actbas 2 downloaded lecture notes

Marivic D. Valenzuela-Manalo of F

Unit 1 Accounting for Merchandising Business

Overview

Background Merchandising business deals primarily with the buying and selling of

finished goods. This unit will introduce readers on the different activities done by a trading business. A brief discussion of the perpetual inventory systems is also included.

Purpose The purpose of Unit I “Accounting for Merchandising Business ” is to

illustrate the various buying and selling activities of a trading business. This unit also illustrates the basic entries using perpetual inventory system. A brief discussion of business documents are also included to give readers ideas of what are the basic papers being used that support a merchandising transaction.

In this unit This unit contains the following topics:

Topics See Page Merchandising Business 2 of F Inventory System 3 of F Merchandise Accounts 7 of F Business Documents 9 of F Proprietor’s Investment and Withdrawal 14 of F Purchase of Merchandise 15 of F Purchase Returns and Allowances 18 of F Discounts on Purchases 20 of F Sales 25 of F Sales Returns and Allowances 27 of F Discounts on Sales 28 of F Freight on Merchandise 29 of F Income Statement 33 of F Review Questions 38 of F Exercises 39 of F


Merchandising Business

Overview An organization that is engaged in the buying and selling of goods or

merchandise is a merchandising or trading concern. Merchandise refers to goods purchased for resale in the same form. Unlike businesses rendering services for compensation, a trading concern derives its income through the resale at a profit of the merchandise purchased.

Activities The activities of a merchandising concern that distinguish it from a service

concern cover the following: • Purchasing. Information as to the kind, quality, quantity, and cost of goods

bought should be maintained for the use of management. Records as to supplies or merchandise bought are also maintained.

• Handling. The costs of transporting and sorting of goods bear an important relation to the prices of goods bought. These should be recorded properly. Transportation costs include freight, express, drayage, and cartage.

• Returning Of Goods Purchased. Some of the merchandise received may prove unsatisfactory and must be returned to the vendors, or if not returned, may be allowed some deductions from the original purchase price.

• Selling. Goods purchased are sold at prices above the cost in order to provide adequate margin of profit. It is therefore imperative that the cost of goods bought should be known from the accounting records so that desirable selling prices may be set.

• Returning Of Goods Sold. The customers may return some of the merchandise sold. Deductions from the original selling prices must be allowed for sales returns. If the goods delivered are defective and no return is made, the customers are granted reduction on the sales price.

• Maintaining Adequate Stocks On Hand. In order to satisfy orders of customers at all times, a stock of merchandise must be maintained on hand. This is called Merchandise Inventory or Inventory on Hand


Inventory System

Overview A business firm selling a product must use an inventory record system to

value the merchandise on hand at the end of an accounting period. Two different inventory systems may be used to record trading transactions in the accounting records. These systems are the periodic and perpetual inventory system.

Perpetual In a perpetual inventory system a continual, or perpetual, record of the

inventory activity is maintained. Consequently, any items that are sold or otherwise physically removed from inventory must be removed from the Merchandise Inventory account, and items that are purchased are added to the Merchandise Inventory account. This may result in significant extra record keeping as compared to a periodic system. However, a perpetual inventory system does have advantages, and businesses with a relatively low number of high-value transactions often find the extra effort to be worthwhile. Computers are also making it practical for businesses to use perpetual systems than would have been not feasible in the past.

Periodic or Physical

In the periodic inventory system, the ending inventory is determined by a physical count of the merchandise on hand at the end of an accounting period. The periodic inventory system receives its name because the balance in the inventory account is known only at the beginning and at the end of the accounting period. The periodic inventory is the simpler system commonly used in practice and was the only practical alternative for most businesses with large number of transactions before the advent of computers. The periodic inventory system will be used in the illustrations throughout this course unless otherwise stated.

Continued on next page


Inventory System, Continued

Transactions in Perpetual Inventory System

As mentioned earlier, a perpetual inventory system attempts to maintain a continual record of the inventory on hand. Thus, if Joseph Labrador purchased merchandise for cash, P50,000, the entry to record this transaction is : Merchandise Inventory 50,000 Cash 50,000 To record merchandise bought. On the other hand, if Joseph sold P20,000 worth of merchandise for P40,000, the entry to record this transaction is: Cash 40,000 Sales 40,000 To record merchandise sold. Cost of Goods Sold 20,000 Merchandise Inventory 20,000 To record the transfer of inventory sold to cost of goods sold account. Assuming this time, Joseph Labrador purchased from Mary Trading merchandise on account, Php 100,000. And at the same time, paid for the freight on the said purchase, Php 2,500. The entries would be: Merchandise Inventory 100,000 Accounts Payable 100,000 To record merchandise bought. Merchandise Inventory 2,500 Cash 2,500 To record freight paid.




Transactions in Perpetual Inventory System, con’t.

Let us say, after two days, Joseph returned defective merchandise bought from Mary amounting to Php 5,000. The entry would be: Accounts Payable – Mary Trading 5,000 Merchandise Inventory 5,000 To record returned merchandise. If on the other hand, Joseph Labrador sold to Michael Supermart merchandise worth Php 50,000 on account at gross profit of 50 percent. The entries would be: Accounts Receivable 50,000 Sales 50,000 Sold merchandise on account. Cost of Goods Sold 25,000 Merchandise Inventory 25,000 To record cost of merchandise sold. Let us assume again that after three days, Michael issued a debit memorandum amounting to Php 1,800 for defective goods received from Joseph. The entries to record the return would be: Sales Returns & Allowances 1,800 Accounts Receivable 1,800 Received debit memorandum. Merchandise Inventory 900 Cost of Goods Sold 900 To record cost of good returned.

Importance It is important to note that both periodic and perpetual inventory systems will record the sale of merchandise similarly. The only difference is that under the perpetual inventory system, there is a second entry that is required to be recorded together with the sale to indicate the transfer out of the amount sold from the Merchandise Inventory account to the Cost of Goods Sold account. It is possible to combine the two entries into a single compound entry with the same debits and credits. For example:

Cash 40,000 Cost of Goods Sold 20,000 Sales 40,000 Merchandise Inventory 20,000 To record merchandise sold.




Pro-forma entry

At the end of the year, no further entries may be required if the balance in the inventory account equals the actual cost of the units on hand. Unfortunately, this seldom happens. Despite the extra effort necessary to maintain a perpetual record of the inventory, the facts often differ from the records. When the facts conflict with the records, the records must be corrected to reflect the facts. Therefore, an adjusting entry is necessary to record any missing inventory items and reduce the balance in the Inventory account to the correct level. The pro-forma entry is:

Merchandise Inventory Short or Over xxx Merchandise Inventory xxx To adjust inventory account to actual balance.

Merchandise Inventory Short or Over

The Merchandise Inventory Short or Over account is an expense account that reflects the cost of missing inventory items. However, depending on its materiality and on normal practice within the industry, the inventory shrinkage amount is often combined with cost of goods sold in the financial statements.

Net Income The net income disclosed on the income statements prepared under the two

inventory systems will reflect the same amount. This is also true with the ending inventory balance reported in the balance sheet. A business that combined its Merchandise Inventory Shrinkage account with its Cost of Goods Sold account would prepare an income statement identical to the one prepared under the periodic inventory system.


Merchandise Accounts

Overview The discussions on this topic are the account titles to be used in recording

acquisition and sale of merchandise of a trading business using the periodic inventory system.

Sales Sales of merchandise are recorded in this account at selling prices. This is a

temporary or nominal account representing income from selling of merchandise. This account has a normal credit balance

Sales Returns and Allowances

This account is debited for all the merchandise returned by customers. The debit entry is at the original selling price of the merchandise. This account is also being used for all goods delivered to customers but is found to be defective or not as ordered and still the buyer desiring to retain the goods as is. The customer in this case is normally permitted to deduct a certain amount from the selling prices of the goods delivered.

