Accounting Quiz: Inventory Systems & Accounts Payable

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Questions and Answers

What is the total amount credited to Accounts Payable in the periodic system on November 2?

$490

$510

$500 (correct)

Null value

In a perpetual system, what is recorded when Accounts Payable is debited on November 12?

Sales Revenue

Purchase Discounts

Cash

Merchandise Inventory (correct)

What is the impact on cash when Accounts Payable is credited in the perpetual system on November 12?

Cash increases by $10

Cash increases by $500

Cash remains unchanged

Cash decreases by $490 (correct)

What amount is recorded as Purchase Discount in the periodic system on November 12?

$10 Signup and view all the answers

Which of the following is NOT recorded as a credit when Accounts Payable is debited in the perpetual system on November 12?

Accounts Payable Signup and view all the answers

What is a key feature of the perpetual inventory system compared to the periodic inventory system?

Transactions are recorded continuously as they happen. Signup and view all the answers

In a periodic inventory system, which account is debited when a purchase is made?

Purchases Signup and view all the answers

Which of the following statements is true regarding the operating cycle for a merchandiser?

The operating cycle includes the time taken to collect cash from customers. Signup and view all the answers

What does the gross invoice price represent in merchandising?

The amount payable before any discounts or allowances. Signup and view all the answers

Which of the following is NOT a typical non-operating activity in a merchandising business?

Sales revenue from merchandise sold Signup and view all the answers

What does 'freight collect' imply in shipping terms?

The buyer is responsible for freight charges after goods are loaded. Signup and view all the answers

Which accounting method reflects immediate inventory adjustments?

Perpetual System Signup and view all the answers

In a periodic system, what entry is made for return of merchandise?

Dr. Accounts Payable, Cr. Purchase Returns and Allowances Signup and view all the answers

Under FOB Destination Point, who pays for the freight costs?

The seller pays the freight costs. Signup and view all the answers

What is the effect of a transaction where Accounts Payable is debited and Merchandise Inventory is credited in a perpetual system?

A reduction in inventory assets. Signup and view all the answers

Which statement is true regarding the treatment of freight costs?

Freight costs impact the cost of goods sold depending on the terms. Signup and view all the answers

What is the primary difference between freight prepaid and freight collect?

Freight prepaid means the seller pays until goods are shipped. Signup and view all the answers

What account is credited when merchandise is returned under a perpetual system?

Merchandise Inventory Signup and view all the answers

What is the purpose of using special journals in a business?

To streamline the recording of frequently occurring transactions Signup and view all the answers

If goods are sold for P33,600 and the price is VAT inclusive at 112%, what is the actual sales price excluding VAT?

P31,250 Signup and view all the answers

Which of the following accurately describes input VAT?

VAT paid on purchases from suppliers Signup and view all the answers

In the cash receipts journal, which type of transactions are typically recorded?

Cash sales and cash collections Signup and view all the answers

What must be included when recording sales in the sales journal?

Sales price excluding VAT Signup and view all the answers

What is a primary feature of a general journal?

It records adjusting and closing entries Signup and view all the answers

What is the significance of the 12% VAT in merchandise transactions?

It impacts the cost of goods purchased Signup and view all the answers

Why is it necessary to have a general journal alongside special journals?

To record all transactions, including those not covered by special journals Signup and view all the answers

What are generally considered product costs in manufacturing?

Direct materials, direct labor, and manufacturing overhead Signup and view all the answers

Which type of cost remains constant per unit despite changes in production volume?

Variable Cost Signup and view all the answers

What distinguishes period costs from product costs?

Period costs include selling and administrative costs Signup and view all the answers

Which of the following statements about fixed costs is true?

Total fixed costs remain unchanged regardless of production volume Signup and view all the answers

What is a key benefit of using subsidiary ledgers?

They allow for more detailed tracking of individual account balances. Signup and view all the answers

Which of the following is NOT true regarding mixed costs?

Mixed costs are solely fixed costs. Signup and view all the answers

What is the function of a controlling account within accounting?

It provides a summary of multiple subsidiary accounts. Signup and view all the answers

The monthly premium contributions for Philhealth effective January 2024 are calculated based on what?

