ACCOUNTING BOOKS –

JOURNAL AND LEDGER 1

MODULE

Review of Accounting Process (with the inclusion of Accounting Practice Set)

Learning Objectives:
The learners should be able to:
1. differentiate the journal from the general ledger;
2. determine the normal balance of an account;
3. prepare journal entries to record basic business transaction;
4. determine balances of accounts using the t-account.

REFERENCES:
 Fundamentals of Accountancy Business, and Management Part 1, 3 rd Edition, Ferrer & Millan
 21st Century Accounting Process, International Edition 2019, Vera Cruz-Manuel

The Books of Accounts

A business maintains two books of accounts, namely: 1. JOURNAL and 2. LEDGER.
The basic two books of account that could be used by the business in recording transactions are the journal and the
ledger. The journal is a book of accounts where transactions are recorded for the first time. It is called the book of
original entry. After all the transactions have been recorded in the journal, the entries are then posted to the ledger. The
ledger is the book of accounts where several transactions are summarized and is called the book of final entry. The
journals and the ledgers are used in accordance with the rules of debit and credit.

Journal
The journal, also called the "book of original entries," is the accounting record where business transactions are first
recorded Business transactions are recorded in the journal through journal entries. This recording process is called
journalizing.

Types of Journals
Journals can be classified into the following:

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 1. Special Journal - is used to record transactions of a similar nature. Special journals simplify the recording
process, thus providing an efficient way of recording and retrieving information.
Common examples of Special journals are:
 Sales journal - is used to record sales on account.
 Purchases journal - is used to record purchases of inventory on account.
 Cash receipts journal - is used to record all transactions involving receipts of cash.
 Cash disbursements journal - is used to record all transactions involving payments of cash.

A business may have other special journals to suit its needs. For example: "Purchase returns journal." "Sales returns
journal," etc.

2. General Journal - All other transactions that cannot be recorded in the special journals are recorded in the
general journal. Examples of such transactions include purchases of inventory in exchange for notes payable,
adjusting entries, correcting entries, reversing entries, and the like. If a business does not utilize special journals,
all its transactions are recorded in the general journal.

Examples:
a. You sold barbecue to a customer who promised orally to pay the sale price next week.
 This transaction involves sale on account; therefore, it is recorded in the sales journal.

b. You sold barbecue to a customer who immediately paid the sale price.
 This transaction involves the receipt of cash; therefore, it is recorded in the cash receipts journal.

c. You sold barbecue to a customer who promised in writing to pay the sale price next week.
 This transaction cannot be recorded in the special journals therefore, it is recorded in the general journal.

Ledger
The ledger is a systematic compilation of a group of accounts. It is used to classify the effects of business transactions
on the accounts. The ledger is also called the "book of secondary entries" or the "book of final entries" because it is used
only after business transactions are first recorded in the journals. The process of recording in the ledger is called
"posting”.

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Kinds of ledgers
Ledgers can be classified into the following:
1. General ledger - contains all the accounts appearing in the trial balance.
2. Subsidiary ledger - provides a breakdown of the balances of controlling accounts.

GENERAL LEDGER SUBSIDIARY LEDGERS

Accounts Receivable from Customer A, P20,000

Accounts Receivable, P100,000 Accounts Receivable from Customer B, P30,000

Accounts Receivable from Customer C, P50,000

Formats of the Books of Accounts

General Journal:

Other columns may be included, such as “posting reference” ([Link].) which is used to cross-reference journal entries to the ledger, and Journal
Entry Number (GJ No.) which is used to number the journal entries.

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General and Subsidiary Ledgers:

Special Journal:

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SAMPLE PRACTICE SET
SALT AIR Ironing Services is the sole proprietorship dry cleaning company established by Tim Taylor. The
business will commence in August 1of the current year and the accounting year will end on December 30 of
the same year. The following accounts shall be used in its books to record August’s journal entries:

Account Names and Numbers

Cash 10100
Accounts Receivable 11000
Ironing Supplies 12000
Prepaid Advertising 14000
Ironing Equipment 15100
Accounts Payable 20000
Unearned Ironing Revenue 24700
Tim Taylor, Capital 39006
Tim Taylor, Drawings 39007
Ironing Revenue 40000
Ironing Supply Expense 74000
Telephone Expense 76000

