Course Title: Fundamentals of Accountancy, Business and Management 2

Grade 12 – ABM

LESSON 1: ACCOUNTING CYCLE OF A MERCHANDISING BUSINESS

Objectives:

1. Describe the nature of transactions in a merchandising business

2. Record transactions of a merchandising business in the general and special journals
3. Post transactions in the general and subsidiary ledgers
4. Prepare a trial balance
5. Prepare adjusting entries
6. Complete the accounting cycle of a merchandising business
7. Prepare the statement of cost of goods sold and gross profit

THE ACCOUNTING CYCLE

1. Transactions – Transactions are identified and analyzed for proper recording in the books of
the company. Only financial transactions are recorded and that the amount can be measured.
Financial transactions are those activities that change the value of an asset, liability or equity.
2. Journal Entries – After transactions are properly identified and analyzed, these should be
journalized by the creation of journal entries.
3. Posting - Once a transaction is journalized, it should be posted to an account in the general
ledger. The general ledger provides a breakdown of all accounting activities by account.
4. Trial Balance - At the end of the accounting period, a trial balance is calculated as the fourth
step in the accounting cycle. A trial balance tells the company its unadjusted balances in each
account.
5. Worksheet - Analyzing a worksheet and identifying adjusting entries make up the fifth step in
the cycle. A worksheet is created and used to ensure that debits and credits are equal. If
there are discrepancies then adjustments will need to be made.
6. Adjusting Journal Entries - In the sixth step, a bookkeeper makes adjustments.
Adjustments are recorded as journal entries where necessary
7. Financial Statements - After the company makes all adjusting entries, it then generates its
financial statements in the seventh step. For most companies, these statements will include
an income statement, balance sheet, and cash flow statement.
8. Closing the books - Finally, a company ends the accounting cycle in the eighth step by
closing its books at the end of the day on the specified closing date. The closing statements
provide a report for analysis of performance over the period.
DEFINITION OF TERMS SPECIFIC TO MERCHANDISING BUSINESS

• Merchandising company – is an enterprise that buys and sells goods to earn a profit.
• Merchandise – also known as “merchandise inventory”; refers to goods that are held for sale
to customers in the normal course of business. This includes goods held for resale.
o Examples:
§ Candies, canned gods, noodles sold at grocery stores
§ Juice, biscuits sold in a grocery store
§ Medicines sold in a pharmacy

Note: Selling of other products not in the normal course of business (i.e., old computer sold
by a grocery store) is not considered as sale of a merchandise since grocery stores do not
normally sell computers.
• Sales Revenue or Sales – is the merchandiser’s primary source of revenue
• Expenses for a merchandising company – divided into two categories:
o Cost of Goods Sold (COGS) – the total cost of merchandise sold during the period
o Operating Expenses (OP) – expenses incurred in the process of earning sales
revenue that are deducted from gross profit in the income statement.
§ Examples:
• Salaries Expense
• Advertising Expense
• Insurance Expense
• Gross Profit (GP) – equal to Sales Revenue less the Cost of Goods Sold.
• Income – equal to Gross Profit less Operating Expense

INCOME EQUATION:

Sales xxx
Less: Cost of Goods Sold (xxx)
Gross Profit xxx
Less: Operating Expenses (xxx)
NET INCOME (LOSS) xxx

OPERATING CYCLE FOR A MERCHANDISER:

1. Buy merchandise inventory

2. Sell inventory
3. Obtain Accounts Receivable
4. Receive Cash

JOURNALIZING THE TRANSACTIONS IN A MERCHANDISING BUSINESS

1. General Journal - The general journal is the book that entity firstly records all of the daily
financial transactions in it. It is also called a book of original entries because all of the
transactions are records in this book before moving to other books.
2. Special Journal – is used to eliminate the problem of congestion of transactions in the general
journal
• Cash Receipts Journal – used to record all cash that had been received
• Cash Disbursements Journal – used to record all transactions involving cash
payments
• Sales Journal (Sales on Account Journal) – used to record all sales on credit (on
account)
• Purchase Journal (Purchase on Account Journal) – used to record all purchases of
inventory on credit (or on account)
INVENTORY SYSTEMS

There are two methods of accounting for inventory in a merchandising business:

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. The “inventory account” is
fluctuating all throughout the accounting period. This system involves:

a. Record purchase of inventory

b. Record revenue and record cost of goods sold when the item is sold
c. 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:

a. Record purchase of inventory

b. Record revenue only when the item is sold
c. At the end of the period, the cost of goods sold (COGS) must be computed:
i. Determine the cost of goods on hand at the beginning of the accounting
period (Beginning Inventory = BI),
ii. Add to it the cost of goods purchased (COGP),
iii. Subtract the cost of goods on hand at the end of the accounting period
(Ending Inventory = EI)

COST OF GOODS SOLD FORMULA

Beginning Inventory xxx

Add: COGP xxx
Cost of Goods available for sale xxx
Less: Ending Inventory (xxx)
COGS xxx

Additional Considerations:
• Perpetual systems have traditionally been used by companies that sell merchandise with high unit
values such as automobiles, furniture, and major home appliances. With the use of computers and
scanners, many companies now use the perpetual inventory system.

