Merchandising Operations and the Accounting Cycle - Pearson

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KEY POINT Closing entries for a merchandising company accomplish the same tasks as in Chapter 4 and also replace beginning inventory with the ending inventory balance. The debit and credit to Income Summary match the income statement column totals from the work sheet. 286 Part One The Basic Structure of Accounting Many companies report their operating expenses in two categories. • Selling expenses are those expenses related to marketing the company’s products—sales salaries; sales commissions; advertising; amortization, rent, utilities, and property taxes on store buildings; amortization on store furniture; delivery expense; and so on. • General expenses include office expenses, such as the salaries of office employees; and amortization, rent, utilities, and property taxes on the home office building. Gross margin minus operating expenses and plus any other operating revenues equals operating income, or income from operations. Many businesspeople view operating income as the most reliable indicator of a business’s success because it measures the entity’s major ongoing activities. The last section of Austin Sound’s income statement is other revenue and expenses, which is handled the same way in both inventory systems. This category reports revenues and expenses that are outside the company’s main line of business. Journalizing the Adjusting and Closing Entries in the Periodic Inventory System Exhibit 5S-7 on page 287 presents Austin Sound’s adjusting entries. These entries follow the same pattern illustrated in Chapter 4 for a service entry. The exhibit also gives Austin Sound’s closing entries. The first closing entry closes the revenue accounts. Closing entries 2 and 3 are new. Entry 2 closes the beginning balance of the Inventory account ($38,600), along with Purchases and Freight In, into the temporary Cost of Goods Sold account. Entry 3 sets up the ending balance of Inventory ($40,200) with a debit and also closes the Purchases contra accounts to the temporary Cost of Goods Sold account. 1 Now Inventory and the temporary Cost of Goods Sold account have their correct ending balances as shown below. Inventory Cost of Goods Sold (temporary) Jan. 1 Bal. 38,600 Dec. 31 Clo. 38,600 Beg. inv. 38,600 Pur. discts. 3,000 Dec. 31 Clo. 40,200 Purchases 91,400 Pur. ret. and Dec. 31 Bal. 40,200 Freight in 5,200 allowances 1,200 End. inventory 40,200 Bal. 90,800 The entries to the Inventory account deserve additional explanation. Recall that before the closing process Inventory still has the period’s beginning balance. At the end of the period, this balance is one year old and must be replaced with the ending balance in order to prepare the financial statements at December 31, 2004. The closing entries give Inventory its correct ending balance of $40,200. 1 Some accountants make the inventory entries as adjustments rather than as part of the closing process. The adjusting-entry approach adds these adjustments (shifted out of the closing entries): Adjusting Entries Dec. 31 Income Summary .............................................. 38,600 Inventory (beginning balance) .................... 38,600 Dec. 31 Inventory (ending balance).............................. 40,200 Income Summary .......................................... 40,200 When these entries are posted, the Inventory account will look exactly as shown above, except that the journal references will be “Adj.” instead of “Clo.” The financial statements are unaffected by the approach used for these inventory entries.
Journal Adjusting Entries a. Dec. 31 Interest receivable ................................................ 400 Interest revenue .............................................. 400 b. Dec. 31 Supplies expense ($650 – $100) .......................... 550 Supplies............................................................ 550 c. Dec. 31 Insurance expense................................................ 1,000 Prepaid insurance ........................................... 1,000 d. Dec. 31 Amortization expense—furniture ..................... 600 Accumulated amortization—furniture........ 600 e. Dec. 31 Unearned sales revenue ...................................... 1,300 Sales revenue................................................... 1,300 f. Dec. 31 Wages expense...................................................... 400 Wages payable................................................. 400 g. Dec. 31 Interest expense.................................................... 200 Interest payable............................................... 200 Closing Entries 1. Dec. 31 Sales revenue .................................................... 169,300 Interest revenue ................................................ 1,000 Income summary ........................................ 170,300 2. Dec. 31 Cost of goods sold ............................................ 135,200 Inventory (beginning balance) .................. 38,600 Purchases...................................................... 91,400 Freight in ...................................................... 5,200 3. Dec. 31 Inventory (ending balance)............................. 40,200 Purchase discounts........................................... 3,000 Purchase returns and allowances................... 1,200 Cost of goods sold....................................... 44,400 4. Dec. 31 Income summary.............................................. 116,450 Sales discounts.................................................. 1,400 Sales returns and allowances.......................... 2,000 Cost of goods sold ($135,200 – $44,400) ........ 90,800 Wages expense .................................................. 10,200 Rent expense ..................................................... 8,400 Amortization expense—furniture.................. 600 Insurance expense ............................................ 1,000 Supplies expense .............................................. 550 Interest expense ................................................ 1,500 5. Dec. 31 Income summary ($170,300 – $116,450) ........ 53,850 Retained earnings........................................ 53,850 6. Dec. 31 Retained earnings............................................. 54,100 Dividends..................................................... 54,100 Closing entry 4 then closes the Sales contra accounts and the temporary Cost of Goods Sold account along with the other expense accounts into Income Summary. Closing entries 5 and 6 complete the closing process. All data for the closing entries are taken from the income statement columns of the work sheet. (Note that some companies close the accounts in closing entries 2 and 3 into the Income Summary account, instead of the temporary Cost of Goods Sold account. This has the same result overall. However, as mentioned above, Inventory and Cost of Goods Sold have their correct account balances before being closed to the Income summary account if they are closed to the temporary Cost of Goods Sold account first.) Study Exhibits 5S-5, 5S-6, and 5S-7 carefully because they illustrate the entire end-of-period process that leads to the financial statements. As you progress through this book, you may want to refer to these exhibits to refresh your understanding of the adjusting and closing process for a merchandising business. EXHIBIT 5S-7 Adjusting and Closing Entries Chapter Five Merchandising Operations and the Accounting Cycle 287
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 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 and 62: Panel A Panel B Beginning inventory
Page 63 and 64: AUSTIN SOUND CENTRE INC. Trial Bala
Page 65: Assets Current assets: Cash .......
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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