inventory) refers to goods
that are held for sale to customers in the normal course of
business.
14) A merchandising company may use special and general
journals to record its transactions.
15) A furniture store who manufacture their own product is
an example of merchandising business.
What is in
ACTIVITY NO. 2:
Let’s have a short review on our previous topic.
Direction: Give the journal entries for the following transactions of FABM
Company, a merchandising business under perpetual inventory system.
Assume that FABM Company purchased five units of computers on cash

for ₱10,000 per unit from a supplier on January 17, 2020 that were
subsequently sold to Jane Doe on January 18, 2020 under Charge Invoice No.
001 amounting to ₱90,000 (₱18,000 per unit) with terms 2/10, n/30, FOB
Shipping Point. On January 23, 2020, Doe paid the said account in full.
What is new
Last module, we discussed the two inventory methods of a merchandising
business: the perpetual inventory and periodic inventory system. On our last
lesson, we focus on how to record and journalize transactions using perpetual
inventory system.
For this lesson, we will learn more about the periodic inventory system.
INVENTORY SYSTEMS
Maintaining inventory items is a unique set-up in a merchandising

business. There are two methods of accounting for inventory, namely:
Perpetual Inventory System and Periodic Inventory System.
Merchandising entities may use either of the following inventory systems:
1. Perpetual System — Detailed records of the cost of each item are

maintained, and the cost of each item sold is determined from records when
the sale occurs. For example, a car dealership has separate inventory records
for each vehicle.
• Record purchase of Inventory.
• Record revenue and record cost of goods sold when the item is sold.
• At the end of the period, no entry is needed except to adjust inventory for losses,
etc.
2. Periodic System — Cost of goods sold is determined only at the end of
an accounting period. This system involves:
• Record purchase of Inventory.
• Record revenue only when the item is sold.
• At the end of the period, you must compute cost of goods sold (COGS):
How to compute for the Cost of Good Sold:

1. Determine the cost of goods on hand at the beginning of the accounting period
(Beginning Inventory = BI),
2. Add it to the cost of goods purchased (COGP),
3. Subtract the cost of goods on hand at the end of the accounting period
4. (Ending Inventory = EI) illustrated as follows:
PERIODIC INVENTORY SYSTEM
Recording purchases and related transactions under the Periodic

Inventory System
PURCHASES OF MERCHANDISE: PERIODIC SYSTEM
1. When merchandise is purchased for resale to customers, the account,

Purchases, is debited for the cost of goods purchased.
2. Like sales, purchases may be made for cash or on account (credit).
3. The purchase is normally recorded by the purchaser when the goods are
received from the seller.
 Each credit purchase should be supported by a purchase invoice.
 A purchase invoice received by the buyer is actually a sales invoice or a charge
invoice prepared by the supplier or vendor.
 Note that only purchases of merchandise are debited to the ‘Purchase’ account.
Acquisition (purchases) of other assets: supplies, equipment, and similar items
are debited to their respective accounts.
TO ILLUSTRATE:
Magaling Computer Store started its operations on January 2, 2016. The store
is located in Sikat Mall in Bicol. The owner invested PHP500,000 to start the
business. On January 3, 2016, Magaling purchased 20 units of computers on
account for PHP10,000 each. Upon delivery of the units, the supplier, Delta,
Inc., issued Charge Invoice No. 145 to Magaling.
PURCHASE RETURNS AND ALLOWANCES
 A purchaser may find the merchandise received to be unsatisfactory

because the goods are:
 damaged or defective
 of inferior quality
 not in accord with the purchaser’s specifications
 The purchaser initiates the request for a reduction of the balance due through
the issuance of a debit memorandum. The debit memorandum is a document
issued by a buyer to inform a seller that the seller’s account has been debited
because of unsatisfactory goods.
 A return of the merchandise (a deduction from the purchase price when

unsatisfactory goods are kept) is shown by the entry where Accounts Payable is
debited and Purchase Returns and Allowances is credited to show that the
purchaseswas reduced with a return or an allowance.
 The Purchase Returns and Allowances account is a “contra purchases” account

when merchandise is returned to a supplier.
TO ILLUSTRATE:
Out of the 20 computer units purchased last January 3, 2016, it was found after
inspection on the same day that one unit was damaged during shipment.
Magaling issued a debit memorandum (DM 01) and informed the supplier that
it will return the one damaged item.
ACCOUNTING FOR FREIGHT COSTS
The sales 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 two most
common arrangements for freight costs are FOB SHIPPING POINT AND FOB
DESTINATION.
FOB Shipping Point:

 Goods placed free on board (FOB) the carrier by seller.
 Buyer pays freight costs.
• Freight-In is debited if buyer pays freight.
• Cash is credited if the goods come on cash on delivery (COD), for example, and
was paid immediately. Accounts Payable would be credited if on account.
• Ownership over the goods is transferred to the buyer once it is out of the
premises of the seller.
FOB Destination
 Goods placed free on board (FOB) at buyer’s business.
 Seller pays freight costs.
 Delivery Expense is debited if seller pays freight on outgoing merchandise to a
buyer. This is an operating expense to the seller.
 Ownership over the goods is transferred to the buyer once the goods are delivered
and received by the buyer.
TO ILLUSTRATE:
Assume the supplier of Magaling is based in Manila. In order to bring the 20

computer units to Bicol, it will cost PHP3,000 to deliver the goods.
If the terms is FOB Shipping Point, the entry to record, assuming Magaling paid
the common carrier in cash on January 4, 2016 is :
If the terms is FOB Destination, no entry is recorded in the books of Magaling.

The PHP 3,000 will be paid by the seller, in this case Delta, Inc.
PURCHASE DISCOUNTS:
 Credit terms (specify the amount of cash discount and time period during which
a discount is offered) may permit the buyer to claim a cash discount for the
prompt payment of a balance due. If the credit terms show 2/10, n/30 means a
2% discount is given if paid within 10 days (called the discount period); otherwise,
the invoice is due in 30 days.
 The buyer calls this discount a purchase discount.
 A purchase discount is normally based on the invoice cost less returns and
allowances, if any.
TO ILLUSTRATE:
The credit terms for the purchase of 20 computer units (total cost PHP200,000)
is 2/10, n/30. This means that if Magaling pays on or before January 13, 2016,
it is entitled to a 2% discount, otherwise Magaling will have to pay the full amount
on or before February 4, 2016 (30 days after purchase). On January 10, 2016,
Magaling paid the account in full with Delta.
Assuming that instead of paying on January 10, 2016, Magaling paid on

February 4, 2016, thus forfeiting the 2% discount, the entry to record is:
RECORDING OF SALES AND RELATED TRANSACTIONS UNDER THE PERIODIC
INVENTORY SYSTEM
SALES TRANSACTIONS: REVENUE ENTRIES FOR A MERCHANDISER
 Revenues are reported when earned in accordance with the revenue recognition
principle, and in a merchandising company, revenues are earned when the
goods are transferred from seller to buyer.
 All sales should be supported by a document such as a cash register tape (to
provide evidence of cash sales) or cash receipt, or office receipt for cash sales,
and charge invoice for credit sales, or sales on account.
 One entry is made with each sale:
 Debit — Accounts Receivable (if a credit sale) or Cash (if a cash sale) which
increases assets for the sales amount
 Credit — Sales which increases revenues
 The sales account is credited only for sales of goods held for resale. Sales of
assets not held for resale (such as equipment, buildings, land, etc.) are credited
directly to the asset account.
TO ILLUSTRATE :
For the month of January, Magaling made the following sale:
1/10/2016 Official Receipt (OR) No. 001 Sold two units for cash to Marie Cruz
for PHP36,000 (PHP18,000 per unit), FOB Destination
1/15/2016 Charge Invoice (ChI) No. 001 Sold five units on account to Rafael
Reyes for PHP97,500 (PHP19,500 per unit) with terms 3/10, n/30, FOB
Shipping Point
FREIGHT TERMS: FOB DESTINATION — SELLER PAYS FREIGHT
 An entry is made when seller pays the freight to deliver goods to a customer or
buyer. If the buyer will pay for the freight, no entry is made.
 Debit — Delivery Expense and credit — Cash or Accounts
Payable TO ILLUSTRATE:
On January 10, 2016 Magaling paid MM Express, PHP500 to deliver the

two units to Marie Cruz.
Take note that no entry will be made regarding the sale to Rafael Reyes since
the term is FOB Shipping Point.
SALES RETURNS AND ALLOWANCES:

 Sales Returns result when customers are dissatisfied with merchandise and
are allowed to return the goods to the seller for credit or a refund.
 Sales Allowances result when customers are dissatisfied, and the seller allows
a deduction from the selling price.
 To grant the return or allowance, the seller prepares a credit memorandum to
inform the customer that a credit has been made to the
 customer’s account receivable.
 Sales Returns and Allowances is a contra revenue account to the Sales
account. A contra account is a reduction to a particular account.
 A contra account is used, instead of debiting sales, to disclose the amount of
sales returns and allowances in the accounts.
 This information is important to management as excessive returns and
allowances suggest inferior merchandise, inefficiencies in filling orders, errors
in billing customers, and mistakes in delivery or shipment of goods.
 The normal balance of Sales Returns and Allowances is a debit.
 One entry is made with each sales return and allowance:
 The entry to record the sales return or allowance:
 Debit — Sales Return and Allowances which decreases revenues for the
amount of the sale
 Credit — Accounts Receivable (if a credit sale) or Cash (if a cash sale) which
decreases assets
TO ILLUSTRATE:
On January 16, 2016, Rafael Reyes returned one unit of the computers
purchased last January 15, 2016 under Charge Invoice 001. The unit returned
was in good condition. However, Rafael Reyes returned the unit because it is
one unit more than what they need. The return was approved and accepted by
Magaling. The price will be deducted from the account of Rafael Reyes.
SALES DISCOUNTS
1. A sales discount is the offer of a cash discount to encourage customers to pay the
balance at an earlier date.
2. An example of a discount term is commonly expressed as: 2/10, n/30, which
means that the customer is given 2% discount if payment is made within 10
days. After 10 days there is no discount, and the balance is due in 30 days.
3. Sales Discounts is a contra revenue account with a normal debit balance.
TO ILLUSTRATE:
Assume that Magaling purchased on cash, five units of computers at PHP10,000

per unit from a supplier on January 17, 2016. These units were subsequently
sold to Jun Cruz on January 18, 2016 under Charge Invoice (ChI) No. 002
amounting to PHP90,000 (PHP18,000 per unit) with terms 2/10, n/30, FOB
Shipping Point. On January 23, 2016, Cruz paid the said account in full.
Notice in the entry on January 23, 2016 that the cash received from Jun Cruz was net of the 2%
discount because he made the payment within the discount period. Take note that the discount
period in this case was from January 19, 2016 to
January 28, 2016 (10 days).

