CHAPTER 10

ACCOUNTING CYCLE OF A
MERCHANDISING BUSINESS
Learning Objectives
1.Prepare the Statement of Cost of
Beginning inventory ₱xx
Goods Sold and Gross Profit. Add: Net purchases xx
2.Complete the accounting cycle of Total Goods Available for sale (xx)
a merchandising business Less:Ending inventory(physical count) (xx)
Cost of Goods Sold xx

❖ MERCHANDISING
BUSINESS Purchases ₱xx
Add: Freight-in xx
A merchandising business is one
Less: Purchase returns (xx)
that buys and sells goods Less:Purchase discount (xx)
in their original form and Net Purchases ₱xx
without any further processing.
❖ Accounts used under
Those goods are referred to as
Periodic System
merchandise inventory (or
➢ Purchases
simply, inventory).
the account used to record
purchases of inventory under the
❖ INVENTORY SYSTEM
periodic system.
a.Perpetual inventory system –
➢ Freight-in
(perpetual means continuing
(Transportation-in)
forever or tuloy tuloy) under this
the account used to record the
system,
shipping costs incurred on
The “Inventory” account is
purchases of inventory under the
updated each time a purchase or
periodic system.
sale is made. Thus, the
➢ Purchase returns
“Inventory” account shows a
the account used to record
continuing or running balance of
returns of purchased goods to the
the goods on hand.
supplier.
➢ Purchase discounts
b.Periodic inventory system –
the account used to record
(periodic means occurring or
cash discounts availed on the
recurring or pana-panahon) under
purchased goods.
this system, the “Inventory”
account is updated only when a
physical count is performed. Thus,
the amounts of
inventory and cost of goods sold
are determined
only periodically
 CHAPTER 11
PARTNERSHIP FORMATION
learning Objectives
“Net sales” is total sales minus 1.Differentiate between the
sales returns and discounts. accounting for partnerships, sole
proprietorships, and
Sales ₱xx corporations.
Less: sales returns (xx) 2.State the valuation of
Less: sales discounts (xx) contributions of partners.
Net sales ₱xx 3.Account for the initial
investments of the partners to the
“Sales returns and “ sales partnership.
discounts” are contra accounts 4.State the peculiar accounts used
(deductions) to “sales” when in a partnership and identify the
computing for “Net sales” transactions that affect these
accounts.
● Sales – include both cash
sales and credit sales ❖ PARTNERSHIP
● Sales returns - the A partnership is an unincorporated
account used to goods sold association of two or more
but were returned by individuals to carry on, as
customers. co-owners, a business, with the
● Sales discounts – the intention of dividing the profits
account used to record among themselves
cash discounts given to
and taken by customers. ➔ Characteristics of a
partnership
➔ TERMS OF 1.Ease of formation
TRANSACTIONS 2.Separate legal personality
•Cash Discounts-discount for 3.Mutual agency
prompt payment “2/10” ,n/30 4.Co-ownership of property
–Sales Discount 5.Co-ownership of profits
–Purchase Discount 6.Limited life
7.Transfer of ownership
•Trade Discount 8.Unlimited liability (this is
–Computed first before reflecting applicable to a general
the cash discount partnership)
Computation
1.Ease of formation ➔ Accounting for
As compared to corporations, the partnerships
formation of a partnership requires The following are the major
less formality considerations in the accounting
for the equity of a partnership:
2.Separate legal personality 1.Formation – accounting for initial
The partnership can transact and investments to the
require properties in its name. partnership
2.Operation – division of profits or
3.Mutual agency losses
A partner may legally bind the 3.Dissolution – admission of a
partnership to a contract or new partner and withdrawal,
agreement that is in line with the retirement or death of a partner
partnership’s operations. 4.Liquidation – winding-up of
affairs
4.Co-ownership of property
A partner has no right to possess a Valuation of contributions of
partnership property for any other partners
purpose without the consent of his - All assets contributed to
partners. (and related liabilities
assumed by) the
5.Co-ownership of profits partnership shall be
Each partner is entitled to his measured at fair value
share in the partnership profit. A .
stipulation which excludes one or Partners’ ledger accounts
more partners from any share in 1.Capital accounts
the profits or losses is void. 2.Drawing accounts
3.Receivable from/ Payable to a
6.Limited life partner
The creation of a partnership is Bonus on initial investments
basically consensual. As such, a A bonus exists when the
partnership may be dissolved by capital account of a partner is
the express will of any partner. credited for an amount greater
than or less than the fair value of
7.Transfer of ownership his contributions.