• The perpetual inventory system is named because the accounting records continuously —
perpetually —show the quantity and cost of the inventory that should be on hand at any time. The
periodic system only periodically updates the cost of inventory on hand.

• A perpetual inventory system provides better control over inventories than a periodic inventory, since
the records always show the quantity that should be on hand. Then, any shortages from the actual
quantity and what the records show can be investigated immediately.
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.
a. Each credit purchase should be supported by a purchase invoice.
b. A purchase invoice received by the buyer is actually a sales invoice or a charge
invoice prepared by the supplier or vendor.
c. 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:

Blackpink Computer Store started its operations on January 2, 2021. On January 3, 2021,
Blackpink purchased 20 units of computers on account for PHP10,000 each. Upon delivery of
the units, the supplier, BTS, Inc., issued Charge Invoice No. 145 to Blackpink.

Entry :

General Journal
Date Account Title and Explanation Ref Debit Credit
1/3/21 Purchases (10,000*20) 200,000
Accounts Payable 200,000
To record purchase of 20 units of computers at PHP10,000 per
unit from BTS, Inc. as per Charge Invoice 145.

PURCHASE RETURNS AND ALLOWANCES

• A purchaser may find the merchandise received to be unsatisfactory because the goods are:
o damaged or defective
o of inferior quality
o 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.

• 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 purchases was 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, 2021, it was found after inspection on the
same day that one unit was damaged during shipment. Blackpink issued a debit memorandum (DM
01) and informed the supplier that it will return the one damaged item.

Entry :

General Journal
Date Account Title and Explanation Ref Debit Credit
1/3/21 Accounts Payable 10,000
Purchase Returns and Allowances 10,000
To record return of 1 unit of computers worth PhP10,000 from BTS, Inc. as
per DM 01

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
Free on Board (FOB) SHIPPING POINT AND FOB DESTINATION.

FOB Shipping Point:

• 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

• 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 Blackpink 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 Blackpink paid the common carrier
in cash on January 4, 2021 is : Entry:

General Journal
Date Account Title and Explanation Ref Debit Credit
1/4/21 Freight-In 3,000
Cash 3,000
To record freight costs for the purchase of 20 units of computers

If the terms is FOB Destination, no entry is recorded in the books of Blackpink. The PHP3,000 will be
paid by the seller, in this case BTS, 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 full amount must be paid 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

Without purchase returns and allowances

The credit terms for the purchase of 20 computer units (total cost PHP200,000) is 2/10, n/30. This
means that if Blackpink pays on or before January 13, 2021, it is entitled to a 2% discount, otherwise
Blackpink will have to pay the full amount on or before February 4, 2021 (30 days after purchase). On
January 10, 2021, Blackpink paid the account in full with BTS.

Entry:

General Journal
Date Account Title and Explanation Ref Debit Credit
1/10/21 Accounts Payable 200,000
Purchase Discount (200,000*2%) 4,000
Cash 196,000
To record full payment of BTS, Charge Invoice No. 145

Assuming that instead of paying on January 10, 2021, Blackpink paid on February 4, 2021, thus
forfeiting the 2% discount, the entry to record is:

General Journal
Date Account Title and Explanation Ref Debit Credit
2/4/21 Accounts Payable 200,000
Cash 200,000
To record full payment of BTS, Charge Invoice No. 145

With purchase returns and allowances

The credit terms for the purchase of 20 computer units (total cost PHP200,000) is 2/10, n/30. This
means that if Blackpink pays on or before January 13, 2021, it is entitled to a 2% discount, otherwise
Blackpink will have to pay the full amount on or before February 4, 2021 (30 days after purchase).

On January 3, 2021, Blackpink issued a debit memorandum (DM 01) and informed the supplier that it
will return the one damaged item.
On January 10, 2021, Blackpink paid the account in full with BTS.

Entry:

General Journal
Date Account Title and Explanation Ref Debit Credit
1
1/10/21 Accounts Payable (20,000*9) 180,000
Purchase Discount (180,000*2%) 3,600
Cash 176,400
To record full payment of BTS, Charge Invoice No. 145

1
Since one unit was already returned to the supplier

Assuming that instead of paying on January 10, 2021, Blackpink paid on February 4, 2021, thus
forfeiting the 2% discount, the entry to record is:

General Journal
Date Account Title and Explanation Ref Debit Credit
2/4/21 Accounts Payable 180,000
Cash 180,000
To record full payment of BTS, Charge Invoice No. 145

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 official 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, Blackpink made the following sale:

1/10/2021 Official Receipt (OR) No. 001 Sold two units for cash to Marie Cruz for PHP36,000
(PHP18,000 per unit), FOB Destination

1/15/2021 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
Entry:

General Journal
Date Account Title and Explanation Ref Debit Credit
1/10/21 Cash 36,000
Sales 36,000
To record OR No. 001 cash sale - Marie Cruz

General Journal
Date Account Title and Explanation Ref Debit Credit
1/15/16 Accounts Receivable 97,500
Sales 97,500
To record Charge Invoice No. 001 Rafael Reyes on account with terms
3/10, n/30

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
Credit — Cash or Accounts Payable

TO ILLUSTRATE:

On January 10, 2021 Blackpink paid MM Express, PHP500 to deliver the two units to Marie Cruz.

