Merchandising Operations and the Accounting Cycle - Pearson

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EXHIBIT 5-5 Trial Balance 238 Part One The Basic Structure of Accounting AUSTIN SOUND CENTRE INC. Trial Balance December 31, 2004 Cash ...................................................................................... $ 2,850 Accounts receivable ........................................................... 4,600 Note receivable, current .................................................... 8,000 Interest receivable ............................................................... Inventory ............................................................................. 40,500 Supplies ............................................................................... 650 Prepaid insurance .............................................................. 1,200 Furniture .............................................................................. 33,200 Accumulated amortization—furniture ........................... $ 2,400 Accounts payable ............................................................... 47,000 Unearned sales revenue .................................................... 2,000 Wages payable ..................................................................... Interest payable ................................................................... Note payable, long-term ................................................... 12,600 Common stock..................................................................... 10,000 Retained earnings................................................................ 15,900 Dividends............................................................................. 54,100 Sales revenue ..................................................................... 168,000 Sales discounts .................................................................. 1,400 Sales returns and allowances .......................................... 2,000 Interest revenue .................................................................. 600 Cost of goods sold ............................................................. 90,500 Amortization expense—furniture ................................... Insurance expense............................................................... Interest expense .................................................................. 1,300 Rent expense ....................................................................... 8,400 Supplies expense ................................................................. Wages expense .................................................................... 9,800 Total ...................................................................................... $258,500 $258,500 Additional data at December 31, 2004: a. Interest revenue earned but not yet collected, $400. b. Inventory on hand, $40,200. c. Supplies on hand, $100. d. Prepaid insurance expired during the year, $1,000. e. Amortization, $600. f. Unearned sales revenue earned during the year, $1,300. g. Accrued wage expense, $400. h. Accrued interest expense, $200. Dec. 31 Cost of Goods Sold..................................................... 300 Inventory................................................................ 300 This entry brings Inventory and Cost of Goods Sold to their correct balances. Austin Sound’s December 31, 2004, adjustment data, including this inventory information [item (b)], are given at the bottom of Exhibit 5-5. The physical count can indicate that more inventory is present than the books show. A search of the records may reveal that Austin Sound received inventory but did not record the corresponding purchase entry. This would be entered the standard way: debit Inventory and credit Cash or Accounts Payable. If the reason for the excess inventory could not be identified, the business adjusts the accounts by debiting Inventory and crediting Cost of Goods Sold. To illustrate a merchandiser’s adjusting and closing process, let’s use Austin Sound’s December 31, 2004, trial balance in
Exhibit 5-5. All the new accounts—Inventory, Cost of Goods Sold, and the contra accounts—are highlighted for emphasis. The additional data item (b) gives the ending inventory figure as $40,200. Preparing and Using the Work Sheet of a Merchandising Business The Exhibit 5-6 work sheet is similar to the work sheets we have seen so far, but there are a few differences. This work sheet does not include adjusted trial balance columns. In most accounting systems, a single operation combines trial balance amounts with the adjustments and extends the adjusted balances directly to the income statement and balance sheet columns. Therefore, to reduce clutter, the adjusted trial balance columns are omitted so that the work sheet contains four pairs of columns, not five. Account Title Columns The trial balance lists a number of accounts without balances. Ordinarily, these accounts are affected by