In case of dissolution, the transfer
of ownership. partners require the The bonus is treated as
approval of the remaining adjustment to the capital accounts
partners. of the other partners.

8.Unlimited liability (this is

applicable to a general
partnership)
Held personally liable for
partnership debt after all
partnership assets have been
exhausted. If a partner personally
insolvent, his share in the
partnership debt shall be assumed
by the other solvent partner.
 ➔ Basic Right of a Partner 2. AS TO LIABILITY OF THE
1. The right to share in the PARTNERS
profits a. General Partnership
2. The right to participate in A partnership where the liability of
the management of the all the partners is unlimited. They
business can be personally liable for the
3. In the event of liquidation, partnership debts.
the right to share in the b. Limited Partnership
assets of the business A partnership where the liability of
after satisfying the claims one or more but not all the
of creditors partners is limited only up to the
extent of his interest or capital in
Remember! the partnership. In a limited
Although a partner has the right to partnership the law provides that
participate in the management of there must be at least one general
the business, it does not mean partner.
however that all the partners are
considered as managing partners. 3. AS TO DURATION OF
The partner usually agrees as to THE PARTNERSHIP
who will act as the managing a. Partnership at will
partner. Is one in which there is no fixed
term for its existence. It can be
➢ Articles of terminated anytime.
Co-Partnership b. Partnership with a
A partnership may be formed
fixed term
merely by oral or verbal
agreement, it is advisable to put Where the partners agree on the
the contract in writing. The term of its existence. And a
partnership contract is called the partnership with a fixed term
“Articles of Co-Partnership”. becomes a partnership at will if
after the expiration of the term,
KIND OF PARTNERSHIP the partners will decide to
continue the business.
1. AS TO ITS ACTIVITIES
a. Commercial partnership
Is one engaged in either trading, 4. AS TO LEGALITY OF ITS
manufacturing or servicing EXISTENCE
business. The income tax on the c. De Jure
earnings of the business is paid by Partnership
the partnership One that has complied with all the
b. Professional Partnership
legal requirements pertaining to its
Is one engaged in the exercise of a
vocation or profession(e.g. formation.
Accounting firm, law firm etc.) the d. De Facto
income tax on the earnings of the Partnership
partnership. Which are distributed One that has not compiled with all
to the partners, is paid by the the legal requirements pertaining
partners.
to its formation
 d. Dormant partner
KINDS OF PARTNER is one who does not participate
1. AS TO CONTRIBUTION actively in the management of the
a. Capitalist Partner business and - not known to be a
One who contributes cash or other partner
properties
b. Industrial Partner A partner who is not really a
One who contributes only his partner but allows his name to be
services with no capital used by the partnership for
contribution accommodation or for other
c. Capitalist- industrial considerations is called a
partner nominal partner. As far as
One who contributes both cash or creditors however are concerned,
a nominal partner is considered a
other properties and services
general partner

Remember!
➔ Disadvantages of a
An industrial partner is not allowed
Partnership
to engage in any business without
the consent of the other partners.
1. Compared with a corporation, a
His profit sharing ratio must be
partnership has limited life
clearly stipulated in the contract.
showing a general instability,
2. AS TO LIABILITY TO
Creditors in this case may be
OUTSIDERS
hesitant to provide more funds.
a. General partner
2. The mutual agency feature of a
is one whose liability for the
partnership may create conflict
partnership debts is unlimited. The
because all the partners have
creditors can run after him in case
equal authority in the
the partnership becomes insolvent.
management of affairs, unless the
b. Limited partner
scope of authorities and
is one whose liability for the
responsibilities have been clearly
partnership debts is limited only
delineated.
up to the amount of his equity or
3. It has a smaller capital base
capital in the business
compared with a corporation
resulting in limited operating
3. AS TO PARTICIPATION IN
activities
MANAGEMENT
a. Managing partner
is one who actively manages the
affairs of the business and is
known to be a partner
b. Secret partner
is one who actively manages the
affairs of the business but is not
known to be a partner
c. Silent partner
is one who does not participate
actively in the management of the
business but is known to be a
partner.