The monthly basic salary of employees Signup and view all the answers

Study Notes

Accounting for Merchandising Business

Merchandising businesses buy and resell finished goods
Key difference from service businesses: merchandising businesses deal with inventory

Non-Operating Activities

Involve transactions that are not part of the company's normal operations
Examples: gain or loss on the sale of non-current assets, interest revenue, interest expense
Reported separately in the income statement

Operating Cycle for a Merchandiser

The process of purchasing goods, selling them, and collecting cash from customers
Includes the following stages:
- Purchase of merchandise
- Sale of merchandise
- Collection of cash

Gross Invoice Price

The total amount that a buyer owes to a seller for a purchase
Components of gross invoice price:
- Net price: price of goods without discounts
- Trade discount: a reduction in price offered to encourage large purchases
- Cash discount: a reduction in price offered for early payment

Sales

Revenue generated from selling goods, recorded at the selling price
Sales are usually recorded at the gross invoice price
The income statement for a merchandising business reports gross sales before returns and allowances

Forms of Income Statement

Single-step income statement:
- Presents all revenues together and all expenses together
- Calculates net income in a single step by subtracting total expenses from total revenues
Multi-step income statement:
- Groups related items into categories like cost of goods sold, and operating expenses
- Calculates gross profit by subtracting the cost of goods sold from sales revenue
- Proceeds to calculate net income by subtracting expenses from gross profit

Inventory Systems

Two main types of inventory systems for keeping track of merchandise:
- Perpetual inventory system
- Periodic inventory system

Perpetual Inventory System

Continuously tracks the balance of inventory
Inventory is updated immediately with each purchase and sale
Provides a running balance of inventory on hand
Uses a Merchandise Inventory account to record all inventory purchases and sales
Utilizes a point-of-sale system for faster transactions and better accuracy
Requires manual input, which can be time-consuming and prone to errors
Helps estimate inventory shortages and provides insights for more balanced inventory management
Requires significant investment in equipment and software

Advantage

Efficient and cost-effective if a company handles high-value items
Track the movement of each individual inventory item
Offers real-time inventory data
Minimizes stock shortages
Facilitates faster inventory turnover

Periodic Inventory System

Uses inventory records sporadically to track inventory
Inventory is updated periodically at the end of each period
Uses a Purchases account to record purchases and a Purchases Returns and Allowances account to record returned purchases
Usually less expensive to implement than perpetual systems
Can be inefficient if high inventory turnover is needed
Requires a physical count of inventory at the end of the period, which can be time-consuming and difficult
Does not track the running balance of inventory on hand
May not provide sufficient accuracy if there are several inventory transactions
Provides a less accurate inventory count than perpetual inventory systems

Recording Business Transactions

Illustrative example of how to record purchases using both inventory systems

Credit Terms

When a sale is made on credit, the buyer has time to pay
Terms specify the discount and the period for payment:
- Example: 2/10, n/30
- 2/ means a 2% discount is offered
- 10 means the discount is available for 10 days
- n/ means no discount is applicable
- 30 means payment is due within 30 days
Illustrative examples show how credit terms are recorded in both inventory systems
If the discount is not taken, the full amount is overdue
The payment of an invoice within the discount period is recorded in the Cash Receipts Journal

Purchases [with] Returns and Allowances

When a buyer returns or discards merchandise, the purchase is called a purchase return
When a buyer receives an allowance for damaged or defective merchandise purchased, it is called a purchase allowance
Illustrative examples demonstrate how purchase returns are recorded with both inventory systems

FREIGHT COSTS

FOB Shipping Point- The buyer pays transportation costs from the shipping point to the destination
FOB Destination Point- The seller pays transportation costs from the shipping point to the destination
Freight Prepaid- The seller pays the freight charges and records it on the seller's books
Freight Collect- The buyer pays the freight charges and records it on the buyer's books

Value Added Tax (VAT)

A tax levied on the value added at each stage of production and distribution
TRAIN Law: The Philippines' Tax Reform for Acceleration and Inclusion Law
Output VAT: Charged by VAT-registered businesses on goods and services sold
Input VAT: Paid by VAT-registered businesses on goods and services purchased for business use
VAT is usually calculated at a specific percentage of the selling price
The VAT for the period is recorded in the VAT Return
VAT-Registered: businesses are liable for VAT charges
VAT-Exempt: businesses are not liable for VAT charges but can claim input VAT as a deductible

SPECIAL JOURNALS

Used to simplify the recording of transactions and streamline the accounting process
The most used special journals are:
- Sales Journal
- Purchase Journal
- Cash Receipts Journal
- Cash Payments Journal