What If Jun Cruz paid the account on January 30, 2016 instead of January 23,
2016? The entry would be:
*The amount indicated here is not connected with the journal entries prepared above. This is for
illustration purposes only.
Determining Cost of Goods Sold under Periodic Inventory System
The Cost of Goods Sold under the periodic inventory system is determined at the
end of the period (monthly or yearly) by a short computation, as follows:
In a periodic inventory system, separate ledger accounts are maintained for various items
composing the cost of goods sold (Purchases, Purchase Returns & Allowances, Freight-In, Purchase
Discounts). At the end of the accounting period, a physical count of inventory is necessary to
establish the ending balance of the inventory.
ACTIVITY NO. 3:
Direction: Compute the Cost of Goods Sold of Shane’s Furniture

Shop, a merchandising business under perpetual inventory system.
Shane’s Furniture Shop sells furniture from a trusted supplier in three different
locations. Shane is finishing his month-end accounting and calculated the
following inventory numbers:
 Beginning inventory: ₱100,000
 New purchases: ₱60,000 with purchase discount of ₱8,000
 The term of the purchases is FOB Shipping Point with the amount of ₱3,000
 A physical count of merchandise inventory was conducted at the end of the

month. The cost of the inventory on hand was ₱35,000
1) Compute for the Cost of Goods Sold.
Step 3. Posting of Transactions of in the General and Subsidiary Ledgers
The process of transferring the entries from journal to respective

ledger accounts is called ledger posting. Balancing of ledgers is carried to find
out differences at the end of the year. Ledger posting is entering information in
the ledger, in respective accounts from the journal for individual records.
Posting to the general ledger involves recording detailed accounting

transactions in the general ledger. It involves aggregating financial transactions
from where they are stored in specialized ledgers and transferring the
information into the general ledger. Initially, transactions that are completed in
volume are usually recorded in a specialty ledger, such as the sales ledger. Doing
so keeps the general ledger from being awash in the detail for thousands of
transactions. The information in the general ledger is then aggregated into a set
of financial statements for each reporting period.
The summary (in specialized journals) or individual transactions (in the
general journal) are then posted from the journals to the general ledger (and
subsidiary ledgers). Nothing should ever get posted to the ledgers without first
being entered in a journal.
SAMPLE ILLUSTRATIONS
Agila Merchandising, owned by Lito Agila, sells ready-to-wear shirts and

dresses to its customers. It started its operations on January 1, 2016.
The company issues the following documents:
• Official Receipts - for all cash collections

• Charge Sales Invoice – for all sales on account
• Check Voucher – for all cash disbursements
Step 1 & 2 –Understanding and Journalizing the transactions
For the month of January 2016, the special journals of Agila are shown below:
Sales Journal
DATE DESCRIPTION (CUSTOMER Charge Invoice Debit Credit
NAME) or Sales
Accounts Receivable Sales
Invoice No.
01/05/2016 Dax 1 2,102 2,102
01/07/2016 Marie 2 3,060 3,060
01/09/2016 Astro 3 1,475 1,475
CANCELLED 4
01/11/2016 PNSC 5 8,960 8,960
01/15/2016 PECO 6 7,125 7,125
01/16/2016 Ipedcare 7 4,560 4,560
01/19/2016 Te 8 1,250 1,250
01/21/2016 Joshua 9 3,125 3,125
01/22/2016 Joseph 10 4,510 4,510
01/24/2016 Jesper 11 2,080 2,080
01/28/2016 Nelcie 12 1,180 1,180
01/29/2016 Ryan 13 900 900
01/30/2016 Arlen 14 3,450 3,450
01/30/2016 Art 15 1,478 1,478
Total for January 2016 45,255 45,255
x Accounts 45,255
x Receivable
Sales 45,255
CASH RECEIPTS JOURNAL
DESCRIPTION Debit Credit Credit Debit
DATE O.R. No.
(PARTICULARS) Cash Sales Accounts Sales Discount
Receivable
1/2/2016 Ana 1 1,000 1,000
1/4/2016 Peter 2 1,890 1,890
1/6/2016 Jun 3 1,289 1,289
1/7/2016 Karen 4 3,456 3,456
1/7/2016 Jade 5 1,290 1,290
1/8/2016 Patrick 6 3,876 3,876
1/8/2016 Jane 7 4,561 4,561
1/10/2016 May 8 5,600 5,600
1/15/2016 April 9 8,060 8,960 900
1/16/2016 Ana 10 4,235 4,235
1/17/2016 Juan 11 2,010 2,010
1/21/2016 Rafael 12 3,410 3,410
1/22/2016 May 13 893 893
1/23/2016 Teh 14 1,250 1,250
1/24/2016 Jun 15 3,452 3,452
1/24/2016 Geo 16 2,102 2,102
1/25/2016 Angela 17 1,000 1,000
1/29/2016 Clyde 18 345 345
1/30/2016 Joe 19 4,000 4,510 510
TOTAL 53,719 38,307 16,822 1,410
x Cash 53,719
x
Sales Discount 1,410
Sales 38,307
Accounts Receivable 16,822
PURCHASE JOURNAL
Dat Account Title and Explanation R Charge Invoice or Amount
Sales Invoice
e e No. (from supplier)
f
1/2/2016 XYS Clothing SI 102 228,560
1/10/2016 RTW Super Store SI611 133,070
1/29/2016 Dresses Unlimited SI341 98,120
TOTAL 459,750
x Purchases 459,750
x
Accounts Payable 459,750
CASH DISBURSEMENTS JOURNAL
Check Purchase
Cash Account Salarie Supplies Advertising R
Discount
DATE DESCRIPTION / s s e
(PARTICULARS) n
Vouch
t
er a
No. l
CREDIT DEBIT DEBIT DEBIT DEBIT D CREDIT
E
B
I
T
1/2/16 St Realty Rental for CV01 10,000 1
Jan-Feb 2016 0
,
0
0
0
1/5/16 Del Supplies- office CV02 3,500 3,500
supplies
1/15/16 XYS Clothing-
CV03 220,000 228,560 8,560
payment of
account
1/16/16 Jean Guzman-
CV04 7,500 7,500
salary Jan 1-15,
2016
1/16/16 Sonic Promo- CV05 4,800 4,800
Advertising
1/25/16 Goldmic Supplies CV06 1,990 1,990
1/29/16 Jean Guzman-
CV07 7,500 6,500
salary Jan 16-30,
2016
TOTAL 254,290 228,560 14,000 5,490 4,800 10,000 8,560
x Accounts Payable 228,560

x
Salaries Expense 14,000
Supplies Expense 5,490
Advertising Expense 4,800
Rental Expense 10,000
Cash 254,290
Purchase Discount 8,560
In addition to the above special journals, the company maintains a general
journal. The General Journal had the following entries for January
General Journal
D Account Title and Explanation R Debit Credit
a e
t f
e
6 Cash 500,000
Agila, Capital 500,000
To record initial investment
Transportation equipment 150,000
Cash 150,000
To record purchase of vehicle
Step 3. Posting to the General Ledger
The process of transferring the entries from journal to respective ledger

accounts is called ledger posting. Balancing of ledgers is carried to find out
differences at the end of the year. Ledger posting is entering information in the
ledger, in respective accounts from the journal for individual records.
From the summary of transactions in the special journals and general
journals, the entries will now be posted in each general ledger account:
Reminders: Nothing should ever get posted to the ledgers without first being entered in a journal.
GENERAL LEDGER
Account: Cash Account No. : 1000
Date Item Debit
R Credit Balance
e
f
1/2/16 Investment of owner 500,000 500,000
Purchase of Vehicle 150,000 350,000
From the Cash receipts Journal 53,719 403,719
From the Cash Disbursement Journal 254,290 149,429
GENERAL LEDGER
Account: Accounts Receivable Account No. : 1200
Date Item RDebit Credit Balance
e
f
From the Sales Journal 45,255 45,255
From the Cash Receipts Journal 16,822 28,433
GENERAL LEDGER
Account: Transportation Equipment Account No. : 1680
e
f
General Journal - Purchase of vehicle 150,000 150,000
GENERAL LEDGER
Account: Accounts Payable Account No. : 2000
e
f
From the Purchase Journal 459,750 459,750
From the Cash Disbursements Journal 228,560 231,190
GENERAL LEDGER
Account: Agila, Capital Account No. : 3000
Date Item Debit
R Credit Balance
e
f
Initial Investment – Gen Journal 500,000 500,000
GENERAL LEDGER
Account: Sales Account No. : 4100
Date Item Debit
R Credit Balance
e
f
From the Sales Journal 45,255 45,255
GENERAL LEDGER
Account: Sales Discount Account No. : 4102
e
f
GENERAL LEDGER
Account: Purchases Account No. : 5100
Date Item Debit
R Credit Balance
e
f
GENERAL LEDGER
Account: Purchase Discount Account No. : 5102
Date Item Debit
R Credit Balance
e
f
GENERAL LEDGER
Account: Salaries Expense Account No. : 6100
Date Item Debit
R Credit Balance
e
f
GENERAL LEDGER
Account: Supplies Expense Account No. : 6150
Date Item Debit
R Credit Balance
e
f
GENERAL LEDGER
Account: Advertising Expense Account No. : 6400
e
f
GENERAL LEDGER
Account: Rental Expense Account No. : 6300
Date Item Debit
R Credit Balance
e
f
What is it
ACTIVITY NO. 4: Modified Word Search Puzzle
Direction: Let us check your knowledge to our topic. Let’s create our own 10x10
word search puzzle! Read the questions and fill in the correct answers in our
puzzle according to the position and details on the table below.
QUESTION POSITION OF THE

ANSWER IN THE
PUZZLE AND OTHER
DETAILS
1 In a merchandising company, _ are earned written on the 5th row
when the goods are transferred from seller to starting on the 2nd column
buyer.
2 Under this inventory system, the purchase is normally written downwards on the
recorded by the purchaser when the goods are 2nd column starting on the
received from the seller. 3rd row
3 Any transaction entered into the purchase written horizontally on the
journal involves a credit to the accounts 3rd row connected to the
account. word “periodic”
4 The first four letters of your name written on the four corners of
the puzzle
5 A book containing accounts in which the classified written diagonally starting on
and summarized information from the journals is the last row and connected to
posted as debits and credits. the “periodic”
6 Nothing should ever get posted to the ledgers written downwards on the 1st
without first being entered in a _. column
7 Your Last Name or the first 8-letters of your last name written downwards on the
last column starting from
the 2nd row
8 It is the 3rd step of the accounting cycle written on the 1st row
9 In a merchandising business, sales of goods held written diagonally

for resale is credited to _. intersecting the word
“payable” and “revenue”
1 Random vowel letters written on the blank
0 grids/boxes in the puzzle
WORD SEARCH PUZZLE
What I have learned
ACTIVITY NO. 5: POSTING
Direction: As the accountant of ABC Computer Supplies, post the following

journal entries for April 2020 in a ledger.
GENERAL JOURNAL
Date Description PDebit Credit
R
A 1 Cash 200,000
p
r
ABC, Capital 200,000
To record initial investment of A. Cruz
2 Delivery Vehicle 120,000

To record purchase of vehicle on account
4 Rental Expense 5,000

Cash 5,000
To record payment of rent
5 Purchases 60,000
To record purchase of 6 units of PC @
10,000 each
1 Accounts Payable 10,000
0
Purchase Returns & Allowances 10,000
To record return of (1) defective computer
1 Delivery Expense 3,000

