Merchandising Operations and the Accounting Cycle - Pearson

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OBJECTIVE S4 Adjust and close the accounts of a merchandising business under the periodic inventory system KEY POINT Recall that Purchases (not Inventory) was debited for merchandise purchased. In the periodic system, no entries are made to the Inventory account for purchases or sales. Beginning inventory remains on the books and on the trial balance until ending inventory replaces it 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 column. 282 Part One The Basic Structure of Accounting Adjusting and Closing the Accounts in a Periodic Inventory System A merchandising business adjusts and closes the accounts much as a service entity does. The steps of this end-of-period process are the same: If a work sheet is used, the trial balance is entered and the work sheet completed to determine net income or net loss. The work sheet provides the data for journalizing the adjusting and closing entries and for preparing the financial statements. At the end of the period, before any adjusting or closing entries, the Inventory account balance is still the cost of the inventory that was on hand at the end of the preceding period. It is necessary to remove this beginning balance and replace it with the cost of the inventory on hand at the end of the period. Various techniques may be used to bring the inventory records up to date. To illustrate a merchandiser’s adjusting and closing process under the periodic inventory system, let’s use Austin Sound’s December 31, 2004, trial balance in Exhibit 5S-4. All the new accounts—Inventory, Purchases, Freight In, and the contra accounts—are highlighted for emphasis. Inventory is the only account that is affected by the new closing procedures. The additional data item (h) gives the ending inventory figure $40,200. Preparing and Using the Work Sheet in a Periodic Inventory System The Exhibit 5S-5 work sheet on page 284 is similar to the work sheets we have seen so far, but a few differences appear. This work sheet is slightly different from the one you saw in Chapter 4; it 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, Interest Payable, and Amortization Expense. The accounts are listed in the order they appear in the ledger. If additional accounts are needed, they can be written in at the bottom, above net income. Trial Balance Columns Examine the Inventory account, $38,600 in the trial balance. This $38,600 is the cost of the beginning inventory. The work sheet is designed to replace this outdated amount with the new ending balance, which in our example is $40,200 [additional data item (h) in Exhibit 5S-4]. As we shall see, this task is accomplished later in the columns for the income statement and the balance sheet. 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 5S-5 to reassure yourself that the adjustments are correct. Income Statement Columns The income statement columns contain adjusted amounts for the revenues and the expenses. Sales Revenue, for example, is $169,300, which includes the $1,300 adjustment. You may be wondering why the two inventory amounts appear in the income statement columns. The reason is that both beginning inventory and ending inventory enter the computation of cost of goods sold. Placement of beginning inventory ($38,600) in the work sheet’s income statement debit column has the effect of adding
AUSTIN SOUND CENTRE INC. Trial Balance December 31, 2004 Cash ...................................................................................... $ 2,850 Accounts receivable ........................................................... 4,600 Note receivable, current .................................................... 8,000 Interest receivable ............................................................... Inventory ............................................................................. 38,600 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 Purchases ............................................................................ 91,400 Purchase discounts ............................................................ 3,000 Purchase returns and allowances.................................... 1,200 Freight in ............................................................................. 5,200 Amortization expense—furniture ................................... Insurance expense............................................................... Interest expense .................................................................. 1,300 Rent expense ....................................................................... 8,400 Supplies expense ................................................................. Wages expense .................................................................... 9,800 Total ...................................................................................... $262,700 $262,700 Additional data at December 31, 2004: a. Interest revenue earned but not yet collected, $400. b. Supplies on hand, $100. c. Prepaid insurance expired during the year, $1,000. d. Amortization for the year, $600. e. Unearned sales revenue earned during the year, $1,300. f. Accrued wage expense, $400. g. Accrued interest expense, $200. h. Inventory on hand based on inventory count, $40,200. beginning inventory in computing cost of goods sold. Placing ending inventory ($40,200) in the credit column decreases cost of goods sold. Purchases and Freight In appear in the debit column because they are added in computing cost of goods sold. Purchase Discounts and Purchase Returns and Allowances appear as credits because they are subtracted in computing cost of goods sold—$90,800 on the income statement in Exhibit 5S-6 on page 285. The income statement column subtotals on the work sheet indicate whether the business earned net income or incurred a net loss. If total credits are greater, the result is net income, as shown in Exhibit 5S-5. If total debits are greater, a net loss has occurred. EXHIBIT 5S-4 Trial Balance Chapter Five Merchandising Operations and the Accounting Cycle 283
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
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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 and 18: Requirement 2 Inventory Cost of Goo
Page 19 and 20: Exhibit 5-5. All the new accounts
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: Panel A Panel B Beginning inventory
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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