Sales Discount This account is debited in the book of the seller whenever the buyer avails of

the cash discounts provided by the seller. This is a deduction from sales account.

Purchases This is a temporary account to which the cost of goods bought during the

period is debited. This account usually has a debit balance at the end of the accounting period.

Purchase Returns and Allowances

Goods bought and returned to supplier, or goods bought and received as defective, or not as ordered, when not returned to the supplier but is subjected to a certain reductions from their acquisition prices. These deductions and returns of purchased goods are credited to this account. Purchase returns and allowances account is a deduction from the Purchases account.



Merchandise Accounts, Continued

Merchandise Inventory

At the end of every accounting period, a physical count of the unsold merchandise on hand is taken. The total amount of these goods on hand is debited to the Merchandise Inventory account.

Purchase Discount

This account is credited in the books of the buyer whenever the purchaser avails of the cash discount given by the seller. This is a deduction from Purchases account.

Freight In or Transportation In

If the buyer pays the expenses of transporting the goods from the place of the seller to his place of business, such expenses are debited to the Freight-in account.

Freight Out or Transportation Out

If the seller pays the expenses of transporting the goods from his place to the place of the buyer, such expenses are debited to the Freight out account. This is reported as part of operating expenses under the selling expenses classification.


Business Documents

Overview All business transactions are evidenced or supported by printed forms or

documents. These business papers or oftentimes-called business documents, furnish the information needed in recording the transactions. Without business papers, it would be very difficult, if not impossible, to keep accurate records of these transactions.

Official Receipts

These are issued every time the business receives cash. They show the date on which the cash is received, the party from whom the cash is received, the amount received, the particulars of the transaction, and the signature of the one who received the cash. The sample given below is an official receipt of MDV Realty issued to Mayon Grocery. From the point of view of MDV Realty, there was an increase in both the asset cash and the income from rent. On the other hand, the asset cash of Mayon Grocery decreased, while its rental expenses increased, thus decreasing its proprietorship.

MDV REALTY 150 Rizal Avenue

Manila

OFFICIAL RECEIPT No. __120____ Date ___June 30, 20X1______ RECEIVED from _____Mayon Grocery________ the sum of _____Ten Thousand___ pesos (P10,000.00) in payment of ___July rental__. Cash_____P10,000 _________________________ Check No._ (Cashier)



Business Documents, Continued

Sales Invoice and Purchase Invoice

After a sale has taken place, the seller fills in the business form called the invoice. The invoice shows the date of the sale, name and address of the seller, name and address of the buyer, terms of the sale, list of articles bought with the unit price and entire cost of each, total amount of the invoice, and method of shipment. Invoices are numbered and usually made out in triplicate or quadruplicate. The original is given to the buyer. When the buyer receives the goods, they are examined. Then the invoice is checked to determine whether there are any discrepancies in quantity or price and any errors in calculation. From the point of view of the seller, the invoice is a sales invoice; from that of the buyer, it is a purchase invoice. The sample given below shows that from the standpoint of the seller, Diamond Grocery, the invoice price of P1,750 is the gross income from sales, which covers the cost of the juice sold and the gross profit. There was an increase in assets in the form of an amount receivable from Mayon Grocery, there was an increase in cost of merchandise available for sale and an increase in liabilities (the amount of P1,750 is payable within 30 days).


DIAMOND GROCERY 930 Del Monte Avenue

Quezon City

I N V O I C E No. ___532___ Sold to: ______Mayon Grocery____ Date ______June 10, 20X1_____ Address __945 Mayon St., Q.C.____ Term: ___Net 30 days _______

Quantity D E S C R I P T I O N Unit Price Amount 50 boxes

Funchum Orange Juice Drink

P 60.00

P 3,000.00



Credit Memorandum

Whenever the buyer finds an error in an invoice, or when merchandise is damaged, he should notify the seller at once. If his claim is admitted as valid, the seller sends him a credit memorandum, which shows the amount by which his account is reduced. Credit memorandum is often shortened to credit memo. The credit memo illustrated below shows that because of the return of two boxes of Funchum juice drink, the gross income from sales of Diamond Grocery decreased, and the amount receivable from Mayon Grocery (asset) decreased. From the point of view of Mayon Grocery, the merchandise available for sale and also the debt to Diamond Grocery decreased.

DIAMOND GROCERY 930 Del Monte Avenue

Quezon City

C R E D I T M E M O No. ___121___ To: ______Mayon Grocery____ Date ______June 15, 20X1_____ __945 Mayon St., Q.C.____ We have credited your accounts as follows:

Inv. No. Explanation Unit Price Amount 532

Return of two boxes of slightly defective Funchum orange juice drink.

P 35.00

P 70.00




Promissory Notes

A promissory note is a written promise signed by one party, called the maker, to pay a certain specified sum to another, called the payee, at a certain future time. The amount to be paid on maturity date may or may not include interest. The amount due, not including interest, is called the face of the note. Promissory notes may be received by the business from its debtors, or the business may give it to its creditors. The following is a sample of a promissory note.

Php 10,000 Quezon City,

May 1, 20X1 Thirty days after date, I promise to pay to the order of Joseph Labrador, Ten

thousand Pesos, payable at COCOBANK, Vito Cruz Branch for value received with interest at 12%.

(Signed) Maria de Jesus

Bank deposit slips and checks

For control and safekeeping of cash most businesses maintain checking or current accounts with the banks. They deposit their money in banks and payments from the deposit are then made by means of checks. The bank deposit slip is filled in every time the business deposits money in the bank. It shows the date when the deposit is made, for whose account the deposit is made, the amount of the deposit classified into currency and checks received from others, and the signature of the depositor.




Check An order to the bank signed by the person issuing it, to pay to bearer or order

a certain sum of money. After the bank has paid the payee, the amount is deducted from the deposit account of the one who issued the check.

Cash register slips

Some cash registers are operated in such a way that a strip or slip of paper comes out as evidence that money was received. The slip shows the date and the amount of cash received.

Miscellaneous bills

Some businesses, like the Meralco, Philippine Long Distance Telephone Co., MWSS, etc., send bills to their customers to notify them of the amounts they have to pay. Thus, there are advertising bills, light bills, water bills, telephone bills, and others.


Proprietor’s Investment and Withdrawal

Overview Owners of merchandising firms may want to invest merchandise into its business operations. The following are the entries that would be recorded under the periodic inventory system if the proprietor invests or withdraws merchandise.

Investment of merchandise

Recording of the investment of the owner in the business will be treated in the same way the recording is done in a service business. The only difference would be if the owner invested an asset into the business in the form of merchandise. When merchandise is part of the owner’s initial investment, the said investment must be debited to the Merchandise Inventory account whether the company is using perpetual or periodic inventory system. But if the investment of merchandise was made during the normal operation of the business, i.e., as an additional investment, the said investment must be debited to Merchandise Inventory, if the company is using perpetual inventory system and Purchases if they are using the periodic inventory system. Pro-forma entry: Initial investment Date Merchandise Inventory xxx Owner, Capital xxx Investment made in the form of merchandise. Pro-forma entry: Additional investment Date Merchandise Inventory xxx Purchases xxx Owner, Capital xxx Owner, Capital xxx Investment made in the form of merchandise.