General Journal
Date Account Title and Explanation Ref Debit Credit
1/10/21 Delivery Expense 500
Cash 500
To record delivery expense

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, 2021, Rafael Reyes returned one unit of the computers purchased last January 15,
2021 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 Blackpink. The price will be deducted from the account of Rafael Reyes.

Entry:

General Journal
Date Account Title and Explanation Ref Debit Credit
1/10/21 Sales Return & Allowances 19,500
Accounts Receivable 19,500
To record return of one unit of computers from Rafael Reyes under Charge
Invoice 001

SALES DISCOUNTS

• A sales discount is the offer of a cash discount to encourage customers to pay the balance at
an earlier date.
• 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.
• Sales Discounts is a contra revenue account with a normal debit balance.

TO ILLUSTRATE:

Assume that Blackpink purchased on cash, five units of computers at PHP10,000 per unit from a
supplier on January 17, 2021. These units were subsequently sold to Jun Cruz on January 18, 2021
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, 2021, Cruz paid the said account in full.

General Journal
Date Account Title and Explanation Ref Debit Credit
1/17/21 Purchases (10,000*5) 50,000
Cash 50,000
To record purchased on cash five units of computers
1/18/21 Accounts Receivable (18,000*5) 90,000
Sales 90,000
To record sales on account under Charge Invoice No. 002 to Jun Cruz with
terms 2/10, n/30
1/23/21 Cash (90,000-1,800) 88,200
Sales Discount (90,000*2%) 1,800
Accounts Receivable 90,000
To record collection of accounts receivable from Jun Cruz net of 2% sales
discount
Notice in the entry on January 23, 2021 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, 2021 to January 28, 2021 (10 days).

What If Jun Cruz paid the account on January 30, 2021 instead of January 23, 2021? The entry would
be:

General Journal
Date Account Title and Explanation Ref Debit Credit
1/30/21 Cash 90,000
Accounts Receivable 90,000
To record collection of accounts receivable from Jun Cruz

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:

Cost of goods sold:

Merchandise Inventory, Beginning 100,000
Purchases 250,000
Less: Purchases returns and allowances 5,000
Purchases discounts 2,000 7,000
Net purchases 243,000
Add: Freight in 6,000
Cost of goods purchased 249,000
Cost of goods available for sale 349,000
Merchandise Inventory, Ending 118,570
Cost of goods sold 230,250

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.
COMPLETE ACCOUNTING CYCLE FOR A MERCHANDISING BUSINESS

Agila Merchandising, owned by Lito Agila, sells ready-to-wear shirts and dresses to its customers. It
started its operations on January 1, 2021. 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 2021, the special journals of Agila are shown below:

Sales Journal
Debit Credit
DESCRIPTION (CUSTOMER Charge Invoice or
DATE Accounts
NAME) Sales Invoice No. Sales
Receivable
1/5/2021 Dax 1 2,102 2,102
1/7/2021 Marie 2 3,060 3,060
1/9/2021 Astro 3 1,475 1,475
CANCELLED 4
1/11/2021 PNSC 5 8,960 8,960
1/15/2021 PECO 6 7,125 7,125
1/16/2021 Ipedcare 7 4,560 4,560
1/19/2021 Te 8 1,250 1,250
1/21/2021 Joshua 9 3,125 3,125
1/22/2021 Joseph 10 4,510 4,510
1/24/2021 Jesper 11 2,080 2,080
1/28/2021 Nelcie 12 1,180 1,180
1/29/2021 Ryan 13 900 900
1/30/2021 Arlen 14 3,450 3,450
1/30/2021 Art 15 1,478 1,478
Total for January 2021 45,255 45,255