3
Cash 3,000
To record freight costs for the purchase of 6 PC units
1 Office Supplies 10,000

5
Cash 10,000
To record purchase of office supplies
2 Accounts Payable 60,000

0
Cash 54,000
To record full payment of purchases
2 Cash 120,000
1
Sales 120,000
To record cash sale with OR#: 001
2 Accounts Receivable 120,000

5
Sales 120,000
To record sale on account with SI#: 002
3 Salaries & Wages 30,000

0
Cash 30,000
To record payment of salaries of 2
employee
3 Cash 120,000
0
Accounts Receivable 120,000
To record cash payment of client with SI#:
002
3 Purchases 30,000
0
Cash 30,000
To record purchase of 3 units of PC @
10,000 each
3 Cash 60,000
0
Sales 60,000
To record cash sale with OR#: 003
Assessment
ACTIVITY NO. 6: MULTIPLE CHOICE
Direction: Read and understand the questions. Choose the letter of the correct answer.
1. The inventory method that continuously update the inventory account?
A. Periodic Inventory C. Yearly Inventory
B. Perpetual Inventory D. All of these are correct
2. Merchandise inventory is classified on the balance sheet as a

A. Current Asset C. Long-Term Asset
B. Current Liability D. Equity
3. The primary difference between the periodic and perpetual inventory systems is that a
A. Periodic system records the cost of the sale on the date the sale is made
B. Periodic system determines inventory at the end of accounting period
C. Periodic system provides an easy means to determine inventory shrinkage
D. Periodic system keeps a record showing the inventory on hand at all times
4. Revenues are reported when earned in accordance with what principle

A. Cost Principle C. Revenue Recognition Principle
B. Business Entity Principle D. Materiality Principle
5. Result when customers are dissatisfied with merchandise and are allowed to return the goods to the
seller for credit or a refund
A. Sales Allowance C. Sales Refund
B. Sales Return D. Sales Defect
6. It is an agreement that the buyer will pay the freight cost

A. FOB Freight In C. FOB Destination
B. FOB Shipping Point D. Delivery Receipt
7. Ownership over the goods is transferred to the buyer once it is out of the premises of the seller.
A. FOB Freight In C. FOB Destination
B. FOB Shipping Point D. Owner’s Capital
8. To record cash sales on a merchandising business. The entry will be debit - Cash and credit – __.
A. Accounts Payable C. Purchases
B. Service Revenue D. Sales
9. It holds account information that is needed to prepare the company's financial statements, and transaction
data is segregated by type into accounts for assets, liabilities, owners' equity, revenues, and expenses.
A. General Ledger C. General Journal
B. Cash Disbursement Register D. Special Ledger
10. Items on the Purchase Journal are credited to the accounts payable and credit to:
A. Purchases C. Cash
B. Merchandise Inventory D. Accounts Receivable
11. It is a group of similar accounts whose combined balances equal the balance in a specific general
ledger account.
A. Subsidiary Ledger C. Journal Entry
B. General Ledger D. General Journal
12. The process of transferring the entries from journal to respective ledger accounts is called
A. Ledger Posting C. Journal Entry
B. Journalizing D. T-Account
13. Nothing should ever get posted to the ledgers without first being entered in a .
A. Journal C. Income Statement
B. Worksheet D. Balance Sheet
14. In periodic inventory system, what is done at the end of accounting period to determine the ending
balance of the inventory?
A. Physical Counting C. Computation
B. Checking of Balance D. Warehouse Cleaning
15. In periodic inventory method, inventory at the beginning of a period, adds new inventory
purchases during the period and deducts ending inventory to derive the
.
A. Cost of Goods Available C. Cost of Inventory
B. Cost of Goods Sold D. Cost of Purchases
ACTIVITY 6
1b
2a
3b
4c
5b
6b
7b
8d
9a
10 a
11 a
12 a
13 a
14 a
15 b
Answer Key
Reference
CHED (2016) Teaching Guide for Senior High School, FUNDAMENTALS

OF ACCOUNTANCY, BUSINESS, AND MANAGEMENT 1
Toppr.com. Posting and Balancing of Ledgers. Date Retrieved: January 13,

2021. Retrieved from: https://www.toppr.com/guides/principles-and-
practices-of- accounting/ledgers/posting-and-balancing-of-ledgers
SECOND QUARTER
MODULE 4:
Nature Transaction of Merchandising
Business
Writer: JENNIFER M. LISTANO

MARY ROSE P. MIRANDA
Integrated School of Lawa

Landline: 049–554 9830 loc. 14


both from public and private institutions to assist you, the teacher or facilitator
in helping the learners meet the standards set by the K to 12 Curriculum while
overcoming their personal, social, and economic constraints in
schooling.
learners acquire the needed 21st century skills while taking into consideration
their needs and circumstances.
In addition to the material in the main text, you will also see this box in the
body of the module:
As a facilitator you are expected to orient the learners on how to use this module.
You also need to keep track of the learners' progress while allowing them to
manage their own learning. Furthermore, you are expected to encourage and
assist the learners as they do the tasks included in the module.
For the learner:

Delivery Mode (ADM) Module on Accounting Principles and Equation.
The hand is one of the most symbolized parts of the human body. It is often
used to depict skill, action and purpose. Through our hands we may learn, create
and accomplish. Hence, the hand in this learning resource signifies that you as
a learner is capable and empowered to successfully achieve the relevant
competencies and skills at your own pace and time. Your academic success lies
in your own hands!
This module was designed to provide you with fun and meaningful
opportunities for guided and independent learning at your own pace and time.
You will be enabled to process the contents of the learning resource while being
an active learner.
1. Use the module with care. Do not put unnecessary mark/s on any part of the module.
Use a separate sheet of paper in answering the exercises.
6. If you encounter any difficulty in answering the tasks in this module, do not hesitate
to consult your teacher or facilitator. Always bear in mind that you are not alone.
7. We hope that through this material, you will experience meaningful learning and gain
deep understanding of the relevant competencies. You can do it!
WEEK
4
I What I need to know
At the end of this lesson, you will be able to:
 Define the meaning of a trial balance

 Identify the steps in preparing a trial balance
 Distinguish the methods of preparing the trial balance
 Establish some instances of errors in the trial balance
How does a trial balance work?

The trial balance is a statement of all debits and credits.
Since each transaction is listed in a way to ensure the debits equaled credits, the quality
should be maintained in the general ledger and the trial balance. If the sum of debits does not
equal the sum of credits, an error has occurred and must be located.
Businesses prepare a trial balance regularly, usually at the end of the reporting period to
ensure that the entries in the books of accounts are mathematically correct.
It is also important to note that even when the trial balance is considered balanced, it
does not mean there are no accounting errors. For example, the accountant may have failed to
record an account or classified a transaction incorrectly. These are accounting errors that would
not show up in the trial balance.
Learning Task 1: Direction: Read each question and choose the best answer.
1. A Trial balance is a _________________

a. list of balances
b. nominal account
c. personal account
d. real account
2. Which of the following is true about a trial balance?

a. It is a kind of financial statement.
b. It is not a part of accounting cycle.
c. It lists down the balances of accounts.
d. It lists down the balances of a balance sheet.
57
3. A trial balance contains the balances of ___________
a. Only personal and real accounts
b. Only real and nominal accounts
c. Only nominal and personal accounts
d. All accounts
4. A trial balance shows ______________

a. honesty of accounts
b. accuracy of accounts
c. only arithmetical accuracy of accounts
d. none of these
5. A trial balance is prepared from _________

a. Cash book
b. Journal
c. Ledger
d. None of these
What’s New
Learning Task 2. Locate the meaning of the following words. Refer to a dictionary or
in the website.
1. Assets __________________________________________________________
2. Liabilities _______________________________________________________
3. Owner’s Equity __________________________________________________
4. Trial balance ____________________________________________________
5. Debit ___________________________________________________________
6. Credit ___________________________________________________________
7. Transaction _____________________________________________________
8. Chart of accounts ________________________________________________
9. Total Method ____________________________________________________
10. Balance Method ________________________________________________
58
D What I know
Learning Task 3. Place the following account title in its right column.
Assets Liabilities Equity Revenue Expenses
1. Cash 6. Accounts Payable 11. Interest income

2. Investments 7. Wages payable 12. Sales
3. Prepaid expenses 8. Interest payable 13. Service revenues
4. Vehicles 9. Additional paid-in capital 14. Utilities expense
5. Receivables 10. Retained earnings 15. Discount allowed
What’s In
How Do you prepare a Trial balance?
To prepare a trial balance, you will need the closing balances of the general ledger accounts. The trial
balance is prepared after posting all financial transactions to the journals and summarizing them on the
ledger statements. The trial balance is made to ensure that the debits equal the credits in the chart of
accounts.
1. Before you start off with the trial balance, you need to make sure that every ledger account
is balanced. The difference between the sum of all the debit entries and the sum of all the
credit entries provides the balance.
59
Account summaries in the ledger are usually presented in the form of T- Accounts. Below is
the T-Accounts for the eight accounts of MPM Co.
Figure 1
2. Prepare the worksheet. The

column headers should be for
the account number, account
name and the corresponding
columns for debit and credit
balances.
The heading of the trial

balance consist of Name of
the Company, Name of the
report and the date.
60
3. For every ledger account, transfer to the trial balance worksheet the account number and
account name along with the account balance
Figure 3
61
Rules for the preparation of the trial balance
While preparation of trial balances we must take care of the following
rules/points
A. The balances of the following accounts are always found on the debit
column of the trial balance
 Assets
 Expense Accounts
 Drawings Account
 Cash Balance
 Bank Balance
 Any losses
B. And the following balances are placed on the credit column of the trial
balance
 Liabilities
 Income Accounts
 Capital Account
 Profits
62
4. Add up the amounts of the debit column and the credit column. Ideally, the totals should be
the same in an error-free trial balance. When the totals are same, you may close the trial
balance
(Figure 4)
Note:
o The purpose of preparing a trial balance is to determine whether the total debits and total
credits I the ledger are equal.
o If total debits and total credits are not equal, an error surely exists.
o However, if total debits and total credits are equal, it does not necessarily mean that there
are no errors.
63
5. If there is a difference, accountants have to locate and rectify the errors.
Here are some other instances of errors in the trial balance.
 Entries have been made twice

 Omission of entries
 Entries have been made to the wrong account
 Transposition error
 A mistake in transferring the balances to the trial balance
 Error in balancing an account
 The wrong amount is posted in the ledger
 Made the entry in the wrong column, debit instead of credit or vice versa.
How to locate errors:
1. Add again the columns

2. If the debit column is not equal to credit column, compute for their difference.
3. See if the difference is divisible by 9. Example: 360/9 = 40,which may be a
transposition error. Where a 516 is written as 156. 516-156 = 360
4. The difference may be a slide error where P25,000 is written as P2,500. Go back to
the source
5. If the difference is 10,100,1,000 and so forth, it may be an addition error. Add again
the column error.
6. The difference maybe exactly the same as one account balance. Trace back to the
source.
7. The difference may be a double an account balance. Item might be debited when it
should be credited. Trace the source.
8. If after doing numbers 1 to 7, a difference still exists, check the mathematical error in
the ledger and journals and other sources.
64
What is It
Kinds of Trial Balance
1. Preliminary Trial Balance (the trial balance before adjustments)

