CHAPTER FIFTEEN ADJUSTMENTS AND THE WORK SHEET FOR A MERCHANDISING BUSINESS

CHAPTER FIFTEEN

ADJUSTMENTS AND THE WORK SHEET FOR A

MERCHANDISING BUSINESS

WORK SHEET OF A MERCHANDISING BUSINESS

Similar to service business worksheet Used to record adjustments

o Including adjustments for• Merchandise Inventory

• Unearned Revenue

Used to prepare financial statements

ADJUSTMENT FOR MERCHANDISE INVENTORY

Example: Ponder’s Bike Parts had a beginning merchandise inventory of $25,000. At the end of the year, a physical inventory of merchandise determined that merchandise costing $30,000 was still on hand.


More inventory atthe END then atthe BEGINNING

of the year?


More inventory atthe END then atthe BEGINNING

of the year?

When PURCHASES EXCEED SALES, the inventory balance is

HIGHER at the end of the year


MERCHANDISE INVENTORY

$25,000BEG. BALANCE



$25,000

This account is NOTchanged during theaccounting period

ADJUSTMENT FOR MERCHANDISE INVENTORYMERCHANDISE

INVENTORY

$25,000PURCHASES

XXX

Merchandise bought duringthe year is debited toPurchases instead of

Merchandise Inventory

ADJUSTMENT FOR MERCHANDISE INVENTORYMERCHANDISE

INVENTORY

$25,000PURCHASES

XXX

The COST of merchandise sold is NOT recorded.The selling price is credited to the Sales account

XXX

SALES



$25,000

After a year ofpurchasing and selling

merchandise, the balanceis no longer accurate



$25,000

An adjustment is needed to update the balance of the Merchandise Inventory account



$25,000

TWO-STEPADJUSTMENT!

Ponder’s Bike Parts Work Sheet (partial)

TRIAL BALANCEDEBIT CREDIT

ACCOUNT TITLE

For Year Ended December 31, 20--

Merchandise InventoryIncome SummaryPurchasesPurchases Returns and AllowancesPurchases DiscountsFreight-In

25,000

80,0001,000

500700

Let’s look at the adjustmenton a partial work sheet.

TRIAL BALANCEDEBITCREDIT

ACCOUNT TITLEDEBIT CREDIT

ADJUSTMENTS


Income Summary

Purchases

Purchases Ret. & Allow.

Purchases Discounts

Freight-In

25,000

80,000

1,000

500

700STEP #1

REMOVE THEBEGINNING BALANCE.



ADJUSTMENTS


Income Summary

Purchases


Purchases Discounts

Freight-In

25,000

80,000

1,000

500

700By crediting Merchandise Inventory,the balance is reduced to zero.

25,000(a)



ADJUSTMENTS


Income Summary

Purchases


Purchases Discounts

Freight-In

25,000

80,000

1,000

500

700

25,000(a)

25,000(a)

The corresponding debit is to Income Summary.



ADJUSTMENTS


Income Summary

Purchases


Purchases Discounts

Freight-In

25,000

80,000

1,000

500

700

25,000(a)

25,000(a)

Step #2The ending inventory is entered

into the Merchandise Inventory account.

30,000(b)



ADJUSTMENTS


Income Summary

Purchases


Purchases Discounts

Freight-In

25,000

80,000

1,000

500

700

25,000(a)

25,000(a)

The balance in the Merchandise Inventoryaccount now reflects the actual amount

of inventory on hand at the end of the year.

30,000(b)



ADJUSTMENTS


Income Summary

Purchases


Purchases Discounts

Freight-In

25,000

80,000

1,000

500

700

25,000(a)

25,000(a)

Income Summary is credited.

30,000(b)(b) 30,000

TRIAL BAL.DR.CR.

ACCOUNT TITLE DR. CR.

ADJUSTMENTSCR. DR.

ADJ. TRIAL BAL.

Merch. Inv.

Income Sum.

Purchases

Purch. R &A

Purch. Disc.Freight-In

25,000

80,000

30,000(b)

1,000

500700

25,000

30,000(b)

(a)

25,000(a)

The new balance isextended to the

“Adjusted Trial Balance”columns.

30,000

TRIAL BAL.DR.CR.


ADJUSTMENTSCR. DR.

ADJ. TRIAL BAL.

Merch. Inv.

Income Sum.

Purchases

Purch. R &A


25,000

80,000

30,000(b)

1,000

500700

25,000

30,000(b)

(a)

25,000(a)

30,000

25,000 30,000

BE CAREFUL!!! BOTH the beginning and ending inventory

amounts are extended to the “Adjusted Trial Balance” columns.

TRIAL BAL.DR.CR.


ADJUSTMENTSCR. DR.

ADJ. TRIAL BAL.

Merch. Inv.

Income Sum.

Purchases

Purch. R &A


25,000

80,000

30,000(b)

1,000

500700

25,000

30,000(b)

(a)

25,000(a)

30,000

25,000 30,000

80,000

1,000

500

700

The other accounts are extendedwith no adjustments.

ADJUST. T/BDR.CR.


INCOME STMTCR. DR.

BALANCE SHEET

Merch. Inv.

Income Sum.

Purchases

Purch. R &A


30,000

80,000

1,000

500700

25,000 30,000

30,000

Merchandise Inventory is extendedto the Balance Sheet columns.

ADJUST. T/BDR.CR.


INCOME STMTCR. DR.

BALANCE SHEET

Merch. Inv.