Cash Receipts Journal

Debit Credit Credit Debit

DESCRIPTION Official Receipt
DATE Account Sales
(PARTICULARS) No. Cash Sales
Receivable Discount
1/2/2021 Ana 1 1,000 1,000
1/4/2021 Maria 2 1,890 1,890
1/6/2021 Peter 3 1,289 1,289
1/7/2021 Jun 4 3,456 3,456
1/7/2021 Karen 5 1,290 1,290
1/8/2021 Jane 6 3,876 3,876
1/8/2021 May 7 4,561 4,561
1/10/2021 April 8 5,600 5,600
1/15/2021 PNSC 9 8,060 8,960 900
1/16/2021 Ana 10 4,235 4,235
1/17/2021 Juan 11 2,010 2,010
1/21/2021 Rafael 12 3,410 3,410
1/22/2021 Ray 13 893 893
1/23/2021 Te 14 1,250 1,250
1/24/2021 Geo 15 3,452 3,452
1/24/2021 Dax 16 2,102 2,102
1/25/2021 Angela 17 1,000 1,000
1/29/2021 Clyde 18 345 345
1/30/2021 Joseph 19 4,000 4,510 510
Total 53,719 38,307 16,822 1,410

Purchase Journal
Account Title and Charge Invoice or Sales Invoice No.
Date Ref Debit Credit
Explanation (from supplier)
1/2/2021 XYS Clothing SI 102 228,560 228,560
1/10/2021 RTW Super Store SI611 133,070 133,070
1/29/2021 Dresses Unlimited SI341 98,120 98,120
Total 459,750 459,750

Cash Disbursements Journal

Check CREDIT DEBIT DEBIT DEBIT DEBIT DEBIT CREDIT
or
DATE DESCRIPTION
Voucher Cash Accounts Salaries Supplies Advertising Rental Purch
No. Payable Exp Exp Exp Exp Disct
St Realty
1/2/21 Rental for Jan- CV01 10,000 10,000
Feb 2021
Del Supplies-
1/5/21 CV02 3,500 3,500
office supplies
XYS Clothing-
1/15/21 payment of CV03 220,000 228,560 8,560
account
Jean Guzman-
1/16/21 salary Jan 1- CV04 14,000 14,000
15, 2021
Sonic Promo-
1/16/21 CV05 4,800 4,800
Advertising
Goldmic
1/25/21 CV06 1,990 1,990
Supplies
TOTAL 254,290 228,560 14,000 5,490 4,800 10,000 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
Date Account Title and Explanation Ref Debit Credit
1/2/16 Cash 500,000
Agila, Capital 500,000
To record initial investment of Agila
1/2/16 Transportation equipment 150,000
Cash 150,000

Additional Information:
 • The delivery vehicle purchased in January 2, 2021 is estimated to be useful for 10 years with
no residual or salvage value.
• A physical count of merchandise inventory was conducted on January 30, 2021. The cost of
the inventory on hand was PHP438,700.
• On January 30, 2021, Agila received a statement of account from Gus Oil Center reflecting a
total bill of PHP2,180, representing fuel purchases on January 2021 that were still unpaid as
of the said date.

Step 3 – Posting to the General Ledger

From the summary of transactions in the special journals and general journals, the entries will now be
posted in each general ledger account:

GENERAL LEDGER
Account: Cash Account No. : 1000
Date Item Ref Debit Credit Balance
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 Ref Debit Credit Balance
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
Date Item Ref Debit Credit Balance
General Journal - Purchase of
150,000 150,000
vehicle

GENERAL LEDGER
Account: Accounts Payable Account No. : 2000
Date Item Ref Debit Credit Balance
From the Purchase Journal 459,750 (459,750)
From the Cash Disbursements
228,560 (231,190)
Journal

GENERAL LEDGER
Account: Agila, Capital Account No. : 3000
Date Item Ref Debit Credit Balance
Initial Investment – Gen Journal 500,000 ( 500,000)

GENERAL LEDGER
Account: Sales Account No.: 4100
Date Item Ref Debit Credit Balance
From the Sales Journal 45,255 ( 45,255)
From the Cash Receipts Journal 38,307 (83,562)
GENERAL LEDGER
Account: Sales Discounts Account No. : 4102
Date Item Ref Debit Credit Balance
From the Cash Receipts Journal 1,410 1,410
GENERAL LEDGER
Account: Purchases Account No. : 5100
Date Item Ref Debit Credit Balance
From the Cash Receipts Journal 459,750 459,750

GENERAL LEDGER
Account: Purchase Discount Account No. : 5102
Date Item Ref Debit Credit Balance
From the Cash Disbursement Journal 8,560 (8,560)

GENERAL LEDGER
Account: Salaries Expense Account No. : 6100
Date Item Ref Debit Credit Balance
From the Cash Disbursement Journal 14,000 14,000

GENERAL LEDGER
Account: Supplies Expense Account No. : 6150
Date Item Ref Debit Credit Balance
From the Cash Disbursement Journal 5,490 5,490

GENERAL LEDGER
Account: Advertising Expense Account No. : 6400
Date Item Ref Debit Credit Balance
From the Cash Disbursement Journal 4,800 4,800

GENERAL LEDGER
Account: Rental Expense Account No. : 6300
Date Item Ref Debit Credit Balance
From the Cash Disbursement Journal 10,000 10,000