Withdrawal of merchandise

Any subsequent withdrawal made by the owner of any asset/s in the business (e.g., cash, supplies, etc.) in anticipation of future profits of the company (i.e., temporary withdrawal) will be debited to the drawing account. Withdrawals that are permanent in nature (i.e., the owner has no intention of returning the said amount into the business) will be debited directly to the capital account. If the company uses the periodic inventory system, withdrawals of the owner in the form of merchandise for personal use will be credited to the Purchases account at cost. This is done in order to maintain the original balance of the Merchandise Inventory account, which was computed by means of actual physical count at the end of the accounting period. On the other hand, the Merchandise Inventory account is credited if the firm uses the perpetual inventory system. Pro-forma entry: Periodic inventory system/Temporary withdrawal Date Owner, Drawing xxx Cash xxx Purchases xxx Owner withdrew cash and merchandise for personal use. Pro-forma entry: Perpetual inventory system/Temporary withdrawal Date Owner, Drawing xxx Cash xxx Merchandise Inventory xxx Owner withdrew cash and merchandise for personal use. Pro-forma entry: Permanent withdrawal Date Owner, Capital xxx Cash xxx Owner permanently withdrew an amount in the business for personal use.


Purchase of Merchandise

Overview When a firm sells goods or services, it gives a sales slip or sales invoice to its

customers. This sales invoice becomes a purchase invoice as far as the purchasing business is concerned. The purchase invoice provides the objective information used to record purchasing transactions. In small business firms, the only written document received or handled in purchases of goods or services is this invoice. For such businesses, authorization for purchases is given informally by telephone or by having an employee personally purchases goods or services. In this part, we would be dealing with transactions affecting the firm’s acquisition of the merchandise for sale. As we have mentioned earlier, all our business transactions must be properly supported by business documents.

Purchase Requisition

Large companies rely on a more careful procedure. As a first step they may insist that the person or department needing the goods or services to be purchased fill out a form called a purchase requisition. This completed form, bearing the signature of some responsible person authorized to approve such requisitions, is next sent to the purchasing agent or purchasing department of the company.

Purchase Order The purchasing department, after selecting the firm from whom the goods or

services are to be bought, prepares a second business paper called a purchase order. The original copy of this document is sent to the company from which the purchase is to be made. This copy gives the selling business authority to send the purchaser the goods or services ordered.

Purchase Invoice

About the same time that shipment of the goods is made or services are supplied to the purchaser, the purchaser is sent an invoice that is the third business paper. This purchase invoice becomes the basis for recording the purchase in the journal just as it is in the case of the informal procedure described for small firms.



Purchase of Merchandise, Continued

Purchases The cycle of a merchandising entity begins with cash, which is used to

purchase inventory. Purchases, in the accounting sense, are only those items of merchandise inventory that a firm buys to resell to customers in the normal course of business. For example, a bookstore records in the purchases account the price it pays for books, school and office supplies, and other items of inventory acquired for resale. A grocery store debits purchases when it buys canned goods, meat, frozen food and other inventory. Below is a sample purchase invoice:

DE ASIS TRADING

2401 Taft Avenue Manila

Sold to : Labrador Store Invoice No. 143 Address : Blk 28, Lot 24 St. Charbels, Cavite Date : Jan. 7, 20X1 How shipped : FOB Destination, prepaid Terms 2/10, n/30

Quantity Description Unit Price Amount 10 dozen Lady’s Sando 25 P 3,000.00 10 dozen Men’s Undershirt 40 4,800.00 10 pcs. Girl’s Dress 95 950.00 P 8,750.00

========= Prepared by : Checked by : Approved by: ---------------- ---------------- -----------------



Purchase of Merchandise, Continued

Journal Entries The purchase made on credit by Labrador Store is recorded in the general

journal as follows: Jan. 5 Purchases 8,750 Accounts Payable - De Asis Trading 8,750 Purchased under wears and children’s dresses. Terms: 2/10,n/30. If the above purchase was made on cash basis instead of on credit, then the journal entry of Labrador Store will be: Jan. 5 Purchases 8,750 Cash 8,750 Cash purchases from De Asis Trading. If the above purchase was made with down payment of P4,000 and the balance on account, then the journal entry of Labrador Store will be: Jan. 5 Purchases 8,750 Cash 4,000 Accounts Payable 4,750 Various purchases. Terms: 4,000 down, balance, 2/10, n/30. Merchandise purchased with value added tax (VAT) is recorded using the following pro-forma journal entry: Purchases xxxx Input Tax xx Accounts Payable xxxx Purchased merchandise on account.


Purchase Returns and Allowances

Overview Merchandise purchased for resale would not always be as what the buyer

expects. In this regard, buyers can return goods purchased due to a lot of reasons, for example, due to defects, wrong specifications, poor quality, etc.

Debit Memorandum

When merchandise bought is returned, or an allowance is requested, the buyer informs the seller in writing. The communication is done usually through the buyer’s printed business form called debit memorandum. An illustration of such a form is shown below:

Labrador Store Blk 28, Lot 24 St. Charbel’s

Dasmarinas, Cavite No. 8

DEBIT MEMORAMDUM Date : Jan. 8, 20X1 To : De Asis Trading 2401 Taft Ave., Manila We DEBIT your account for the following: 2 pcs. Lady’s Sando P25 P 50 5 pcs. Men’s Undershirt 40 200 1 pc. Girl’s dress 95 95 -------- P 345 ===== Remarks: The above goods were received in damaged-condition as per your invoice No 143 dated Jan. 5, 2001.



Purchase Returns and Allowances, Continued

Credit Memorandum

If the return is accepted or the allowance is granted by the seller, the seller usually sends to the buyer such acceptance or grant in writing through a printed form called credit memorandum. A credit memorandum may in similar form as the debit memorandum above except for the change of the word debit to credit. Upon receipt of this communication, the buyer makes an entry for the returns or allowances

Illustration Assume the following transactions:

Jan. 8, 20X1 - Labrador Store returned P343 worth of merchandise to De Asis Trading. This was accepted by De Asis Trading (see sample debit memorandum).

Journal entry to record the return: Jan. 8 Accounts Payable - De Asis Trading 345 Purchase returns and allowances 345 Merchandise returned to De Asis Trading. Note: As a result of the returns, the debt to De Asis Trading was diminished, thus, the seller’s account was debited.

The return was credited to purchase returns and allowances account instead of directly against purchases in order to have the books show total purchases and total returns and allowances. If the purchase of January 5 was in cash, the return of goods worth P343 on Jan. 8 may result in a refund of cash from De Asis Trading. If no cash refund is made, then Labrador Store will have a receivable from the De Asis Trading which may be collected or applied to purchases in the future.

Jan. 8 Cash 345 Purchase returns and allowances 345 Cash refund for the return of goods However, if the return on Jan. 8 was not refunded in cash, then the journal entry should have been: Jan. 8 Accounts Receivable - De Asis Trading 345 Purchase returns and allowances 345 To charge De Asis Trading for goods returned.


Discounts on Purchases

Overview Buyers of merchandise can avail of two types of discounts, namely, the cash discount and trade discount. This part will provide readers on how to record discounts on merchandise purchased.

Cash Discounts Special deductions from the prices of goods bought granted by the seller to the buyer

to induce the latter to pay within a specified period. Example: Jan. 5, 20X1 Labrador Store bought merchandise from De Asis Trading

P8,750. Terms: 2/10, n/30 The terms of the above transaction mean that if the invoice is paid within 10 days after the date of the invoice (Jan. 6 to 15), Labrador Store may pay the invoice amount less a discount of 2%. This is computed as follows: Amount of invoice P8,750 Less: 2% thereof 175 Amount to be paid P8,575 ====== If payment is not made within 10 days, then Labrador Store should pay the full amount of the invoice, P8,750, within 30 days from the date of the invoice. If the invoice remains unpaid after 30 days, it is said to be past due and, usually, the amount begins to earn interest from the 31st day. Other examples of terms attached to a credit invoice are: 5/10, n/30 - There is a 5% discount if paid 10 days after invoice date, net

amount if paid beyond the 10 days but within 30 days. 2/10, 1/15, n/30 - There is a 2% discount if paid 10 days after invoice date, 1%

discount if paid within fifteen days, net amount if paid beyond 15 days but within 30 days.

