MERCHANDISING BUSINESS-ACCOUNTING CYCLE

Merhandising business is the one that buys and sells goods without changing
their physical form.

Inventory System
Inventories are accounted for using either of the following inventory
systems:

1. Perpetual inventory system

Under this system, the "Inventory" account (or merchandise inventory)
is updated each time a purchase or sale is made. Thus the inventory account shows
a continuing or running balance of the goods on hand.

2. Periodic Inventory system

Under this system, the "Inventory" account (or merchandise inventory) is updated
only when a physical count of inventory is performed. Thus, the amounts of inventory and cost
of goods sold are determined only periodically.

Purchases - the account used to record purchases under periodic system.

Freight-in (Transportation-in) - the account used to record the shipping costs incurred
on purchases of inventory under periodic system.
Purchase returns - the account used to record returns of purchased goods to the supplier.
Purchase discounts- the account used to record cash discount availed of on the purchased
goods.

Illustration -A

1. You purchased goods worth P10,000 on account

2. You paid shipping cost of P1,000 on the purchase above.
3. You returned damaged goods worth P2,000 to the supplier
4. You sold goods costing P5,000 for P20,000 on account.
5. A customer returned goods with sale price of P800 and cost of P200

Requirements: Prepare the necessary journal entries under Perpetual and Periodic Inventory system

Illustration B - Perpetual Inventory System

You opended a souvenir store called "Your Souvenir" on November 1, 2022. The following were the
transactions during the period:

November Transactions
1 Provided P50,000 cash as initial investment to the business.
1 Acquired equipment for P36,000 cash. The equipment has a useful life ot 4 years.
1 Paid a one-year insurance premium of P12,000. (Use asset method)
12 Purchased inventory costing P15,000 for cash.
14 Sold goods for P15,000 cash. The cost of sales is P2,000

December
1 Sold goods with sale price of P12,000 in exchange for a P12,000, 10%, one-year note
receivable. Principal and interest are due at maturity. The cost of sales is P1,500.
5 Purchased inventory for P2,000 on account.
26 Sold goods for P17,000 on account. The cost of sales is P3,000.
27 Paid P1,000 account payable.
29 Collected P10,000 account receivable.
Additional information:
a. Of the total accounts receivable, P1,000 si doubtful of collection
b. Salaries earned by employees during the period but were not yet paid amounted to P10,000

REQUIREMENT: Complete the accounting cycle.

ILLUSTRATIONS
Perpertual system Periodic system

1 Inventory/Merchandise Inv 10,000 Purchases

Accounts Payable 10,000 Accounts Payable

2 Inventory 1,000 Freight-In

Cash 1,000 Cash

3 Accounts Payable 2,000 Accounts Payable

Inventory 2,000 Purchase returns

4 Accounts Receivable 20,000 Accounts Receivable

Sales/Sales Revenue 20,000 Sales/Sales Revenue

Cost of Sales/C.Goods Sold 5,000 no entry

Inventory 5,000

5 Sales Returns 800 Sales Returns

Accounts Receivable 800 Accounts Receivable

Inventory 200
Cost of Sales 200 no entry
10,000
10,000

1,000
1,000

2,000
2,000

20,000
20,000

800
800
ILLUSTRATION BB -PERPERTUAL INVENTORY SYSTEM
JOURNAL ENTRIES
Nov Description PR Debit Credit
1 Cash P 50,000
Cureg, Capital P 50,000

1 Equipment 36,000
Cash 36,000

1 Prepaid Insurance 12,000

Cash 12,000

12 Inventory 15,000
Cash 15,000

14 Cash 15,000
Sales 15,000

Cost of Sales 2,000

Inventory 2,000

Dec

1 Notes Receivable 12,000

Sales 12,000

Cost of Sales 1,500

Inventory 1,500

5 Inventory 2,000
Accounts Payable 2,000

26 Accounts Receivable 17,000

Sales 17,000

Cost of Sales 3,000

Inventory 3,000

27 Accounts Payable 1,000

Cash 1,000

29 Cash 10,000
Accounts Receivable 10,000
AJE
Dec
31 Depreciation Expense 1,500
Accumulated Depreciation 1,500
(36,000/4yrs) x 2/12

Insurance Expense 2,000

Prepaid Insurance 2,000
(12,000/12) x 2mos

Interest Receivable 100

Interest Income 100
( 12,000 x 10% x 1/12)

Bad Debts Expense 1,000

Allowance for Bad Debts 1,000

Salaries Expense 10,000

Salaries Payable 10,000

Closing entries
 Cash
1-Nov 50,000 3,000 Dec-03
FINANCIAL STATEMENTS under Perpetual Inventory Sytem

YOUR SOUVENIR
Income Statement
For the Year ended Dec. 31, 2022

Gross Sales P xxx

less: Sales Returns P xxx
Sales Discount xxx xxx
Net Sales xxx

less: Cost of Sales xxx

Gross Profit/Gross Income xxx

add: Interest Income xxx

Total Income xxx

less: Expenses
Salaries Expense P xx
Insurance Expense xx
Depreciation Expense xx
Bad Debt Expense xx xxx

Net Income /Net Loss P xxx