Step 4 & 5– Prepare the unadjusted trial balance, and preparation of worksheet

The balances in the general ledger for each account will be extended to the first two money columns
of the worksheet. The unadjusted trial balance of Agila is:

AGILA MERCHANDISING
Worksheet
For the month ending January 30, 2021

Unadjusted Trial Balance

ACCOUNT TITLE
DEBIT CREDIT
Balance Sheet Accounts
Cash 149,429
Accounts Receivable 28,433
Merchandise Inventory 0-
Transportation Equipment 150,000
Accum. Deprn-Off Eqpt 0
Accounts Payable 231,190
Agila, Capital 500,000
Income Statement Accounts
Sales 83,562
Sales Discounts 1,410
Purchases 459,750
Purchase Discount 8,560
Salaries Expense 14,000
Supplies Expense 5,490
Advertising Expense 4,800
Rental Expense 10,000
Depreciation Expense 0
823,312 823,312

Step 6 – Prepare adjusting entries.

The five basic sources of adjusting entries:

1. Depreciation expense
2. Deferred expenses or prepaid expenses
3. Deferred income or unearned Income
4. Accrued expenses or accrued liabilities
5. Accrued income or accrued assets

Identify transactions in the books of Agila that will require adjustments:

• Depreciation of transportation equipment purchased on January 2, 2021

Monthly Depreciation = (Cost – Salvage or Residual Value) / Useful Life (in months)

Cost 150,000
Less: Residual Value (0)
Depreciable Value 150,000
Divide: Useful Life 120
Monthly Depreciation 1,250
Adjusting entry :
Depreciation Expense 1,250
Accum. Deprn- Transpo Eqpt 1,250

• Deferred or Prepaid Expenses

In the cash disbursement journal, the rental payment made on January 2, 2021 is for the month of
January and February 2021 amounting to PHP10,000. The entire amount was charged to rental
expense which is not proper because one half (1/2) of the said payment is considered as an advance
payment of rental. Thus, an asset should be recognized. The adjusting entry is:

Prepaid Expenses 5,000

Rental Expense 5,000
Note: With this entry, the correct rental expense of PHP5,000 and a prepaid expense of PHP5,000 ( an asset account) are
recognized.

• Accrued Expenses

On January 30, 2021, fuel expenses incurred amounting to PHP2,180 should be recorded as an
expenses and liability. The entry to adjust is:

Fuel Expenses 2,180

Accrued Expenses 2,180
AGILA MERCHANDISING

Worksheet

For the month ending January 30, 2021

Unadjusted Trial
Adjustments Adjusted Trial Balance
ACCOUNT TITLE Balance
DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
Balance Sheet Accounts
Cash 149,429 149,429 -
Accounts Receivable 28,433 28,433 -
Merchandise Inventory - - -
Prepaid Expenses 5,000 5,000 -
Transportation Equipment 150,000 150,000 -
Accum. Deprn-Off Eqpt 1,250 - 1,250
Accounts Payable 231,190 - 231,190
Accrued Expenses 2,180 - 2,180
Agila, Capital 500,000 - 500,000

Income Statement
- -
Accounts
Sales 83,562 - 83,562
Sales Discounts 1,410 1,410 -
Purchases 459,750 459,750 -
Purchase Discount 8,560 - 8,560
Salaries Expense 14,000 14,000 -
Supplies Expense 5,490 5,490 -
Advertising Expense 4,800 4,800 -
Rental Expense 10,000 5,000 5,000 -
Depreciation Expense 1,250 1,250 -
Fuel Expenses 2,180 2,180 -
823,312 823,312 8,430 8,430 826,742 826,742

Step 7 - Preparation of Financial Statements

1. The first statement prepared is the income statement. All income statement accounts are extended
to the appropriate column. Using the periodic inventory system, the beginning balance of
merchandise inventory account is also extended to the debit side, while the result of the physical
count to determine the ending inventory is reflected on the credit side.

Income (Loss) = Total debit less Total credit of the accounts under Income Statement Column of the
worksheet

If the result is negative, meaning credit side is greater than the debit side, the result is NET INCOME.
This is then extended to the credit side of the balance sheet.
If the result is positive, meaning dedit side is greater than the credit side, the result is NET LOSS. This
is then extended to the debit side of the balance sheet.