2/5EOM, n/45 - There is a 2% discount if paid 5 days after end of the month, net amount if paid beyond 5 days after end of month but within 45 days from the invoice date.

2/10, n/EOM - There is a 2% discount if paid 10 days after invoice date, net amount if paid beyond the 10 days but up to end of the month only.

n/60 - No cash discount is offered. The full amount must be paid within 60 days from invoice date.

Cash discounts are computed on the amount of the bill less returns and allowance, if any. The base amount should be that which pertains only to merchandise. Discounts are ordinarily not allowed on incidental expenses such as freight, insurance while in transit, taxes, duties, and other charges.



Discounts on Purchases, Continued

Recording of Cash Discounts

Below are sample transactions involving the recording of cash discounts:

Transactions 20X1

Jan. 4 - Mary Store purchased merchandise from Uniwide Trading, P10,000. Terms: 2/10, n/30

7 - Mary Store made a partial payment of P5,000 to Uniwide Trading

14 - Mary Store paid in full its account to Uniwide Trading 18 - Mary Store purchased merchandise from SM Superstore

worth P25,000. Terms: P10,000 down payment, balance 2/10, 1/15, n/30.

21 - Mary Store returned to SM Superstore P500 cost of merchandise acquired on Jan. 18. SM Superstore in return issued a credit memo with the same amount-signifying acceptance of the return made by Mary.

31 - Mary Store settled in full its account with SM.




Recording con’t

Continuation of the recording of discounts:

Journal Entries: 20X1

Jan. 4 Purchases 10,000 Accounts Payable - Uniwide 10,000 Merchandise purchased. Terms:

2/10,n/30.

7 Accounts Payable - Uniwide 5,000 Cash 5,000 Partial Payment. 14 Accounts Payable - Uniwide 5,000 Cash 4,800 Purchase Discounts 200 Full payment. 18 Purchases 25,000 Cash 10,000 Accounts Payable-SM 15,000 Bought merchandise. Terms:

2/10,1/15/n/30.

21 Accounts Payable - SM 500 Purchase Returns and Allowances 500 Received CM for merchandise

returned.

31 Accounts Payable - SM 14,500 Purchase Discounts 145 Cash 14,355 Settled account in full.

NOTE: The cash discount in the last entry was computed on the net amount after deducting the returns.




Trade Discounts

Deductions from the list prices of merchandise offered by the seller to the buyer to encourage the latter to buy in bulk or large volume/quantity. This is a strategy being adopted by the seller to promote the sale of the merchandise. A list price may be subjected to one or more trade discounts

Illustration Trade Discounts and Cash Discount Illustrated:

a. Assume a credit invoice of P3,000 less 10. Terms: 2/10,n/30.

List price P3,000 Less: trade discounts(3,000x10%) 300 Net invoice price P2,700 Less: Cash discounts(2,700x2%) 54 Amount due if payment is made with in 10 days P2,646 =====

b. Assume a credit invoice of P5,000 less 10-5. Terms: 2/10,n/30.

List price P5,000.00 Less: First trade discounts(5,000x10%) 500.00 P4,500.00 Less: Second trade discounts(4,500x5%) 225.00 Net Invoice price P4,275.00 Less: Cash discounts(4,275x2%) 85.50 Amount due if payment is made w/in 10 days P4,189.50 ========




Journal Entries The journal entries on buyer’s book for (b):

At the time of purchase Purchases 4,275.50 Accounts Payable 4,275.50 Purchased merchandise on account.

Payment within 10 days Accounts Payable 4,275.50 Purchase discounts 85.50 Cash 4,189.50 Settled accounts in full with in discount period

Payment beyond 10 days Accounts Payable 4,275.50 Cash 4,275.50 Paid account in full.

Summary The purchase invoice is the business document generated by a purchase

transaction. Most merchandising entities offer discounts (i.e. cash and trade discounts) to their customers. Trade discounts are not recorded in the books of both buyer and seller. While cash discounts are recorded in the buyer’s book under the account title Purchase Discount. The Purchase Discount account, which has a credit balance, is a contra account to Purchases. Most businesses allow their customers to “return” merchandise that is defective, damaged in shipment, or otherwise unsuitable. Or if buyer chooses to keep damaged goods, the seller may deduct an allowance from the amount the buyer owes. Similar to purchase discount, Purchase Returns and Allowances, the account title used to record returns and allowance granted, is also a contra purchases account.


Sales

Overview The sale of merchandise may be for cash or on account. An invoice supports

every sale. The seller’s sales invoice is the buyer’s purchase invoice. When a sale is for cash, the seller receives money in return for his merchandise. When the sale is made on credit, the seller acquires a receivable or right to collect from the buyer. The preceding discussion on methods of recording merchandise inventory transactions stated that under the periodic inventory method, purchases represent the cost of merchandise bought. Sales, on the other hand, represent the selling price of merchandise previously bought and then sold. In the income statement (See sample on page 36 of F), Sales is shown as an income item from which the cost of goods sold (consisting of merchandise inventory beginning and end and net cost of purchases), was deducted, the difference being the gross profit. Therefore, sales represents income, which covers both the cost of merchandise, sold and gross profit (or gross loss). In the following discussions, it was assumed that merchandise is sold normally at a profit, i.e., the selling price of the merchandise sold is greater than its cost. It is very important to note that a purchase and sales transaction involve two parties; namely, the buyer and the seller. Furthermore, a business acts sometimes as a buyer and sometimes a seller. The analysis of a purchase and sale transaction would depend on whether the business for which the accounting work is being done, is playing the role of a buyer or that of a seller. The treatment therefore, for cash discount and returns and allowances on this part will also be similar to that discussed under purchases, only this time the account titles to be used would be Sales discount and Sales returns and allowances.



Sales, Continued

Cash Sales Retailers like drug stores, sari-sari stores, department stores and restaurants

will at times sell their merchandise on cash basis. Assuming Mary Store sold P5,000 worth of merchandise for cash, this cash sale is recorded as follows: Jan. 10 Cash 5,000 Sales 5,000 Cash Sales.

Sales on Account

Most business establishments are now extending credit to their customers to become competitive. In the advent of what we call “plastic money”, i.e., credit cards, selling on account has been the current trend whether you are a manufacturing business, wholesaler or retailer. Assuming Mary Store sold merchandise worth P7,000 on account. The transaction is recorded as follows: Jan. 13 Account receivable 7,000 Sales 7,000 Sold merchandise on account. The related cash receipt on account is recorded as follows: Jan. 20 Cash 7,000 Accounts receivable 7,000 Collected account in full. Merchandise sold with value added tax (VAT) will be recorded using the following pro-forma journal entry: Accounts Receivable xxxx Sales xxxx Output Tax xx Sold merchandise on account.


Sales Returns and Allowances

Overview When the customer returns goods to the seller or requests for a deduction

from the price of the goods delivered to him, the seller accepts the return or grants the request through a credit memorandum.

Entries The effect of a sales return or allowance is to reduce the amount of sales and

the amount of receivable from the customer. If Sales account is debited for the return or allowance, then, the said account will show only net sales. To preserve the gross amount of sales and to maintain a separate record for the returns and allowances, the entry to record sales returns or allowances is:

Sales Returns and Allowances Accounts Receivable Return of goods.

xxx xxx

If a cash sale is made and a return of a part thereof by the customer is accepted, the seller may refund cash to the customer for which the entry is:

Sales Returns and Allowances Cash Cash refund for good returned.

xxx xxx

However, if cash is not refunded, then the entry will be Sales Returns and Allowances Accounts Payable Customer credited for goods returned.

xxx xxx


Discounts on Sales

Overview Credit terms encountered in sales are similar to those discussed in accounting

for purchases. The following are illustrations on how to record sales transactions with cash discount.