Used of Special Journals and the General Journal

Special journals are used to record common transactions that occur frequently in a business enterprise
The General Journal remains essential for recording transactions that are not suitable for special journals
- Examples: adjustments, closing entries, and other transactions that are not recurring

Sales Journal

Used to record all sales transactions made on credit
Provides a summary of credit sales, customer name, and invoice number
Simplifies the recording of credit sales
Reduces the number of entries in the general journal
Example of a Sales Journal

Purchase Journal

Used to record all purchases made on credit
Provides a summary of credit purchases, vendor name, and invoice number
Reduces the number of entries in the general journal
Example: a purchase made on credit:
- Accounts Payable: debited for the amount of the purchase
- Inventory: credited for the amount of the purchase

Transaction recorded in the Cash Receipts Journal

Receipts of cash from customers for sales made on account
Payments by customers on account
Receives other cash payments, like interest or dividends
Allows for easy reconciliation of bank deposits and cash accounts

Cash Payments Journal

Used to record all payments of cash
Includes:
- Payments to suppliers for purchases made on account
- Payment of expenses
- Payment of other cash payments
Reduces the number of entries in the General Journal

General Journal Transactions

Used to record all entries not recorded in a special journal
Provides a detailed record of each transaction with explanations of the accounting rules applied
Used to record transactions for which there is no special journal, including:
- Adjusting entries
- Closing entries
- Transactions related to non-recurring activities

Effects on General Journal

The use of special journals eliminates the need to make many entries in the General Journal, making it more efficient
The General Journal remains essential for recording complex transactions
The General Journal includes entries to close accounts at the end of the accounting period

Subsidiary Ledgers

Used to provide detailed information about individual accounts
Examples:
- Accounts Receivable Ledger
- Fixed Assets Ledger,
- Accounts Payable Ledger
Provide detail about each individual customer, asset, or supplier
Can be used for:
- Analyzing customer creditworthiness
- Calculating depreciation for assets
- Evaluating supplier performance

Advantages of using subsidiary ledgers are that they:

Reduce the amount of detail in the general ledger
Improve the accuracy of the financial statements
Enable easier reconciliation of accounts

Controlling Account

A general ledger account that summarizes the balances of all the subsidiary ledger accounts
Example: the Accounts Receivable account is the controlling account for the Accounts Receivable Ledger

Accounts Receivable Ledger

Used to record all receivables from customers
Essential for credit control and managing customer credit
Includes:
- Customer name
- Invoice number
- Invoice date
- Amount of the invoice
- Payment terms

Payroll Accounting

The process of calculating and paying employees' wages and salaries
Includes:
- Calculating gross earnings
- Withholding taxes
- Calculating net pay
- Managing payroll records
- Filing payroll tax returns

Definition of Terms

Gross Earnings: Total earnings before deductions for taxes and other withholdings
Net Pay: The amount of money paid to the employee after deductions
Deductions: Amounts withheld from an employee's gross pay
Withholdings: Required payments made to the government and other entities taken from an employee's pay
Taxable income: Portion of an employee's gross earnings subject to taxes
Deductions: Payments made to an employee on top of their salary, that are not taxed

Basic Labor Laws

Essential to understand the employee relations laws to manage employee wages, salary, benefits, and responsibilities
Provides framework for ensuring safe and fair working conditions in the workplace
Provides a structure for the settlement of labor disputes
Helps prevent employment discrimination
Prohibits child labor
Requires proper safety equipment and education
Includes minimum wage laws - set minimum hourly rates for employers to follow
Requires overtime pay after a specific number of working hours
Includes provisions on employee dismissal
Provides for a regulatory body to oversee the implementation and enforcement of labor laws

Benefits Inclusion (SSS & EC)

Social Security System (SSS)
Employee Compensation (EC)
Pag-IBIG Fund
National Health Insurance Program (PhilHealth)

A government agency that provides social insurance for Filipino workers
Programs include:
- Retirement benefits
- Sickness benefits
- Disability benefits
- Death benefits
- Loan programs
Helps employees facing sudden medical expenses
Helps workers in the event of disability or unemployment
Aims to provide financial security for workers who become unemployed or sick

Employee's Compensation Program

Provides benefits for employees who suffer an injury or illness resulting from their work
Aims to protect families of injured employees
Covers employees injured at work and compensates them through a variety of programs
A government-run social insurance system for employees