The following are the transactions occurred in August:

Aug 01 Tim invested cash amounting to $125 to start her ironing services.
She paid $60 for four months of advertising in Facebook.
Purchased ironing supplies for $10 cash.
Acquired an ironing equipment for $60, paying $30 as down payment.
Aug 05 She made an additional investment of $25.
Aug 06 Paid half of the amount owed for the ironing equipment.
Aug 07 Withdrew $30 for personal use.
Aug 08 Collected cash for ironing services performed amounting to $150, and $20 due
from a customer.
Aug 09 Paid August rent for $50.
Aug 10 Received $10 on account.
Aug 27 Two customers paid $5 each for next week’s ironing services.
Aug 29 Paid phone bill for $20.

Adjusting information were also provided as follows:

 One month of scheduled advertising already appeared in the newsfeed of Facebook.
 A count of ironing supplies revealed a balance of $5.
 Depreciation was taken on the equipment with a useful life of 5 years.
 On Thursday, September 1, Taylor paid her only employee who worked Tuesdays and Thursdays, $12
for the week.
 Ironing services for one of the two customers paid advance were performed as of August 31.
 On August 30, finished ironing services to customers who promised to pay $10 next week.

Required: Prepare all the necessary journal entries and a 10-column worksheet as of August 31, 2023.

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GENERAL JOURNAL

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GENERAL JOURNAL

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GENERAL LEDGER

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Page 9 of 10
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 5 Accounting for
Merchandising Operations
Learning Objectives
ACCOUNTING FOR 1
Describe merchandising operations and inventory
systems.
MERCHANDISING BUSINESS
2 Record purchases under a perpetual inventory system.

MODULE 3 Record sales under a perpetual inventory system.

BACHELOR OF SCIENE IN ACCOUNTANCY

Apply the steps in the accounting cycle to a

4 merchandising company.

Compare a multiple-step with a single-step income

5 statement.

LEARNING
1
Describe merchandising operations and Merchandising Operations
OBJECTIVE inventory systems.

Income Measurement
Merchandising Companies
Not used in a
Buy and Sell Goods Sales Less
Service business. Illustration 5-1
Revenue Income measurement process for a
merchandising company
Retailer

Cost of Equals Gross Less

Goods Sold Profit

Operating Equals Net

Cost of goods sold is the total Income
Wholesaler Consumer Expenses
cost of merchandise sold during (Loss)
the period.
The primary source of revenues is referred to as
sales revenue or sales.
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 Operating Cycles Flow of Costs
Illustration 5-4
Illustration 5-2
The operating
cycle of a
merchandising
company
ordinarily is longer
than that of a
service
company.

Companies use either a perpetual inventory system or a periodic

Illustration 5-3 inventory system to account for inventory.
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Flow of Costs Flow of Costs

PERPETUAL SYSTEM PERIODIC SYSTEM

 Maintain detailed records of the cost of each inventory  Do not keep detailed records of the goods on hand.
purchase and sale.
 Cost of goods sold determined by count at the end of
 Records continuously show inventory that should be on the accounting period.
hand for every item.
 Calculation of Cost of Goods Sold:
 Company determines cost of goods sold each time a
Beginning inventory $ 100,000
sale occurs. Add: Purchases, net 800,000
Goods available for sale 900,000
Less: Ending inventory 125,000
Cost of goods sold $ 775,000

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 Record purchases under a perpetual
DO IT! 1 Merchandising Operations and Inventory
Systems
LEARNING
OBJECTIVE
2
inventory system.

Indicate whether the following statements are true or false.  Made using cash or credit (on account).
1. The primary source of revenue for a merchandising
company results from performing services for  Normally record when
customers. goods are received from
2. The operating cycle of a service company is usually the seller.
shorter than that of a merchandising company.
 Purchase invoice should
3. Sales revenue less cost of goods sold equals gross support each credit
profit.
purchase.
4. Ending inventory plus the cost of goods purchased
equals cost of goods available for sale.
Illustration 5-6
Sales invoice used as purchase
invoice by Sauk Stereo

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Recording Purchases of Merchandise Freight Costs

Illustration 5-6

Illustration: Sauk Stereo (the

Ownership of the goods
buyer) uses as a purchase
passes to the buyer when the
invoice the sales invoice public carrier accepts the
prepared by PW Audio Supply, goods from the seller.
Inc. (the seller). Prepare the
journal entry for Sauk Stereo for
the invoice from PW Audio Ownership of the goods
remains with the seller until
Supply.
the goods reach the buyer.

