Merchandising Operations and the Accounting Cycle - Pearson

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 ad-
justed 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