the adjusting process. Examples include Interest Receivable, Wages Payable, and Amortization Expense. The accounts are listed in order by account number, the order they appear in the ledger. If additional accounts are needed, they can be written in at the bottom of the work sheet above the net income amount. Student to Student I had problems remembering the different journal entries to use in the work sheet. I found that Exhibit 5-2 on page 225 was very helpful in remembering the journal entries for purchases and merchandise sales. If I remember one account in the entry, the operating cycle makes it obvious which other account to use. Cam M., Abbotsford Trial Balance Columns Examine the Inventory account in the Trial Balance. Inventory has a balance of $40,500 before the physical count at the end of the year. Cost of Goods Sold’s balance is $90,500 before any adjustment based on the physical count. We shall assume that any difference between the Inventory amount on the trial balance ($40,500) and the correct amount based on the physical count ($40,200) is unexplained and should be debited or credited directly to Cost of Goods Sold. Adjustments Columns The adjustments are similar to those discussed in Chapters 3 and 4. They may be entered in any order desired. The debit amount of each entry should equal the credit amount, and total debits should equal total credits. You should review the adjusting data in Exhibit 5-5 to reassure yourself that the adjustments are correct. Income Statement Columns The income statement columns contain adjusted amounts for the revenues and expenses. Sales Revenue, for example, has an adjusted balance of $169,300. The income statement column subtotals indicate whether the business had a net income or a net loss. • Net income: Total credits > Total debits •Net loss: Total debits > Total credits Austin Sound’s total credits of $170,300 exceed the total debits of $116,450, so the company earned a net income. Insert the net income amount in the debit column to bring total debits into agreement with total credits. Insert a net loss amount in the credit column to equalize total debits and total credits. Net income or net loss is then extended to the opposite column of the balance sheet, so that total debits equal total credits. Balance Sheet Columns The only new item on the balance sheet is Inventory. The balance listed in Exhibit 5-6 is the ending amount of $40,200, as determined by the physical count of goods on hand at the end of the period. KEY POINT If you were preparing a work sheet, you could omit the adjusted trial balance columns. Once you understand the mechanics of the work sheet, you can take a trial balance amount, add or subtract the adjustments, and extend the new amount to either the income statement or balance sheet columns. Chapter Five Merchandising Operations and the Accounting Cycle 239
Page 1 and 2: C H 5A P T E R Merchandising Operat
Page 3 and 4: Before launching into merchandising
Page 5 and 6: Suppose FGL’s Sports Experts stor
Page 7 and 8: debiting the Inventory account. A $
Page 9 and 10: Austin paid within the discount per
Page 11 and 12: STOP & THINK Refer to the Accounts
Page 13 and 14: STOP & THINK Why is there no Januar
Page 15 and 16: sales. Therefore the GST paid on pu
Page 17: Requirement 2 Inventory Cost of Goo
Page 21 and 22: EXHIBIT 5-7 Financial Statements of
Page 23 and 24: Journal Adjusting Entries a. Dec. 3
Page 25 and 26: Two Key Ratios for Decision Making
Page 27 and 28: Wal-Mart 1 2 3 4 5 6 Austin Sound C
Page 29 and 30: Decision Guidelines How do merchand
Page 31 and 32: 3. Prepare the company’s multi-st
Page 33 and 34: Requirement 3 JAN KING DISTRIBUTING
Page 35 and 36: c. Buying a large enough quantity o
Page 37 and 38: Date: ___________________________ T
Page 39 and 40: 2. The R39 truck tires were ordered
Page 41 and 42: Required 1. Prepare the business’
Page 43 and 44: $7,700, $12,160, and $10,180 thousa
Page 45 and 46: 2. The note payable signed on May 2
Page 47 and 48: Trial Balance Adjustments Account T
Page 49 and 50: Sales discounts....................
Page 51 and 52: e. Store supplies on hand at Decemb
Page 53 and 54: Required 1. Inventory on hand at Se
Page 55 and 56: c. The equipment is expected to las
Page 57 and 58: HEIGHTS PHARMACY LTD. Balance Sheet
Page 59 and 60: Supplement to Chapter 5 Accounting
Page 61 and 62: Panel A Panel B Beginning inventory
Page 63 and 64: AUSTIN SOUND CENTRE INC. Trial Bala
Page 65 and 66: Assets Current assets: Cash .......
Page 67 and 68: Journal Adjusting Entries a. Dec. 3
Page 69 and 70:
Summary Problem for Your Review The
Page 71 and 72:
Requirement 2 Adjusting Entries 200
Page 73 and 74:
Requirement 4 Inventory Cost of goo
Page 75 and 76:
Required Journalize these transacti
Page 77:
BLISS SALES COMPANY LTD. Trial Bala
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Merchandising Operations and the Accounting Cycle - Pearson

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