CHAPTER 8 – FINANCIAL STATEMENT PRESENTATION, CLOSING THE BOOKS AND FINANCIAL ANALYSIS
PREPARING THE FINANCIAL STATEMENTS
CARLA AUTO REPAIR SHOP
ADJUSTED TRIAL BALANCE
December 31, 2018
Cash on Hand
Cash in Bank
Accounts Receivable
Allowance for Doubtful Accounts
Notes Receivable
Interest Receivable
Prepaid Insurance
Prepaid Supplies
Machinery & Equipment
Accumulated Depreciation-Machinery & Equipment
Furniture & Fixtures
Accumulated Depreciation-Furniture & Fixtures
Accounts Payable
Notes Payable
Interest Payable
Taxes Payable
Carla, Capital
Carla, Drawings
Repair Income
Referral Income
Interest Income
Depreciation Expense-Machinery & Equipment
Depreciation Expense-Furniture & Fixtures
Doubtful Accounts
Insurance Expense
Salaries Expense
Supplies Expense
Rent Expense
Taxes & Licenses Expense
Utilities Expense
Interest Expense
Totals
Debit
₱ 25,000
45,000
49,000
Credit
₱ 4,900
30,000
450
5,000
200
150,000
7,500
25,000
2,250
26,000
50,000
750
1,500
132,850
5,000
275,000
15,000
450
7,500
2,250
4,900
10,000
45,000
400
55,000
8,750
46,750
1,000
516,200
516,200
INCOME STATEMENT – usually presented first to enable one to determine the profit which is needed to be able to prepare the capital
statement. The ending capital is then presented in the statement of financial position.
Nature of Income
1. Regular or operating income
2. Other income
Page 1 of 12
Forms of Presentation for Costs and Expenses
1. Based on nature – normally used for a simple business such as that of a service provider. Two sections may be formed, one
for revenues and the other for expenses. This form which is called the single step form makes a single step of deducting the
total expenses from the total revenues to arrive at the profit or loss.
CARLA AUTO REPAIR SHOP
INCOME STATEMENT
For the year ended December 31, 2018
Revenue:
Repair Income
Other Operating Income (note 1)
Expenses:
Rent Expense
Utilities Expense
Salaries Expense
Depreciation Expense (note 2)
Other Expenses (note 3)
Interest Expense
Profit for the year
Note 1: Other Income
Referral Income
Interest Income
Total
Note 2: Depreciation Expense
Depreciation - Machinery & Equipment
Depreciation - Furniture & Fixtures
Total
Note 3: Other Expenses
Insurance Expense
Taxes & Licenses Expense
Doubtful Accounts
Supplies Expense
Total
2.
Observe
1.
2.
3.
4.
₱ 275,000
15,450
₱ 55,000
46,750
45,000
9,750
24,050 -
180,550
1,000
₱ 108,900
₱ 15,000
450
₱ 15,450
₱
₱
7,500
2,250
9,750
₱ 10,000
8,750
4,900
400
₱ 24,050
Based on function – presents the expenses according to its function or use: cost of sales, distribution cost, administrative
cost and financial cost, to name a few.
the following rules in preparing the income statement:
Note that the statement consists of four parts: heading, revenues earned, expenses incurred and net income or profit.
The third line in the heading must always be for a time period.
Margin on the left side – the extreme margin is used to describe the major sections and the inner margin is used to describe
the accounts contained in the minor section.
Money columns on the right side – the extreme margin is for the major amounts and the inner money column is for the amounts
of the described accounts.
Page 2 of 12
5.
6.
7.
Peso signs in the final money column (extreme right) are placed on the first and last amounts.
A single rule is placed under the last figure to be added or subtracted and a double line or rule is placed under the final figure.
Income from the principal line of operation called operating revenue is always presented first followed by other income. Expenses
may be presented from the highest amount to the lowest amount (descending order) in which case other expenses may be
presented first in the expense section of the income statement. Or these may be arranged alphabetically. Interest expense being
a financial cost is always presented last. The rule is also the same in the arrangement of the expenses in the supporting notes.
STATEMENT OF CHANGES IN EQUITY - changes in the owner’s capital or owner’s equity are summarized in this statement also
known as the capital statement. It explains what happened to the capital or claim of the owner.
CARLA AUTO REPAIR SHOP
STATEMENT OF CHANGES IN OWNER'S EQUITY
As of December 31, 2018
Carla, Capital, January 1
Additional Investment
Add: Profit
Total
Less: Withdrawals
Carla, Capital, December 31
₱ 100,000
32,850
108,900
₱ 241,750
5,000
₱ 236,750
STATEMENT OF FINANCIAL POSITION – this statement lists in detail the assets and liabilities of the business and shows the residual
interest of the owner as of a specific date.
Two Forms of Statement of Financial Position
1. Account Form – follows the accounting equation where assets are listed on the left hand column of the report with the liabilities
and owner’s equity listed on the right hand column.
2. Report Form – shows in one straight column the assets followed by the liabilities and owner’s equity.
CARLA AUTO REPAIR SHOP
STATEMENT OF FINANCIAL POSITION
As of December 31, 2018
ASSETS
Current Assets:
Cash
Trade and Other Receivable
Prepaid Expenses
Total
Non-Current Assets:
Property & Equipment
Total Assets
(Note 1)
(Note 2)
(Note 3)
₱
70,000
74,550
5,200
₱
149,750
₱
165,250
315,000
₱
78,250
₱
236,750
315,000
(Note 4)
LIABILITIES AND OWNER'S EQUITY
Current Liabilities:
Trade and Other Payables
(Note 5)
Owner's Equity:
Carla, Capital
Total Liabilities & Owner's Equity
Page 3 of 12
Note 1: Cash on Hand
Cash in Bank
Total
₱
Note 2: Accounts Receivable
Less: Allowance for Doubtful Accounts
Notes Receivable
Interest Receivable
Total
₱
Note 3: Prepaid Insurance
Prepaid Supplies
Total
₱
Note 4: Machinery & Equipment
Less: Accumulated Depreciation
₱ 150,000
7,500
Furniture & Fixtures
Less: Accumulated Depreciation
Total
Note 5: Accounts Payable
Notes Payable
Interest Payable
Taxes Payable
Total
₱
₱
₱
₱
₱
25,000
45,000
70,000
49,000
4,900
₱
44,100
30,000
450
74,550
₱
142,500
₱
22,750
165,250
5,000
200
5,200
25,000
2,250
26,000
50,000
750
1,500
78,250
Observe the following rules in presenting the statement of financial position:
1. The heading consists of three lines:
a. Name of the Business
b. Title of the Report
c. Date
2. Margin on the left side for the major classifications: The extreme left margin is used for describing the major classifications like
current assets or current liabilities and the inner margin is used for describing the accounts herein like cash, accounts receivable
and supplies.
