ACC 102: Fundamentals of Financial Accounting and Reporting

Student Activity Sheet #10

Name: ____________________________________________________________ Class number: _____

Section: ____________ Schedule:_____________________________________ Date: _____________

Illustrating the operating cycle of a merchandising business Materials:

Lesson Objectives: Activity Sheet #10
To prepare journal entries pertaining to the operating cycle of the
merchandising business References:
Fundamentals of Financial
Accounting and Reporting by WIN
Ballada

What do you know about Merchandising businesses? Try answering the questions below by
writing your ideas under the What I Know column. You may use key words or phrases that you
think are related to the questions. Answer the What I learned section after finishing Activity 2.

What I Know Questions: What I Learned

What is a check?

What is Merchandising?

What is a Purchase order?

Review I (5 minutes)

Directions: Answer the questions briefly.

1. What is a reversing entry?

2. Enumerate the four adjustments that can be reversed at the beginning of the next
accounting period.

Concept Notes (15 minutes)

The merchandising business purchases inventory, sells the inventory and uses cash to
purchase more inventory.
For cash sales, the cycle is from cash to inventory and back to cash. For sales on account,
the cycle is from cash to inventory and back to cash.

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 ACC 102: Fundamentals of Financial Accounting and Reporting
Student Activity Sheet #10

Example: Purchases 10,000

Cash 10,000
To record purchases of merchandise for cash

Accounts Receivable 15,000

Sales 15,000
To record sale of merchandise on credit

Cash 15,000
Accounts Receivable 15,000
To record collection of account

Activity 1

Part I (15 minutes)

Directions: Prepare journal entries for the following transactions:

June 1 Cash sales, P230,000.

4 Sales on account, P450,000.
10 Purchased merchandise for cash, P150,000.
15 Purchased merchandise on account, P620,000.
22 Received cash for sales made on account.
28 Paid the amount due for merchandise purchased.

Date Account Title Dr. Cr.

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 ACC 102: Fundamentals of Financial Accounting and Reporting
Student Activity Sheet #10

Part II (15 minutes)

Directions: Write the word True if the statement is correct, otherwise, write False.

1. ___________ Buying and selling are the primary activities of a merchandising business.
2. ___________The chart of accounts for a merchandising entity differs from that of a
service entity.
3. ___________The purchase of equipment not for resale should be debited to the
purchases account.
4. ___________For cash sales, the operating cycle is from cash to inventory to accounts
receivable and back to cash.
5. ___________The operating cycle involves the purchase and sale of inventory as well as
the subsequent payment for purchases and collection of cash.
6. ___________A business can shorten its operating cycle by increasing its percentage of
cash sales and reducing its percentage of credit sales.
7. ___________Ordering of merchandise is not a component of the operating cycle.
8. ___________A car wash is an example of a merchandising company.
9. ___________The entry to record a payment on a P15,000 account would include a debit
to Accounts Payable.
10. ___________A P5,000 purchases on account would include a debit to Cash.

Teacher-led Discussion and/or Coaching Time (20 minutes)

How do you compare service from merchandising business as far as the manner of generating
revenue is concerned?

A service business performs services for a fee. In ascertaining profit, a basic income statement
is all that is needed. Profit is measured as the difference between revenues from services and
expenses. In contrast, a merchandising business earns profit by buying and selling goods. It
uses the same basic accounting methods as a service business, but the process of buying and
selling merchandise requires some additional accounts and concepts. This results in a more
complex income statement.

Identifying source documents in the merchandising business Materials:

Lesson Objectives: Activity Sheet #10
To identify the common source documents used in the
merchandising business References:
Fundamentals of Financial
Accounting and Reporting by WIN
Ballada

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 ACC 102: Fundamentals of Financial Accounting and Reporting
Student Activity Sheet #10

Review II (5 minutes)

Bring out any receipts or invoices that you have in your bags or pockets. Describe what you see
in those documents.

If you’ve saved any receipt

Concept Notes (15 minutes)

Merchandising businesses uses the following forms and source documents to help
identify the transactions that should be recorded in the books.

1. Sales Invoice is prepared by the seller of goods and sent to the buyer. It contains the
name and address of the buyer, the date of sale and the quantity, description and
price about the goods sold. It also specifies the amount of sales and the transportation
and payment terms. The cash sales invoice is used for cash sales while the credit
sales invoice is used for sales on account.

2. Official receipt evidences the receipt of cash by the seller or the authorized
representative.

3. Credit memorandum is a form used by the seller to notify the buyer that his account is
being decreased due to sales returns or errors or other factors requiring adjustments.

