Chapter 12 Slides Adjusting Merchandising

8/3/2019 Chapter 12 Slides Adjusting Merchandising

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Chapter 12Completing Accounting Cycle

for a Merchandising Company


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More Adjusting Entries Not all customers will pay their accounts

receivable.

Matching principle requires that expenses forthe period should match the revenue produced

during the same accounting period.

Will need to estimate and process an expenseentry for doubtful accounts


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Bad Debts We do not wait until an account goes bad

before we recognize the expense.

We will process an adjustment during thecurrent accounting period to recognize future

bad debts rather than allowing these figures to

be overstated. Achieves a more accurate presentation on the

financial statements.


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Bad Debt Adjusting EntryDec 31 Bad Debt Expense 10,000

Allowance for Doubtful Accounts 10,000

Estimated allowance for bad debtsfor fiscal 2011 period.

Allowance for Doubtful Accounts is a contra asset account.

It has a credit balance which offsets the A/R Account.

N

et A/R = A/R Allowance for Doubtful Accounts. A/R not credited directly because we dont know for certain

which a/cs may not be paid. Also, schedule of A/R needs to

balance to the control account


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Estimating Bad Debt ExpenseTwo Methods: Income Statement Method andBalance Sheet Method.

Income Statement Method: uses a percentageof net sales (e.g. 1% of net sales). Thendebits bad debt expense and creditsAllowance for Doubtful Accounts

Balance Sheet Method: uses a percentage ofA/R to make to determine the amount toexpense.


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Balance Sheet Method forBad Debts Step 1: Prepare an aged listing of A/R

(automatically produced for computerized systems) see page 590

Step 2: Apply a pre-determined % for each group ofoutstanding accounts and add together to obtain atotal (e.g. 2% 1-30 days, 5% of 31-60 days, 50% ofover 90 days, etc.)

Step 3: Adjust the combined total obtained in step 2by any outstanding balance in the allowance fordoubtful accounts.


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Balance Sheet Method and an Outstanding

Balance in the Allowance Account

Your estimated bad debt expense is $15,000

The Allowance for Doubtful Accounts

balance has $300 credit balance remainingfrom last year.

Your goal is get the Allowance for Doubtful

Accounts to $15,000. Since you already havea credit balance of $300 your adjusting entry

will be for $14,700.


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Debit Balance in the Allowance Account

forBad Debts You estimate the allowance for doubtful accounts should be

$15,000.

The allowance account currently has a debit balance of $500

as you had underestimated what you would need to write off

last year.

Dr Bad Debt expense $15,500

Cr Allowance for Doubtful Accounts $15,500

Allowance for Doubtful Accounts

500 15,500

Bal 15,000


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Writing off Uncollectible Accounts Once determined an account is uncollectible

the company will write off the specific

accounts receivable. Example:Apr 1 Allowance for Doubtful A/c 578.00

A/R Dimmond Associates 578.00

To write off account as uncollectible Customers a/c is now zero and will be closed.


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Accruals Adjusting entries required for revenue or expenses

that have been incurred but have not yet been

journalized, e.g. interest, accrued salaries, interestincome on a bond.

Salary payment dates often dont match the fiscal

year end. Need to calculate the accrued salaries.

Dr Salaries Expense 15,000CR Salaries Payable 15,000


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Accrued Interest Interest is often deducted during the month, e.g. the 21st day

of each month.

Assuming a 31 day month, 10 days of interest has accrued by

the end of the month. It is owed but wont be deducted untilnext month.

Need to show the accrued interest expense for this accountingperiod.

Dr Interest expense $993.15

Cr Interest payable $993.15

Adjusting entry (500,000 * 7.25% * 10/365)


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Interest calculation Principal * rate * # of days outstanding/365

Or principal *rate * # of months/12

Example: As at Dec 31st outstand loan is $2.1

million with an interest rate of 7%. Interest

was last deducted Dec 15th.

$2.1 million * .07 * 16/365 = $6,443.84

Also see page 595


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Unearned Revenue If revenue has been received but is not yet

earned (e.g. payment in advance, gym

memberships, subscription revenue formagazines) an adjusting entry is required.

Unearned Revenue is a liability account (not a

revenue account) used to record the unearnedrevenue


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Unearned Revenue

Original entry - Customer pays $15,000 upfront for akitchen installation:

Dr Cash $15,000

Cr Unearned Revenue $15,000

To record revenue not yet earned

Adjusting entry if of contract performed by year end:

Dr Unearned revenue $7,500Cr Sales $7,500

To adjust unearned revenue


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Effect if accrued expense entries

no[;plkjnhbt adjusted Expenses will be understated

Net income will be overstated

Liabilities will be understated

Owners equity will be overstated

See page 598 for accrued revenue


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The Worksheet need to adjust for merchandise

inventory if using periodic

See page 604 for periodic method

Two methods

A) through the adjustments columns on the

worksheet using the Income Summary A/c as

the offsetting entry (p 611) or

B) Through the closing entries (see page 604)


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Merchandise on the WorksheetTo prepare for updating the merchandise accountbalance via the closing entries you need to:

a) transfer the beginning balance of inventory to the

debit column of the Income Statement columnb) transfer the ending balance of inventory to the

credit column of the Income Statement Column aswell as to the debit column of the Balance SheetColumn

c) you are now ready to proceed to the closingentries where you will also update the merchandiseinventory account


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Reversing Entries Accrual entries such as interest and salaries

need to be reversed on the first working day

after the end of the fiscal period. The bank will deduct the interest from our

bank a/c for the full amount. If we expensethe full amount of the interest payment (or

payroll deduction) we will have doublecounted the expense and our expenses for thenew accounting period will be overstated.


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Working the entries throughInterest Expense

Dec 31(adj) 225 Dec 31 (close) 225

Jan 2 Interest Payable 225.00Interest Expense 225

To reverse adj entry Dec 31.

Interest Expense

March 31 500 Jan 2 (reversal) 225Bal 275


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Closing Entries Process Adjusted Step 1: Close all the accounts in the Income

Statement Column of the Worksheet with a creditbalance (this will include merchandise inventory,

purchase discounts, etc.) to Income Summary Step 2: Close all the accounts in the Income

Statement Column of the Worksheet with a debitbalance (includes merchandise inventory, salesreturns and allowances, etc.) to Income Summary

Step 3: Close the Income Summary to the CapitalA/c

Step 4: Close the Drawings Account to Capital

Documents

Chapter 12 Slides Adjusting Merchandising