20X1

Jan. 4 Sold to Francis Asis merchandise worth P12,000 less 5. Terms: 2/10, n/30

7 Francis Asis issued a debit memo worth P500 for defective items received from Joseph

10 Made partial payment amounting to P5,000 14 Francis Asis settled account with Joseph in full

Journal Entries The following are the journal entries:

20X1 Jan. 4 Accounts receivable - Asis

Sales Sold merchandise. Terms: 2/10, n/30

11,400 11,400

7 Sales returns and allowances Accounts receivable - Asis Asis was credited for allowance granted

500 500

10 Cash Accounts receivable - Asis Received partial payment

5,000

5,000

10 Cash Sales discount Accounts receivable - Asis Asis settled account in full

5,682 218

5,900


Freight on Merchandise

Overview Transportation or freight on merchandise purchased or sold is recorded as an

expense in the books of the party who, as per contract, should shoulder the expense.

Shipping Terms Freight-in is the title used in recording the freight or transportation charges

on merchandise bought, and Freight-out, for the freight on merchandise sold. The term of shipment that is contained in the bill of lading indicates whether or not the buyer or the seller should assume the burden of the freight expense (Punzalan, J., Santos, L., 1963). Merchandise may be shipped under the following terms: • F.O.B shipping point means that the goods are free on board up to the

shipping point. Therefore, if the seller is in Davao and the buyer is in Manila, the seller absorbs all transportation expenses up to the port of Davao only. This also signifies that title to the goods already passes to the buyer upon the loading of the goods onto the carrier at Davao.

• F.O.B destination means that the goods are free on board up to the point of destination. If the seller is in Davao and the buyer is in Manila, the seller absorbs all transportation expenses of the goods up to Manila. The title of the goods passes to the buyer only upon the unloading of the goods from the carrier in Manila.

• Freight prepaid means that the seller has paid the shipping company the transportation expenses up to the point of destination.

• Freight collect means that the buyer should pay the shipping company upon the delivery of the goods at the point of destination.



Freight on Merchandise, Continued

Illustration No. 1

Assume Mr. Vic Cruz of Davao sold to Joseph Labrador of Manila on account. The invoice showed the following: Price of merchandise P 14,000 Freight (to Manila) 1,000 Total P 15,000 ====== 1. If the purchase is F.O.B shipping point, prepaid, the journal entry of

Joseph is: Purchases P 14,000 Freight-in 1,000 Accounts Payable-Cruz 15,000 Purchased merchandise on account. FOB SP, prepaid. Analysis: The transportation expense to Manila is the expense of Labrador. In as much as Vic Cruz has advanced the amount of freight, then, the amount payable to him should include the said amount of freight. 2. If the purchase is F.O.B shipping point, collect, the journal entries

of Labrador are: Purchases Account payable-Cruz Purchased merchandise on account

14,000 14,000

Freight-in Cash Paid freight F.O.B. SP, collect

1,000 1,000

3. If the purchase is F.O.B. destination, prepaid, the journal entry of

Labrador is:

Purchases Accounts payable-Cruz Purchased merchandise on account.

14,000 14,000

Note: The freight is not reflected in the books of Labrador because said expense is for the account of Cruz.




Illustration No. 1, con’t.

4. If the purchase is F.O.B. destination, collect, the journal entries of Labrador are:

Purchases Accounts Payable-Cruz Purchased merchandise on account.

14,000 14,000

Accounts Payable-Cruz Cash Paid freight F.O.B. destination, collect.

1,000 1,000

Note: Labrador is liable to pay Cruz only P13,000 (14,000-1,000). In the foregoing transactions, the entries presented are all in the books of the buyer. Now, using the same transactions, the following are the entries in the books of the seller.

Illustration No. 2

1. If the sale is F.O.B. shipping point, prepaid, the journal entries of Cruz are:

Account Receivable- Labrador Sales Sold merchandise on account.

14,000

14,000

Accounts Receivable- Labrador Cash Paid freight F.O.B. SP, prepaid

1,000

1,000

Note: Cruz advanced the amount of freight, which is supposed to be paid by Labrador. Therefore, the amount receivable from Joseph should include the amount of freight.




Illustration No. 2, con’t.

2. If the sale is F.O.B shipping point, collect, the journal entry of Cruz is:

Accounts Receivable- Labrador Sales Sold merchandise on account.

14,000 14,000

Note: The freight is not reflected in the books of Cruz because the said expense is for the account of Labrador.

3. If the sale is F.O.B destination, prepaid, the journal entries of Cruz are:

Accounts Receivable- Labrador Sales Sold merchandise on account

14,000 14,000

Freight-out Cash Paid freight F.O.B. Destination, Prepaid

1,000 1,000

4. If the sale is F.O.B. Destination, collect the journal entries of Cruz are:

Accounts receivable- Labrador Sales Sold merchandise on account

14,000 14,000

Freight-out Accounts receivable- Labrador F.O.B. Destination, collect.

1,000 1,000

Note: The total receivable of Cruz from Labrador will be 13,000 only (14,000-1,000), since the payment of freight was advanced by Labrador.

Reminder It should be noted that both freight-in and freight-out represent expense.

However, freight-in is shown as an addition to net purchases because it is a direct cost of procuring the merchandise bought. On the other hand, freight-out is listed among the selling expenses


Income Statement

Overview A merchandising business prepares its income statement using the functional. The functional income statement contains several sections, subsections and subtotals. The amount of the details presented in this section, e.g., the selling expenses, general and administrative expenses, etc., varies from company to company

Income Statement Terminologies

Below are the terms used in the income statement: • Revenue from Sales. The total amount charged to customers for

merchandise sold, for cash and on account, is reported in this section. Sales returns and allowances and Sales discounts are deducted from this to yield Net Sales.

• Cost of Goods (Merchandise) Sold. The cost of merchandise sold during the period may also be called Cost of Goods Sold or the Cost of Sales. It is computed by adding to the beginning inventory the net cost of purchases to yield Total Goods Available for Sale. The ending inventory is deducted from the Total Goods Available for Sales to yield the Cost of Goods (Merchandise) Sold. The net purchases amount is computed by deducting purchase discount and purchase returns and allowances from purchases. Net cost of purchases is computed by adding freight-in to the net purchases amount.

• Gross Profit. The excess of net sales over the cost of goods sold is called gross profit. It is sometimes called gross profit on sales or gross margin.

.



Income Statement, Continued

Income Statement Terms, con’t

Con’t • Operating Expenses. Most merchandising businesses classify operating

expenses as either selling expenses, administrative expenses or other operating expenses. However, depending on the decision-making needs of managers and other users of the financial statements, other classifications could be used. Expenses that are incurred directly in the selling of merchandise are selling expenses. They include such expenses as salespersons’ salaries, store supplies used, depreciation of store equipment, and advertising. Expenses incurred in the administration or general operations of the business are general and administrative expenses. Examples of these expenses are office salaries, depreciation of office equipment, and office supplies used. Expenses that are related to both administrative and selling functions may be divided into the two classifications. In small businesses, however, such expenses as rent, insurance, and taxes are commonly reported as administrative expenses. Transactions for small, infrequent expenses are often reported as Miscellaneous Selling Expense or Miscellaneous Administrative Expense. Expenses that cannot be traced directly as selling or administrative expenses are identified as other operating expenses. Examples of these are the losses incurred in the disposal of plant and other assets and Discount lost on the purchase of plant assets. Interest expense that results from financing activities is included in the operating expenses after the other operating expenses.




Income Statement Terms, con’t

Con’t • Other Income. Revenues from sources other than the primary operating

activity of a business are classified as other income or non-operating income. In a merchandising business, these items include income from interest, rent, and gains resulting from the sale of plant and other assets.

• Net Income. The final figure on the income statement is called the net income (or net loss). It is the net increase (or net decrease) in the owner’s equity as a result of the period’s profit-making activities.