2. The statement of financial position is then prepared. All assets, liabilities and equity accounts are
extended. The ending merchandise inventory is extended to the debit side.
The worksheet for these two financial statements are presented below:

AGILA MERCHANDISING
Worksheet
For the month ending January 30, 2021

Adjusted Trial Income Statement of Financial

Balance Statement Position
DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
Balance Sheet Accounts
Cash 149,429 - 149,429 -
Accounts Receivable 28,433 - 28,433 -
Merchandise Inventory - - 438,700 438,700
Prepaid Expenses 5,000 - 5,000 -
Transportation Equipment 150,000 - 150,000 -
Accum. Deprn-Off Eqpt - 1,250 - 1,250
Accounts Payable - 231,190 - 231,190
Accrued Expenses - 2,180 - 2,180
Agila, Capital - 500,000 - 500,000
- -
Income Statement
- -
Accounts
Sales - 83,562 - 83,562
Sales Discounts 1,410 - 1,410 -
Purchases 459,750 - 459,750 -
Purchase Discount - 8,560 - 8,560
Salaries Expense 14,000 - 14,000 -
Supplies Expense 5,490 - 5,490 -
Advertising Expense 4,800 - 4,800 -
Rental Expense 5,000 - 5,000 -
Depreciation Expense 1,250 - 1,250 -
Fuel Expenses 2,180 - 2,180 -
493,880 530,822
Net Income 36,942 ————————> 36,942
826,742 826,742 530,822 530,822 771,562 771,562

The proper format of the income statement and the schedule of cost goods sold of Agila for January
2021 are presented below:

AGILA MERCHANDISING
Schedule of Cost of Goods Sold
For the month ended January 30, 2021

Merchandise Inventory, Beginning 0

Add: Purchases 459, 970
Less: Purchase Discount 8, 560
Cost of Goods Available for Sale 451, 190
Less: Merchandise Inventory, Ending (438, 700)
Cost of Goods Sold 12,490
 AGILA MERCHANDISING
Income Statement
For the month ended January 30, 2021

GROSS SALES 83,562

Less: Sales Discounts 1,410
NET SALES 82,152
Less: Cost of Goods Sold (see above schedule) (12,490)
GROSS PROFIT 69, 662
LESS: EXPENSES
Salaries Expense 14,000
Supplies Expense 5,490
Advertising Expense 4,800
Rental Expense 5,000
Depreciation Expense 1,250
Fuel Expense 2,180
Total Expense 32,270
NET INCOME 36,942

Step 8 – Closing Entries

The closing journal entries consist of the following:

• All of the nominal revenue accounts should be closed to the income summary account:
Sales xxx
Income summary xxx

• All of the nominal expense and cost of goods sold accounts should be closed to the income
summary:
Income Summary xxx
Expense xxx

• The Merchandise Inventory, Beginning is closed to Income summary account:

Income Summary xxx
Merchandise Inventory xxx

• The Merchandise Inventory, Ending is set up in the books:

Merchandise Inventory, Ending xxx
Income Summary xxx

The amount that will be used is the result of the physical count.

• The balance in the income summary account should now reflect the net income for the
accounting period. The next journal entry should close the income summary account to the
equity or capital account.

If net profit (income):

Income Summary xxx
Owner, Capital xxx

If net loss:
Owner, Capital xxx
Income Summary xxx

Once the closing journal entries have been entered into the general journal, the information
should be posted to the general ledger. When this is accomplished, all of the nominal
accounts in the general ledger should have zero balances. To double check on this, we
prepare another trial balance based on the new balances in the general ledger. If we have
any nominal accounts with positive balances, a mistake was made along the way and will
need to be corrected before proceeding to the next accounting period.
The closing entries of Agila are:

GENERAL JOURNAL
DATE ACCOUNT TITLE AND EXPLANATION REF DEBIT CREDIT
1/30/21 Sales 83, 562
Sales Discounts 1,410
Income Summary 82,152
To close nominal revenue accounts
Income Summary 483,910
Purchase Discount 8,560
Purchases 459,750
Salaries Expense 14,000
Supplies Expense 5,490
Advertising Expense 4,800
Rental Expense 5,000
Depreciation Expense 1,250
Fuel Expense 2,180
To close nominal expense and cost of goods sold account accounts

Merchandise Inventory, Ending 438,700

Income Summary 438,700
To set up merchandise inventory ending

No closing entry was made for the Merchandise Inventory, Beginning because it was the first month
of operations and the inventory beginning has zero value.

INCOME SUMMARY BALANCE

Total Credits (82,152 + 438,700) 520,852

Total Debit 83,910
Net (credit balance) 36,942

The last closing entry is to close the balance of income summary to the capital account:

GENERAL JOURNAL
DATE ACCOUNT TITLE AND EXPLANATION REF DEBIT CREDIT
1/30/21 Income Summary 36, 942
Agila, Capital 36, 942
PERPETUAL INVENTORY SYSTEM

Recording Purchases and related transactions under the Perpetual Inventory System

PURCHASES OF MERCHANDISE: PERPETUAL SYSTEM

• When merchandise is purchased for resale to customers, the account, Merchandise

Inventory, is debited for the cost of goods purchased.
• Like sales, purchases may be made for cash or on account (credit).
• 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 Merchandise Inventory.
Purchases of other assets: supplies, equipment, and similar items) are debited to
their respective accounts.