3. Money columns on the right side: The placement of the amounts usually follows the margin on the left side, extreme right
money column for the major amounts following the major classifications and inner money column for the amounts of the
described accounts.
4. In the final money column, the peso sign is placed on the first and last amounts per accounting value; while in the inner money
column, the peso sign is placed on the first amount of every column of figures.
5. A single line or rule is placed under the last figure to be added or subtracted and a double line or rule is placed under the final
figure.
ADEQUATE DISCLOSURES – this principle requires the inclusion of significant information that will help enhance the firm’s financial
statements.
Aside from the notes supporting the line items presented in the financial statements, other notes are given below for the Carla problem:
Notes to
1.
2.
3.
Financial Statements:
Financial statements are presented in accordance with generally accepted accounting principles.
Revenues and expenses are recognized based on the realization principle and the matching principle.
Machinery and equipment are presented at book value based on cost less accumulated depreciation.
Page 4 of 12
4.
5.
6.
7.
Depreciation is computed using straight line method.
Accounts receivables are presented at net realizable value based on cost less allowance for doubtful accounts.
Doubtful accounts are estimated using an aging of accounts receivables.
Merchandise is valued based on net realizable value which is lower than cost.
Other information that should be disclosed include major liabilities and their due dates, contingent assets and liabilities, subsequent
events that may affect the resources that were presented in the statement of financial position. PAS 1 states that an entity should disclose
any information that a reasonably informed person would consider necessary for the proper interpretation of the financial statements.
STATEMENT OF CASH FLOWS
Some questions cannot be answered just by reading the income statement or the statement of financial position such as:
a. How was cash obtained by the business?
b. How was cash spent?
c. What caused the increase or decrease in cash?
d. Why was the cash only P50,000 when the net income was P100,000?
Relevance of the Statement of Cash Flows
a. It will enlighten you on how cash is being managed.
b. Cash flows are vital to the financial health of the business.
c. Some businesses fail because of its inability to maintain a proper balance between receipts and disbursements.
Classification of Cash Flows
1. Operating activities
2. Investing activities
3. Financing activities
A summary of cash flows is given below:
ACTIVITIES
INFLOWS
OUTFLOWS
OPERATING
Revenue collections
Payment for expenses
INVESTING
Sale of securities, plant, property and equipment
Acquisition of securities, plant, property
and equipment
FINANCING
Loans extended by creditors or contributions of
investors
Cash paid to creditors or withdrawn by
investors
Page 5 of 12
DIRECT METHOD OF DETERMINING CASH FLOW
The cash flow statement for the year ended December 31, 2018 appears below. Additional information are needed such as: cash on
January 1, 2018 was P100,000 with an additional investment of P32,850 in cash during the year. Accounts payable came from the
purchase of machinery.
CARLA AUTO REPAIR SHOP
STATEMENT OF CASH FLOWS
For the Year Ended December 31, 2018
Cash flows from operating activities:
Collections from customers
Collections for referrals made
Payment for rent
Payment for utilities
Payment for salaries
Payment for insurance
Payment for taxes
Payment for supplies
Payment for interest expense
Net cash inflows from operating activities
Cash flows from investing activities:
Purchase of machinery and equipment
Acquisition of furniture
Net cash outflows from investing activities
Cash flows from financing activities:
Investment by the owner
Cash withdrawals
Loan from Republic Finance
Net cash inflows from financing activities
Decrease in cash
Cash, January 1
Cash, December 31
Schedule 1:
Repair Income
Accounts Receivable, Dec. 31
Notes Receivable, Dec. 31
Collections from customers
Schedule 2:
Schedule 3:
Schedule 1
Schedule 2
Schedule 3
Schedule 4
Schedule 5
₱ 196,000
15,000
- 55,000
- 46,750
- 45,000
- 15,000
7,250
600
250
₱ 41,150
Schedule 6
-₱ 124,000
- 25,000
- 149,000
₱ 32,850
5,000
50,000
77,850
-₱ 30,000
100,000
₱ 70,000
275,000
- 49,000
- 30,000
196,000
Schedule 4:
Supplies Expense
Prepaid Supplies
Supplies paid
400
200
600
Insurance Expense
Prepaid Insurance, Dec. 31
Insurance paid
10,000
5,000
15,000
Schedule 5:
Interest Expense
Interest Payable
Interest paid
-
1,000
750
250
Taxes and Licenses Expense
Taxes Payable
Taxes and Licenses paid
8,750
1,500
7,250
Schedule 6:
Machinery and Equipment
Accounts Payable
Payment for machinery
150,000
- 26,000
124,000
-
Page 6 of 12
The following rules are to be observed:
1. Determine the increases or decreases in the statement of financial position accounts related to revenue and expense accounts.
Since this is the first year of operation, the procedure is quite simple. All items appearing in the statement of are deemed to be
increases. Receivables at the end of the year represent increases in uncollected accounts hence it should be deducted from
income to arrive at the cash actually collected. The same rule applies for payables. Ending balances represent increases in
unpaid accounts and should be deducted from expenses reported in the income statement to arrive at expenses actually paid.
2. For investing activities, go over the property and equipment accounts: increase in property represents acquisition of property
and paid in cash if there is no increase in payable for this; decrease in property represents sale or disposal of property but you
have to add the gain on disposal (or less loss on disposal) to arrive at the total proceeds representing cash inflow.
3. For financing activities, go over the loans and owner’s activities (investments and withdrawals). Increase in loan and investment
represent cash inflows from financing. Decrease in loan and owner’s drawing represent payment or cash outflow from financing
activities. To prove that you got the correct cash flows, the cash balance in this statement should reconcile with what was
reported in the statement of financial position.