May 4 Inventory 3,800 Illustration 5-7

Shipping terms
Accounts Payable 3,800 Freight costs incurred by the seller are an
operating expense.
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Freight Costs Purchase Returns and Allowances

Illustration: Assume upon delivery of the goods on May 6, Sauk Purchaser may be dissatisfied because goods are damaged
Stereo pays Public Freight Company $150 for freight charges, or defective, of inferior quality, or do not meet specifications.
the entry on Sauk Stereo’s books is:

May 6 Inventory 150 Purchase Return Purchase Allowance

Cash 150 Return goods for credit if the May choose to keep the
sale was made on credit, or merchandise if the seller will
for a cash refund if the grant a reduction of the
Assume the freight terms on the invoice in Illustration 5-6 had purchase was for cash. purchase price.
required PW Audio Supply to pay the freight charges, the entry
by PW Audio Supply would have been:

May 4 Freight-Out 150

Cash 150
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Purchase Returns and Allowances Purchase Discounts

Illustration: Assume Sauk Stereo returned goods costing Credit terms may permit buyer to claim a cash discount
$300 to PW Audio Supply on May 8. for prompt payment.
Example: Credit terms
May 8 Accounts Payable 300
Advantages: may read 2/10, n/30.
Inventory 300  Purchaser saves money.

 Seller shortens the operating cycle by converting the

accounts receivable into cash earlier.

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Purchase Discounts Purchase Discounts

Illustration: Assume Sauk Stereo pays the balance due of

2/10, n/30 1/10 EOM n/10 EOM $3,500 (gross invoice price of $3,800 less purchase returns
and allowances of $300) on May 14, the last day of the
2% discount if 1% discount if Net amount due discount period. Prepare the journal entry Sauk Stereo
paid within 10 paid within first 10 within the first 10 makes on May 14 to record the payment.
days, otherwise days of next days of the next
net amount due month. month. May 14 Accounts Payable 3,500
within 30 days.
Inventory 70
Cash 3,430

(Discount = $3,500 x 2% = $70)

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Purchase Discounts Summary of Purchasing Transactions

Illustration: If Sauk Stereo failed to take the discount, and

instead made full payment of $3,500 on June 3, the journal
entry would be:

June 3 Accounts Payable 3,500 4th - Purchase 3,800 300 8th - Return
Cash 3,500 6th – Freight-in 150 70 14th - Discount

Balance 3,580

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 Record sales under a perpetual
DO IT! 2 Purchase Transactions
LEARNING
OBJECTIVE
3
inventory system.

On September 5, De La Hoya Company buys merchandise on  Made using cash or credit (on account).
Illustration 5-6
account from Junot Diaz Company. The selling price of the
 Sales revenue, like service
goods is $1,500, and the cost to Diaz Company was $800. On
revenue, is recorded when
September 8, De La Hoya returns defective goods with a
the performance obligation
selling price of $200. Record the transactions on the books of
is satisfied.
De La Hoya Company.
 Performance obligation is
satisfied when the goods
are transferred from the
seller to the buyer.

 Sales invoice should

support each credit sale.
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Recording Sales of Merchandise Recording Sales of Merchandise

Journal Entries to Record a Sale Illustration: PW Audio Supply records the sale of $3,800
on May 4 to Sauk Stereo on account (Illustration 5-6) as
follows (assume the merchandise cost PW Audio Supply
#1 Cash or Accounts receivable XXX Selling $2,400).
Sales revenue XXX Price

May 4 Accounts Receivable 3,800

#2 Cost of goods sold XXX Sales Revenue 3,800

Cost
Inventory XXX
4 Cost of Goods Sold 2,400
Inventory 2,400

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Sales Returns and Allowances Sales Returns and Allowances

 “Flip side” of purchase returns and allowances. Illustration: Prepare the entry PW Audio Supply would make
to record the credit for returned goods that had a $300 selling
 Contra-revenue account to Sales Revenue (debit).
price (assume a $140 cost). Assume the goods were not
 Sales not reduced (debited) because: defective.