Illustration Below is an illustration of a functional form income statement:

Joseph Labrador Consultancy Income Statement

For the year ended December 31, 20X1

Note Net sales revenue 1 P 193,000 Cost of sales 2 (145,000) Gross profit P 48,000 Other income 3 3,000 Total income P 51,000 Operating expenses: Selling expenses 4 P 14,000 Administrative expenses 5 24,000 Other operating expenses 6 1,000 Finance Cost - Interest Expense 1,000 (40,000) Net income P 11,000

Notes to the Functional Form

The following are the notes to the functional form income statement:

Note 1 - Net sales revenue Gross sales P 200,000 Less: Sales Returns & Allowances P 5,000 Sales Discount 2,000 7,000 Net sales revenue P 193,000




Notes to the Functional Form (continued)

Note 2 - Cost of sales Merchandise Inventory, Jan. 1 P 5,000 Add: Net cost of purchases Purchases P 175,000 Less: Purchase Returns & Allowances P 3,000 Purchase Discounts 2,000 5,000 Net purchase P 170,000 Add: Freight-in 1,000 171,000 Cost of goods available for sale P 176,000 Less: Merchandise Inventory, Dec. 31 31,000 Cost of sales P 145,000 Note 3 - Other income Rent Income P 1,500 Dividend Income 800 Interest Income 500 Gain on Sale of Furniture & Fixtures 200 Total other income P 3,000 Note 4 - Distribution expenses Salesmen's Salaries and Commissions P 9,000 Representation and Entertainment 1,200 Depreciation - Store Equipment 1,000 SSS & Philhealth Premiums - distribution 900 Freight-out 800 Miscellaneous Distribution Expense 1,100 Total distribution expenses P 14,000 Note 5 - Administrative expenses Salaries Expense P 15,000 Light, Water and Telephone 3,500 Uncollectible Accounts Expense 2,000 Depreciation Expense 1,500 SSS & Philhealth Premiums - Administrative 1,300 Miscellaneous Administrative Expense 700 Total administrative expenses P 24,000 Note 6 - Other operating expenses Loss on Sale of Equipment P 800 Discount Lost 200 Total other operating expenses P 1,000

Marivic D. Valenzuela-Manalo Page 1 of G

IVLE Lecture Note on Plant, Property and Equipment

Overview

Background Property, plant and equipment are assets used in the operation of business and often constitute the largest single asset category of a firm. For accounting purposes, these so called plant assets or tangible assets are grouped into three sub classifications: (Dyckman, T., Dukes, R., Davis, C., 1998).

• Assets subject to depreciation, e.g., buildings, equipment, etc. • Assets subject to depletion, e.g., mineral deposits, timber tracts, etc. • Land, which is not subject to depreciation or depletion.

Purpose The purpose of this section “Plant, Property and Equipment” is to illustrate how the

acquisition and disposal of fixed assets may be recorded in the books of the company.

Nature of Property, Plant & Equipment

The term plant, property and equipment is used to describe long lived assets that meet the following criteria: (Pefianco, E., Mercado, R., 1983) 1. they must possess physical existence; 2. they must be more or less permanent in nature; 3. they must not be held for sale; 4. they must be intended for use in operations; and 5. must undergo depreciation (except land)

In this unit This unit contains the following topics:

Topics See Page Kinds of Expenditures 2 of G Purchase of Land 3 of G Purchase of Property, Furniture or Equipment 4 of G Cash Purchase of Property, Plant & Equipment 5 of G Credit Purchase of Property, Plant & Equipment 6 of G Returns & Allowances on Plant Assets Acquired 8 of G Partial Payments on Plant Assets Acquired 10 of G Full Payment of Outstanding Liability 11 of G Recording Incidental Charges 13 of G Recording Sale of Property and Equipment 14 of G


Kinds of Expenditures

Overview Expenditures related to the acquisition and use of operational assets is either

capital expenditures or revenue expenditures. The charge to an expense account is based on the assumption that the benefits from the expenditure will be used up in the current period, and the cost should therefore be deducted from the revenue of the period in determining the net income.

Capital Expenditure

Expenditures for the purchase or expansion of plant assets are called capital expenditures and are recorded as asset accounts.

Revenue Expenditure

Expenditures for ordinary repairs, maintenance, fuel and other items necessary to the ownership and use of plant and equipment are called revenue expenditures and are recorded by debiting expense accounts.

Exceptions to the rule

There are items on the other hand that businesses purchase which will benefit several accounting periods but whose amounts are relatively low, e.g., wastebaskets, pencil sharpeners, etc. These are not capitalized in order not to be burdened by the yearly computation of the assets’ depreciation. Thus, for reasons of convenience and economy, expenditures that are not material in peso amount are treated in accounting records as expenses of the current period. In short, any material expenditure that will benefit only the current period or that is not material in amount is treated as revenue expenditure.


Purchase of Land

Overview Acquiring a piece of land which will be used as a site where an office

building or a factory may be constructed will be recorded in the books of the buyer as “Land” not to be subjected to depletion, i.e., the gradual decrease in the value of land due to mining or oil extraction purposes.

Terms of Payment

Purchase of land will cause an increase in assets and the corresponding credit varies depending on the terms under which the purchase was made. The purchase may be on • cash basis, • on credit terms, • on credit terms with down payment, or • by signing a mortgage contract for the plant assets. Land is unique. Its cost is not depreciated/expensed overtime because its usefulness does not decrease like that of other assets. Land xxxx Cash or Mortgage Payable xxxx Purchased land to be used in the business operation

Land Improvements

Improvements to real estate such as driveways, fences, parking lots, etc. have limited life and are therefore subject to depreciation. For this reason, they should be recorded in separate account called Land Improvements


Purchase of Property, Furniture or Equipment

Overview Every business organization would need different types of fixed assets to

function efficiently and effectively. In this part, we shall be dealing on how to record acquisition of different properties of the firm, e.g., land, equipment, furniture and fixtures. We would also show how to record the eventual sale of this used plant assets.

Nature of depreciable assets

All assets except land decline in usefulness as they age. These depreciable assets are of useful to the company for only a limited number of years. Depreciation, as the term is used in accounting, is the allocation of the cost of a plant asset to expense in the periods in which services are received from the asset. This is being done for the basic purpose of achieving the matching principle, i.e., to offset the revenue of an accounting period with the cost of goods and services being consumed in the effort to generate that revenue

Rule on acquisition

When property, furniture or equipment is acquired, the purchase may be made on cash basis, on credit terms with down payment, or by issuing a promissory note. If the purchase is made under credit terms, the said purchase must be recorded net of cash discount, if the seller is giving such discount.


Cash Purchase of Property, Plant & Equipment

Overview Plant assets may be acquired under different purchase terms. In the case of

cash purchase, assets are acquired and fully paid on the date of acquisition.

Effect of cash purchase

When property, furniture or equipment is acquired by cash purchase, there is an increase in the asset property and equipment and a decrease in the asset cash.

Illustration For example, Labrador Trading purchased one IBM computer for P40,000,

cash basis. The entry to record the transaction is:

Office Equipment Cash Purchased one IBM computer.

40,000 40,000


Credit Purchase of Property, Plant & Equipment

Overview A purchase on credit terms of any type of plant assets will either require a down payment or purely on account basis. At the same time, the seller may or may not give a cash discount.

Purely credit without cash discount

Assuming the purchase made was purely on account basis without any discounts, this will cause an increase in asset and increase in liability.

Office equipment Accounts Payable Purchased IBM computer on account.

40,000

40,000

With downpayment without cash discount

Credit purchase with down payment but without any discounts given will be recorded by using the following entry:

Office equipment Accounts Payable Cash Purchased IBM computer. Terms: with 50% down, balance on account.

