CHAPTER 7

MERCHANDISING OPERATIONS
Gross Profit – difference between net sales and cost of sales.
Operating Profit – operating income is added, and operating expenses are deducted from gross profit.
SOURCE DOCUMENTS
This helps identify transactions that should be recorded in the books. These contain vital information about the nature
and amount of transactions.
1. Sales Invoice – prepared by the seller of goods and sent to the buyer.
2. Bill of Lading – a document issued by the carrier that specifies contractual conditions and terms of delivery
such as freight terms, time, place, and the person named to receive the goods.
3. Statement of Account – a formal notice to the debtor detailing the accounts already due.
4. Official Receipt – evidences the receipt of cash by the seller or the authorized representative. It notes the
invoices paid and other details of payment. This is used in service operations.
5. Deposit Slips – printed forms with the depositor’s name, account number and space for details of the deposit.
A validated deposit slip indicates that cash and checks with the supplied details were actually deposited or
credited to the account holder.
6. Check – a written order to a bank by a depositor to pay the amount specified in the check from his checking
account to the person named on the check. The entity issuing the check is the payor while the receiver is the
payee.
7. Purchase Requisition – a written request to the purchaser of an entity from an employee or user department
of the same entity that goods be purchased.
8. Purchase Order – is an authorization made by the buyer to the seller to deliver the merchandise as detailed in
the form.
9. Receiving Report – a document containing information about goods received from a vendor. It formally
records the quantities and description of goods delivered.
10. Credit Memorandum – is a form used by the seller to notify the buyer that his account is being decreased
due to errors or other factors requiring adjustment. This is commonly used when goods sold are returned to the
seller.
STEPS IN A PURCHASE TRANSACTION
1. The user department fills a purchase requisition form and sends it to the purchasing department.
2. The purchasing department prepares purchase order after checking. This is addressed to the selected vendor
contains the quantity, description, price of merchandise ordered, payment terms, and transportation
arrangements.
3. The seller forwards an invoice to the purchaser upon shipment. Sales invoice by the seller and purchase
invoice by the buyer.
4. Upon receiving the shipment of merchandise, the receiving department sees that the terms are complied with
and prepares a receiving report.
TERMS OF TRANSACTIONS
Credit period – a period of time allowed when goods are sold on account.
Cash Discounts – discount given to prompt payment.
Discount Period – the period covered by the cash discount.
Trade Discounts – encourage buyers to purchase products because of markdowns.
Invoice Price – can be obtained by subtracting trade discounts from the list price.
TRANSPORTATION COSTS
F.O.B. – abbreviation for “free on board”
FOB Shipping Point – the buyer shoulders the shipping costs; ownership of goods passes from seller to buyer when
inventory leaves the seller’s place – the shipping point. The buyer already owns the goods while still in transit.
FOB Destination – the seller bears the shipping costs. Title passes only when goods are received by the buyer at the
point of destination. While in transit, the seller is still the owner of the goods.
Freight Prepaid – the seller pays the transportation cost before shipment.
Freight Collect – the freight entity collects from the buyer.
INVENTORY SYSTEMS
Perpetual Inventory System – the inventory account is continuously updated.
Periodic Inventory System – used by businesses that sell inexpensive goods. No entries are made to the inventory
account; only at the end of the period when inventory is counted.
Cost of Sales – or cost of goods sold is the largest single expense of the merchandising business. It is the cost of
inventory sold to customers.
STEPS IN PHYSICAL COUNT
a. All merchandise owned by the entity is counted.
b. The quantity counted is multiplied by the cost per unit for each inventory item.
c. The costs of various items are added to determine the total cost of inventory.

