Merchandising Operations and the Accounting Cycle - Pearson

288 Part One The Basic Structure of Accounting
Net sales, cost of goods sold, operating income, and net income are unaffected by
the choice of inventory system. You can prove this by comparing Austin Sound’s financial
statements given in Exhibit 5S-6 with the corresponding statements in
Exhibit 5-7 on page 241. The only differences appear in the cost-of-goods-sold section
of the income statement, and those differences are unimportant. In fact, virtually
all companies report cost of goods sold in streamlined fashion, as shown for The
Forzani Group Ltd. in Exhibit 5-1 and for Austin Sound in Exhibit 5-7.
Learning Tip Here is an easy way to remember the closing process. First look at
the work sheet. Then:
1. Debit all income statement accounts with a credit balance. Credit Income
Summary for the sum of all these debits.
2. Credit all income statement accounts with a debit balance. Debit Income Summary
for the sum of all these credits.
3. Credit the inventory account for the amount of opening inventory and debit inventory
for the amount of ending inventory obtained from the year-end physical
count.
4. Take the balance in the Income Summary account. If the account has a debit balance,
there is a net loss; credit Income Summary for that amount, and debit
Retained Earnings. If Income Summary has a credit balance, there is a net income
for the period; debit Income Summary for that amount, and credit Retained
Earnings.
5. Look at the debit balance of Dividends in the balance-sheet column. Credit
Dividends for its balance, and debit Retained Earnings for the same amount.