CLOSING ENTRIES
After all the adjustments have been journalized and posted and the financial statements prepared, the income and expense accounts
and owner’s drawing account have to be closed. Closing the books means bringing the temporary or nominal accounts to
zero balance by transferring them to the capital account or owner’s equity. After the closing entries, the books are “cleared” of these
accounts so that in the next reporting period, the books are ready for a new set of temporary or nominal accounts. On the other hand,
we carry forward the balances of the assets, liabilities and owner’s equity to the next accounting period since these are real or
permanent accounts and we don’t close these accounts unless the assets are disposed, the liabilities are paid and the capital is
returned to the owner.
The following are the steps in making the closing entries:
1. The revenue accounts such as Repair Income and Interest Income which normally are credit balances should be closed on the
debit side and credited to the Income Summary account.
2. The expense accounts such as Salaries Expense and Taxes Expense which normally are debit balances should be closed on the
credit side and debited to the Income Summary account.
3. Determine the balance of the Income Summary account which is a net income or a net loss. If a credit balance, representing a
net income, close by debiting the Income Summary account and credit to increase the Owner’s Capital account. If a debit
balance, representing a net loss, close by crediting the Income Summary account and debit to decrease the Owner’s Capital
Account.
4. The drawing account which normally is a debit balance is credited to close and debited to the capital account to bring a reduction.
Using the Carla Auto Repair Shop, the closing entries in the general journal will appear thus:
Date
Particulars
Dec. 31 Closing Entries:
Repair Income
Referral Income
Interest Income
Income Summary
To close the credit accounts.
Income Summary
Salaries Expense
Supplies Expense
Taxes & Licenses
Rent Expenses
Utilities
Interest Expense
Bad Debts
Insurance Expense
Depreciation Expense - Machinery
Depreciation Expense - Furniture
To close the debit accounts.
F Debit
Credit
275,000
15,000
450
290,450
181,550
45,000
400
8,750
55,000
46,750
1,000
4,900
10,000
7,500
2,250
Page 7 of 12
Income Summary
Carla, Capital
To close profit to capital
Carla, Capital
Carla, Drawing
To close drawing to capital
108,900
108,900
5,000
5,000
PREPARING A POST CLOSING TRIAL BALANCE
The Post Closing Trial Balance is prepared after closing the books and contains only real accounts with balances. It has the same
accounts as those found in the statement of financial position.
CARLA AUTO REPAIR SHOP
POST CLOSING TRIAL BALANCE
December 31, 2018
Cash on Hand
Cash in Bank
Accounts Receivable
Allowance for Bad Debts
Notes Receivable
Interest Receivable
Prepaid Insurance
Prepaid Supplies
Machinery & Equipment
Accumulated Depreciation-Machinery & Equipment
Furniture & Fixtures
Accumulated Depreciation-Furniture & Fixtures
Accounts Payable
Notes Payable
Interest Payable
Taxes Payable
Carla, Capital
Totals
Debit
Credit
₱ 25,000
45,000
49,000
₱ 4,900
30,000
450
5,000
200
150,000
7,500
25,000
2,250
26,000
50,000
750
1,500
236,750
329,650 329,650
Page 8 of 12
OPENING ENTRY
To bring forward the accounts with balances to the next accounting period, an opening entry should be prepared based on the postclosing trial balance.
Date
Jan. 1
Particulars
Cash on Hand
Cash in Bank
Accounts Receivable
Notes Receivable
Interest Receivable
Prepaid Insurance
Prepaid Supplies
Machinery & Equipment
Furniture & Fixtures
Allowance for Bad Debts
Accumulated Depreciation-Machinery & Equipment
Accumulated Depreciation-Furniture & Fixtures
Accounts Payable
Notes Payable
Interest Payable
Taxes Payable
Carla, Capital
To open the books with the beginning balances.
F Debit
Credit
25,000
45,000
49,000
30,000
450
5,000
200
150,000
25,000
4,900
7,500
2,250
26,000
50,000
750
1,500
236,750
REVERSING ENTRIES
These are the opposite of adjusting entries and are prepared on the first day of the succeeding reporting period. Prepaid Expenses under
the expense method and Deferred Income under the income method are the only items being reversed. No reversing entry is needed
for accruals. The reasons for making reversing entries are the following:
1. To close out the accounts created when the adjusting entries were prepared such as the prepaid expense (under the expense
method) and the unearned income (under the income method).
2. To recognize the expired/income portion applicable for the succeeding period.
3. To simplify the bookkeeping entries in the following accounting period.
If the expense method was used for the purchase of supplies, the following entries will be prepared for 2018 and 2019:
Date Particulars
2018 Supplies Expense
Feb. 8
Cash on Hand
Purchased supplies for cash.
Dec. 31 Prepaid Supplies
Supplies Expense
Adjust for the unused portion.
2019
Jan. 1 Supplies Expense
Prepaid Supplies
Reverse prepaid supplies.
F Debit
Credit
600
600
200
200
200
200
Page 9 of 12
Another Illustration: Commission income of P3,000 was received in advance on December 1, good for three months. On December
31, only one-month commission was earned. Under the income method, entries will be:
Date Particulars
Dec. 1 Cash on Hand
Commission Income
31
F Debit
Credit
3,000
3,000
Commission Income
Unearned Commission Income
2,000
2,000
Jan. 1 Unearned Commission Income
Commission Income
Reverse prepaid supplies.
2,000
2,000
FINANCIAL ANALYSIS
HAPPY TOUR AND TRAVEL
Comparative Statement of Financial Position
December 31, 2018 & 2017
2018
2017
ASSETS
Current Assets:
Cash
Accounts Receivable
Supplies
Total Current Assets
Noncurrent Assets:
Cars
Less: Accumulated Depreciation - Cars
Equipment
Less: Accumulated Depreciation - Equipment
Furniture & Fixtures
Less: Accumulated Depreciation - Furniture & Fixtures
Total Noncurrent Assets
TOTAL ASSETS
155,750
25,000
4,500
185,250
138,500
3,000
700
142,200
350,000
60,000
290,000
45,000
3,500
41,500
25,000
3,000
22,000
353,500
538,750
350,000
30,000
320,000
30,000
1,000
29,000
25,000
1,500
23,500
372,500
514,700
1,000
25,000
10,000
1,500
37,500
5,000
50,000
501,250
538,750
459,200
514,700
LIABILITIES & OWNER'S EQUITY
Current Liabilities:
Accounts Payable
Loans Payable
Rent Payable
Utilities Payable
Total Current Liabilities
Owner's Equity
Gomez, Capital
TOTAL LIABILITIES & OWNER'S EQUITY
500
55,500
Page 10 of 12
HAPPY TOUR AND TRAVEL
Comparative Income Statements
For the Years Ended December 31, 2018 and 2017
2018
REVENUES EARNED
Service Fees Income
LESS: OPERATING EXPENSES
Rent Expense
Salary Expense
Gas & Oil Expense
Depreciation Expense
Utilities Expense
Repair Expense
Supplies Expense
Total
NET INCOME
2017
455,250
364,200
120,000
90,000
46,520
34,000
19,000
11,500
4,330
325,350
129,900
108,000
76,000
35,500
32,500
15,500
10,000
7,500
285,000
79,200
Profitability – ability of the company to enhance owner’s equity through profit. The relevant information are the revenues earned, the
net income obtained, the assets used in the operation and the investment made by the owner.
