SCHOOLS DIVISION OFFICE OF TABACO CITY

Fundamentals of
Accountancy, Business and
Management 1
Quarter 4 – Week 7

LAS 7 – THE ACCOUNTING CYCLE OF A MERCHANDISING BUSINESS

Development Team

Writer
MARIA ASUNCION T. BRIZUELA, T-II

Editors/Reviewers
PAULO C. MOJOS, T-II
REYNALDO C. CAÑEZO JR., MT-I
DIOLETA B. BORAIS, EPS 1 MATHEMATICS

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 Republic of the Philippines
Department of Education
Region V – Bicol
SCHOOLS DIVISION OFFICE OF TABACO CITY

Name: _______________________________ Strand and Block: ____________ Date: ______________

Learning Area: FABM 1 Teacher: _______________________________________

LEARNING ACTIVITY SHEETS NO. 7

THE ACCOUNTING CYCLE OF A MERCHANDISING BUSINESS
Objective: Complete the accounting cycle of a merchandising business.

Learning Activity

The worksheet is a common tool and a summary device used by the accountants to gather on a sheet of paper
all the information needed for the preparation of the financial statements, adjusting entries, closing entries, and
the post-closing trial balance. Hence, before the adjusting and closing entries are recorded on the books and
financial statements are prepared, the accountant is assured of the arithmetical accuracy of his or her work.
Adjusting journal entries has been discussed. In the worksheet, these entries are recorded under the
adjustments column.

Steps in Preparing the Worksheet

1. Write the heading on the top center of the paper covering the necessary data:
a) name of business
b) name of working paper
c) period covered
2. Copy the account titles and the balances of the trial balance in the unadjusted trial balance columns.
Total the amounts to check their accuracy. Total debits should equal total credits.
3. Input data in Adjustment column.
a. Enter the adjustments in the proper adjustments column writing the number or letter of each
adjustment accordingly before each debit or credit amount. Accounts which are not listed in the
unadjusted trial balance are added under the accounts column.
b. After all adjustments have been entered, total the pair of adjustments column to prove the equality of
debits and credits.
c. For merchandise inventory, end, this will be included in the closing entries when nominal accounts
are closed.
4. Compute each account’s adjusted balance by extending the amounts from the pre-adjusted trial balance
to the adjusted trial balance plus or minus the adjustments.

Account Balance in the Unadjusted Adjustments What to do

Trial Balance

Debit Debit Add the two amounts

Debit Credit Subtract the credit amount from

the debit amount

Credit Credit Add the two amounts

Credit Debit Subtract the debit amount from the

credit amount

5. From the adjusted trial balance, extend the balances of the Asset, Liability, and Owner’s Equity accounts
to the appropriate columns of the Statement of Financial Position or Balance Sheet and the adjusted
balances of Income and Expense accounts to the appropriate columns of the Statement of
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 Comprehensive Income or Income Statement. The sales account represents the revenue account to be
extended to the credit column of the Income Statement while the sales discount and sales returns and
allowances are extended to the debit column. The beginning inventory and purchases accounts
including freight-in are considered as cost accounts. Hence, they should be extended to the debit
column of the income statement while the purchase returns and allowances accounts are extended to
the credit column. Applying the direct extension method, extend the ending inventory to the credit
column of the income statement and debit column of the balance sheet. The beginning inventory and
ending inventory form part of the Cost of Sales section of the income statement.
6. Total the Balance Sheet columns and the Income Statement columns. The difference between the
Income Statement column totals and the Balance Sheet column totals should be the same. Otherwise,
review your work for error or errors. This difference represents either the net income or net loss. When
the credit total of the income statement exceeds the debit total, the difference is a net income. When the
debit total of the income statement exceeds the credit total, the difference is a net loss.
7. Write the difference as a balancing figure on the income statement and on the balance sheet. Write “Net
Income” or “Net Loss’’ under the account titles column depending on the result of operations. For Net
Income, write the amount under the debit column of the Income Statement and credit column of the
Balance Sheet. For Net Loss, write the amount under the credit column of the Income Statement and
debit column of the Balance Sheet.
8. Double rule the totals of the last four columns.