CLASSIFICATION OF PARTNER ➔ Classification of a
1. General Partner Partnership
is the one whose liability in the 1. Object
partnership extends to his/her 2. liability
personal property. 3. Taxation
2. Limited Partner CHAPTER 12
is the one whose liability in the PARTNERSHIP
partnership is only limited to OPERATIONS
his/her contribution and not Learning Objectives
allowed to contribute services. 1. State the items that affect the
3. Capitalist Partner division of a partnership’s profits
is the one who contributes money or losses among the partners.
or property. 2. Compute for the share of a
4. Industrial Partner partner in the partnership’s profit
is the one who contributes only or loss.
industry or expertise.
5. Managing Partner ➔ Division of profits and
is the one who actively manages losses
the daily affairs of the partnership. •The partners shall share in the
6. Liquidating Partner profits or losses of a partnership
is the one who winds up the in accordance with the partnership
dissolution and liquidation of a agreement.
partnership.
7. Silent Partner •If only the share of each partner
is the one who has limited in the profits has been agreed
participation in the daily activities upon, the share of each in the
of the partnership but is known to losses shall be in the same
the public as a partner. Proportion
8. Secret Partner
is the one who participates in the •In the absence of stipulation,the
partnership activities but is not share of each partner in the profits
known to the public as a partner. and losses shall be in proportion
9. Dormant Partner to what he may have
is the one who does not have contributed but the industrial
active participation in the business partner shall not be liable for the
and is not known to the public as a losses. (Art. 1797 of the
partner PhilippineCivilCode)
10. Nominal Partner
is the one who does not have •The designation of losses and
active participation since he/her is profits cannot be entrusted to
not an actual partner but is one of the partners (Art. 1798)
publicly considered as one
•A stipulation which excludes one
or more partners from any
share in the profits or losses is
void (Art. 1799)
 modes for dividing the profits and
➔ Other stipulations that losses, For example, the profits
affect division of P/L are divided equally between or
1.Salaries among the partners, but when
Normally, an industrial partner losses are incurred, it will be
shall receive salary, in addition to divided based on the capital ratio.
his share in the partnership’s
profits, as compensation for his ➔ Equal Distribution
services to the partnership. An equal distribution of profits and
losses disregards the capital
2.Bonuses balances of or any effort
The partnership agreement may contributed by the partners to the
stipulate a bonus to be given to a partnership
managing partner to encourage
excellent management ➔ Arbitrary Ratio
performance. Unlike for salaries The partners agree on a specific
though, a partner is entitled to a profit-and-loss distribution
bonus only if the partnership earns mechanism based on what they
profit. believe is equitable, fair, and just.
1. Fraction
3.Interest on capital contributions 2. Percentage
The partnership agreement may 3 Decimal
stipulate that each partner may be 4. Ratio
entitled to a per annum interest
computed on his capital ➔ Salary to Partners
contributions. The partners may agree to provide
salary allowances for the services,
•The above-mentioned items are efforts, and time devoted by a
normally provided first to the partner in managing the daily
respective partners and any affairs of the partnership.
remaining amount of the profit or
loss is shared based on the The provision of salary allowances
stipulated profit or loss ratio. to the partners is basically treated
as a distribution of profits and
➔ Methods of Dividing losses and not as a deductible
Profits or Losses business expense.
Since a partnership is composed of
two or more partners, the amount The provision of a salary is always
of the profits or lase at the end of applied even when the net income
the accounting period is divided for the period is not sufficient to
between or among them based on absorb the total amount.
their agreement
1. Equal distribution
2. Arbitrary ratio
3. Based on the capital ratio
4. With interest on the capital
5. Salary allowances to the
partners
6. Bonus to the managing partners
However, there are instances when
partners adopt two different
 ★ After Deducting the
➔ Bonus to Partners Bonus but Before the
The provision of a bonus to a Income Tax
managing partner is based on the the amount of the bonus will be
assumption that the partnership deducted from the reported
operation for the period is income.
profitable. In other words, bonuses The bonus in this case is computed
u provided only when there is an as follows:
income. B = % (NI - B)
Where:
Otherwise, the provision for bonus B = Bonus
is affected If The financial % - Bonus percentage
operation of the partnership NT - Net income
has incurred losses.