TO ILLUSTRATE: Blackpink Computer Store started its operations on January 2, 2021. The store is
located in Sikat Mall in Bicol. The owner invested PHP500,000 to start the business. On January 3,
2021, Blackpink purchased 20 computer units on account for PHP10,000 each. Upon delivery of the
units, the supplier BTS, Inc. issued a Charged Invoice No. 145 to Blackpink.

Entry:

GENERAL JOURNAL
DATE ACCOUNT TITLE AND EXPLANATION REF DEBIT CREDIT
1/3/21 Inventory (Merchandise Inventory) (10,000*20) 200,000
Accounts Payable 200,000
To record purchase of 20 units of computers at PHP10,000 per unit from
BTS Inc., as per Charge Invoice 145

PURCHASE RETURNS AND ALLOWANCES

• A purchaser may be dissatisfied with merchandise received because the goods are:
• damaged or defective
• of inferior quality
• not in accordance 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 Merchandise
Inventory is credited to show that the cost of the Merchandise Inventory is reduced with a
return or an allowance.

TO ILLUSTRATE:

Out of the 20 units of the computers purchased last January 3, 2021, it was found out after inspection
on the same day that one unit was damaged during shipment. Blackpink issued a debit memorandum
(DM 01) and informed the supplier that it will return the one damaged unit.
Entry :

GENERAL JOURNAL
DATE ACCOUNT TITLE AND EXPLANATION REF DEBIT CREDIT
1/3/21 Accounts Payable 10,000
Inventory 10,000
To record return of 1 unit computer, PHP10,000 unit from BTS, Inc. as per
DM 01

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.

• Merchandise Inventory is debited if buyer pays freight.
• Cash is credited if the goods come on cash on delivery (COD) 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

• Seller pays freight costs.

• Delivery Expense is debited if seller pays freight on outgoing merchandise to a buyer which 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:

Assuming the supplier of Blackpink is based in Manila and in order to bring the 20 computer units to
Bicol it will cost PHP3,000 to deliver the goods.

1. If the terms is FOB Shipping Point, the entry to record, assuming Blackpink paid in cash the
common carrier on January 4, 2021 is :

Entry:

GENERAL JOURNAL
DATE ACCOUNT TITLE AND EXPLANATION REF DEBIT CREDIT
1/4/21 Inventory 3,000
Cash 3,000
To record freight costs for the purchase of 20 units computer

2. If the terms is FOB Destination, no entry is recorded in the books of Blackpink. The PHP3,000 will
be paid by the seller, in this case BTS, 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% is discount is given if paid within 10 days
(called the discount period); otherwise the invoice is due in 30 days.
• The buyer records this discount as a reduction to Merchandise Inventory.
• 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 Blackpink pays on or before January 13, 2021, it is entitled to a 2% discount. Otherwise,
they will have to pay the full amount on or before February 4, 2021 (30 days after purchase). On
January 10, 2021, Blackpink paid in full the account with BTS.

Entry:

GENERAL JOURNAL
DATE ACCOUNT TITLE AND EXPLANATION REF DEBIT CREDIT
1/10/21 Accounts Payable 200,000
Merchandise Inventory (200,000*2%) 4,000
Cash 196,000
To record full payment of BTS Charge Invoice No. 145

Assuming that instead of paying on January 10, 2021, Blackpink paid on February 4, 2021, thus
forfeiting the 2% discount, the entry to record is:

GENERAL JOURNAL
DATE ACCOUNT TITLE AND EXPLANATION REF DEBIT CREDIT
2/4/21 Accounts Payable 200,000
Cash 200,000
To record full payment of BTS Charge Invoice No. 145

Recording of Sales and related transactions under the Perpetual 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 (provide evidence
of cash sales) or cash receipt or office receipt for cash sales, and charge invoice for credit
sales or sales on account.
• Two entries are made with each sale:

• The first entry records the 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 second entry records the cost of the merchandise sold:

• Debit — Cost of Goods Sold which increases expenses

• Credit — Merchandise Inventory which decreases assets

The sales account is credited only for sales of good 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, Blackpink made the following sale:

1/10/2021 Official Receipt (OR) No. 001 Sold two units for cash to Marie Cruz for PHP36, 000
(PHP18,000 per unit), FOB Destination

1/15/2021 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.

Entry:

GENERAL JOURNAL
DATE ACCOUNT TITLE AND EXPLANATION REF DEBIT CREDIT
1/10/21 Cash 36,000
Sales 36,000
Cost of Goods Sold (10,000*2) 20,000
Inventory 20,000
To record OR No. 001 cash sale-Marie Cruz
GENERAL JOURNAL
DATE ACCOUNT TITLE AND EXPLANATION REF DEBIT CREDIT
1/15/21 Accounts Receivable 97,500
Sales 97,500
Cost of Goods Sold (10,000*5) 50,000
Inventory 50,000
To record Charge Invoice No. 001 Rafael Reyes on account with terms
3/10, n/30

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.