CHAPTER 9
SPECIAL AND COMBINATION JOURNALS, AND VOUCHER SYSTEM
Control Account – the combined balances of individual customer accounts in the subsidiary ledger.
Subsidiary Ledger – contains the detailed record of transactions with individual customers.
Sales Journal – lists all credit sales or sales of merchandise on account.
Cash Receipts Journal – contains all transactions involving cash receipts.
Purchases Journal – designed to account for purchases of merchandise, supplies, and other assets on account.
Cash Disbursement Journal – contains all cash payments.
General Journal – record transactions that cannot be recorded appropriately in a special journal.
Voucher System – used in controlling purchases and cash disbursements by the process of verification and approval
of payments.
a. Voucher – serially numbered form that identifies the name and address of the payee, due date, terms,
description, and invoice amount. (Voucher Package includes purchase requisition, purchase order, invoice,
and receiving report.)
b. Voucher Register – takes the place of purchases journal and provides a record of all authorized check
payments.
c. Unpaid Voucher File – after vouchers have been entered in the voucher register, they are filed in the order of
required date of payment.
d. Check Register – record of all check payments.
e. Paid Voucher File – where paid voucher along with supporting documents are filed.
CHAPTER 10
MANUFACTURING OPERATIONS
ELEMENTS OF MANUFACTURING COSTS
Direct Materials - materials become a physical part of a finished product. Their costs can be conveniently and
economically traceable to the finished product.
Direct Labor - is the compensation of employees or workers who physically convert raw materials into finished
goods.
Manufacturing Overhead - includes all manufacturing costs that cannot be classified as direct materials or direct
labor.
Prime Costs - consist of direct materials and direct labor.
Conversion Costs - consist of direct labor and manufacturing overhead.
MANUFACTURING INVENTORY ACCOUNTS
Finished Goods Inventory - the cost of completed goods that have remained unsold at the end of the accounting
period. This inventory is what the manufacturers sell to the merchandisers.
Work in Process Inventory - this account gives the cost of the goods that are in the manufacturing process but are not
yet complete at the end of the accounting period.
Raw Materials Inventory - this account holds the cost of direct materials on hand that is intended for use in the
manufacturing process.
Factory Supplies Inventory - the cost of unused indirect materials at period end.
ACCOUNTING FOR MANUFACTURING ACTIVITIES
Cost System - keeps perpetual records of the costs of raw material, work in process, and finished goods inventories.
Non-Cost System - produces a manufacturing accounting system based on the periodic inventory system.
CHAPTER 12
PARTNERSHIPS: BASIC CONSIDERATIONS AND FORMATION
In a contract of partnership two or more persons bind themselves industry to a property, or themselves, to contribute
money. property, or industry to a common with the intention of dividing the profits among themselves. Two or more
persons may also form a partnership for the exercise of a profession (Civil Code of the Philippines, Article 1767).
Partner - called for the owner of partnership
Partnerships are generally associated with the practice of law, public accounting, medicine and other professions.
Partnerships of this nature are called general professional partnerships. On the other hand, service industries, retail
trade, wholesale and manufacturing enterprises may also be organized as partnerships.
CHARACTERISTICS OF A PARTNERSHIP
1. Mutual Contribution. There cannot be a partnership without contribution of money, property or industry (i.e.
work or services which may either be personal manual efforts or intellectual) to a common fund.
2. Division of Profits or Losses. The essence of partnership is that each partner must share in the profits or
losses of the venture.
3. Co-Ownership of Contributed Assets. All assets contributed into the partnership are owned by the
partnership by virtue of its separate and distinct juridical personality. If one partner contributes an asset to the
business, all partners jointly own it in a special sense.
4. Mutual Agency. Any partner can bind the other partners to a contract if he is acting within his express or
implied authority. (Parters action is ame as the other as long as within the scope of business)
5. Limited Life. A partnership has a limited life. It may be dissolved by the admission, death, insolvency,
incapacity, withdrawal of a partner or expiration of the term specified in the partnership agreement.
6. Unlimited Liability. All partners (except limited partners), including industrial partners, are personally liable
for all debts incurred by the partnership. If the partnership can not settle its obligations, creditors' claims will
be satisfied from the personal assets of the partners without prejudice to the rights of the separate creditors of
the partners.
7. Income Taxes. Partnerships, except general professional partnerships, are subject to tax at the rate of 25%
(per CREATE Act) of taxable income.
8. Partners' Equity Accounts. Accounting for partnerships are much like accounting for sole proprietorships.
The difference lies in the number of partners' equity accounts. Each partner has a capital account and a
withdrawal account that serves similar functions as the related accounts for sole proprietorships.
 ADVANTAGES AND DISADVANTAGES OF A PARTNERSHIP
Advantages versus sole proprietorship:
1. Bring greater financial capability to the business .
2. Combine special skills, expertise, experience of the partners.
3. Offers relative freedy and flexibility of action in decision making.
Advantages versus corporation
1. Easier and less expensive to organize.
2. More personal and informal.
Disadvantages
1. Easily dissolve and thus unstable compared to a corporation.
2. Mutual angency and unlimited liability may create personal obligations to partners.
3. Less effective than corporation in raising large amounts of capital.