In this approach of determining
The bonus is computed based on the bonus, the net income
the net income in any of the reported for the period is a gross
following conditions: of the bonus.
1. before deducting the bonus and
income tax ★ Before Deducting the
2. after deducting the bonus but Bonus But After the
before the income tax Income Tax
3. before deducting the bonus but For income tax purposes a general
after the income tax partnership is treated like a
4. after deducting the bonus and corporation. The present
income tax applicable rate for the corporate
income tax is 30% of the net
★ Before Deducting Both income realized during the period.
the Bonus and Income The amount of the bonus in this
Tax case is computed as follows:
The bonus in this approach is B - %(NI-T)
immediately determined as a Whenes
percentage of the net income, that Bonus
is, the amount of the net income is % - Bonus percentage
multiplied by the percentage of NI - Net Income
bonus. T - Tax provision
The bonus in this case is computed
as follows: The Amount Of income tax is
B = % (NI) computed as follows:
Where: T. = 30% (NI)
B - Bonus The following is the expanded
% - Bonus percentage equation to compute for the
NI - Net income bonus:
B = % [NI -[.30x NI)]
 ★ After Deducting Both ➔ Admission of partner
the Bonus and Income •The admission of a new partner
Tax may be effected either through:
When bonus is computed based on A. Purchase of interest in the
the net income after deducting the partnership, or
bonus and the incorne tax. B. Investment in the
partnership
the amount of the bonus to be
granted is computed as follows: A. Purchase of interest
B - % (NI - B - T) •A personal transaction between
T=. 30 (NI - B) and among the partners
Therefore: •Any consideration paid or
B = % {NI - B - [.30(NI - B)]} received is not recorded in the
Where: partnership books
B - Bonus •Only a transfer within equity
% - Bonus percentage is made to establish the capital
NI - Net income account of the new partner and
T - Tax provision Decrease the capital account(s) of
the selling partner(s).
The applicable tax rate to use is • No gain or loss shall is
30% as amended by Republic Act recognized in the partnership
No, 8424. books.
➔ Revaluation of assets
•When a partnership is dissolved
CHAPTER 13 but not liquidated, a New
PARTNERSHIP DISSOLUTION partnership is created. The assets
Learning Objectives and liabilities carried over to the
1.State the causes of partnership new partnership are restated to
dissolution. fair values.
2.Account for the effects of •Any adjustment to the assets and
partnership liabilities is allocated first to
dissolution on the partnership The existing partners before
equity. recording the admission of the
new partner.
● Dissolution
is the change in the relation B. Investment in the
of the partners caused by any partnership
partner ceasing to be associated in • The incoming partner invests
the carrying on the business. directly to the partnership
instead of purchasing interest from
➔ Causes of partnership an existing partner(s).
dissolution •This is a transaction between the
1.Admission of a partner new partner and the
2.Withdrawal, retirement or death partnership. Any consideration
of a partner paid by the incoming partner
3.Incorporation of a partnership is recorded in the partnership
books.
•No gain or loss shall be
recognized
 ➔ Withdrawal, retirement
or death of a partner Causes of Dissolution
•When a partner withdraws, Article 1830 of the Civil Code of
retires or dies, his interest may be the Philippines enumerates the
purchased causes of partnership dissolution.
(a) by one or all of the remaining 1. admission of a new partner.
partners or 2. death of any partner
(b) by the partnership. 3. insolvency of any partner
4. insolvency of the partnership
•The interest of the withdrawing, 5. expulsion of any partner
retiring, or deceased partner shall 6. civil interdiction of any partner
be adjusted for the following:
a.his share of any profit or loss ❖ Amount Paid is Equal to
during the period up to the date of the Interest Purchased
his withdrawal, retirement or The partners in the existing
death; and partnership represent the book
b. His losses as at the date of his value of the assets. On the part of
withdrawal, retirement,or death. the selling partner/s no gain or
loss is recognized.