40,000 20,000 20,000

Credit purchase with cash discount

When a credit purchase is with a cash discount, the property acquired must be recorded net of cash discount. To illustrate, Labrador Trading purchased a cash register from Omron Marketing for P30,000. Terms: 2/10, n/30. The entry to record the transaction is: Store Equipment Accounts Payable Purchased cash register. Terms: 2/10, n/30

29,400 29,400

COMPUTATION: Since there was a cash discount given by the seller,

the applicable amount should be deducted from the liability to be recorded.

Invoice Price P 30,000 Less: 2% cash discount(30,000*2%) 600 Accounts Payable to be recorded P 29,400

======= Continued on next page


Credit Purchase of Property, Plant & Equipment, Continued

Downpayment and Cash discount

Recording net of cash discount will also be applied under credit purchase with down payment and cash discount. To illustrate, Labrador Trading purchased a cash register from OMRON Marketing for P30,000. Terms: P10,000 down payment; balance, 2/10, n/30. The entry to record the transaction is:

Store Equipment Cash Accounts payable Purchased cash register. Terms: with down; balance, 2/10, n/30.

29,600

10,000 19,600

COMPUTATION: Since the down payment is not to be subjected to the cash discount, only the liability portion must be recorded at an amount net of cash discount.

Invoice Price Less: Down payment Accounts Payable should be Less: Cash discount (20,000x2%) Accounts Payable to be recorded Add: Down payment Cost of Store Equipment to be recorded

P 30,000 10,000 20,000 400 19,600 10,000 P 29,600 =======

Reminder It is important to note that the computation started with invoice price, thus,

trade discounts will be treated in the same way it was used in the purchase of merchandise.


Returns and Allowances on Plant Assets Acquired

Overview When property, furniture or equipment purchased turns out to be defective,

damaged, or of the wrong specification, the buyer either returns the asset bought or bargains for a reduction in the acquisition cost of such asset. When asset bought is returned, there is a decrease in asset and a decrease in liability, if the asset was originally acquired on credit terms. And the said reduction must also be recorded net of cash discount if there was a cash discount given in the term of purchase since returns and allowances are normally treated as part of the amount subjected to the cash discount. But when property is purchased on cash basis, allowance granted will be made by way of cash refunds. This will cause an increase in asset cash and a decrease in asset property.

Illustration Assume that on July 1, Labrador Trading purchased store shelves and

cabinets from Mansion Inc. for P40,000 less 5. Terms: P10,000 down; balance; 2/10, n/30. The entry to record the transaction is:

Jul. 1 Store Furniture and Fixture

Cash Accounts Payable Purchased cabinet and shelves. Terms: 10,000 down, balance 2/10, n/30.

37,440 10,000 27,440

COMPUTATION: List Price Less: Trade Discount (40,000 x 5%) Invoice Price Less: Down payment Accounts Payable should be Less: Cash discount (28,000 x 2%) Accounts Payable to be recorded Add: Down payment Cost of Furniture and Fixture to be recorded

P 40,000 2,000 38,000 10,000 28,000 560 27,440 10,000 P 37,440 ========



Returns and Allowances on Plant Assets Acquired, Continued

Illustration, con’t

If one of the shelves is subsequently returned by Labrador to Mansion, Inc. because of some defects, there will be a decrease in liability and also a decrease in the asset. Assume that on July 3, Labrador returned one of the cabinets worth P5,000 due to some major defects. The entry to record the transaction is:

July 3 Accounts Payable

Store Furniture and Fixture Returned one cabinet.

4,900 4,900

COMPUTATION: Since the original purchase was recorded net of cash discount, subsequent returns made by the buyer will also be recorded as net of cash discount.

Amount of returned asset Less: Applicable cash discount(5,000 x 2%) Decrease in the liability of the buyer

P5,000 100 P4,900 =====

Defective items It is not uncommon for a seller to replace defective items sold with a new

unit. When this happens, no entry need be made of the return.


Partial Payments on Plant Assets Acquired

Overview The buyer has the option to make a partial payment of his account to decrease

the amount of his liability prior to his full payment. Partial payment will reduce liability and asset, cash.

Illustration Assume that on July 5, Labrador Trading made a partial payment of P10,000.

The entry to record the transaction is:

July 5 Accounts Payable Cash Made a partial payment.

10,000 10,000

Note: Partial payments, unlike returns, are not recorded net of cash discount since it will not affect computation of the discount account on the date payment is made. Partial payments on the other hand will reduce existing liability of the buyer.


Full Payment of Outstanding Liability

Overview The buyer can pay his outstanding account within or after the discount period.

If full settlement is made within the discount period, the entry will only reflect a decrease in liability and cash

Illustration Assume on July 11, Labrador Trading settled his account with Mansion, Inc.

in full. The entry to record this transaction is:

July 11 Accounts Payable Cash Full payment of account.

12,540 12,540

COMPUTATION: Accounts Payable initially recorded Less: Return of one table Partial Payment Account to be paid

P 4,900 10,000

P 27,440 14,900 P 12,540 =======

Reminder It is important to note that the acquisition of property was recorded net of

cash discount on the date asset was bought. Therefore, if the buyer pays his liability within the discount period, the accounts payable reflected on his books would be the amount that must be actually paid with the cash discount already deducted. The cash discount reduces the cost of the property acquired and not to be recorded in a separate account title such as purchase discount (as in the case of merchandise)



Full Payment of Outstanding Liability, Continued

Illustration Assume that instead of paying on July 11, Labrador paid his account in full

with Mansion, Inc. on July 20. The entry to record the transaction is:

July 20 Accounts Payable Discount Lost Cash Paid account in full.

12,540 460

13,000

COMPUTATION:

Accounts Payable initially recorded Less: Return of one table Partial Payment Accounts Payable balance in the books of the buyer Add: Discount lost due to paying after discount period Original amount of Accounts Payable P28,000 Less: Actual amount of return 5,000 Basis for computing cash discount 23,000 Cash discount percentage x 2% Cash to be paid by the buyer

P 27,440 4,900 10,000 P 12,540 460 P 13,000 =========

Reminder The “Discount Lost” account is to be included in the other expenses category

in the functional income statement since this expense was incurred due to the failure of the company to take advantage of the discount given to them by the seller.


Recording Incidental Charges

Overview The purchase of property, furniture, or equipment may involve additional

expenditures for freight, insurance while asset is in transit, brokerage fees, arrastre, handling, storage, customs duties, test runs, installation costs, etc. These expenditures are usually paid by the buyer and are necessary in order to put the property in a place and condition ready for use. These expenditures become part of the cost of acquiring the property, furniture or equipment. In short, incidental charges are capitalized, i.e., debited to the asset account and not to an expense account

Illustration Assume that on July 20, 20X1, Labrador Trading bought a delivery van from

Toyota, Inc., Japan for P950,000. Terms: P300,000 down payment; balance, 2/10, n/30. F.O.B. shipping point, collect P3,000. The entries to record the transaction are:

July 20 Delivery Equipment

Cash Accounts Payable Purchased delivery van. Terms: with down, balance, 2/10, n/30

937,000 300,000 637,000

July 20 Delivery Equipment Cash Freight cost of the van purchased.

3,000 3,000

Assume further that Labrador Trading paid for the following incidental charges for the delivery van bought. Customs duties Insurance while in transit

P 20,000 15,000

The entry to record this is: July 20 Delivery Equipment

Cash Taxes and insurance paid for the van.

35,000 35,000


Recording Sale of Property and Equipment

Overview Although property and equipment are not originally intended for sale, these

assets may eventually be sold when they become worn out or obsolete. The proceeds of the sale will be used to replace old units with new units. Disposal of property and equipment could be for an amount just sufficient to recover the book value of the asset at the date of sale or for an amount, which results in either a gain on the sale or a loss on the sale. A comparison is made between the selling price and the net book value of the asset sold. Net book value is the difference between the acquisition cost of the asset and any depreciation accumulated to date.