PARTNERS DISTINGUISHED FROM CORPORATION

1. Manner of Creation. A partnership is created by mere agreement of the partner while corporation is created
by operation o of law.
2. Number of Persons. Two or more persons may form a partnership; in a corporation, not exceeding Person
Fifteen (15). A corporation with a single stockholder is considered a one person Corporation (Sec. 10. Revised
Corporation Code of the Philippines).
3. Commencement of Juridical Personality. In a partnership, juridical personality commences from the
execution of the articles of partnership. In a corporation, from the Issuance of certificate of incorporation by
the Securities and Exchange Commission.
4. Management. In a partnership, every partner is an agent of the partnership if the partners did not appoint a
managing partner, in a corporation, management is vested on the Board of Directors.
5. Extent of Liability. In a partnership, each of the partners except a limited partner is liable to the extent of his
personal assets; in a corporation, stockholders are liable only to the extent of their interest or investment in the
corporation.
6. Right of Succession. In a partnership, there is no right of succession; in a corporation, there is right of
succession. A corporation has the capacity of continued existence regardless of the death, withdrawal,
insolvency or incapacity of its directors or stockholders.
7. Terms of Existence. In a partnership, for any period of time stipulated by the partners; in a corporation, shall
have perpetual existence unless its articles of incorporation provides otherwise (Sec. 11, Revised Corporation
Code of the Philippines).

CLASSIFICATIONS OF PARTNERSHIPS
1. According to object:
a. Universal partnership of all present property. All contributions become part of the partnership
fund.
b. Universal partnership of profits. All that the partners may acquire by their industry or work during
the existence of the partnership and the use of whatever the partners contributed at the time of the
institution of the contract belong to the partnership. If the articles of universal partnership did not
specify its nature, it will be considered a universal partnership of profits.
c. Particular partnership. The object of the partnership is determinate-its use or fruit, specific
undertaking, or the exercise of a profession or vocation.
2. According to liability:
a. General. All partners are liable to the extent of their separate properties.
b. Limited (Ltd.) The limited partners are liable only to the extent of their personal contributions. In a
limited partnership, the law states that there shall be at least one general partner.
3. According to duration
a. Partnership with a fixed term or for a particular undertaking.
b. Partnership at will. One in which no term is specified and is not formed for any particular
undertaking.
4. According to purpose:
a. Commercial or trading partnership. One formed for the transaction of business.
b. Professional or non-trading partnership. One formed for the exercise of profession.
5. According to legality of existence:
 a. De jure partnership. One which has complied with all the legal requirements for its establishment.
b. De facto partnership. One which has failed to comply with all the legal requirements for its
establishment.
KINDS OF PARTNERS
1. General partner. One who is liable to the extent of his separate property after all the assets of the partnership
are exhausted.
2. Limited partner. One who is liable only to the extent of his capital contribution. He is not allowed to
contribute industry or services only.
3. Capitalist partner. One who contributes money or property to the common fund of the partnership.
4. Industrial partner. One who contributes his knowledge or personal service to the partnership.
5. Managing partner. One whom the partners has appointed as manager of the partnership.
6. Liquidating partner. One who is designated to wind up or settle the affairs of the partnership after
dissolution.
7. Dormant partner. One who does not take active part in the business of the partnership and is not known as a
partner.
8. Ostensible partner. Known to everyone and does contribute
9. Silent partner. One who does not take active part in the business of the partnership though may be known as
a partner.
10. Secret partner. One who takes active part in the business but is not known to be a partner by outside parties
11. Nominal partner or partner by estoppel. One who is actually not a partner but who represents himself as
one.
ARTICLES OF PARTNERSHIP
A partnership may be constituted orally or in writing. In the latter case, partnership agreement are embodied in the
Articles of Partnership. The following essential in the agreement:
1. The partnership name, nature, purpose and location;
2. The names, citizenship and residences of the partners;
3. The date of formation and the duration of the partnership;
4. The capital contribution of each partner, the procedure for valuing non-cash investments, treatment of excess
contribution (as capita) or as loan) and the penalties for a partner's failure to invest and maintain the agreed
capital;
5. The rights and duties of each partner;
6. The accounting period to be adopted, the nature of accounting records, financial statements and audits by
independent public accountants:
7. The method of sharing profit or loss, frequency of income measurement and distribution, including any
provisions for the recognition of differences in contributions;
8. The drawings or salaries to be allowed to partners;
9. The provision for arbitration of disputes, dissolution, and liquidation.
10. A contract of partnership is void whenever immovable property or real rights are contributed and a signed
inventory of the said property is not made and attached to a public instrument.