•Purchase by one or all of the ❖ Amount Paid is Less
remaining partners Than the Interest
This is a transaction between and Purchased
among the partners (or the buying partner realized a gain
deceased partner’s estate). As and the selling partners incurred a
such, the settlement amount loss for the difference between the
Is not recorded in the books. The amount paid and the interest.
only entry to be made in ❖ Admission by
the partnership books is a transfer Investment
within equity simply means that a new partner
. is admitted in an existing
•Purchase by the partnership partnership by investing or
This is a transaction between the infusing fresh amounts. This type
retiring or withdrawing partner (or of admission creates a transaction
deceased partner’s estate) between the partnership and the
and the partnership As such, the incoming partner or existing
settlement amount is recorded in partners.
the books.

]
1. Total Agreed Capital (TAC)
is the new capital of the The following simple guidelines
partnership after the admission can assist in solving the problems
which has been agreed either on the admission by
expressly or implicitly by the Investment:
partners.
1. Compare TAC and TCC.
2. Total Contributed Capital A. If TAC = TCC, there is no
(TCC) is the sum of the capital revaluation of assets.
account balances of the old B. If TAC > TCC, there is a
partners and the investments of positive revaluation of
the new partner. assets.
C. If TAC < TCC, there is a
3. Credited Capital (CC) negative revaluation of
refers to the interest or equity that assets.
a new partner is credited. within Revaluation of assets is only
the partnership. In the event that applicable to the old partners.
the amount of credited capital is
not expressly 2. Compare CC and CI.
agreed upon, it will be computed A. If CC = CIP, there is no
based on total agreed capital and bonus.
not on total contributed capital. B. If CC> CI, there is a bonus
4. Capital Investment (CI) to the new partner.
refers to the actual amount C. If CC < CI, there is a
invested by a new partner to the bonus to the old partners.
partnership.
3. Goodwill is not recognized in
5. The bonus partnership accounting,
refers to the amount of capital particularly in the admission of a
transferred from one partner to new partner.
another in order to satisfy the
requirement on the credited 4. The ratio of profit-and-loss
capital. A bonus may be given to agreement has no relationship
the old or to a new partner. with the credited capital of the
partners.
➔ Common Problems in
Admission by
Investment
1. The total agreed capital is not
given in the problem.
2 The total agreed capital is not
equal to the total contributed
capital.
3. The credited capital is not equal
to the contributed capital.
4. The one who owns the bonus
must be determined.
 ❖ Agreed Capital in 3. The difference between the
Admission by total agreed capital and the
Investment is Given total contributed capital may be
The agreed capital has an recorded as follows:
important role in the admission by a. bonus
investment. Once the agreed b. Revaluation of assets
capital is given, the situation is
simplified since it already Incorporation of a Partnership
eliminates the need to determine The partnership is dissolved and a
or compute the agreed capital. corporation is created. Partners
❖ Agreed Capital in sometimes agree to convert their
Admission by partnership into a corporation. for
Investment is Not Given the advantages offered by being a
The agreed capital can be corporate entity.
computed by considering the ❖ ADMISSION OF
interest that will be credited to the PARTNER
partners.
Purchase of Investment in the
1. Use the cash investment of Interest partnership
the incoming partner as the
base. The transaction is The transaction is
recorded as a recorded in the
This method approximates the fair
transfer within regular manner:
value of the transactions and the equity:
first priority approach to apply.
Selling partner’s Assets
In computing for the agreed invested(Dr)
capital (Dr)
capital, simply divide the invested Incoming Incoming partner’s
amount of the new partner by the partner’s capital (Cr) capital (Cr)
credited interest.
2. Use the contributed capital ❖ WITHDRAWAL,
of the old partners as the base. RETIREMENT OR DEATH
This method of computing the OF A PARTNER
agreed capital of the partnership is
adopted only under the following Purchase by Settlement by
remaining partners partnership
situations:
The transaction is The transaction is
when the first approach, which is recorded as a recorded in the
the first priority, resulted in an transfer within regular manner:
equity:
agreed capital that is lower than
Outgoing partner’s
the total contributed capital of the Outgoing partner’s
capital (Dr)
new partnership capital (Dr)
Payment made (Cr)
Purchasing partner’s
when the problem expressly
capital (Cr)
specifies that the assets of the old
partnership should not be
negatively revalued so that a
downward or negative revaluation
is not needed.