► Would obscure importance of sales returns and May 8 Sales Returns and Allowances 300
allowances as a percentage of sales.
Accounts Receivable 300
► Could distort comparisons.
8 Inventory 140
Cost of Goods Sold 140

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Sales Returns and Allowances Sales Discount

Illustration: Assume the returned goods were defective  Offered to customers to promote prompt payment of
and had a scrap value of $50, PW Audio would make the the balance due.
following entries:
 Contra-revenue account (debit) to Sales Revenue.
May 8 Sales Returns and Allowances 300
Accounts Receivable 300

8 Inventory 50
Cost of Goods Sold 50

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Sales Discount
DO IT! 3 Sales Transactions

Illustration: Assume Sauk Stereo pays the balance due of On September 5, De La Hoya Company buys merchandise on
$3,500 (gross invoice price of $3,800 less purchase returns account from Junot Diaz Company. The selling price of the
and allowances of $300) on May 14, the last day of the goods is $1,500, and the cost to Diaz Company was $800. On
discount period. Prepare the journal entry PW Audio Supply September 8, De La Hoya returns defective goods with a
makes to record the receipt on May 14. selling price of $200 and a fair value of $30. Record the
transactions on the books of Junot Diaz Company.
May 14 Cash 3,430
Sales Discounts 70 *
Accounts Receivable 3,500

* [($3,800 – $300) X 2%]

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Apply the steps in the accounting cycle

DO IT! 3 Sales Transactions
LEARNING
OBJECTIVE
4
to a merchandising company.

On September 5, De La Hoya Company buys merchandise on Adjusting Entries

account from Junot Diaz Company. The selling price of the
 Generally the same as a service company.
goods is $1,500, and the cost to Diaz Company was $800. On
September 8, De La Hoya returns defective goods with a  One additional adjustment to make the records agree with
selling price of $200 and a fair value of $30. Record the the actual inventory on hand.
transactions on the books of Junot Diaz Company.
 Involves adjusting Inventory and Cost of Goods Sold.

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Adjusting Entries Closing Entries

Illustration: Suppose that PW Audio Supply has an unadjusted

balance of $40,500 in Merchandise Inventory. Through a physical
count, PW Audio determines that its actual merchandise inventory
at year-end is $40,000. The company would make an adjusting
entry as follows.

Cost of Goods Sold 500

Inventory 500

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Closing Entries
DO IT! 4 Closing Entries

The trial balance of Celine’s Sports Wear Shop at December 31

shows Inventory $25,000, Sales Revenue $162,400, Sales
Returns and Allowances $4,800, Sales Discounts $3,600, Cost
of Goods Sold $110,000, Rent Revenue $6,000, Freight-Out
$1,800, Rent Expense $8,800, and Salaries and Wages
Expense $22,000. Prepare the closing entries for the above
accounts.

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 The trial balance of Celine’s Sports Wear Shop at December 31 LEARNING Compare a multiple-step with a single-
5
OBJECTIVE step income statement.
shows Inventory $25,000, Sales Revenue $162,400, Sales
Returns and Allowances $4,800, Sales Discounts $3,600, Cost
of Goods Sold $110,000, Rent Revenue $6,000, Freight-Out
Multiple-Step Income Statement
$1,800, Rent Expense $8,800, and Salaries and Wages  Shows several steps in determining net income.
Expense $22,000. Prepare the closing entries for the above
accounts.
 Two steps relate to principal operating activities.

 Distinguishes between operating and non-operating

activities.

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Illustration 5-14 Illustration 5-14

Multiple- Multiple-
Step Step

Key Items: Key Items:

 Net sales  Net sales

 Gross profit

Illustration 5-14 Illustration 5-14

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 Illustration 5-14

Multiple- Multiple-
Step Step

Key Items: Key Items:

 Net sales  Net sales

 Gross profit  Gross profit

 Operating  Operating
expenses expenses

 Nonoperating
activities

Illustration 5-14 Illustration 5-14

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Multiple- Multiple-
Step Step

Key Items: Key Items:

 Net sales  Net sales

 Gross profit  Gross profit

 Operating  Operating
expenses expenses

 Nonoperating  Nonoperating
activities activities

 Net income

Illustration 5-14 Illustration 5-14

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Single-Step Income Statement Single-Step Income Statement

 Subtract total expenses from total revenues Illustration 5-15

 Two reasons for using the single-step format:

1. Company does not realize any profit until total

revenues exceed total expenses.

