Tanauan Institute, Inc.
– Senior High School Department
TANAUAN INSTITUTE, INC.
Senior High School Department
Modified Learning Scheme : Workbook
Fundamentals of Accountancy, Business and Management 2
1st Semester, S.Y. 2020-2021
Subject Teacher: ____________________
Name: ___________________________________ Score: ________________
Section: __________________________________ Date: _________________
Topic Session
Completing the Cycle for the Chapter 10
Merchandising Business Part 2
Objectives of the Lesson
At the end of the lesson, the student should be able to:
1. Develop skills in the preparation of income statement.
2. Compare income statement prepared under nature of expense and
function of expense methods.
3. Explain why temporary accounts are closed each period
4. Recognize the need for post-closing trial balance and reversing entries in
particular instances.
5. Prepare closing entries, post-closing trial balance and reversing entries.
6. Explain how the worksheet under perpetual inventory system differs from
that prepared under a periodic inventory system.
Values Integration
Perseverance. The attitude that no matter how difficult an issue or a
problem maybe one will still continue until he or she succeeds. The lesson
that will be discussed involves analytical thinking which will require the
perseverance of the students in order to learn it.
Vocabulary
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Tanauan Institute, Inc. – Senior High School Department
Discussion
Income Statement (Merchandising Business – Periodic Inventory System)
The discussion on the major parts of the income statement for a merchandising entity
has been made in the previous chapter. The statement may be prepared by referring to
the income statement columns of the worksheet. Per revised IAS No. 1, an enterprise
should present an analysis of expenses or their function within the entity, whichever
provides information that is reliable and more relevant. Entities are encouraged to
present the analysis of expenses on the face of the income statement.
Nature of Expense Method
Expenses are aggregated or combined in the income statement according to their
nature and are not reallocated among various functions within the entity. This method is
simple to apply in many smaller enterprises because no allocation of operating
expenses between functional classifications is necessary. Examples include raw
materials and consumables used, employee benefits expense, depreciation and
amortization expense, transportation costs, advertising costs and other operating
expenses.
Function of Expense Method
This method, also referred to as the “cost of sales” method, classifies expenses
according to their function as part of cost of sales, distribution/selling, administrative and
other operating activities. This presentation often provides information that is more
relevant to users than the nature of expense method but the allocation of costs to
functions can be arbitrary and involves considerable judgment. This method provides
multiple classifications and intermediate differences to highlight significant relationships.
In a merchandising business, net sales arise from the sale of goods while cost of sales
or cost of goods sold represents the cost of inventory the entity has sold to customers.
The difference between net sales and cost of sales is called gross profit.
Then, other operating income is added and operating expenses (like distribution costs,
administrative expenses and other operating expenses) are deducted from gross profit
to arrive at operating profit.
Investment revenues, other gains and losses, and finance costs (e.g. interest expense)
are considered to arrive at profit before tax then income tax expense is deducted to
arrive at profit from continuing operations. Finally, profit from discontinued operations
(net of tax) is taken to account to get profit for the period.
Net Sales P xxx
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Tanauan Institute, Inc. – Senior High School Department
Cost of Sales (xxx)
Gross Profit P xxx
Other Operating Income xx
Total P xxx
Operating Expenses
Distribution Costs P xx
Administrative Expenses xx
Other Operating Expenses xx (xx)
Operating Profit P xxx
Finance Costs (xx)
Investment Revenues xx
Profit from Continuing Operations P xxx
Profit from Discontinued Operations x
Profit P xxx
The difference between the two methods lies in the items above operating profit. The
standard does not prescribe any format. The choice between the two methods depends
on historical and industry factors and the nature of the entity.
Adjusting and Closing Entries
The adjusting entries are journalized and posted to the ledger as they would be in a
service entity. The closing entries for T. Calaguas Traders under closing entry method
appear in the following sample entries.
Note that merchandise inventory is credited in the 1st entry for the amount of the
beginning inventory, P528,000; and debited in the 2nd entry for the ending inventory,
P483,000. Except for the closing of the temporary accounts typical of a merchandising
business, the closing procedures are the same with that of a service business.
Closing Entries for T. Calaguas Traders: Closing Entry Method
Journal
Date Account Titles and Explanation PR Debit Credit
2016
Dec.31 Merchandise Inventory, End 483,000
Sales 2,463,500
Purchases Returns & Allowances 56,400
Purchases Discounts 21,360
Income Summary 3,024,260
To close temporary accounts with
credit balances and to establish
the ending merchandise inventory.
Dec.31 Income Summary 2,569,050
Merchandise Inventory, Beg. 528,000
Sales Returns & Allowances 27,500
Sales Discounts 42,750
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Tanauan Institute, Inc. – Senior High School Department
Purchases 1,264,000
Freight In 82,360
Sales Salaries Expense 225,000
Office Salaries Expense 171,000
Store Supplies Expense 15,400
Office Supplies Expense 12,040
Insurance Expense Selling 5,600
Insurance Expense-General 3,600
Freight Out 57,400
Utilities Expense 48,000
Depreciation Expense-Store Eqpt. 26,000
Depreciation Expense-Office Eqpt. 22,000
Interest Expense 38,400
To close temporary accounts with
debit balances and to remove
beginning inventory.