Profit Margin = Net Income / Revenues
2018
129,900/455,250 = .2853 or 28.53%
2017
79,200/364,200 = .2175 or 21.75%
This shows the adequacy of the revenue to earn profit.
Rate of Return = Net Income / Average Total Assets
2018
Average Total
Assets
Rate of Return
2017
538,750 + 514,700 = 526,725
2
514,700 + 385,000* = 449,850
2
129,900 / 526,725 = .2466 or
24.66%
79,200 / 449,850 = .1761 or
17.61%
*Assume that P385,000 is the initial investment of Gomez at the start of the year.
The rate of return shows the income earned by the business based on assets invested. A high rate means the assets are being used
profitably by the business.
Rate of Return on Equity = Net Income / Average Owner’s Equity
Average Owner's Equity
Rate of Return
2018
501,250 + 459,200 = 480,225
2
2017
459,200 + 385,000 = 422,100
2
129,900 / 480,225 = .2705 or
27.05%
79,200 / 422,100 = .1876 or
18.76%
Page 11 of 12
Liquidity –ability of the business to pay for its short-term obligations. The relevant figures for liquidity are the current assets and current
liabilities.
Working Capital = Current Assets – Current Liabilities
2018
P185,250-P37,500 = P147,750
2017
P142,200-P55,500 = P86,700
Working capital was higher in 2018. A horizontal analysis of the assets will show that working capital is building up.
Current Ratio = Current Assets/Current Liabilities
2018
185,250 / 37,500 = 4.95 : 1
2017
142,200 / 55,500 = 2.56 : 1
This means that the business has P4.95 current assets to pay for a peso of current liability in 2018 against P2.56 current assets to pay
for a peso of current liability in 2017. The rule of thumb is a ratio of 2:1.
Quick or Acid Test Ratio = Quick Assets/Current Liabilities
2018
180,750 / 37,500 = 4.82 : 1
2017
142,200 / 55,500 = 2.55 : 1
Quick assets are usually composed of cash and accounts receivable. The rule of thumb is a 1:1 ratio.
Solvency – long term liquidity and is measured based on ability of the business to pay for long term obligations when they fall due.
Debt Ratio = Total Liabilities/Total Assets
2018
37,500 / 538,750 = .0696 or 6.96%
2017
55,000 / 514,700 = .1078 or 10.78%
The debt ratio shows the proportion of the assets provided by the creditors.
Equity Ratio = Total Owner’s Equity/Total Assets
2018
501,250 / 538,750 = .9304 or 93.04%
2017
459,200 / 514,700 = .8922 or 89.22%
The equity ratio shows the proportion of the assets invested by the owner.
Page 12 of 12
Chapter 9 – Processing Transactions for a Merchandiser (Value-Added Tax Entries)
Value-Added Tax – a tax levied by the government to certain providers of goods and services.
Input Tax – the 12% VAT paid on purchases
Output Tax - the 12% VAT added on sales
VAT payable = Output tax minus Input tax
Illustration: Alicia Villarama Feeds based in Pasig City trades specialty feeds for race horses, fighting cocks, aquarium fish, zoo animals
and other animals generally considered as pets. On May 13, 2006, Alicia Villarama Feeds purchased on account specialty feeds with a
total amount payable of P784,000. A wholesaler operating in the region bought for cash all of the available feeds on May 25, 2006;
amount of cash received was P1,120,000. Alicia Vaillarama Feeds paid the value-added tax due by month end not minding the actual
deadline. The entries related to value-added tax are as follows:
2006
May 13 Purchases
Input Tax
Accounts Payable
Purchase of goods on account.
700,000
84,000
784,000
May 25 Cash
Sales
Output Tax
Cash sale of feeds.
1,120,000
1,000,000
120,000
May 31 Output Tax
Input Tax
VAT Payable
Setting up of VAT Payable for the month of May 2006
May 31 VAT Payable
Cash In Bank
Payment of VAT Payable to the BIR.
120,000
84,000
36,000
36,000
36,000
Input tax increased the amount to be paid but has no effect on the cost of the purchases. Output tax also increased the amount collected
but not necessarily, the sales figure. The value of goods or properties sold and subsequently returned or for which allowances were
granted by a VAT-registered person may be deducted from the gross sales or receipts for the quarter in which the refund is made or a
credit memorandum issued.
Illustration: Assume that the wholesaler purchased the feeds from Villarama on account and that a 2% sales discount is available if
the account is settled within 10 days from invoice date. Villarama was able to collect the account on May 30. The related entry follows:
May 25 Accounts Receivable
Sales
Output Tax
Sale of feeds on account.
1,120,000
May 30 Cash
Output Tax
Sales Discounts
Accounts Receivable
Collection of receivable.
1,097,600
2,400
20,000
1,000,000
120,000
1,120,000
CHAPTER 9 – PROCESSING TRANSACTIONS FOR A MERCHANDISER
Merchandising business – one that buys and sells goods in order to make a profit.
Inventory – tangible property that is held for resale or will be used in producing goods or services.
– reported on the balance sheet as an asset.
Types of inventory:
1.
2.
3.
4.
Merchandise inventory
Raw materials inventory
Work in process inventory
Finished goods inventory
manufacturer
Inventory Cost – cost principle requires that inventory be recorded for the price paid or the consideration given up.
– includes invoice price (minus purchase discounts), transportation in costs (also called “freight in”), inspection costs
and preparation costs.
FIFO Costing Method – assets purchased or acquired first are disposed of first. It assumes that the remaining inventory consists of
items purchased last.
Sales revenue or sales – primary source of revenues of a merchandising business. It is earned when the merchandiser transfers the
goods to the customer.