- Trial balance of balances
- Trial Balance of totals
2. Adjusted Trial Balance – (the trial balance after adjustments)
3. Post – Closing Trial Balance (the trial balance after the closing entries)
Let’s take a look at this example:
65
Given the following adjustments below. Prepare the adjusted Trial Balance.
Adjusting Journal entries

Debit Credit
(a) December 31, 2018 Accounts Receivable 9,500
Service Revenue 9,500

To record Accrual of Revenue
(b) December 31, 2018 Amortization Revenue 1,000
Accumulated amortization – equipment 1,000
To record amortization for December
(c) December 31, 2015 Salary Expense 2,300
Salary payable 2,300

To record accrual of Salaries at Dec. 31
Let’s use the representation of letters (a,b,c) marked on date to record the adjustments in the
adjustment columns.
Note: Again after posting the adjustments do not forget to get the total of the debit and credit column
of the adjustments
66
Posting the Adjusted Trial Balance
After posting the adjustments you are now ready to calculate the adjusted total trial
balance for each account.
Each account has only the debit and credit balance. Remember this:
A. If there are no adjustments just copy the amount on the correct column
B. If you have two (2) debits you add the amount in the unadjusted and adjustment
columns.
Debit + Debit
C. If you have two (2) credits add the amount in the unadjusted and adjustment
Columns. +
Credit Credit
D. If you have a debit and credit, or a credit or debit on the
unadjusted and adjustment column Debit
- Credit
you will subtract.
- Debit
Credit
67
E What’s More
Learning Task 4: MPM Co. have following ledger balances on December 31, 2018
Account Titles
Notes Payable P 30,000.00

Owner’s Equity 35,000.00
Equipment 92,000.00
Owner’s Drawings 13,000.00
Salaries and Wages Expense 43,000.00
Service Revenue 93,000.00
Cash 11,000.00
Supplies 11,000.00
Rent Expense 6,000.00
Salaries and Wages Payable 18,000.00
Accounts Receivable 13,000.00
Accumulated amortization 13,000.00
- equipment
Requirement: Prepare the unadjusted trial balance.
HEADINGS
Account Title Debit Credit
68
A What I have Learned
Learning task 5: JML and MPM holdings opened the business on January 1, 2018. The
following were the transactions during the first week of operation.
January Transactions
1 Provided 500,000 cash as initial investment to the business
2 Acquired furniture and fixture for P200,000 cash
4 Purchase supplies for P30,000 cash.
5 Rendered services worth P 10,000 on cash basis.
7 Paid 15,000 salaries of employees
Requirement:
A. Provide the journal entries
B. Post the entries to the ledger (use T-accounts)
C. Prepare the unadjusted trial balance
69
70
Learning Task 4:
MPM Co
Unadjusted trial balance
Dec. 31, 2018
Account Title Debit Credit
Cash 11,000.00
Supplies 11,000.00
Accounts Receivables 13,000.00
Equipment 92,000.00
Accumulated Amortization - equipment 13,000.00
Notes payable 30,000.00
Salaries and wages payable 18,000.00
Owner’s equity 35,000.00
Owner’s drawings 13,000.00
Service Revenue 93,000.00
Rent Expense 6,000.00
Salaries and Wages expense 43,000.00
TOTAL 189,000.00 189,000.00
Learning task 3:
Learning Task 1
Assets Liabilities Equity Revenue Expenses 1. A
Cash Accounts Additional Interest Utilities 2. C
payable paid-in income expense
capital 3. D
Investments Wages Retained Sales Discount 4. C
payable earnings allowed 5. C
Prepaid Interest Service
Investments payable revenues
Vehicle Learning Task 2:
Receivables (Answers may vary)
Answer Key
71
Learning Task 5B
Cash Furniture and Fixture Supplies
500,000 200,000 200,000 30,000
20,000 30,000
10,000
520,000 240,000
280,000 200,000 30,000
Capital Service Income Salaries Expense
300,000 200,000 10,000
300,000 200,000 10,000
Learning Task 5A
Date Account title and Explanation Debit Credit
January 1 Cash 500,000
Capital 500,000
Initial Investment of the owner
2 Furniture and fixtures 200,000
Cash 200,000
Payment for cash
4 Supplies 30,000
Cash 30,000
Payment for supplies
5 Cash 20,000
Service Income 20,000
7 Salaries Expense 10,000
Cash 10,000
Payment of cash
520,000.00 520,000.00 TOTAL
10,000.00 Salary Expense

20,000.00 Service Income
P 500,000.00 Capital
200,000.00 Furniture and fixtures
30,000.00 Supplies
P 280,000.00 Cash
Credit Debit Account Title
January 31,2018
Trial Balance
JML and MPM holdings
Learning Task 5C
Reference
CHED (2016) Teaching Guide for Senior High School, FUNDAMENTALS OF ACCOUNTANCY, BUSINESS, AND
MANAGEMENT 1
https://corporatefinanceinstitute.com/resources/knowledge/accounting/trial-balance/
https://www.principlesofaccounting.com/chapter-2/the-trial-balance/
https://www.accountingtools.com/articles/2017/5/16/the-trial-balance-example-format
72
SECOND QUARTER
MODULE 5:
Adjusting Entries of Merchandising
Business
Writer: GILBERT B. SULLA

Palo Alto Integrated School

Landline: 049–554 9830 loc. 14
73


For the learner:

74
1. Use the module with care. Do not put unnecessary mark/s on any part of the
module. Use a separate sheet of paper in answering the exercises.
hesitate to consult your teacher or facilitator. Always bear in mind that you are
not alone.
7. We hope that through this material, you will experience meaningful learning and
gain deep understanding of the relevant competencies. You can do it!
75
WEEK
5 Adjusting Entries of Merchandising

Business
I
This module was written for you to accomplish at home. It was carefully
designed so that you can work at your own pace and allow self-discovery of the concept
through activities that you will perform. Activities were also selected to allow
independent learning which also aims to develop student’s reading comprehension skills
through understanding written texts
After going through this module, you are expected to:
1. Prepare adjusting entries of merchandising business
PRE-TEST
Identify. Rearrange the jumbled letters opposite each statement to

describe/identify. (Critical thinking, Communication, Character-building)
1. Inventory system wherein purchases of merchandise are accumulated in the

Purchases account.
CREPDIOI RYTONEVIN SYSTEM – ___________________________
2. It is deducted from goods available for sale to obtain cost of sales.

INGNED RYTONEVIN – ___________________________
3. It contains all the account balances of Debit and Credit at the end of an accounting
period.
LIART CELANAB – ___________________________
4. An inventory system which provides a continuous record of merchandise inventory

and cost of goods sold.
TUALPEREP RYTONEVIN SYSTEM – ___________________________
5. They involve changing account balances at the end of the period from what is
current balance of the account to what is the correct balance for proper financial
reporting.
TINGSUJDA SIERTNE – ___________________________
76
D
The Need for Adjustments
Accountants make adjusting entries to reflect in the accounts information on
economic activities that have occurred but have not yet been recorded. Adjusting
entries assign revenues to the period in which they are earned, and expenses to the period
in which they are incurred.
Adjusting entries involve changing accounts balances at the end of the period
from what is the current balance of the account to what is correct balance for proper
financial reporting.
Merchandise Inventory at the end of the Period
At the end of an accounting period, entries are made to reflect in the inventory
account the ending balance.
The objectives of these entries are:
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.
For the purpose of simplicity we will use the T-account (skeletal presentation
of the ledger containing the DEBIT side on the left and the CREDIT side on the
right).
The attainment of the objectives is illustrated using the figures from Calamba
Traders (a hypothetical company)
Merchandise Inventory
Jan. 1 Beginning bal. 528,000 Dec.31 Effect a (beg. Bal.)
528,000
Dec. 31 Effect b (Ending Bal.)
483,000
77
Income Summary
Dec. 31 Effect a 528,000 Dec. 31 Effect b 483,000
In this example, Merchandise Inventory was P528,000 at the beginning of the

year and P483,000 at the end of the year. Effect a removed the P528,000 from the
Merchandise Inventory account and transferred it to Income Summary Account. In
Income Summary , the P528,000 is in effect added to Net 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 the effect of deducting the ending 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 and b
concurred. The question then arises as to how to achieve these effects. Two
acceptable methods are available:
A. The Adjusting Entry Method
B. The Closing Entry Method
For purposes of simplicity, we will not use the complete parts of the General
Ledger.
The Adjusting Entry Method
Using the adjusting entry method, the two entries indicated by effects a and b
which are prepared at the time the other adjusting entries are made follow:
Dec. 31 Income Summary P528,000
Merchandise Inv., Beginning P528,000
To remove beginning balance of Merchandise
Inventory and transfer it to Income Summary
Dec. 31 Merchandise Inventory, End P483,000

Income Summary P483,000
To establish ending balance of Merchandise
78
Inventory and deduct it from Goods Available
For Sale in Income Summary
The Closing Entry Method
The Closing Entry Method makes the Debit and the Credit to Merchandise
Inventory by including them among the Closing Entries as follows:
Dec. 31 Income Summary XXX

Merchandise Inventory, Beginning P528,000
Temporary Accounts with Debit balances XXXXX
To close Temporary Accounts with
Debit balances and to remove beginning
Inventory.

Temporary Accounts with Credit
Balances XXXX
Income Summary P xxxx
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 Income
Summary.
Activity 1. Merchandising Inventory at the end of the Period
Instruction: Prepare the Adjusting Entries to update the Merchandise Inventory

account as at December 31, 2012. (Critical Thinking, Communication,
Collaboration, Creativity, Character-building).
The beginning and ending Merchandise Inventories for GBS Company for the year
ended Dec. 31, 2012 are as follows:
Merchandise Inventory, 1/1/2012 (beginning) P300,000

Merchandise Inventory, 12/31/2012 (ending) P230,000
Activity 2: Compute the Cost of Goods Sold for the Current Year. (Critical
Thinking, Communication, Character-building)
Glen Company has the following data pertaining to the current year:
Purchases P4,500,000
Beginning Inventory P1,700,000
Ending Inventory P2,100,000
Freight in P500,000
79
Freight out (selling expenses) P750,000
How much is the Cost of Goods Sold for the current year?
a. 3,850,000
b. 4,600,000
c. 4,850,000
d. 5,400,000
E
Learning Task 1: Adjusting Entry for Merchandise Inventory
Instructions: 1. Prepare the Adjusting entry needed for Merchandise Inventory 2.