Illustration:
J. Ong Merchandising
Worksheet
For the Year Ended December 31, 2019
Account Adjusted Trial
Trial Balance Adjustments Income Statement Balance Sheet
Title Balance

Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit

Cash 100,000
100,000 100,000

Accounts 101,0 101, 101,0

Receivable 00 000 00

Allow. For
7,000 7,000 7,000
Bad Debts

Notes 465,0 465, 465,0

Receivable 00 000 00

Mdse. 80,0 80, 60,0

80,000 60,000
Inventory 00 000 00

Office 5,0 a.1 4, 4,0

Supplies 00 ,000 000 00

Prepaid 15,0 c.8, 7, 7,0

Insurance 00 000 000 00

Furniture & 28,0 28, 28,0

Fixture 00 000 00

Accum.
8,0 b.2 10,5
Depn.- F & 10,500
00 ,500 00
F

Accounts 60,0 60,0

60,000
Payable 00 00

Notes 54,0 54,0

54,000
Payable 00 00

Mortgage 105,0 105,0

105,000
Payable 00 00

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 461,6 461,6
Ong, Capital 461,600
00 00

Ong, 30,00 30,0 30,0

Drawing 0 00 00

888,00 888,00
Sales 888,000
0 0

Sales Ret. & 51,00 51,0 51,00

Allow. 0 00 0

Sales 38,00 38,0 38,00

Discount 0 00 0

550,00 550,0 550,00

Purchases
0 00 0

25,00 25,0 25,00

Freight-in
0 00 0

Purch. Ret. 92,00

92,000 92,000
& Allow. 0

Purchase 18,00
18,000 18,000
Discount 0

Sales
123,00 d.17,0 140,0 140,00
Salaries
0 00 00 0
Exp.

Utilities 8,90 8,9 8,90

Exp.-Store 0 00 0

Office 90,00 90,0 90,00

Salaries 0 00 0

Utilities 10,20 10,2 10,20

Exp.-Office 0 00 0

Bad Debts 3,00 3,0 3,00

Expense 0 00 0

Office
5,50 a.1,00 6,5 6,50
Supplies
0 0 00 0
Exp.

Interest 10,00 10,0 10,00

Expense 0 00 0

Interest 25,00 25,00

25,000
Income 0 0

Rent 20,00 20,00

20,000
Income 0 0

1,738,60 1,738,60
Totals
0 0

Depn. Exp.- b.2,50 2,5 2,50

F&F 0 00 0

Insurance c,8,00 8,0

8,000
Exp.-Store 0 00

Salaries d.17,0 17,00 17,0

Payable 00 0 00

1,758,10 1,023,10 1,103,00 795, 715,1

28,500 28,500 1,758,100
0 0 0 000 00

79,90 79,9
Net income
0 00

1,103,00 1,103,00 795,00 795,00

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 0 0 0 0

Practice Exercise

True or False. Write T if the statement is true and F if false.

_____ 1. The difference between the Income Statement column totals and the Balance Sheet column totals in
the worksheet should not be the same.
_____ 2. The worksheet is a common tool and a summary device used by the accountants to gather on a
sheet of paper all the information needed for the preparation of the financial statements, adjusting entries,
closing entries, and the post-closing trial balance.
_____ 3. From the adjusted trial balance, extend the balances of the Asset, Liability, and Owner’s Equity
accounts to the appropriate columns of the Statement of Financial Position or Balance Sheet only.
_____ 4. If the account balance in the unadjusted trial balance is credit and the adjustments balance is debit,
the next step is to subtract the debit amount from the credit amount.
_____ 5. The heading of the worksheet consists of name of business, name of the working paper and the
period covered.

Evaluation

Presented below is the trial balance of Lucky Co. for December 31, 2019.

Lucky Company
Trial Balance
December 31, 2019

Cash P 16,800
Accounts Receivable 6,600
Merchandise Inventory 16,500
Prepaid Insurance 800
Office Supplies 2,000
Store Equipment 15,000
Accumulated Depreciation – Store Equipment P 3,600
Office Equipment 12,000
Accumulated Depreciation – Office Equipment 3,000
Accounts Payable 10,000
Lucky, Capital 26,600
Lucky, Drawing 5,000
Sales 150,000
Sales Returns and Allowances 13,000
Purchases 75,000
Purchase Returns and Allowances 4,500
Purchase Discounts 1,500
Freight-in 800
Salaries Expense 12,000
Rent Expense 20,000
Utilities Expense 2,500
Freight-out 1,200
_________ ________
P 199,200 P 199,200
========= =========

Additional pieces of information determined for December 31, 2019 are as follows:
a. Depreciation of the store equipment is P 1,200, and that of office equipment is P 1,500.
b. Office supplies used during the year amounted to P 1,000.
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 c. Insurance expired during the year is P 200.
d. Ending inventory amounted to P 10,000.
e. Doubtful accounts at year-end are estimated to be P 800.
f. Unpaid utilities at year-end amounted to P 24,000.

Required: Prepare a 10-column worksheet.

Answer key for Practice Exercise

1. F
2. T
3. F
4. T
5. T

References
● Teacher’s Guide: Fundamentals of Accountancy, Business, and Management 1.
● Fundamentals of Accountancy, Business and Management 1 for Senior High School by: Flocer Lao
Ong