Sales
-Sales Returns and Allowances
-Sales Discounts (often given to credit customers who pay the seller quickly)
Net Sales
Sales Discounts:
1.
Trade Discounts – a percentage reduction from a published list price granted to retailers or wholesalers for buying large
quantities of goods or for regularly patronizing the business. Since it is granted at the point of sale, this is immediately
deducted from the list price and only the net amount called gross invoice price will be the basis for invoicing and
recording.
Illustration: Assume that a cabinet with a list price of P5,000 was delivered to the customer less a trade discount of 2%
and 1%. The gross invoice price will be computed as follows:
List Price
Less 2% of P5,000
Less 1% of P4,900
Gross Invoice Price
₱ 5,000
100
₱ 4,900
49
₱ 4,851
2. Cash Discounts – refer to an incentive that a seller offers to a buyer in return for paying a bill before the scheduled due
date.
Cost of Sales – calculated as the number of units sold during the period multiplied by their unit costs.
– a major expense item for most non-service businesses.
– recorded in the period the units are SOLD (REVENUE is recognized), regardless of when the units are paid for.
Total Goods Available for Sale – expresses the total cost of what has been available for sale throughout a given period.
Gross Profit – net sales minus cost of sales.
Page 1 of 11
Merchandise Inventory, Beginning
Purchases
Less: Purchase Returns & Allowances
Purchase Discounts
Net Purchases
Add: Freight in
Net Cost of Purchases
₱ 59,700
₱ 521,980
₱ 9,100
2,525
11,625
₱ 510,355
17,400
527,755
Total Goods Available For Sale
Less: Merchandise Inventory, End
₱ 587,455
62,150
Cost of Sales
₱ 525,305
Page 2 of 11
Terms of Sales & Purchases:
1.
Discount Terms
For example: 2/10, n/30
2% discount if balance will be paid in ten days, remainder to be paid within 30 days of sale
2.
FOB Shipping and FOB Destination
FOB Shipping Point: Buyer pays the shipping costs because ownership “title” transfers to buyer at the point the shipment starts
on its journey.
FOB Destination: Seller pays shipping costs because title does not transfer to the buyer until the goods reach their destination
(the buyer’s place of business).
Inventory Systems
1.
Perpetual Inventory System – The inventory account is continuously updated for the following events:
a. Purchases
b. Purchase Discounts Taken
c. Purchase Returns & Allowances
d. Sales (remove from inventory the COST of the units sold)
e. Sales Returns (add to inventory the COST of units returned)
– The necessary detailed record-keeping required by the perpetual system has become much
easier with current computer technology.
– A physical count of the inventory is still required at the end of the accounting period to assure
accurate inventory records in case of errors or theft.
2.
Periodic Inventory System – Inventory transactions are not recorded directly in the INVENTORY account. Instead, separate
accounts are used for:
a. Purchases
b. Purchase Returns & Allowances
c. Purchase Discounts
d. Transportation In
– Because entries are not made to the inventory account during the accounting period, the amount
of inventory is not known until the end of the period when the inventory count is done.
– Periodic inventory systems require more closing entries at the end of the period. (Purchases,
Purchase Returns and Allowances, Purchase Discounts and Transportation In are all separate
TEMPORARY accounts that must be closed out at the end of the period.)
– Purchases is an account that holds the current period’s inventory purchases (a debit balance) and
is used in the calculation of Cost of Goods Sold on the Income Statement.
– The Purchase Returns and Allowances account also is used to calculate Cost of Goods Sold on the
income statement. It is a deduction from the cost of purchases in a periodic inventory system.
– When using the periodic system, Purchase Discounts are recorded in a separate account. This
helps managers keep track of the company’s performance in taking advantage of discounts.
– The ending inventory is determined at the end of the period by taking a physical count of the
goods remaining on hand.
Page 3 of 11
2
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Page 9 of 11
Accounting and Inventory Management:
The accounting system plays three roles in inventory management:
1.
2.
3.
Provides accurate information for financial statements and tax reports.
Provides up-to-date information on inventory quantities and cost.
Provides information necessary to protect inventory from theft and misuse.
1.
Gross Margin Percentage – gross margin as a percent of sales
Ratios:
Net Sales - Cost of Sales
Net Sales
2.
or
Gross Margin
Net Sales
Return on sales
Net Income
Net Sales
Page 10 of 11
Common-size Income Statement – Each item of the income statement is expressed as a % of that year’s Net Sales. It is used for
vertical analysis, in which each line item in a financial statement is represented as a percentage of a base figure within the statement.
Question: Why did the company have a net loss when sales increased by $1,000?
Trend Analysis – shows both peso and % changes from one year to the next year for each item on the income statement.
Page 11 of 11
Computations related to accounting for VAT:
PURCHASES:
Purchases
Input tax
100%
12%
VAT Inclusive Amount/Total Payable/Total
Cash to be paid
112%
If the VAT exclusive amount is given or the cost of purchase,
Input tax = VAT exclusive amount or cost of purchase X 12%
and
VAT Inclusive Amount or Total Payable or Total Cash to be paid = Purchases + Input tax
If the VAT inclusive amount or total payable or total cash to be paid is given,
Purchases = VAT Inclusive Amount or Total Payable or Total Cash to be paid ÷ 112%
and
Input tax = VAT exclusive amount or cost of purchase X 12%
If the input tax is given,
Purchases = Input tax ÷ 12%
and
VAT Inclusive Amount or Total Payable or Total Cash to be paid = Purchases + Input tax
SALES:
Sales
Output tax
100%
12%
VAT Inclusive Amount/Total
Receivable/Total Cash to be received
112%
If the VAT exclusive amount is given or the amount of sales,
Output tax = VAT exclusive amount or sales X 12%
and
VAT Inclusive Amount or Total Receivable or Total Cash to be received = Sales + Input tax
If the VAT inclusive amount or total receivable or total cash to be received is given,
Sales = VAT Inclusive Amount or Total Receivable or Total Cash to be received ÷ 112%
and
Output tax = VAT exclusive amount or sales X 12%
If the output tax is given,
Sales = Output tax ÷ 12%
and
VAT Inclusive Amount or Total Receivable or Total Cash to be received = Sales + Output tax
CHAPTER 10 – SPECIAL JOURNALS
Special Journals – journals of original entry other than the general journal that are designed for recording specific types of transactions
of a similar nature. Most entities use the following special journals:
Journal
Specific Transactions Recorded
Posting
Abbreviation
Sales Journal
Cash Receipts Journal
Sales of merchandise on account
Receipts of cash
S
CR
Purchases Journal
Cash Disbursements Journal
Credit purchases of merchandise
and other items
Payments of cash
P
CD
General Journal
Entries that do not fit in the other
journals
GJ
Cash sales are usually recorded in the cash receipts journal rather than in the sales journal because cash is best controlled when all
routine cash receipts are recorded in one journal. Similarly, an entity can increase control over cash disbursements by recording cash
purchases of merchandise or other items in the cash disbursements journal rather than in the purchases journal.