Prepare the Partial Income Statement
(Critical thinking, Communication, Collaboration, Character-building)
Listed below is a partial Trial Balance of the Tindahan Retailers at December 31,
2012:

Sales 190,000
Sales Return and Allowances 20,000
Purchases 60,000
Purchases Discounts 3,000
Transportation-In 1,000
The Merchandise Inventory on December 31 is P74,000.
Learning Task 2: True or False (Critical Thinking, Communication and Character-

building)
1. In the Perpetual Inventory System, the Inventory amount in the Trial Balance is
the year-end balance since the inventory account is perpetually updated.
2. No Merchandise Inventory adjusting in the Perpetual Inventory system at the end
of the period.
3. No Closing Entry in the Perpetual Inventory system at the end of the period.
4. The Cost of Sales account is a ledger account in the Perpetual System.
5. An Adjusting Entry is necessary when the year-end Inventory account balance
does NOT tally with the physical inventory amount.
80
A
Learning Task 3:
Multiple Choice: Read and understand the following statements Write the letters of the
CORRECT answer on the separate sheet of paper. (Critical Thinking,
Communication, Character-building)
1. Which of the following Accounts would appear on a Worksheet for a merchandising

company that uses the Periodic Inventory system?
a. Income Summary c. Purchase Returns and Allowances
b. Cost of Goods Sold d. All of the above
2. Which of the following Accounts would appear on a Worksheet for a merchandising
company that uses the Perpetual Inventory system?
a. Purchases c. Cost of Goods Sold
b. Income Summary d. Purchases Returns and Allowances
3. Which of the following accounts would not be closed by a merchandising company
that uses the Perpetual Inventory System?
a. Income Summary c. Merchandise Inventory
b. Cost of Goods Sold d. Sales Returns and Allowances
4. Which of the Accounts is Closed by Debiting the Account?
a. Purchases Returns and Allowances
b. Purchases
c. Sales Returns and Allowances
d. Transportation In
5. Under the Periodic Inventory system
a. Purchases of merchandise are accumulated in the Purchases Account.
b. No entry is made to the Merchandise Inventory account during the Accounting
Period
c. The only way to obtain the cost of Ending Inventory is to make a physical count.
d. All of the above
81
Learning Task 1:
1. Adjusting Entry for Merchandise Inventory
Dec. 31 Income Summary P80,000
82
Merchandise Inventory, Beginning P80,000
To remove the beginning balance of merchandise Inventory
and transfer it to Income Summary.
For Sale in Income Summary.
2. Partial Income Statement
Sales P190,000
Less: Sales Returns and Allowances ( 20,000)
---------------
Net Sales 170,000
Less: Cost of Sales
Beginning Inventory P80,000
Add: Purchases 60,000
Purchases Discounts (3,000)
Transportation In 1,000
----------
Goods Available for Sale 138,000
Less: Ending Inventory (74,000)
-------------
64,000
--------------
Pre-Test
1. Periodic Inventory System
2. Ending Inventory
3. Trial Balance
4. Perpetual Inventory System
5. Adjusting Entries
Learning Task 2: Activity 1
6. True Dec. 31 Income Summary P300,000
7. True Merchandise Inventory, Beginning P300,000
8. True To remove beginning balance of Merchandise
9. True Inventory and transfer it to Income Summary
10. True
Learning Task 3: For Sale in Income Summary.
1. D Activity 2
2. C Beginning Inventory, P1,700,000
3. C Purchases 4,500,000
4. A Freight In 500,000
5. D -------------------
Goods Available for Sale 6,700,000
Less: Ending Inventory 2,100,000
--------------------
Cost of Goods Sold P4,600,000
==========
Answer Key
References
Textbooks
Ballada, Susan & Ballada, Win (2012). Accounting Fundamentals, 3rd Edition,
Philippines: DomDane Publishers & Made Easy Books.
Teaching Guide in Senior High School Fundamentals of Accountancy, Business, and

Management 1, donated by the Commission on Higher Education in Collaboration
with the Philippine Normal University to the Department of Education.
Websites
Accounting coach.com
Investopedia.com
83
SECOND QUARTER
MODULE 6:
Accounting Cycle of Merchandising
Business
Writer: ELMO G. BAUTISTA


Landline: 049–554 9830 loc. 14
84


For the learner:

85
answers.
are not alone.
86
WEEK
6
Accounting Cycle of Merchandising
Business
I
This module focus on merchandising business. This is designed for you learners so to
be able to:
 Completes the accounting cycle of merchandising business.
D
Completing the accounting cycle of a Merchandising Business
Preparation of Financial Reports
The income statement is sometimes referred to as the profit and loss statement
(P&L), statement of operations, or statement of income. The income statement is important
because it shows the profitability of a company during the time interval specified in its
heading. The period of time that the statement covers is chosen by the business and will
vary.
Net Sales – COGS = Gross Profit

Gross Profit – Operating Expenses = Net Income
Net Income from Operations – Other Income = Net Income
A balance sheet, also called as the statement of financial position, shows the
financial position or condition or an entity by listing assets, liabilities, and owner’s equity
as of a specific date. It summarizes a company's assets, liabilities and shareholders' equity
at a specific point in time. These three balance sheet segments give investors an idea as to
what the company owns and owes, as well as the amount invested by shareholders.
Asset = Liabilities + Shareholders’ Equity
87
Recording Adjusting and Closing Entries
Adjusting Entries
A business using the perpetual inventory system requires one additional adjustment
to make the recorder inventory match inventory on hand.
Inventory on hand is measured by a physical account - a control feature of the
perpetual inventory system.
These are shown on the worksheet and are journalized.
Then, are posted to the proper accounts.
Closing Entries
All temporary accounts are closed to the owner’s equity account (revenues, expenses,
drawings).
All debit balance accounts must be credited for the total, and the reverse applies for
credit balance accounts.
New accounts w/ merchandising businesses: sales returns and allowances, COGS,
and Freight out.
Sales is normally the only credit balance account.
When closing the general ledger, write Closing Entry for each posting in the
Description column of the general ledger account.
Partial general ledger at the end of the fiscal period.
88
89
90
91
Preparing a post-closing trial balance
This is prepared after closing entries are made. Its purpose is to test the equality
between debits and credits after closing entries are prepared and posted. The post-
closing trial balance contains real accounts only since all nominal accounts have already
been closed at this stage.
A post-closing trial balance is prepared at the end of the accounting period to

prove the general ledger accounts are in balance.
Completing reversing entries
Reversing entries are made on the first day of an accounting period in order to remove
certain adjusting entries made in the previous accounting period. Reversing entries are used
in order to avoid the double counting of revenues or expenses and to allow for the efficient
processing of documents. Reversing entries are most often used with accrual-type adjusting
entries.
92
E
Learning Task 1: Preparing financial statement
Account Title Amount Account Title Amount

Accounts Payable ₱ 52,000 Kitty, Drawing ₱ 52,000
Accounts Receivable 38,000 Notes Payable (due June 30, 2018) 12,000
Accrued Interest Expense 1,200 Prepaid Rent 60,000
Accumulated Depreciation-
8,000 Merchandise Inventory, January 1 43,000
Store Equipment
Advertising Expense 25,000 Purchase Returns and Allowances 1,500
Allowance for Bad Debts 2,300 Purchases 295,000
Bad Debts Expense 1,100 Salaries Expenses 140,000
Cash 21,000 Sales 470,000
Depreciation Expense-Store Merchandise Inventory, December

4,000 47,000
Equipment 31
Freight-in 2,700 Sales Discount 3,000

Freight-out 2,200 Store Equipment 40,000
Insurance Expense 18,000 Store Supplies 3,600
Interest Expense 4,400 Store Supplies Expense 2,700
Kitty, Capital 66,700 Unearned Sales Revenue 14,000
REQUIRED: Based on the account balances listed above, prepare the following foe
Hello Trading:
1. A Statement of Changes in Equity for the year ended December 31, 2015;
and
2. A report-form Statement of Financial Position as of December 31, 2015

(with supporting notes)
93
A
Learning Task 2:
Multiple Choice: Read and understand the following statements Write the letters of the CORRECT
answer on the separate sheet of paper.
1. What kind of activity refers to the day to day business of a firm?

A. Financing activities C. Operating activities
B. Investing activities D. All of these are correct
2. These are paid for, but not yet consumed at the balance sheet days.
A. Equipment C. Prepaid expenses
B. Merchandise inventory D. Stocks
3. This is referred to as the Statement of Financial Position.
A. Balance sheet C. Income Statement
B. Cash Flow Statement D. Statement of Changes in Equity
4. Sheji Enterprise has an asset of ₱ 21,656 and Liability is ₱ 12,500, what is the owner’s equity of
Sheji Enterprise?
A. ₱ 9,156.00 C. ₱ 9, 510.00
B. ₱ 9, 165.00 D. ₱ 9, 516.00
5. These are amounts received for revenues that are not reported as sales before the balance
sheet date.
A. Accounts Payable C. Unearned revenue
B. Accounts Receivable D. none of these are correct
6. In March 2017, Toy Fun Inc. received cash from bank loan ₱ 15,000, received cash from
revenues earned ₱ 11,200, the owner added additional cash in the business ₱ 4,500, and
incurred and paid expenses ₱ 5, 600. How much is the net income for the month?
A. Loss of ₱ 4,900 C. Profit of ₱ 13,900
B. Profit of ₱ 5,600 D. Profit of ₱ 25,100
7. What will be the effect of investing cash in a journal?
A. Increase in asset and increase in equity
B. Increase in asset and increase in liability
C. Increase in expense and increase in equity
D. Decrease in asset and increase in equity
8. What is the equation in obtaining Net Income from Operations?
A. Gross profit – Operating Expenses
B. Net Sales – Net Expenses
C. Net Sales – Cost of Goods Sold
D. Net Income from Operations + other Income – Total Expenses
94
9. What is the equation in obtaining Gross Profit?
A. Net Sales – Net Expenses
B. Net Sales – Cost of Goods Sold
C. Gross profit – Operating Expenses
D. Net Income from Operations + other Income – Total Expenses
10. Its purpose is to test the equality between debits and credits after closing entries are prepared
and posted.
A. Adjusting Entries C. Reversing entries
B. Post-closing trial balance D. None of these are correct
11. Which among these is an expense account?
A. Accounts Payable C. Inventory
B. Cost of Goods Sold D. Trademark
12. Which among those is a revenue?
A. Cash C. Retained earnings
B. Interest receivable D. Sales
13. It is the result when total expense is larger that total revenues.
A. Gross Profit C. Net loss
B. Net income D. Revenue
For numbers 14 – 15. Refers to the table below.
Accounts payable ₱ 41, 500