Delivery Expense xxx

Cash or Accounts Payable. xxx

TO ILLUSTRATE:

On January 10, 2021 Blackpink paid MM Express, PHP500 to deliver the two units to Marie Cruz.

GENERAL JOURNAL
DATE ACCOUNT TITLE AND EXPLANATION REF DEBIT CREDIT
1/10/21 Delivery Expense 500
Cash 500
To record full payment of BTS Charge Invoice No. 145

Take note that no entry will be made as to 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 accounts 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 in the accounts the amount of
sales returns and allowances.
• 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.
• Two entries are made with each sale return and allowance:
• The first entry records 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
• The second entry records the increase in Merchandise Inventory:

• Debit — Merchandise Inventory which increases assets

• Credit — Cost of Goods Sold which decreases expenses

TO ILLUSTRATE:

On January 16, 2021, Rafael Reyes returned one unit of the computers purchased last January 15,
2021 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 Blackpink. The price will be deducted from the account of Rafael Reyes.

Entry:

GENERAL JOURNAL
DATE ACCOUNT TITLE AND EXPLANATION REF DEBIT CREDIT
1/16/21 Sales Return and Allowances 19,500
Accounts Receivable 19,500
Merchandise Inventory 10,000
Cost of Goods Sold 10,000
To record return of one unit computer from Rafael Reyes under Charge
Invoice No. 001

SALES DISCOUNTS

1. A sales discount is the offer of a cash discount to a customer to encourage them 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 Blackpink purchased five units of computers on cash for PHP10,000 per unit from a supplier
on January 17, 2021 that were subsequently sold to Jun Cruz on January 18, 2021 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, 2021, Cruz paid the said account in full.

GENERAL JOURNAL
DATE ACCOUNT TITLE AND EXPLANATION REF DEBIT CREDIT
1/17/21 Inventory 50,000
Cash 50,000
To record five units of computers purchased on cash
1/18/21 Accounts Receivable 90,000
Sales 90,000
Cost of Goods Sold 50,000
Inventory 50,000
To record sales on account under Charge Invoice No. 002 to Jun Cruz
with terms 2/10, n/30
1/23/21 Cash 88,200
Sales Discount (90,000*.2%) 1,800
Accounts Receivable 90,000
To record collection of accounts receivable from Jun Cruz, net of 2%
sales discount

Notice in the entry on January 23, 2021 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 is from January 19, 2021 to January 28, 2021 (10 days).

What If Jun Cruz paid the account on January 30, 2021 instead of January 23, 2021? The entry
should be:

GENERAL JOURNAL
DATE ACCOUNT TITLE AND EXPLANATION REF DEBIT CREDIT
1/23/21 Cash 90,000
Accounts Receivable 90,000
To record collection of accounts receivable from Jun Cruz.

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 2021, Geo had the
following transactions:

1/1/21 Merchandise inventory on hand 1,000 cans @ PHP10/can PhP 10,000

1/10/16 Purchased 5,000 cans @ PHP11 /can 55,000
1/20/21 Purchased 4,000 cans @ PHP12/can 48,000
Total 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 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 (by total
quantities.

Total Cost 113,000

Divide by: Total Quantities 10,000
Average Cost 11.30

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 units @ PHP10
5,000 units @ PHP11
1,000 units @ PHP12
7,000 units

Therefore, the ending inventory will come from the January 20 purchases: 3,000 @ PHP12 =
PHP36,000
SUMMARY OF JOURNAL ENTRIES

PERIODIC PERPETUAL
Account Name Debit Credit Account Name Debit Credit
Purchases xxx Merchandise Inventory xxx
Purchase
Cash/AP xxx Cash/AP xxx

Purchase ret. Cash/AP xxx Cash/AP xxx

and all. Purch. Ret and All. xxx Merchandise Inv. xxx

Freight on Freight In xxx Merchandise Inventory xxx

purchases Cash/AP xxx Cash/AP xxx

Payment on Accts Payable (AP) xxx Accts Payable (AP) xxx

account with Cash xxx Cash xxx
discount Purch. Discount xxx Merchandise Inv. xxx

Payment on AP xxx AP xxx

account Cash xxx Cash xxx
without
discount

Cash/AR xxx Cash/AR xxx

Sales xxx Sales xxx
Sale of
merchandise
No entry for the cost of goods sold Cost of goods sold xxx
Merchandise Inv. xxx

Sales ret. and all. xxx Sales ret. and all. xxx
Cash/AR xxx Cash/AR xxx
Return of
merchandise
No entry for the cost of goods sold Merchandise Inventory xxx
COGS xxx

Freight on Delivery Expense xxx Delivery Expense xxx

sale Cash/AP xxx Cash/AP xxx

Cash Cash xxx Cash xxx

received on Sales Discount xxx Sales Discount xxx
discount AR xxx AR xxx

Cash Cash xxx Cash xxx

received on AR xxx AR
xxx
discount