When special journals are used, the general journal is maintained for adjusting, closing and reversing entries; and for recording
transactions that do not fit in other special journals. Examples of the latter include the recording of purchases returns and allowances
and sales returns and allowances.
Advantages of Using Special Journals:
1.
2.
3.
They permit division of labor.
The use of special journals often reduces recording time. (explanations, headings, posting to the general ledger)
Flexible
SALES JOURNAL
The sales journal of Nazario Sea Products is designed for an entity using the periodic inventory system. This journal lists all credit sales
for the month of June. The information for each sales is obtained from a copy of the related sales invoice, which should be prenumbered
for control purposes. This journal is specifically designed to record sales of merchandise on account.
SALES JOURNAL
Date Invoice No.
2007
June
1
001
5
002
12
003
22
004
29
005
30
006
Account Debited
Post. Ref.
Accounts Rec. Dr./Sales Cr.
Zamboanga Exports
Butuan Company
Cagayan de Oro Stores
Dapitan Retailers
Dipolog Traders
Pagadian Grocers
20,000
10,000
100,000
40,000
30,000
50,000
250,000
(120/410)
Page 1 of 5
GENERAL LEDGER
Accounts Receivable
Sales
(120)
Jun 30 S1
250,000
(410)
250,000
Jun 30 S1
ACCOUNTS RECEIVABLE
SUBSIDIARY LEDGER
6/22
S1
Dapitan Retailers
40,000
6/29
S1
Dipolog Traders
30,000
S1
Pagadian Grocers
50,000
6/30
6/1
S1
Zamboanga Exports
20,000
6/5
S1
Butuan Company
10,000
S1
Cagayan de Oro Stores
100,000
6/12
CASH RECEIPTS JOURNAL
All transactions involving cash receipts are recorded in a cash receipts journal. The illustration shows the cash receipts journal for an
entity using the periodic inventory system. In a merchandising business, the main sources of cash are collections on account and cash
sales. Thus, this journal has debit columns for cash and sales discounts; and credit columns for accounts receivable and sales. In addition,
there are columns on the right-hand side of the journal which can be used to record the account titles and credits to other accounts
resulting from cash receipts not related to cash sales and collections on account. Examples of these include investments by the owner
and loan releases.
Cash receipts are evidenced by source documents like prenumbered official receipts (OR), cash register tapes (CRT) or cash slips, and
bank credit memorandum (CM). Note that the entries on June 15 and June 30, debiting cash and crediting sales, recorded cash sales for
a certain period. In practice, cash sales which are usually supported by cash register tapes, should be recorded daily rather than semimonthly.
CASH RECEIPTS JOURNAL
Debits
Date OR No.
2007
June
1
File
8
001
10
CM
15
CRT
21
002
29
003
30
CRT
Description
Investment by owner
Zamboanga Exports
PCIBank Loan
Cash sales, June 1-15
Cagayan de Oro Stores
Dipolog Traders
Cash sales, June 16-30
Cash
500,000
19,600
300,000
200,000
49,000
29,400
250,000
1,348,000
(110)
Credits
Sales
Discounts
400
Accounts
Receivable
Sales
Other Accounts
Account Title
PR Amount
Nazario, Capital
310
500,000
Notes Payable
230
300,000
20,000
200,000
1,000
600
50,000
30,000
2,000
(420)
100,000
(120)
250,000
450,000
(410)
800,000
Page 2 of 5
PURCHASES JOURNAL
Merchandising businesses frequently purchase merchandise and supplies. Such purchases are usually made on account. The purchase
journal is designed to account for purchases of merchandise, supplies and other assets on account. In contrast, cash purchases are
recorded in the cash disbursements journal.
The purchases journal for an entity using the periodic inventory system is being illustrated in the sample below. The primary source
document used as the basis for the entries in the journal is the receiving report (RR). The journal showed special columns for debits to
purchases, office supplies and store supplies, as well as for credits to accounts payable. A column is also provided for debits to accounts
for which no special column is available. In practice, a column for input taxes may be included. A separate column for purchase terms
may also be provided to help identify the due date and the discounts available.
The amounts in the accounts payable column are posted to the accounts payable subsidiary ledger on a daily basis. A check mark in the
posting reference column indicates that this has been done. At the end of the month, the columns are totaled, and the journal is balanced
to ensure that total debits equal total credits.
PURCHASES JOURNAL
Date RR No.
2007
June
2
001
9
002
14
003
18
004
25
005
30
006
Account Credited
Gingoong Distributors
Oroquieta Suppliers
Tangub Office Systems
Davao Wholesalers
Ozamiz Company
Surigao Office Supplies
Credits
Accounts
PR Payable
70,000
190,000
120,000
140,000
40,000
30,000
590,000
(210)
Debits
Purchases
Office
Supplies
Store
Supplies
Other Accounts
Account Title
PR
Amount
70,000
190,000
Office Equipment
190
120,000
140,000
400,000
(510)
40,000
10,000
50,000
(160)
20,000
20,000
(170)
120,000
CASH DISBURSEMENTS JOURNAL
All cash payments are recorded in a cash disbursements journal. Example shows the June cash disbursements journal for Nazario Sea
Products after the related transactions have been recorded, and the journal balanced and posted. Note the special columns for credits to
cash and purchases discounts, and for debits to accounts payable and purchases. Ordinarily, these accounts will have the most entries.
This special journal has columns for the date and the number of check issued for each cash payment. Also, the other accounts column
is available for recording debits to other accounts.
CASH DISBURSEMENTS JOURNAL
Date Ck. No.