4. Delivery receipt is a document that is typically signed by the receiver of a shipment to

indicate that they have in fact received the items being shipped and have taken
possession of.

5. Bill of lading is a document issued by the carrier (shipping company) that specifies
contractual conditions and terms of delivery such as freight terms, time, place, and the
person named to receive the goods. If the carrier is an airline company, the form is
called Airway Bill.

6. Check is a written order to a bank by a depositor to pay the amount specified in the
check from his checking account to the person named in the check.

7. Receiving report is a document containing information about goods received from a

vendor which includes quantities and description of goods received.

8. Debit memorandum is a notification from a buyer to a seller that tells the seller that a
debit was made in the seller’s account on the buyer’s books. It is a way for a buyer to
inform the seller that it wants a refund or discount on its purchase.

9. Accounts payable voucher is used to record liabilities to individuals or companies

supported by the supplier’s invoice and the company’s receiving report and purchase
order.

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 ACC 102: Fundamentals of Financial Accounting and Reporting
Student Activity Sheet #10

10. Check voucher is a kind of document that explains both the nature of payment and
details of the check.

Other business documents that are being used in the operating cycle but are not
recorded in the accounting books are the following:

1. Statement of account is a formal notice to the debtor detailing the accounts already
due.
2. Deposit slips are printed bank forms with depositor’s name, account number and
space for details of the deposit.
3. Purchase requisition is a written request to the purchaser of an entity from an
employee or user department of the same entity that goods need to be purchased.
4. Purchase order is an authorization made by the buyer to the seller to deliver the
merchandise as detailed in the form.

Activity 2
Part I (15 minutes)

Matching Type
A. Purchase Requisition F. Official Receipt
B. Purchase Order G. Statement of Account
C. Credit Memorandum H. Deposit Slips
D. Bill of Lading I. Receiving Report
E. Invoice J. Check

1. This is an authorization made by the buyer to the seller to deliver the merchandise as
detailed in the form.
2. The document issued by the seller authorizing the return of merchandise due to errors in
delivery terms.
3. This document evidences the receipt of cash by the seller.
4. The document prepared by the seller of goods and sent to a buyer detailing the specifics
of a sale.
5. It is a written request to the purchaser of an entity from a user department of the same
entity that goods be purchased.
6. It is a written order to a bank by a depositor to pay the specified amount from his checking
account to the person named.
7. These are printed forms with depositor’s name, account number and details of deposit.
8. It specifies contractual conditions and terms of delivery of goods.
9. It is a formal notice to the debtor detailing the accounts already due.
10.It contains information about goods received from a vendor.

Part II (10 minutes)

Steps in a Purchase Transaction

1. The user department fills in a purchase requisition form and sends it to the purchasing

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 ACC 102: Fundamentals of Financial Accounting and Reporting
Student Activity Sheet #10

department.
2. The purchasing department prepares a purchase order.
3. After receiving the purchase order, the seller forwards an invoice to the purchaser
upon shipment of the merchandise.
4. The purchaser’s receiving department sees to it that the terms in the purchase order
are complied with and prepares a receiving report.
5. Before approving the invoice for payment, the accounts payable department
compares copies of the purchase requisition, purchase order, receiving report, and
invoice to ensure that quantities, descriptions and prices agree.

Directions: Fill in the blanks with the correct answer.

Fill in the Blanks:

1. When certain items are needed, the user department fills in a

________________________________ form and sends it to the purchasing
department.
2. The purchasing department then prepares a ___________________________after
checking with the pricelists, quotations, or catalogs of approved vendors.
3. After receiving the purchase order, the seller forwards the
___________________________to the purchaser upon shipment of the merchandise.
4. Upon receiving the shipment of merchandise, the purchaser’s receiving department sees
to it that the terms in the purchase order are complied with, and prepares a
___________________________.
5. All of the above forms are called ____________________________________.

Teacher-led Discussion and/or Coaching Time (20 minutes)

Directions: Answer the following questions briefly

1. Name and describe at least five of the common source documents used in the
merchandising business.
2. What transactions are those documents supporting?
3. Name at least five source documents used in the merchandising business and list the
common information found in those documents.

LESSON WRAP-UP
Work Tracker

Good Work! We’re already in the second period, let’s start strong! Let’s track your progress.
Shade the session number you just completed.

“Happiness is mostly a by-product of doing what makes us fulfilled.”

-Benjamin Spock

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Student Activity Sheet #10

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