SEC REGISTRATION
When the partnership capital is P3,000 or more, in money or property, the public instrument must be recorded with the
Securities and Exchange Commission (SEC). Even if it not registered, the partnership having a capital of P3,000 or
more is still valid and therefore has legal personality. The SEC shall not register any corporation organized for the
practice of public accountancy (The Philippine Accountancy Act of 2004, Sec. 28).

CHAPTER 14
CORPORATIONS: BASIC CONSIDERATIONS
A corporation is an artificial being created by operation of law, having the right of succession and the powers,
attributes and properties expressly authorized by law or incident to its existence (Revised Corporation Code of the
Philippines, Sec. 2).
ADVANTAGES OF A CORPORATION
1. The corporation has the legal capacity to act as a legal entity.
2. Shareholders have limited liability
 3. It has continuity of existence.
4. Shares of tock can be transferred without the consent of the other shareholders.
5. Its management is centralized in the board of directors,
6. Shareholders are not general agents of the business.
7. Greater ability to acquire funds.
DISADVANTAGES OF A CORPORATION
1. A corporation is relatively complicated in formation and management.
2. There is a greater degree of government control and supervision.
3. It requires a relatively high cost of formation and operation.
4. It is subject to heavier taxation than other forms of business organizations. Minority shareholders are
subservient to the wishes of the majority.
5. In large corporations, management and control have been separated from ownership.
6. Transferability of shares permits the uniting of incompatible and conflicting elements in one venture.

CLASSES OF CORPORATIONS
Stock Corporation - have share capital divided into shares and are authorized to distribute to the holders of such
shares, dividends or allotments of the surplus profits on the basis of the shares held.
Non-stock Corporation - one where no part of its income is distributable as dividends to its members, trustees or
officers.
OTHER CLASSIFCATIONS OF CORPORATIONS
1. According to number of persons:
a. Corporation Aggregate - corporation consisting of more than one corporator.
b. Corporation Sole - or a special form of corporation usually associated with the clergy. It is a corporation
which consists of only one member or corporator and his successor such as a bishop.
2. According to nationality:
a. Domestic Corporation - a corporation organized under Philippine laws.
b. Foreign Corporation - corporation formed, organized or existing under laws other than the Philippines'
and whose laws allow Filipino citizens and corporations to do business in its own country or State (Sec.
140)
3. According to whether for public or private purposes:
a. Public Corporation - a corporation formed or organized for the government of a portion of the state (e.g.,
provinces, cities, municipalities and barangays).
b. Private Corporation - a corporation created for private aim, benefit or purpose.
4. According to whether for charitable purpose or not:
a. Ecclesiastical Corporation - organized for religious purposes.
b. Eleemosynary Corporation - established for public charity.
c. Civil Corporation - established for business or profit.
5. According to their legal right to corporate existence:
a. De jure Corporation - a corporation existing in fact and in law. It is organized in strict conformity with
the law.
b. De facto Corporation - a corporation existing in fact but not in law.
6. According to degree of public participation with regard to share ownership:
a. Close Corporation - corporation whose share ownership is limited to selected persons or members of a
family not exceeding 20 persons.
b. Open Corporation - a corporation where the share is available for subscription or purchase by any
person.
c. Publicly-held Corporation - a corporation with a class of equity securities listed on exchange or with
assets in excess of P50,000,000 and having 200 or more holders, at least 200 of which are holding at least
100 shares of a class of its equity securities.
7. According to their relation to another corporation:
a. Parent or Holding Corporation - corporation that is related to another corporation that it has the power
to either directly or indirectly elect the majority of the directors of a subsidiary corporation.
b. Subsidiary Corporation - a corporation controlled by another corporation known as a parent corporation.