National Health Insurance Program

Provides health coverage for Filipinos
Aims to ensure accessible, affordable health services for all Filipinos
Uses a system of contributions of citizens to fund social insurance

Pag-IBIG Fund (Pagtutulungan sa Kinabukasan:Ikaw, bangko, Industria at Gobyerno)

A government-run organization promoting homeownership and financial security for Filipinos
Provides:
- Housing loans
- Savings programs
- Emergency loans
- Retirement benefits
The goal is to improve the quality of life of Filipinos

SSS Contributions

Employees and employers contribute to the SSS through payroll deductions
Contributions are based on monthly wage
The employer is responsible for withholding and remitting both the employee's share and the employer's share of the contributions
The amount contributed is a percentage of the monthly salary
The SSS contributions are an important component of social insurance

Revised Schedule of SSS Contributions

The Philippine government periodically reviews the SSS contributions for changes, ensuring the program can support the social and economic needs of the country
The SSS contributions are subject to change

Employees' Payroll Deductions and Employer's Payroll Expenses

Payroll deductions: Amounts subtracted from an employee's gross pay
- These include contributions to Social Security (SSS), Medicare, and the
- Employee's share of contributions to the Pag-IBIG Fund
- Withholdings for taxes
Employer's payroll expenses: Expenses incurred by the employer related to payroll
- These include:
  - Employer's contributions to the SSS, PhilHealth, and the Pag-IBIG Fund
  - Employer's share of payroll taxes
  - Payments for employee benefits such as health insurance and life insurance

Pag-IBIG Fund (Pagtutulungan sa Kinabukasan: Ikaw, Bangko, Industriya, at Gobyerno)

Provides housing loans and savings programs for Filipinos for housing and financial stability

Withholding Taxes

Income tax is withheld from an employee's salary
The amount of tax withheld depends on the employee's taxable income and filing status
The withholding tax is a key part of income tax compliance in the Philippines
Payroll software has a built-in feature for calculating withholding taxes

Remember:

Taxable earnings are earnings subject to a tax rate
Non-taxable earnings are earnings not subject to a tax rate

Payroll System

The process of calculating and paying employees' wages and salaries, including deductions and withholdings
Payroll is a complex and time-consuming process
Payroll software and systems are designed to automate payroll calculations and help employers comply with payroll tax regulations

Employee Earnings Record

Detailed records of each employee's earnings and withholdings for each pay period
Used for:
- Calculating payroll taxes
- Preparing payroll reports
- Reconciling payroll records with bank statements

Remittances

Payments made by the employer for employee benefits
Employers send remittances to various agencies:
- SSS
- PhilHealth
- Pag-IBIG Fund

Internal Control over Payrolls

A set of procedures designed to safeguard payroll assets and ensure accurate payroll calculations
Includes:
- Segregation of duties: different employees handle different aspects of payroll
- Independent verification: payroll records are independently reviewed to ensure accuracy
- Physical security: payroll records and checks are protected from theft and unauthorized access
Important to ensure accurate payroll calculations and reduce the risk of payroll fraud

Classification of Costs

Costs are categorized based on various criteria, aiding in business decision-making

Manufacturing Costs -** also called inventoriable costs or product costs

Direct materials: raw materials directly used in the production of goods
Direct labor : the wages of workers directly involved in the production of goods
Manufacturing overhead: all other costs associated with manufacturing, indirect costs
It is calculated as: Direct materials + Direct labor + Manufacturing overhead

Non-Manufacturing Costs

Sales costs: costs incurred to market and sell goods or services
- Examples: distribution expenses, marketing expenses

Product Costs VS.Period Costs

Product costs are treated as inventory and are expensed when the goods are sold.
Period costs are expensed in the period they are incurred

Cost Classified as to Variability

Fixed cost: costs that remain constant regardless of changes in activity.
Variable cost: costs that vary in direct proportion to changes in activity.
Mixed cost: costs that have both fixed and variable components
Step-fixed costs: costs that remain fixed within a relevant range of activity but increase in steps when activity exceeds the range

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Description

Test your knowledge on the differences between periodic and perpetual inventory systems in accounting. This quiz covers key concepts related to Accounts Payable, purchase discounts, and operating cycles in merchandising. Enhance your understanding of how various transactions impact financial statements.