2007
June
2
101
3
102
12
103
15
104
19
105
28
106
30
107
Description
Paid employees
Paid June rent
Gingoong Distributors
Acquired Equipment
Oroquieta Suppliers
Purchased merchandise
Insurance policy
Credits
Purchases
Cash
Discount
280,000
60,000
68,600
50,000
188,100
15,000
12,000
673,700
(110)
Debits
Accounts
Payable
1,400
70,000
1,900
190,000
Store
Supplies
Other Accounts
Account Title
PR
Amount
Salaries Payable
Rent Expense
270
560
280,000
60,000
Store Equipment
180
50,000
Prepaid Insurance
140
12,000
402,000
15,000
3,300
(520)
260,000
(210)
15,000
(510)
Page 3 of 5
GENERAL JOURNAL
When special journals are used, transactions that cannot be recorded appropriately in a special journal are recorded in the general
journal. Examples include merchandise returns; write-offs of uncollectible accounts; and certain non-cash transactions involving notes
receivable and notes payable.
PROVING THE LEDGERS
At the end of the period, after all postings have been made, equality should exist between the following:



total debit balances and total credit balances of the accounts in the general ledger. These amounts are used to prepare the trial
balance.
the balance of the accounts receivable control account in the general ledger and the sum of the individual customer accounts
in the accounts receivable subsidiary ledger.
the balance of the accounts payable control account in the general ledger and the sum of the individual creditor accounts in the
accounts payable subsidiary ledger.
This control procedure is important because this helps ensure the accuracy of the accounting records.
VOUCHER SYSTEM
Most entities control purchases and cash disbursements by formalizing the process of verification and approval of payments using a
method known as the voucher system. Under this system, checks may be drawn only upon a written authorization in the form of a
voucher approved by responsible officials. The system consists of vouchers, voucher register, unpaid voucher file, check register and
paid voucher file. The voucher register takes the place of the purchases journal while the check register substitutes the cash
disbursements journal.
VOUCHER
The voucher is a serially numbered form that identifies the name and address of the payee, the due date, terms, description and invoice
amount. This form includes a section for designated officers to sign their approval for payment. It also has spaces for details such as the
date of payment, check number and ledger entries.
Before the designated official approves the voucher for payment, various personnel perform verification procedures that include the
following:
1.
2.
3.
comparison of purchase requisition, purchase order, invoice, and receiving report for agreement of quantities, prices, types of
goods and terms.
review of extensions and footings in the invoice.
approval of account distribution (i.e. the general ledger accounts to be debited)
VOUCHER REGISTER
As noted, the voucher register takes the place of the purchases journal, and provides a record of all authorized check payments. In a
voucher system, all expenditures are recorded first in the voucher register.
Approved vouchers are entered in the voucher register in numerical sequence. The vouchers should be prenumbered so they can be
accounted for and referred to easily. All entries in the voucher register will result to a credit to accounts payable control account.
The register has columns for expense and asset accounts frequently debited such as purchases, transportation in, office supplies and
transportation out. Debits and credits to accounts for which columns are not provided for are made in the other accounts section.
Voucher
No. Date
121 12/1
122 12/2
12/5
…
…
146 12/21
147 12/27
148 12/30
Payee
Rodriguez Co.
Rubinos Freight
Escutin, Inc.
…
Sonza Co.
Gamboa Co.
Espinosa Delivery
Date
Paid Ck. No.
12/9
528
12/5
527
12/15 531
…
…
12/31 539
Credits
Accounts
Payable Purchases
35,000
35,000
3,000
12,000
…
…
120,000
25,000
25,000
2,500
1,850,000 1,220,000
(320)
(550)
Debits
Trans. In
Office
Supplies Trans. Out
Account Title
Other Accounts
PR
Debit
Credit
3,000
…
12,000
…
85,000
(560)
46,000
(160)
… …
Office Equipment
2,500
32,000
(680)
…
150
…
120,000
…
467,000
-
Page 4 of 5
UNPAID VOUCHER FILE
The voucher register has columns to record payment date and check number, which will be entered when the voucher is paid. After
vouchers have been entered in the voucher register, they are filed in the order of required date of payment in order for the company to
not miss discounts.
CHECK REGISTER
The check register is a record of all check payments. Since checks are entered in the check register in numerical sequence, this record
provides a convenient reference for the check number and the date of payment.
Checks are issued only in payment of approved and recorded vouchers. Every check is recorded by a debit to accounts payable and credit
to cash, and to purchases discounts, if appropriate.
On or before the due date, the voucher package is removed from the unpaid file and forwarded to the disbursing officer for final approval
of payment. After signing the voucher, the disbursing officer has a check drawn. The check number and payment date are recorded in
the voucher, which is then turned to the accounting department.
To safeguard against irregularities, the voucher and its underlying documents should be canceled by the disbursing officer before the
voucher is returned to the accounting department. The department is now responsible for the recording of the check payment in the
check register and the voucher register.
Check
No. Date
525 12/2
527 12/5
528 12/9
…
…
530 12/31
Payee
Palma Corporation
Rubinos Freight
Rodriguez Company
…
Sonza Co.
Debits
Voucher Accounts
No.
Payable
120
25,000
122
3,000
121
35,000
…
…
146
120,000
1,670,000
(320)
Credits
Purchases
Cash in
Discounts
Bank
25,000
3,000
700
34,300
…
…
120,000
12,000 1,658,000
(570)
(110)
PAID VOUCHER FILE
The paid voucher along with its supporting documents are filed in numerical sequence in a paid vouchers file. This file is then available
for examination by internal or external auditors requiring information about a specific expenditure.
Page 5 of 5
BSA01 – Fundamentals of Accounting
Reviewer for the Pre-Final Examination
Multiple Choice
1. When a corporation sells merchandise and the terms are FOB shipping point and
pays the shipping costs, the seller would record the transportation costs with the
following entry:
a) Debit Cash, credit Accounts Receivable
b) Debit Accounts Receivable, credit Sales
c) Debit Accounts Receivable, credit Cash
d) Debit Purchases, credit Accounts Payable
Correct answer: C
2. A sales invoice included the following information: merchandise price, P12,000;
transportation, P500; terms 2/10, n/30, FOB shipping point. Assuming that a credit for
merchandise returned of P600 is granted prior to payment, that the transportation is
prepaid by the seller, and that the invoice is paid within the discount period, what is the
amount of cash received by the seller?
a) P11,662
b) P11,672
c) P12,250
d) P11,172
Correct answer: B
3. Merchandise with an invoice price of P7,000 is purchased with terms of 2/10, n/30,
FOB shipping point. Transportation costs paid by the seller were P125. What is the cost
of the merchandise purchased if payment is made during the discount period?
