University of the East – Manila

College of Business Administration

Junior Philippine Institute of Accountants
REVIEW MATERIAL

Types of Business

 Sole proprietorship - the simplest business form under which one can operate a business. It
simply refers to a person who owns the business and is personally responsible for its debts.
 Partnership - a business structure whereby two or more people share ownership;
these partners share any profits, but also the costs, risks, and responsibilities involved
with the running of the business.
 Corporation - a legal form of business that is separate from its owners.

Sole Proprietorship Partnership Corporation

Start – up Process Easy to start Easy to start Difficult to start
Liability Unlimited Liability Unlimited Liability Limited Liability
Taxation Single Taxation Single Taxation Double Taxation
After an owner dies Ends when the owner Must reorganize Life continues after
or leaves dies when a partner die an owner die

Accounting Cycle (AJPUAFCPR)

Analyzing Data – collects the data and analyze the transactions.

Journalizing – record the entries into the first books of accounts (General Journal).
Posting – record the entries into the secondary books of accounts (General Ledger).
Unadjusted trial balance – the debit balances will be recorded on the debit side and the credit
balances will be recorded on the credit side.
Adjusted trial balance – is prepared after the adjustment entries are passed.
Financial Statements – From the adjusted trial balance, all the financial statements are born.
Closing – Closing the books means that all financial statements are prepared and all
transactions have been recorded, analyzed, summarized, and recorded.
Post – Closing Trial balance – To ensure that the accounting transactions are properly
recorded, analyzed, and summarized, a post-closing trial balance is prepared.
Reversing – are made at the beginning of an accounting period to reverse or cancel out
adjusting journal entries made at the end of the previous accounting period.

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MERCHANDISING- PROCESSING RANSACTIONS.
Are concepts of Service Operation applicable to Merchandising Operations? YES
Are concepts of Merchandising Operations applicable to Service Operations? PARTLY YES, PARTLY NO.

Merchandiser- person who buys and sells goods or merchandise

Kinds of Merchandiser:
1. Wholesaler – one who buys bulk from a manufacturer or another wholesaler and sells them in
bulk to other wholesalers or retailers.
2. Retailer- buys merchandise from the manufacturer or wholesaler and sells them by piece to
ultimate consumers.
SERVICE VS. MERCHANDISING
SERVICE MERCHANDISING
Service Fee Revenue XXX Sales Revenue XXX
Other Revenue and XXX Less: Cost of Sales (XXX)
Gains
Less: Operating (XXX) Gross Profit XXX
Expenses and Losses
Other Revenues and XXX
Gains
Operating Expenses (XXX)
Other Expenses and (XXX)
Losses
NET INCOME XXX NET INCOME XXX

COST OF SALES/ COST OF GOODS SOLD- major expense representing the cost of buying the
merchandise sold.
GROSS PROFIT- the mark up or margin of profit in selling the goods to the customers and would be a
good basis for determining whether that company’s pricing policy is adequate or not.
OTHER REVENUES AND GAINS- auxiliary income made by the company such as rent income, gain from
sale of property, interest income, etc.
OPERATING EXPENSES- represent expenses such as salaries, rent, advertising, and commission which
are necessary to operate a business in order to earn revenue.
OTHER EXPENSES AND LOSSES- auxiliary expenses not connected directly to the operations such as, loss
from sale of property, interest expenses, etc.
NET PROFIT- profit obtained by company from the operations.
INVENTORY SYSTEM:
1. PERPETUAL METHOD- a method that records continuously the movement of the
merchandise and shows the inventory balance at any point in time.
When purchasing Asset:
Inventory xxx
Cash/Accounts Payable xxx
When asset is sold:
Cash/Accounts Receivable xxx
Sales Revenue xxx
Cost of Sales xxx
Inventory xxx

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 2. PERIODIC METHOD- no detailed recording hence no inventory balance can be
determined at any point in time.
When purchasing Asset:
Purchases xxx
Cash/Accounts Payable xxx
When asset is sold:
Cash/Accounts Receivable xxx
Sales Revenue xxx
No entry for simultaneous adjustment of Inventory

At the end of the year:

Cost of Sales xxx
Inventory, end xxx
Purchase returns and allowances xxx
Inventory, Beg. xxx
Purchases xxx
Freight in xxx

How is it determined? through INVENTORY COUNT

SALES REVENUE
- Earned when the merchandiser transfers the goods to the customer.
INVOICE- source document for sales

SALES DISCOUNT
1. Trade discount- percentage of reduction from a published list price granted to buyers
for buying large quantities of goods or for regularly patronizing the business
2. Cash discount- an encouragement of buyers to pay more promptly
SALES RETURNS AND ALLOWANCES
- A contra revenue account, for defective or damaged goods sold.
- Cash refund or credit memorandum
Credit memorandum- business document issued by the seller informing the buyer that
his account was decreased accordingly for the return made or for the reduction of price
requested.
NET SALES= Sales revenue- Sales discount- sales returns and allowances
PURCHASES- account used for PERIODIC inventory whenever a merchandise is bought for sale.
FREIGHT IN vs. FREIGHT OUT
PURCHASE RETURNS AND ALLOWANCES
PURCHASE DISCOUNTS

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Value added - Tax
- a tax levied by the government to certain providers of goods and services.
- 12%
- Input Tax, Output Tax, VAT Payable

P100 Cost P100 + VAT from seller P12 Costs P112 +VAT P13.44 + mark up
Orig. price Price from seller 112+ his markup Our price 112+13.44 + our markup

ADJUSTING ENTRIES
Transactions that needs to be adjusted: (Take notes for the adjusting entries)
1. ACCRUED INCOME & ACCRUED EXPENSES
Accrued Income- income earned but not yet received
Accrued Expenses- income incurred but not yet paid
2. ADVANCED PAYMENTS/PREPAYMENTS- EXPIRED AND UNEXPIRED
These are expenses already paid but not yet incurred
3. ADVANCED COLLECTIONS- EARNED AND UNEARNED
These are income already received but not yet earned
4. DEPRECIATION FOR PROPERTIES
For allocating the cost.
5. INVENTORY ADJUSTMENTS (SEE DISCUSSION ON PERIODIC METHOD OF INVENTORY)
6. BAD DEBTS EXPENSE FOR ACCOUNTS RECEIVABLE
a. Allowance Method- sets up a contra-asset account against AR
1. As percentage of sales- provides provision up to the percentage
2. As percentage of Accounts Receivable
a.1.an Increase the allowance to
a.1.b Increase the allowance by
3. Aging of Accounts receivable- uses schedule
b. Direct Write-off method

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