Accounts receivable 28,650
Building 295,000
Cash 18,500
Equipment 68,800
Retained earnings 500,000
Prepaid expenses 13,100
Sales 156,000
Salary expense 25,000
Utility expense 10,000
Long-term investments 45,000
Trademarks 7,000
Accrued expenses 9,000
Short-term notes payable 37,500
Common stock 2,300
Interest receivable 3,400
Inventory 98,400
Dividends paid 29,100
Cost of goods sold 58,000
Income tax expense 6,500
14. Assuming that the income statement is already made, how much should be the
gross profit?
A. ₱ 56, 500 C. ₱ 98,000
B. ₱ 91, 500 D. None of these are correct
15. How much is the income before tax?
A. ₱ 63,000 C. ₱ 131,000
B. ₱ 121,000 D. ₱ 146,000
95
96
Learning 1:
1. Statement of Changes in Equity
HELLO TRADING
Statement of Changes in Equity
For the year ended December 31, 2015
Account Title Note Dr Cr
Kitty, Capital, January 1 Php 66,700
Kitty, Drawing Php 12,000
Net loss 22,600 -(34,600)
Php 32,100
2. Statement of Financial Position
HELLO TRADING
Statement of Financial Position
For the year ended December 31, 2015
Account Title Note Dr Cr
ASSETS
Current Assets
Cash Php 21,000
Trade and other receivables 5 35,700
Learning 2 Merchandise Inventory 47,000
Prepaid expenses 6 63,600
16. C
Total current assets Php 167,300
17. C Non-current Assets
18. A Property, plant, and equipment 7 32,000
19. A
TOTAL ASSETS Php 199,300
20. C
21. B LIABILITIES AND EQUITY
22. A
Current Liabilities
23. A Trade and other payable 8 Php 67,200
24. B
Non-current Assets
25. B
Notes Payable (due June 30, 2018) 100,000
26. B TOTAL LIABILITIES Php 167,200
27. D
28. C EQUITY
Kitty, Capital 32,100
29. C
30. A TOTAL LIABILITIES and EQUITY Php 199,300
Answer Key
References
Textbook:
Tugas, Florenz C., et.al, Fundamentals of Accountancy, Business and Management 1,
Department of Education
Website:
www.lcsnc.org
Quexhub Application of Fundamentals of ABM 1
97
SECOND QUARTER
MODULE 7:
Statements of Cost of Goods Solds and
Gross Profit
Writer: JEFFERSON CHARLES T. AMBAT

Looc Integrated School

Landline: 049–554 9830 loc. 14
98


For the learner:

99
answers.
are not alone.
100
WEEK STATEMENTS OF COST OF GOODS
7 SOLD AND GROSS PROFITS
I
This module was written for you to accomplish at home. It was carefully
designed so that you can work at your own pace and allow self-discovery of the concept
through activities that you will perform. Activities were also selected to allow independent
learning which also aims to develop students’ reading comprehension skills through
understanding written texts. This is designed for you learners so to be able to: 1. Prepares
statements of cost of goods sold and gross profits.
PRE-TEST:
__________ 1. Cost of goods sold is the amount of goods purchased excluding the expenses
incurred on manufacturing the goods.
__________ 2. The gross profit is a profitability measure that evaluates how efficient a
company is in managing its labor and supplies in the production process.
__________ 3. Cost of goods sold is computed only to know the gross profit from the trading
activities of a business unit.
__________ 4. The COGS is an important metric on the financial statements as it is
subtracted from a company’s revenues to determine its gross profit.
__________ 5. Gross profit is equal to the net sales less the cost of goods sold.
__________ 6. Gross profit will appear on a company's income statement and can be
calculated by subtracting the cost of goods sold (COGS) from revenue
(sales).
__________ 7. If you are selling a physical product, inventory is what you sell.
__________ 8. Wages you pay to employees who spend all their time working directly on
the products your company makes is an example of direct costs.
__________ 9. Gross profit is the money you have available to run your business after
paying for the goods or services that let you make the sales in the first
place.
__________ 10. Beginning and ending inventory are not important in preparing the cost
of good sold statement.
101
D
COST OF GOODS SOLD AND GROSS PROFIT
A business enterprise either purchases goods or manufactures goods to sell in the market. The
cost of goods sold is the price of all inventory sold which includes both fixed and variable costs. It is
computed to know the profit earned (GROSS PROFIT) or loss incurred (GROSS LOSS) from the
training activities of a business unit for a particular period.
Cost of Goods Sold are also known as “cost of good sales” or its acronym “COGS.” COGS refers
to the cost of goods that are either manufactured or purchased and then sold. COGS count as a
business expense and affect how much profit a company makes on its products.
Cost of goods sold is found on a business’s income statement, one of the top financial reports
in accounting. An income statement reports income for a certain accounting period, such as a year,
quarter, or month.
Cost of goods sold = the amount of goods purchased plus expenses incurred in bringing the goods to
the place of sale or expenses incurred on manufacturing the goods (called direct expenses).
In case there is a stock goods to be sold in the beginning of the year or at the end of the year
the cost of good sold is calculated as follows:
Cost of goods sold = opening stock + net purchases + all direct expenses -closing stock
While the gross profit is simply computed as follows:

Gross Profit = Net sales – Cost of goods sold
102
I. COST OF GOODS SOLD AND INVENTORY
The calculation of the cost of goods sold is focused on
the value of your business's inventory. If you are selling a
physical product, inventory is what you sell. Your business
inventory might be items you have purchased from a
wholesaler or that you have made yourself and are reselling.
You might also keep an inventory of parts or materials for products that you make. Inventory
is an important business asset, with a specific value.
The process of calculating the cost of goods sold starts with inventory at the beginning of the
year and ends with inventory at the end of the year. Many businesses have a process of taking
inventory at these times to figure the value of their inventory.
Inventory that is sold appears in the income statement under the COGS account. The
beginning inventory for the year is the inventory left over from the previous year—that is, the
merchandise that was not sold in the previous year. Any additional productions or purchases made
by a manufacturing or retail company are added to the beginning inventory. At the end of the year,
the products that were not sold are subtracted from the sum of beginning inventory and additional
purchases. The final number derived from the calculation is the cost of goods sold for the year.
COGS=Beginning Inventory + P − Ending Inventory

Where P=Purchases during the period
What Does the COGS Tell You?
The COGS is an important metric on the financial statements as it is subtracted from a

company’s revenues to determine its gross profit. The gross profit is a profitability measure that
evaluates how efficient a company is in managing its labor and supplies in the production process.
Because COGS is a cost of doing business, it is recorded as a business expense on the
income statements. Knowing the cost of goods sold helps analysts, investors, and managers
estimate the company’s bottom line. If COGS increases, net income will decrease. While this
103
movement is beneficial for income tax purposes, the business will have less profit for its
shareholders. Businesses thus try to keep their COGS low so that net profits will be higher.
NOTE:
 Cost of goods sold (COGS) includes all of the costs and expenses directly related to
the production of goods.
 COGS excludes indirect costs such as overhead and sales & marketing.
 COGS is deducted from revenues (sales) in order to calculate gross profit and gross
margin.
 Higher COGS results in lower margins.
 As a rule of thumb, if you want to know if an expense falls under COGS, ask: "Would
this expense have been an expense even if no sales were generated?"
The items that make up costs of goods sold include:
 Cost of items intended for resale.

 Cost of raw materials.
 Cost of parts used to make a product.
 Direct labor costs.
 Supplies used in either making or selling the product.
 Overhead costs, like utilities for the manufacturing site.
 Shipping or freight in costs.
 Indirect costs, like distribution or sales force costs.
 Container costs.
NOTE: all operating expenses are not included like insurance, office maintenance, lease etc.
Steps in Calculating the Cost of Goods Sold
Step 1: Determine Direct and Indirect Costs

List all costs, including cost of labor, cost of materials and supplies, and other costs.
There are two types of costs included in COGS:
 Direct Costs are costs related to the production or purchase of the product.
 Indirect Costs are costs related to warehousing, facilities, equipment, and
labor.
Step 2: Determine Facilities Costs
You must set a percentage of your facility costs (rent or mortgage interest, utilities,
and other costs) to each product, for the accounting period in question.
Step 3: Determine the Beginning Inventory

Inventory includes the merchandise in stock, raw materials, work in progress, finished
products, and supplies that are part of the items you sell.
Step 4: Add Purchases of Inventory Items
104
You must keep track of the cost of each shipment or the total manufacturing cost of
each product you add to inventory.
Step 5: Determine the Ending Inventory
Ending inventory costs are usually determined by taking a physical inventory of

products, or by estimating.
Step 6: Do the COGS Calculation

At this point, you have all the information you need to do the COGS calculation. You
can do it on a spreadsheet.
SAMPLE COGS: DETAILED COMPUTATION
Example 1: Detailed Cost of Goods Sold

JOHN Manufacturing Company, a manufacturer of soda bottles, had the following
inventory balances at the beginning and end of 2018.
105
During 2018, the company purchased Php1 000 000 of raw material and direct labor incurred
of Php 1 600 000. Manufacturing overhead costs were as follows:
*Sales revenue was Php 4 105 000 for the year. Selling and administrative expenses for the
year amounted to Php 110 000.
Required:
 Prepare Cost of goods manufactured statement.

 Prepare cost of goods sold statement.
Solution:
106
STUDY QUESTIONS:
Answer the following questions briefly and concisely. Use real-life examples if needed.
1. Do the John manufacturing company is still good for business? Why?
2. What is the importance of knowing the cost of goods sold in a business?
Example 2: Simple Cost of Goods Sold
Information pertaining to the Seaworthy Scuba Gear in one month.
Purchases Php. 120,000

Raw Materials 42,000
Cost of Labor 20,000
Freight-In 15,500
Beginning Inventory 30,000
Ending Inventory 20,500
Insurance 20,000
What amount should the Seaworthy Scuba Gear report as cost of goods sold for the year?
107
Solution:
SEAWORTHY SCUBA GEAR

COST OF GOODS SOLD STATEMENT
Php Php
Purchases 120,000
Freight-In 15,500
Raw materials 42,000
Cost of Labor 20,000
Total Goods Available for sale 227,500
Ending Inventory 20,500
Cost of Goods Sold 207,000
Study Question:
1. Is it important to know what expenses should be excluded in the cost of

goods sold? Why?
2. How do we compute COGS when there is a stock goods to be sold in the

beginning or end of the period?
ACTIVITY 1. LET’S TRY WHAT YOU HAVE LEARNED:
The following information pertained to SinoVac Co. for the month of February 2021.
Ending Inventory Php 48,000

Direct Labor 102,000
Freight-In Materials 150,000
Office Lease 25,000
Container Expenses 50,000
Insurance 20,000
Shipping Fee 15,000
Required:
1. Compute for the COGS of SinoVac Co. for the month of February 2021.
2. If SinoVac sales is Php 350,000 and given all the above information, do you think
you can solve for gross profit of the manufacturing company? How?
108
II. GROSS PROFIT: EARNED PROFIT
Gross Profit is one of the components of the profit and loss statement of your business.
It is the difference between net sales and cost of goods sold. In other words, it is the profit
generated as an outcome of undertaking the basic operational activities of your business. Such
basic activities include: Manufacturing, Purchasing and Selling of Goods.
What is gross profit?
The definition of gross profit is total sales less cost of goods sold (COGS). “It is the
amount of revenue after you subtract the cause of goods.”
GROSS PROFIT = SALES REVENUE -- COST OF GOODS SOLD
Sales is defined as the amount of goods and services you sell to customers. The cost
of goods sold balance includes all costs that are directly related to creating and selling the
product or service.
It is important to note that gross profit is different than net income. To calculate net
income, you must subtract operating expenses from gross profit.
In addition, sales do not equal revenue. Total revenue includes sales, and other
activities that generate cash inflows and profit. If a manufacturer, for example, sells a piece of
equipment for a gain, the transaction generates revenue. However, a gain on sale is different
than selling a product to a customer.
109
A gain on sale is posted to the income statement as non-operating income and is
not part of the gross profit formula.
Understanding Gross Profit