a) P6,860.00
b) P6,982.50
c) P7,000.00
d) P6,985.00
Correct answer: D
4. Freight costs incurred by the seller are recorded in the
a) Sales account
b) Cost of merchandise sold account
c) Transportation In account
d) Transportation Out account
Correct answer: D
5. Gross Margin is calculated as:
a) Sales less cost of merchandise sold
b) Sales less merchandise inventory
c) Sales less expenses
Page 1 of 7
BSA01 – Fundamentals of Accounting
d) Sales less operating expenses
Correct answer: A
6. Which of the following is equal to cost of sale plus ending inventory?
a) Beginning inventory
b) Goods available for sale
c) Gross profit
d) Sales
Correct answer: B
7. Which of the following accounts is used in merchandising but not in service business?
a) Cash
b) Depreciation expense
c) Allowance for bad debts
d) Sales returns and allowances
Correct answer: D
8. Which of the following is not recorded in the books of accounts?
a) Cash discount
b) Sales discount
c) Purchase discounts
d) Volume discounts
Correct answer: D
9. Which of the following is reported as selling expenses?
a) Sales discount
b) Sales return
c) Sales allowance
d) Freight out
Correct answer: D
10. Purchases paid in cash are recorded in the:
a) Sales journal
b) Purchases journal
c) Cash receipts journal
d) Cash disbursements journal
Correct answer: D
11. Under the perpetual inventory system, which of the following accounts would not be
used?
a) Sales
b) Cost of goods sold
c) Merchandise inventory
Page 2 of 7
BSA01 – Fundamentals of Accounting
d) Purchases
Correct answer: D
12. Which company would most likely use a periodic inventory system?
a) Camella Homes
b) SM Hypermarket
c) Toyota
d) Honda
Correct answer: B
13. A physical count of inventory is usually taken:
a) At the end of the fiscal year
b) In the middle of the fiscal year
c) At the start of the fiscal year
d) At the peak of the busy season
Correct answer: A
14. Adjusting entries are usually found in:
a) Sales journal
b) General journal
c) Cash receipts journal
d) Voucher register
Correct answer: B
15. Which is not a contra account?
a) Freight in
b) Sales discount
c) Purchase returns and allowances
d) Sales returns and allowances
Correct answer: A
Page 3 of 7
BSA01 – Fundamentals of Accounting
True or False
False 1. A sale on account for P1,000 offered with terms 2/10, n/30 means that the
customers will get a P2 discount if payment is made within 10 days; otherwise, full
payment is due within 30 days.
False 2. A sales allowance is recorded as a debit to Accounts Receivable and a credit to
Sales Allowances.
False 3. The Sales Returns account is an expense account.
True 4. Freight-in is included in the cost of inventory.
True 5. Revenues, expenses and drawing accounts are known as nominal accounts.
True 6. Under the perpetual inventory system, cost of sale is determined every time a
sale is made.
True 7. An unadjusted trial balance would include real and nominal accounts.
True 8. Only sales on account is being recorded in the sales journal.
True 9. Each amount listed in the adjusted trial balance of a worksheet is transferred to
either the income statement columns or balance sheet columns.
True 10. Under the periodic inventory system, the cost of sale is computed only after
physical count of the unsold merchandise at the end of the period is conducted.
False 11. The cash discount is another name for trade discount.
False 12. Reversing entries are made at the end of the accounting period.
False 13. A credit term of “2/10, n/30” means that the buyer may deduct 2% from the
invoice if payment is made within 10 days from the end of the month.
False 14. There is no need for a physical inventory count in the perpetual inventory
system.
False 15. Freight in and freight out are examples of selling expenses.
Page 4 of 7
BSA01 – Fundamentals of Accounting
Straight Problems
1. P800 of inventory is purchased for cash, FOB shipping point. In a separate
transaction, the purchaser pays P100 of shipping charges to the shipping company.
P200 of merchandise purchased is returned. Prepare journal entries assuming the
company is using perpetual inventory system.
Merchandise Inventory
800
Cash
800
To record purchase of inventory in cash.
Merchandise Inventory
100
Cash
100
To record shipping fee paid in cash.
Cash
200
Merchandise Inventory
200
To record merchandise returned to seller.
2. P800 of inventory is purchased on account, FOB shipping point. The seller pays
P100 to the shipping company on behalf of the buyer, which is added to the seller’s
invoice. The credit terms offered by the seller are 2/10, n/30. P200 of merchandise
purchased is returned prior to payment. The invoice was paid within the discount
period. Prepare journal entries assuming the company is using periodic inventory
system.
Purchases
800
Freight in
100
Accounts Payable
900
To record purchase of inventory and freight in on
account.
Accounts Payable
Purchase Return and Allowances
To record merchandise returned to
seller.
200
Accounts Payable
700
Purchase Discounts
Cash
To record payment within the discount
period.
200
12
688
Page 5 of 7
BSA01 – Fundamentals of Accounting
3. The following transactions took place for Third Company.
Third Company bought merchandise amounting to P15,000
Jan 01 from a supplier. This is on account with terms 2/10, n/30.
Jan 02 Returned P300 worth of defective merchandise.
Jan 11 Paid in full the account with the supplier issuing a check.
Requirements:
Prepare the necessary journal entries under these 3 different methods:
a. Periodic Inventory System – Non-VAT
b. Periodic Inventory System – with VAT
c. Perpetual Inventory System – Non-VAT
a.
Jan
01 Purchases
Accounts Payable
02
11
b.
11
15,000
Accounts Payable
300
Purchase Returns and Allowances
Accounts Payable
Purchase Discounts
Cash in Bank
Jan
01 Purchases
Input Tax
Accounts Payable
02
15,000
14,700
294
14,406
15,000
1,800
16,800
Accounts Payable
336
Input Tax
Purchase Returns and Allowances
Accounts Payable
Purchase Discounts
Input Tax
Cash in Bank
300
36
300
16,464
294
35
16,135
Page 6 of 7
BSA01 – Fundamentals of Accounting
c.
Jan
01 Merchandise Inventory
Accounts Payable
02
11
15,000
15,000
Accounts Payable
Merchandise Inventory
300
Accounts Payable
Merchandise Inventory
Cash in Bank
14,700
300
294
14,406
Page 7 of 7