Illustration Assume that on July 25, Labrador Trading sold its old typewriter being used

in the office. The said asset was acquired at P20,000 with an accumulated depreciation to date amounting to P12,000. Case 1: Assume that the typewriter was sold at P8,000. The entry to record the transaction is:

July 25 Cash

Accumulated depreciation-Office Equipment Office Equipment Sold old typewriter.

8,000 12,000

20,000

COMPUTATION:

Acquisition cost Less: Accumulated depreciation Net Book value Resale price No gain or loss

P 20,000 12,000 8,000 8,000 - =======



Recording Sale of Property and Equipment, Continued

Illustration, con’t

Case 2: Assume that the typewriter was sold at P10,000. The entry to record the transaction is:

Cash Accumulated depreciation-Office Equipment Office Equipment Gain on sale of Office Equipment Sold old typewriter.

10,000 12,000

20,000 2,000

COMPUTATION: Resale Price Less: Net Book Value Acquisition Cost Less: Accumulated Depreciation Gain on sale of office equipment

20,000 12,000

10,000 8,000 P 2,000 =======

Case 3: Assume that the typewriter was sold at P7,000. The entry to record the transaction is: Cash Accumulated Depreciation-Office Equipment Loss on sale of Office Equipment Office Equipment Sold old typewriter

7,000 12,000 1,000

20,000

COMPUTATION: Resale Price Less: Net Book Value Acquisition Cost Less: Accumulated Depreciation Loss on sale of office equipment

20,000 12,000

7,000 8,000 (P 1,000) ========

Reminder Any gain on the sale of property and equipment is classified as other income

because it is an income from a source which is not from the ordinary course of business operations. Any loss on the sale is classified as other expense in the functional income statement.

Marivic Valenzuela-Manalo 1

IVLE Lecture Notes on Value Added Tax (Vat) On Merchandise Purchased and Sold

Definition of Terms Input Tax means the value-added tax due from or paid by a VAT-registered person in the course of his trade or business on importation of goods, or local purchase of goods or services, including lease or use of property, from a VAT-registered person Output Tax means the value-added tax due on the sale or lease of taxable goods or properties or services by any person registered. VAT Payable – is the excess of output tax over allowable input tax. It is payable to BIR. Creditable Input Tax – is the excess of input tax over output tax. It serves as tax credit. Formula of VAT payable

Output tax ( VAT on sales) P XXX Less: Input tax (VAT on purchases) XXX VAT payable PXXX

Nature of VAT

• The value-added tax is an indirect tax. The amount of the tax may be shifted or passed on the buyer, transferee or lessee of the goods, properties or services.

Who shall file

1. A VAT-registered person; and 2. A person required to register as a VAT taxpayer but failed to register.

Ø This return/declaration must be filed by the aforementioned taxpayers for as long as the VAT registration has not yet been cancelled, even if there is no taxable transaction during the month or the aggregate sales/receipts for any 12-month period did not exceed the P1,500,000.00 threshold.

When to pay Ø Monthly Vat Payable is paid not later than the 20th day following the close of the

month. Ø Quarterly VAT Payable must be paid not later than the 25th day following the

close of the quarter.


Where to file VAT Declaration

Ø The returns/declarations must be filed with any Authorized Agent Bank (AAB) within the jurisdiction of the Revenue District Office where the taxpayer is required to register. In places where there are no Authorized Agent Bank (AAB), the returns/declarations shall be filed with the Revenue Collection Officer or duly Authorized City or Municipal Treasurer located within the revenue district where the taxpayer is required to register.

Rates and Bases of Tax A. On Sale of Goods and Properties – twelve percent (12%) of the gross selling price or

gross value in money of the goods or properties sold, bartered or exchanged. B. On Sale of Services and Use or Lease of Properties – twelve percent (12%) of gross

receipts derived from the sale or exchange of services, including the use or lease of properties.

C. On Importation of Goods – twelve percent (12%) based on the total value used by the Bureau of Customs in determining tariff and customs duties, plus customs duties, excise taxes, if any, and other charges, such tax to be paid by the importer prior to the release of such goods from customs custody: Provided, That where the customs duties are determined on the basis of quantity or volume of the goods, the value added tax shall be based on the landed cost plus excise taxes, if any.

D. On Export Sales and Other Zero-rated Sales - 0%. VAT EXCLUSIVE - Illustrative case: Transactions Journal Entries DR Cr

1. Purchased merchandise P10,000 terms 2/10 n/30, plus a 12% VAT

Purchases Input Tax (10,000 x .12) Accounts Payable (10,000 x 1.12)

10,000 1,200

11,200

2. Sold merchandise P18,000 terms 2/10 n/30, plus a 12% VAT

Account Receivable (18,000 x 1.12) Sales Output Tax (18,000 x .12)

20,160 18,000 2,160

3. Returned merchandise amounting to P1,000, plus 12% VAT

Accounts Payable (1,000 x 1.12) Purchase Returns and

Allowance Input Tax ( 1,000 x .12)

1,120 1,000

120

4. Sales Returns, P1,000, plus 12% VAT

Sales Returns and Allowances Output Tax (1,000 x .12) Accounts Receivable

1,000 120

1,120

5. Partial Payment of P1, 500.

Accounts Payable Cash

1,500 1,500

6. Partial Collection of 2,000.

Cash Accounts Receivable

2,000 2,000


7. Payment of account within discount period.

Accounts payable (11,200 -1,120 -1,500) Purchase discount ((11,200-1,120) x .02 = 201.6 / 1.12)) Input tax ( 180 x .12) Cash (8,378.4 – 201.6)

8,580

180.00 21.60

8,378.40 8. Collection of

account within Discount period.

Cash (17,040 -380.8) Sales discount ((20,160-1,120) x.02=380.8 / 1.12 )) Output tax (340 x .12) Account Receivable (20,160 -1,120 -2,000)

16,659.20 340.00

40.80

17,040

It will be noted that the input tax increases the amount to be paid but does not increase the cost of the purchase. Likewise, the output tax increases the amount to be collected from the customer but does not increase the sales revenue. At the end of the month, the input tax and output tax are compared and if output tax is greater, then the difference is credited to an account VAT Payable to the government. To illustrate, based on the foregoing transactions above: Journal Entries DR Cr Output tax (2,160-120-40.8) 1,999.2 Input Tax (1,200 -120-21.6) 1,058.4 VAT Payable ( 1,999.2 – 1,058.4) 940.8 If input tax is higher: (assuming input tax is P1,999.2 and output tax is P1,058.4) Journal Entries DR Cr Output tax 1,058.4 Excess of Input Tax over Output tax / Creditable Input Tax*

940.8

Input Tax 1,999.2 *Creditable Input tax serves as tax credit the following month and be deducted along with the input tax. Remittance of Vat payable amounting to P940.8 Journal Entries DR Cr Vat Payable 940.8 Cash 940.8


VAT INCLUSIVE - Illustrative case: Transactions Journal Entries DR Cr

1. Purchased merchandise P10,000 including 12% VAT , terms 2/10 n/30.

Purchases (10,000 / 1.12) Input Tax ( 8,928.57 X. 12) Accounts Payable

8,928.57 1,071.43

10,000

2. Sold merchandise P18,000 including 12% VAT , terms 2/10 n/30.

Account Receivable Sales ( 18, 000 / 1.12) Output Tax (16,071.43 x .12)

18,000 16,071.43

1,928.57

FINANCIAL STATEMENT PRESENTATION

1. Vat Payable – Current Liability as part of Notes to the Financial Statement - Trade and other Payable

2. Excess of Input Tax over Output tax / Creditable Input Tax – Other current asset and be presented after Prepaid Expense.