2. Format is simpler and easier to read.

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Classified Balance Sheet

DO IT! 5 Financial Statement Classifications

Illustration 5-16
Indicate in which financial statement and under what
classification each of the following accounts would be reported.

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 LEARNING APPENDIX 5A: Prepare a worksheet for
6
OBJECTIVE a merchandising company.

Using a Worksheet
As indicated in Chapter 4, a worksheet enables companies to
prepare financial statements before they journalize and post
adjusting entries. The steps in preparing a worksheet for a
merchandising company are the same as for a service
company. Illustration 5A-1 shows the worksheet for PW Audio
Supply, Inc. (excluding nonoperating items). The unique
accounts for a merchandiser using a perpetual inventory
system are in red.

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LEARNING APPENDIX 5B: Record purchases and

7
Illustration 5A-1 OBJECTIVE sales under a periodic inventory system.

Determining Cost of Goods Sold Under a

Periodic System
 No running account of changes in inventory.

 Ending inventory determined by physical count.

 Cost of goods sold not determined until the end of the

period.

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Determining Cost of Goods Sold Recording Merchandise Transactions
Under a Periodic System Illustration 5B-2
Cost of goods sold for a
merchandiser using a periodic
inventory system  Record revenues when sales are made.
 Do not record cost of merchandise sold on the date of
Illustration 5B-2
sale.
 Physical inventory count determines:
► Cost of merchandise on hand and
► Cost of merchandise sold during the period.

 Record purchases in Purchases account.

 Purchase returns and allowances, Purchase discounts,
and Freight costs are recorded in separate accounts.

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Recording Purchases of Merchandise Recording Purchases of Merchandise

Illustration: On the basis of the sales invoice (Illustration 5-6) FREIGHT COSTS
and receipt of the merchandise ordered from PW Audio Supply,
Illustration: If Sauk pays Public Freight Company $150
Sauk Stereo records the $3,800 purchase as follows.
for freight charges on its purchase from PW Audio Supply on
May 6, the entry on Sauk’s books is:
May 4 Purchases 3,800
Accounts Payable 3,800 May 6 Freight-In (Transportation-In) 150
Cash 150

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Recording Purchases of Merchandise Recording Purchases of Merchandise

PURCHASE RETURNS AND ALLOWANCES PURCHASE DISCOUNTS

Illustration: Sauk Stereo returns $300 of goods to PW Audio Illustration: On May 14 Sauk Stereo pays the balance due
Supply and prepares the following entry to recognize the on account to PW Audio Supply, taking the 2% cash discount
return. allowed by PW Audio for payment within 10 days. Sauk
Stereo records the payment and discount as follows.
May 8 Accounts payable 300
May 14 Accounts Payable 3,500
Purchase Returns and Allowances 300
Purchase Discounts 70
Cash 3,430

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Recording Sales of Merchandise Recording Sales of Merchandise

Illustration: PW Audio Supply, records the sale of $3,800 of SALES RETURNS AND ALLOWANCES
merchandise to Sauk Stereo on May 4 (sales invoice No. 731,
Illustration: To record the returned goods received from Sauk
Illustration 5-6) as follows.
Stereo on May 8, PW Audio Supply records the $300 sales
return as follows.
May 4 Accounts Receivable 3,800
Sales Revenue 3,800 May 8 Sales Returns and Allowances 300
Accounts Receivable 300
No entry is recorded for cost of goods sold at the time of the
sale under a periodic system.

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Recording Sales of Merchandise Recording Sales of Merchandise

SALES DISCOUNTS COMPARISON OF ENTRIES

Illustration 5B-3
Illustration: On May 14, PW Audio Supply receives payment
of $3,430 on account from Sauk Stereo. PW Audio honors the
2% cash discount and records the payment of Sauk’s account
receivable in full as follows.

May 14 Cash 3,430

Sales Discounts 70
Accounts Receivable 3,500

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Recording Sales of Merchandise Illustration 5B-5

Worksheet for
merchandising
company—periodic
inventory system
COMPARISON OF ENTRIES
Illustration 5B-3

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