Gross profit assesses a company's efficiency at using its labor and supplies in
producing goods or services. The metric mostly considers variable costs—that is, costs that
fluctuate with the level of output, such as:
 materials
 direct labor, assuming it is hourly or otherwise dependent on output levels
 commissions for sales staff
 credit card fees on customer purchases
 equipment, perhaps including usage-based depreciation
 utilities for the production site
 shipping
As generally defined, gross profit does not include fixed costs (that is, costs that
must be paid regardless of the level of output). Fixed costs include rent, advertising, insurance,
salaries for employees not directly involved in the production and office supplies.
However, it should be noted that a portion of the fixed cost is assigned to each unit of
production under absorption costing, which is required for external reporting under the
generally accepted accounting principles (GAAP). For example, if a factory produces 10,000
widgets in each period, and the company pays PHP 30,000 in rent for the building, a cost of
PHP 3.00 would be attributed to each widget under absorption costing.
Gross profit should not be confused with operating profit, also known as earnings
before interest and tax (EBIT), which is a company's profit before interest and taxes are
factored in. Operating profit is calculated by subtracting operating expenses from gross profit.
Why is Gross Profit Important as A Measure?
To determine the operational efficiency and financial performance of a business, it is

important to consider Gross Profit. Gross Profit indicates the ability of a business in making
use of its available resources including raw material, labor, and other supplies.
Sales and cost of goods sold are two of the biggest balances in the income statement. If
you can make changes to either balance, you can increase profitability. Operating expenses may
be harder to reduce since many of the costs are fixed.
How to Calculate Gross Profit :
Examples 1:
To understand the gross profit formula, meet Racquel, the owner of RACQUEL’S
Outdoor Manufacturing. Racquel’s business manufactures hiking boots, and her firm just
110
completed its first year of operations. Below is the income statement of the business for the
end of the year 2020. Study how the gross profit is computed until the net income was
solved. Notice that gross profit is totally different from net profit.
RACQUEL'S OUTDOOR MANUFACTURING

Income Statement for 2020
Php Php
Sales 1,890,000
Cost of Sales
Materials 300,000
Dunkel Bros. Equip&Shipping 350,000
Labor 531,990
Total Cost of Goods Sold 1,181,990
Gross Profit 708,010
Operating Expenses
Office salaries 104,200
Depreciation 0
Insurance 20,000
Home office lease 0
Marketing, advertising 30,000
Repair and maintenance 15,000
Total Operating Expenses 169,200
Net Income 538,810
The sales component of the formula is straightforward (selling price multiplied by the
number of boots sold). R. Outdoor sold Php 1,891,910 of boots in 2020. The firm’s cost of sales
component is more complex, however. What expenses are included in the cost of goods sold
balance?
Gross profit is important for a company’s accounting because it deals specifically
with cost of goods sold. In other words, the data generated can reflect how efficient a
company’s management is when it comes to the purchasing of supplies, allocation of labor or
decisions regarding the plant or location where the product is being produced.
NOTE:
 Also called gross income, gross profit is calculated by subtracting the cost of goods sold
from revenue.
 Gross profit only includes variable costs and does not account for fixed costs.
 Gross profit assesses a company's efficiency at using its labor and supplies in producing
goods or services. 111
How to Calculate Simple Gross Profit
Example 2:
Let us pretend you own a stand on the beach, and you sell snorkel sets. The only cost
associated directly with making a sale is the amount you paid to purchase the snorkel sets you
are selling to folks who come to the beach unprepared.
If you price your snorkel sets at Php 200 each and you sell 10 sets before you hit the
waves at noon, you will have made Php 2000 in sales. Php 200 per snorkel set x 10 snorkel
sets sold = Php 2000 in sales
But you must pay for the snorkel sets you sold. Chances are you paid in full before
your supplier shipped them to you, but you need to replenish your stock—otherwise, you will
not have anything to sell and your beach stand will go out of business. Let us pretend you
purchased your snorkel sets for Php50 each. The cost of the 10 snorkel sets you sold, then, is
Php500.
Php 50 cost per snorkel set x 10 snorkel sets purchased for resale = Php 500 in cost of goods
This means your gross profit is Php1500:

Php 2000 in snorkel set sales – Php500 paid to snorkel set supplier = Php1500 gross profit
This Php1500, in turn, gets used to maintain your beach stand, advertise at the tiki hut
down the shore, etc.
Gross profit, then, is the money you have available to run your business after paying for the
goods or services that let you make the sales in the first place.
ACTIVITY 2: LET’S TRY WHAT YOU HAVE LEARNED.
1. Make a simple calculation of gross profit based on businesses that you can
observed in your community.
2. Complete the computation below when the sale is Php500,000.

Chairs and Tables Inc.
Income Statement 2020
Php Php
Sales ____________
Cost of Sales
Materials 88,000
Labor Cost 22,000
Total Cost of Goods Sold _____________
Gross Profit _____________
Operating Expenses
Depreciation 10,500
Insurance 20,000
Total Operating Expenses _____________
Net Income 112 _____________
E
1. Based on your understanding, what is a Cost of Goods Sold?

________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
2. What are the steps in solving the COSG? Explain briefly.

________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
3. What is the difference between NET profit and GROSS profit? Explain comprehensively.
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
4. What is the importance of knowing the COGS in a merchandising business?

_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
5. Why do you think it is important for a company to have a knowledge about the status of
their gross profit?
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
113
A
POST-TEST:
__________ 1. Cost of goods sold is the amount of goods purchased excluding the expenses
incurred on manufacturing the goods.
__________ 2. The gross profit is a profitability measure that evaluates how efficient a
company is in managing its labor and supplies in the production process.
__________ 3. Cost of goods sold is computed only to know the gross profit from the trading
activities of a business unit.
__________ 4. The COGS is an important metric on the financial statements as it is
subtracted from a company’s revenues to determine its gross profit.
__________ 5. Gross profit is equal to the net sales less the cost of goods sold.
__________ 6. Gross profit will appear on a company's income statement and can be
calculated by subtracting the cost of goods sold (COGS) from revenue
(sales).
__________ 7. If you are selling a physical product, inventory is what you sell.
__________ 8. Wages you pay to employees who spend all their time working directly on
the products your company makes is an example of direct costs.
__________ 9. Gross profit is the money you have available to run your business after
paying for the goods or services that let you make the sales in the first
place.
__________ 10. Beginning and ending inventory are not important in preparing the cost
of good sold statement.
114
REFLECTIVE LEARNING SHEET ON COST OF GOODS SOLD AND GROSS PROFIT
Student:
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
115
116
FABM1_WEEK 7_MODULE_7
ANSWER KEY
PRETEST ACTIVITY 1: SinoVac CO.
1. F COGS Statement
2. T Php Php
3. F Sales 350,000
4. T Cost of Sales
5. T Beginning Inventory 24,000
6. T F-In Materials 150,000
7. T Direct Labor 102, 000
8. T Container Expenses 50,000
9. T Total Goods Available for Sale 224,000
10. F Ending Inventory 48,000
Cost of Goods Sold 176,000
ACTIVITY 2.2
POST TEST
Chairs and Tables Inc.
1. F Income Statement 2020
2. T Php Php
3. F Sales 500,000
4. T Cost of Sales
5. T Materials 88,000
6. T Labor Cost 22,000
7. T Total Cost of Goods Sold 110,000
8. T
9. T Gross Profit 390,000
10. F
Operating Expenses
Depreciation 10,500
Insurance 20,000
Total Operating Expenses 75,500
Net Income 314,500
Answer Key
References
https://www.fundera.com/blog/how-to-find-gross-profit
https://www.thebalancesmb.com/how-to-calculate-cost-of-goods-sold-397501
https://www.youtube.com/watch?v=-2jJYh-Qi_w
https://www.freshbooks.com/hub/accounting/cost-of-goods-sold-cogs
https://quickbooks.intuit.com/r/bookkeeping/gross-profit/
https://www.youtube.com/watch?v=ujH3gfMU27w
https://www.investopedia.com/terms/g/grossprofit.asp#:~:text=Gross%20profit%20is%20the%20profit,
)%20from%20revenue%20(sales)
117
SECOND QUARTER
MODULE 8:
Statements of Cost of Goods Solds and
Gross Profit
Writer: ROSALIA Q. ORIEL


Landline: 049–554 9830 loc. 14
118


For the learner:

119
answers.
are not alone.
120
WEEK
STATEMENTS OF COST OF GOODS
8 SOLD AND GROSS PROFITS
I
This module was written for you to accomplish at home. It was carefully designed
so that you can work at your own pace and allow self-discovery of the concept through
activities that you will perform. Activities were also selected to allow independent learning
which also aims to develop students’ reading comprehension skills through understanding
written texts.
This is designed for you learners so to be able to:
 Prepares statements of cost of goods sold and gross profits.
PRE -ACTIVITY
Directions: Complete the sentence by filling up the blanks. Find the correct answer in
the puzzle below.
c x m t e k r a m t e g r a i
f o i o j x n n r x m p a g c
c v s c n z i e u j u j o u n
j l b t n e i d r v d b b h z
k b r w o l y e y w d h a l y
r v y j p f p a t e n t i u r
a l i p p c g e u h c j e u o
m g u a s u p o u c t o s q t
e s v x a v l c o p v h b i n
s i p u r o e s f d o l v v e
a c r c w k n n e i s a p o v
l t k m d v q j w v h s v e n
e l i w i x k p p w k a o n i
s r x y g t w s u o h z s l h
j p u r c h a s e s s i p w d
121
1. _______ refers to the cost of goods that are either manufactured or purchased and
then sold.
2. The process of calculating the cost of goods sold starts with _______ at the beginning of
the year ends with inventory at the end of the year.
3. Any additional or _______ made by a manufacturing or retail company are added to the
beginning inventory.
4. ________ is the total sales less cost of goods sold (COGS).It is the amount of revenue
after you subtract the cost of goods sold.
5. ______ is the amount of goods and services you sell to the customers.
D
Determining Cost of Goods Sold under the Perpetual Inventory System
The Cost of Goods Sold under the perpetual inventory system is determined by getting the
running balance in the general ledger of the account. Recall the previous discussion on posting
the journal entries to the general ledger. At any point in time, you can determine the cumulative
cost of goods sold under the perpetual inventory system because in this system a separate
general ledger for “Cost of Goods Sold” is maintained
THE FLOW OF INVENTORY COSTS

Under the periodic inventory system, physical count is necessary to determine the
ending balance of merchandise inventory. After the count, the costs of these inventory items
will be computed. There are instances that the unit prices for merchandise purchased are
different.
Consider this scenario:
Geo San is in the business of buying and selling canned sardines. On January 2016, Geo had
the following transactions:
1/1/16 Merchandise inventory on hand 1,000 cans @ PHP10/can PhP 10,000
1/10/16 Purchased 5,000 cans @ PHP11 /can 55,000
1/20/16 Purchased 4,000 cans @ PHP12/can 48,000
Total PhP 113,000
During the month of January the total sales in units is 7,000. Therefore, the ending
inventory in units is 3,000 cans of sardines (1,000+5,000+4,000-7,000). The problem now is
122
the unit cost that will be used to determine the value of the ending inventory. This is where the
cost flow assumption is needed.
The two most commonly used cost flow assumptions are:

• Average Cost
Using the above example, average unit cost is simply computed by dividing the total
cost (PHP113, 000) by total quantities (1,000+5,000+4,000) 10,000. Average unit cost is
PHP11.30
The cost of merchandise inventory ending is 3,000 x PHP11.30 = PHP33, 900
• First in, First out (FIFO)

As the name implies, FIFO involves the assumption that goods sold are the first units that were
purchased - that means the oldest goods on hand. Thus, the remaining inventory is comprised
of the most recent purchases.
Applying this to the problem above, the 7,000 units sold were taken from:
1,000 @ PHP10
5,000 @ PHP11
1,000 @ PHP12
———————-
7,000 units
Therefore, the ending inventory will come from the January 20 purchases:
3,000 @ PHP12 = PHP36, 000
Think of this …….

