SESSION#5

MERCHANDISING ACTIVITIES

SALES:
Sales is main source of revenue and as per rule, revenue should be recorded in CREDIT
SIDE .

If goods are sold for cash, then journal entry will be

Cash--------------------------Dr
Sales revenue-----------------------Cr

Reason:
Increase of cash(assets) is Debited
Increase of revenue(sales) is Credited

If goods are sold on credit, then journal entry will be:

A/c receivable-------------------Dr
Sales------------------------Cr

Reason:
Increase of A/c Receivable(assets) is debited
Increase of revenue(sales) is Credited

SALES RETURN

If goods returned by customer whom goods were sold for cash, journal entry will
be:
Sales return-------------------Dr
Cash--------------------------Cr

Reason:
Decrease in sales is debited
Decrease in cash is credited

Athar Iqbal
athar@iqra.edu.pk

If goods returned by customer whom goods were sold on credit:

Sales return---------------------Dr
A/c Receivable-------------------Cr

Reason:
Decrease in sales is debited
Decrease in A/c Receivable(assets) is credited
COLLECTION FROM CUSTOMER:

When cash collected from customer, the journal entry will be:
Cash---------------------Dr
A/c Receivable-----------------Cr

Reason:
Increase in cash(assets) is debited
Decrease in A/c receivable(assets) is credited
SALES DISCOUNT
When customer allowed some discount in their payment, it is treated as expense and
Debited in journal entry.

Cash received from Arif Rs.475 in settlement of his account of Rs.500

Journal entry will be:

Cash------------------------Dr 475
Sales discount------------Dr 25
A/c Receivable( Arif)-------------------Cr 500
Reason:
Increase in cash(assets) is debited
Increase in expenses(sales discount) is debited
Decrease in A/c receivable(assets) is credited

Athar Iqbal
athar@iqra.edu.pk

PURCHASE OF MERCHANDISE:

Purchase of merchandise/ goods for cash, journal entry will be:

Purchases-------------------Dr
Cash------------------------Cr

Reason:
Increase of merchandise(expense) is debited
Decrease of cash(assets) is credited

Purchase of merchandise/goods on credit, journal entry will be:

Purchases--------------------Dr
A/c Payable-------------------Cr

Reason:
Increase of merchandise(expense) is debited
Increase of liability(A/c Payable) is credited
RETURN OF GOODS TO SUPPLIER
When goods return to supplier, goods will be reduced. Purchases return can be taken as
contra expense account and should be credited.

if goods returned to supplier and received cash, journal entry will be:
Cash---------------------Dr
Purchases return---------------Cr

Reason:
Increase of cash, because cash will be paid by supplier
Purcashes return will be taken as contra expense and should be reported on credit side.

If goods returned to supplier from whom goods were bought on credit, then
journal entry will be:
A/c Payable-----------------------Dr
Purchases return--------------------Cr

Reason:
Athar Iqbal
athar@iqra.edu.pk

Decrease of liability(A/c Payable) is debited:

PAYMENT TO SUPPLIER:
When cash paid to supplier, journal entry will be:
A/c Payable-----------------------Dr
Cash----------------------------------Cr
Reason:
Decrease of liability(A/c Payable) is debited
Decrease of Cash(assets) is credited
PURCHASES DISCOUNT
Purchases discount is treated as revenue account and should be credited because company
pay less amount.

Paid to Mr.Ahmad Rs.275 in full settlement of Rs.300

A/c Payable-----------------------Dr 300
Cash-----------------------------------Cr 275
Purchases discount------------------Dr 25

ADJUSTMENT AT YEAR END

1) DEPRECIATION
All fixed assets that is used in business reduce their value because of their use in
business. They are not physically consumed in business but their economic usefulness
diminishes over time. Example of depreciable assets are equipment, building, plant,
machinery etc.
So in accounting depreciation means the systematic allocation of the cost of a depreciable
assets to expense over the assets useful life.
Remember the land will not be depreciated because it has unlimited life.
ADJUSTING ENTRY
Depreciation expense
Accumulated depreciation

Dr
Cr
Athar Iqbal
athar@iqra.edu.pk

2) BAD DEBTS/ UNCOLLECTABLE AMOUNT

Generally company expects that whole amount of A/c Receivable will not be collected
from customers because of one or other reason. The amount company expected not to be
collected is called bad debts. Company estimates bad debts at the end of the
accounting period on A/c Receivable. ( It is also possible to compute bad debts on sales
but we have to keep our practice limit on a/c receivable only )
ADJUSTING ENTRY
Bad debts expense
Allowance for bad debts

Dr
Cr

3) ACCRUED EXPENSE
The expenses due on firm but not yet paid is taken as accrued expense
Other term which may be use instead of this are as follows
Outstanding expense
Unpaid expense
Payable
Due but not paid
Rule: use adjustment amount
..expense
.Payable

Dr
Cr

4) ASSETS AND EXPENSE

Trial Balance: Prepaid Rent
$ 15000
Adjustment data: Rent expired $ 1000
NOTE: Word Prepaid, unexpired, unused, advance show that amount paid in advance
and treated as assets. When portion of assets used in business:
Expense----- increase------- debit
Assets--------decrease--------credit
Rule: use adjustment amount
Rent expense
Prepaid Rent

Dr--- $ 1000
Cr---- $ 1000
Athar Iqbal
athar@iqra.edu.pk

5) ACCRUED REVENUE
When services given to client on credit and amount not received by the firm, this sort of
adjustment is called accrued revenue
Other term or word which may be used in question are:
Earned but not yet received
Accrued interest revenue
Receivable income
Trial Balance: Service revenue $ 45,000
Adjustment: Accrued service revenue $ 5,000
Rule: use adjustment amount
Service Receivable
Service Revenue

Dr----$ 5,000
Cr-----$ 5,000

6) Unearned Revenue
Note: When amount received in advance and services not provided till the end of the
period, this amount is called unearned means amount received but no service given to
client, so it would be treated as liability
Other term which may be used are as follows:
Amount received in advance but included in revenue
Amount received but not yet earned
Client has given advance payment but it was reported in revenue
Trial balnce: Commission revenue $ 4500
Adjsutment: Commission revenue received in advance but included in revenue $ 400
Rule: Adjustment amount is taken to prepare entry
Commission Revenue-----Decrease--------Dr
Commission unearned-----Increase--------Cr
Athar Iqbal
athar@iqra.edu.pk

Adjusting entry:
Commission Revenue
Commission Unearned

Dr---$ 400
Cr----- $ 400

7) DOUBLE ASSETS
This is only statement confusion created by suing similar words. For example you have
Rs. 100 in your pocket right now and in evening you have Rs. 25 in your pocket, so what
amount have been used by you i.e Rs.75 by taking the difference of both statement
amount. Same rule will be applied here, let us see:
Trial balance: Prepaid Insurance $ 500
Adjustment: Insurance unexpired $ 100
Rule: When trial balance and adjustment showing same nature of accounts, minus both
amount and pass entry
Insurance expense
Prepaid Insurance

Dr----$ 400
Cr-----$ 400

Athar Iqbal
athar@iqra.edu.pk