Dec.31 Income Summary 455,210
T. Calaguas, Capital 455,210
To close income summary
Account.
Dec.31 T. Calaguas, Capital 200,000
T. Calaguas, Withdrawal 200,000
To close withdrawal account.
Post-Closing Trial Balance
A final trial balance to test the equality of the accounts after posting the adjusting and
closing entries. This trial balance is similar to the one discussed in the service business
except for the addition of the merchandise inventory account.
Theodore Calaguas Traders
Post-Closing Trial Balance
Dec. 31, 2016
Cash P 304,500
Accounts Receivable 484,200
Merchandise Inventory 483,000
Store Supplies 10,600
Office Supplies 6,360
Prepaid Insurance 4,600
Land 145,000
Building 202,600
Accumulated Depreciation-Building P 82,500
Office Equipment 86,000
Accumulated Depreciation-Office Eqpt. 50,000
Accounts Payable 206,830
Salaries Payable 20,000
Interest Payable 38,400
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Tanauan Institute, Inc. – Senior High School Department
Long-term Notes Payable 480,000
T. Calaguas, Capital 849,130
P 1,726,860 P 1,726,860
Worksheet in a Perpetual Inventory System
The worksheet is prepared after all transactions for the year have been journalized and
posted. However, the following items should be noted:
1. The inventory amount in the trial balance is the year-end balance since the
inventory account is perpetually updated. There will be no merchandise inventory
adjusting or closing entry unlike when the periodic inventory system is used. The
year-end inventory balance will simply be extended to the debit column of the
balance sheet.
2. The cost of sales is a ledger account in the perpetual system. There will be no
accounts for purchases, purchases returns and allowances, purchases discounts
and transportation in (freight in) because information related to these items is
recorded directly to the inventory account. When the closing entries are made,
cost of sales will be closed with the other temporary accounts with debit
balances.
3. The adjustments are handled in exactly the same way as they are handled in the
periodic worksheet.
4. An adjusting entry is necessary when the year-end inventory account balance
does not tally with physical inventory amount.
Questions
1. Name and describe the two methods of presenting expenses in the
income statement of a merchandising entity.
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2. Why temporary accounts (such as income) need to be closed each
period?
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Tanauan Institute, Inc. – Senior High School Department
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3. What are the differences of the worksheet of businesses using periodic
inventory system and businesses using perpetual inventory system?
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Activity
Direction: Prepare the income statement using the function of expense
method.
The accounts of Issa Babylon Health Store selected from the December 31, 2016
trial balance as follows:
Advertising Expense P 150,000
Freight Out 260,000
Depreciation – Office Equipment 110,000
Depreciation – Store Equipment 140,000
Freight In 100,000
Merchandise Inventory, 1/1/2016 1,160,000
Merchandise Inventory, 12/31/2016 1,040,000
Miscellaneous Expenses 90,000
Office Supplies Expense 430,000
Purchases 6,710,000
Purchases Returns and Allowances 250,000
Purchases Discounts 180,000
Salaries Expense – Selling 960,000
Salaries Expense – General 1,130,000
Sales 9,810,000
Sales Returns and Allowances 260,000
Sales Discounts 140,000
Selling Supplies Expense 70,000
Quiz
Directions: Prepare the Worksheet. Prepare the income statement
(function of expense method). Prepare the closing entries.
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Tanauan Institute, Inc. – Senior High School Department
The ledger accounts of the Cris Sou Bags for the year ended December 31, 2016 are
as follows:
Accumulated Depreciation – Building P 100,000
Accumulated Depreciation – Equipment 150,000
Accounts Receivable 136,000
Accounts Payable 74,000
Cash 72,000
Freight In 72,000
Insurance Expense 25,000
Interest Expense 208,000
Sou, Capital 1,510,000
Sou, Withdrawals 200,000
Land 400,000
Merchandise Inventory 598,000
Mortgage Payable 1,100,000
Notes Payable due in 2 yrs. 200,000
Office Building 1,600,000
Office Equipment 570,000
Office Supplies 42,000
Prepaid Advertising 75,000
Purchases Discounts 172,000
Purchases Returns and Allowances 133,000
Purchases 2,643,000
Salaries Expense 862,000
Sales Discounts 161,000
Sales Returns and Allowances 187,000
Sales 4,600,000
Travel Expense 188,000
Reflection
As an accounting student what have you realized in the lesson?
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References
Ballada, Win. 2017. Fundamentals of Accountancy Business &
Management 1. Manila, Philippines. DomDane Publishers. pp. 347-354.
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Tanauan Institute, Inc. – Senior High School Department
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