Purchases of inventory were made as follows.
Lot A January 5, 2016 100 units at P50 per unit P5,000
Lot B January 15, 2016 50 units at P45 per unit 2,250
Lot C January 27, 2016 20 units at P60 per unit 1,200
A cash sale of 10 units was made on February 10, at P90 per unit.
In a journal entry to be made of: Debit Credit

Cash P900
Sales P900
123
MOVING AVERAGE METHOD.
Under the average method of inventory valuation, the unit cost from
a first acquisition is changed by the cost of a second acquisition is
changed by the cost of a second acquisition, and still changed by
cost of a third and subsequent.
If the inventory sold came from Lot B, the cost of sales is P450 (P45 x 10) and the
journal entries from the sale would have been:
Purchased Price Formula Cost per Unit

Lot A P5,000 P5,000 divided by 100 units in Lot A P50.00
Lot B 2,250
P 7,250 P7,250 divided by 150 in Lots A and B 48.33
Lot C 1,200
P8,450 P8,450 divided by 170 units in Lots A,B< and C P49.70
Journal Entries Cash P 900

( 10 units x P45) Sales P900
( 10 units x P49.75) Cost of sales ?

Inventory ?
To find the cost of goods sold during an accounting period, use the COGS formula:
1. COGS = Beginning Inventory + Purchases During the Period – Ending Inventory.
2. Gross Income = Gross Revenue – COGS.
3. Net Income = Revenue – COGS – Expenses.
ACTIVITY 1. LET’S TRY WHAT YOU HAVE LEARNED:
Use the following information to answer the questions:
Placebo Clip-On Tie Company had one tie in inventory at the beginning of the year,
and it cost P5. On February 10, the company bought another tie for inventory, and it
cost P8. On March 10, the company bought another tie for P10; on April 3, it purchased
124
another for P12; and on May 12, it bought another for P15. In June, Placebo sold three
ties.
If the company uses the average cost method of recording cost of goods sold
expense, how much is cost of goods sold?
______________________________________________________________________________________
______________________________________________________________________________________
______________________________________________________________________________________
______________________________________________________________________________________
______________________________________________________________________________________
______________________________________________________________________________________
______________________________________________________________________________________
E
Listed below are some of the accounts relating to the income of Leather Plus (owned
by Abner Bravo) for the three month period ended March 31, 2016:
Sales 500,000 Merchandise Inventory, 170,100

beginning
Sales Returns and 15,000 Merchandise Inventory, 165,000
Allowances Ending
Sales Discounts 7,800 Purchase Discounts 1,800
Purchases 302,000 Freight-In 5,000
Purchase Returns and 4,900 Rental Expense 5,000
Allowances
Supplies Expense 1,200 Delivery Expense 2,100
Salaries Expense 18,000 Utilities Expense 8,000
Required:
1. Prepare a schedule of cost of goods sold for the three-month period ended March
31, 2016.
2. Prepare a statement of income for the period ended March 31, 2016.
3. Prepare closing entries.
125
A
Learning Task 2:
The following data was taken from ledger account balances and supplementary data for the XYZ
Company.
Merchandise inventory, beginning PHP 20,000

Merchandise inventory, ending 23,000
Purchases 215,000
Purchases discounts 6,000
Purchases returns and allowances 3,000
Sales 400,000
Sales discounts 3,200
Sales returns and allowances 1,800
Freight-in 10,000
Required:
Complete Income Statement in proper format. Compute of net sales, cost of goods sold, and
gross profit for the year ended December 31, 2016.
XYZ COMPANY
Income Statement
For the Year Ended December 31, 2016
Revenue from sales:

Gross sales……………………………………… PHP400, 000
Less: Sales discounts …………………………. PHP 3,200
Sales returns and allowances 1,800 5,000
Net sales………………………………………… __(1)_____
Cost of goods sold:

Merchandise inventory, 1/1/16……………….. 20,000
Purchases……………………………………….. PHP215, 000
Less: Purchase discounts………………………. PHP6, 000
Sales returns and allowances………. 3,000 9,000
Net purchases .............................. ___(2)____
Add Freight-in ………………………………… 10,000

Cost of goods purchased……………………… __(3)_____
Goods available for sale……………………….. 236,000

Merchandise inventory, 12/31/16…………… 23,000
Cost of goods sold……………………………………… ___(4)___
Gross profit from sales…………………………………… ___(5)____

126
REFLECTIVE LEARNING SHEET ON COST OF GOODS SOLD AND GROSS PROFIT
Why do you need to know your COGS and Gross Profit?

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127
128
Learning Task 1.2:
CLOSING ENTRIES
Leather Plus
Sales 500,000
Income Statement
Sales Returns & Allow 15,000
For the three-month period ended March 31, 2016
Sales Discounts 7,800
Income Summary 477,200
Gross Sales 500,000
Less: Sales Returns & Allow (15,000)
Sales Discounts (7,800)
Purchase Returns & Allow 4,900
——————
Net Sales 477,200
Purchases 302,000
Less: Cost of Goods Sold 305,400
Freight-In 5,000
——————
Rental Expense 5,000
Less: Expenses
Delivery Expense 2,100
Utilities Expense 8,000
Income Summary 170,100 Rental Expense 5,000
Merchandise Inventory, Beg 170,100 Delivery Expense 2,100
Utilities Expense 8,000
Merchandise Inventory, End 165,000 ——————
Income Summary 165,000 Total Expenses 34,300
——————
Net Income 137,500
Bravo,Capital 137,000 —————
Learning Task 1.1: ACTIVITY 1. LET’S TRY WHAT
YOU HAVE LEARNED:
Leather Plus
Answer: P30
Schedule of Costs of Goods Sold
The average cost method
For the three-month period ended March 31, 2016
calculates the cost of all units
available for sale during the
Merchandise Inventory, Beg 170,100
period.
Add: Net Purchases
Purchases 302,000
Less: Purchase Returns & Allow (4,900) Then, a cost per unit is calculated
Purchase Discounts (1,800) 295,300 using the cost of all units available for
—————- sale divided by the total number of
Add: Freight-In 5,000 units available for sale.
——————-
Cost of Goods Available for Sale 470,400 Then, that cost per unit is multiplied
Less; Merchandise Inventory, End (165,000) by the number of units sold to arrive
—————— at cost of goods sold expense — 10
Cost of Goods Sold 305,400 ×3 = 30.
Learning Task 2 Pre- activity
(1) Net Sales P395,000 1. Cost of Goods Sold
(2) Net Purchases P206,000 Think of this 2. Inventory
(3) Cost of Goods Purchased P216,000 Cost of sales P497.00 3. Purchases
(4) Cost of Goods Sold P213,000 4. Gross Profit
(5) Gross Profit from Sales P182,000
Inventory P497.00
5. Sales
Answer Key
References
https://www.fundera.com/blog/how-to-find-gross-profit
https://www.thebalancesmb.com/how-to-calculate-cost-of-goods-sold-397501
https://www.youtube.com/watch?v=-2jJYh-Qi_w
https://www.freshbooks.com/hub/accounting/cost-of-goods-sold-cogs
https://quickbooks.intuit.com/r/bookkeeping/gross-profit/
https://www.youtube.com/watch?v=ujH3gfMU27w
https://www.investopedia.com/terms/g/grossprofit.asp#:~:text=Gross%20profit%20is%20the%20profit,
)%20from%20revenue%20(sales)
https://www.dummies.com/business/accounting/cost-of-goods-sold-practice-questions/
The Fundamentals in Accounting K to 12 BASIC EDUCATION FUNDAMENTALS OF

ACCOUNTANCY BUSINESS AND MANAGEMENT 1 by. Virgilio D. Reyes
Teaching Guide for Senior High School Fundamentals of Accountancy, Business and
Management 1
129

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Senior High School

Self – Learning Module

Writer: RANDY M. DAVID

Reviewer: ISABELITA R. HIZON

Department of Education│R4A│Division of Calamba City

Welcome to the Fundamentals of Accountancy, Business and Management 1.

This module was collaboratively designed, developed and reviewed by educators

For the learner:

Welcome to Fundamentals of Accountancy, Business and Management 1 Alternative

__________ 5. Purchase invoice should support each cash purchase.

__________ 6. A business engaging in the purchasing and sale of products or goods is

__________ 8. A merchandising business is an enterprise composed of a professional or team

NATURE OF A MERCHANDISING BUSINESS

A business engaging in the purchasing and sale of products or goods is considered as

Inventory Systems in a Merchandising Business

1. The Periodic System

3. What are the two types of merchants?

5. In your own words, discuss the perpetual inventory systems.

Directions: Write T if the statement is true and F if it is false.

__________ 1. A business engaging in the purchasing and sale of products or goods is

__________ 3. A merchandising business is an enterprise composed of a professional or team

__________ 10. Purchase invoice should support each cash purchase.

REFLECTIVE LEARNING SHEET

Writers: ELMO G. BAUTISTA

Reviewer: ISABELITA R. HIZON

Department of Education│R4A│Division of Calamba City

Welcome to the Fundamentals of Accountancy, Business and Management 1.

This module was collaboratively designed, developed and reviewed by educators

For the learner:

Welcome to Fundamentals of Accountancy, Business and Management 1 Alternative

 Records transactions of a merchandising business in the general and special

A merchandise may be accounted for under one of two inventory methods:

1. Perpetual inventory is an alternative to periodic inventory system. In this inventory

The most common types of transactions for merchandising companies are:

xx Merchandise Inventory 35,000

2. Sale of merchandise - the purpose of purchasing a merchandise is to resell it, generally

xx Accounts Payable - Fabshoppe 3,500

xx Sales Returns and Allowances 1,000

xx Merchandise Inventory 700

Example: Sample Invoice

xx Accounts Payable – Fabshoppe 31,500

Prepare journal entries to record each of the merchandising transactions assuming

A. Accounts Receivable-G. Felicio C. Sales

A. Cash C. Notes Payable

Writer: PATRICK R. NAHIAL

Reviewer: ISABELITA R. HIZON

Department of Education│R4A│Division of Calamba City

Welcome to the Fundamentals of Accountancy, Business and Management 1.

This module was collaboratively designed, developed and reviewed by educators

For the learner:

Welcome to Fundamentals of Accountancy, Business and Management 1

3 Merchandising Business in the General

What I need to know

1) A merchandising business sells goods that it produces.

Let’s have a short review on our previous topic.

Assume that FABM Company purchased five units of computers on cash

Maintaining inventory items is a unique set-up in a merchandising

Merchandising entities may use either of the following inventory systems:

1. Perpetual System — Detailed records of the cost of each item are