Income Sum.

Purchases

Purch. R &A


30,000

80,000

1,000

500700

25,000 30,000

30,000

25,000 30,000

BOTH the beginning and ending inventory are extended to the Income Statement columns.

ADJUST. T/BDR.CR.


INCOME STMTCR. DR.

BALANCE SHEET

Merch. Inv.

Income Sum.

Purchases

Purch. R &A


30,000

1,000

500700

25,000 30,000

30,000

25,000 30,000

80,000 80,000

1,000

500700

Since the Purchases accounts and Freight-Inare Income Statement accounts, they are

extended to the Income Statement columns.

ADJUST. T/BDR.CR.


INCOME STMTCR. DR.

BALANCE SHEET

Merch. Inv.

Income Sum.

Purchases

Purch. R &A


30,000

1,000

500700

25,000 30,000

30,000

25,000 30,000

80,000 80,000

1,000

500700

The Cost of Goods Sold can be computedfrom the Income Statement columns.

Merch. Inv., January 1

From Income Summaryaccount on Work Sheet

Cost of Goods Sold:

$25,000


Before we can combine Purchases and Beginning Inventory, we must subtract

the contra-purchases accounts.

Cost of Goods Sold:

$25,000

Purchases $80,000

Less: Purchases R&A $1,000

500Purchases Disc. 1,500


Freight-In is added to Net Purchasesto determine the “Cost of Goods Purchased.”

Cost of Goods Sold:

$25,000

Purchases $80,000



Net purchases $78,500

Freight-In 700Cost of Goods Purch. 79,200


Cost of Goods Purchasedis added to the Beginning Inventory

to determine Goods Available for Sale.

Cost of Goods Sold:

$25,000

Purchases $80,000





Goods available for sale $104,200


Merchandise still on hand at the end of the year is subtracted from the amount available for sale

to determine the Cost of Goods Sold.

Cost of Goods Sold:

$25,000

Purchases $80,000





Goods available for sale $104,200

Less: Merch. Inv., Dec. 31 30,000

Cost of Goods Sold $74,200

ADJUSTMENT FOR UNEARNED REVENUE

Example: Brown County Playhouse sells season tickets. Tickets sell for $10 for each play ($50 for a 5 play season ticket) and a maximum of 1,000 seats can be sold for each play. Let’s assume all shows sell out during the first week that season tickets are available.


UNEARNED TICKET REVENUE

$50,000

When season tickets are soldCash is debited and

Unearned Ticket Revenue is credited



$50,000

Following the production of the third show,financial statements are to be prepared



$50,000

An adjusting entry isneeded to recognize theticket revenue earned

for the three shows



$50,000

TICKET REVENUE

3 shows x 1,000 tickets for each show = 3,000 tickets3,000 tickets x $10 per ticket = $30,000

$30,000



$50,000

TICKET REVENUE

$30,000 in earned revenue is removed from theunearned account and put into the revenue account.

$30,000 $30,000



$50,000

TICKET REVENUE

The remaining balance of $20,000 in seasonticket sales is reported on the Balance Sheet

as a current liability.

$30,000 $30,000$20,000 Bal.

NORTHERN MICROCHART OF ACCOUNTS

Let’s review theChart of Accounts

for a merchandisingbusiness!


Assets Current Assets101 Cash 122 Accts. Rec.131 Merch. Inv.141 Supplies145 Prepaid Ins.

Assets now includeMerchandise Inventory



Property, Plant, & Equip161 Land 171 Building 171.1 Acc. Depr. - Bldg

181 Store Equipment 181.1 Acc. Depr. - Store Eq

NORTHERN MICROCHART OF ACCOUNTS (cont.)

Liabilities

201 Notes Payable

219 Wages Payable

Current Liabilities

231 Utilities Payable

Long-Term Liabilities251 Mortgage Payable

Owner’s Equity

202 Accounts Payable

241 Unearned Sub. Rev.

311 G.L. Fishel, Capital312 G.L. Fishel, Drawing


231 Utilities Payable 241 Unearned Sub. Rev. Long-Term Liabilities

251 Mortgage Payable

Owner’s Equity311 G. L. Fishel, Capital 312 G. L. Fishel, Drawing

313 Income Summary





Revenue401 Sales401.1 Sales Returns & Allow Other Revenue411 Interest Revenue412 Rent Revenue413 Subscrip. Revenue





Revenue401 Sales401.1 Sales Returns & Allow Other Revenue411 Interest Revenue412 Rent Revenue413 Subscrip. Revenue

ExpensesCost of Goods Sold

501 Purchases501.1 Purch. Ret. & Allow.

501.2 Purchases Discounts502 Freight-In


Liabilities

201 Notes Payable 202 Accounts Payable 219 Wages Payable

Current Liabilities



Owner’s Equity

311 G. L. Fishel, Capital 312 G. L. Fishel, Drawing

Operating Expenses511 Wages Expense

521 Rent Expense 523 Supplies Expense 525 Telephone Expense 533 Utilities Expense 535 Insurance Expense 540 Depr. Exp. - Building 541 Depr. Exp. - Store Eq. 549 Misc. Expense

512 Advertising Expense513 Bk Credit Card Exp.




Owner’s Equity311 G. L. Fishel, Capital 312 G. L. Fishel, Drawing

313 Income Summary

523 Supplies Expense 525 Telephone Expense 533 Utilities Expense 535 Insurance Expense 540 Depr. Exp. - Building 541 Depr. Exp. - Store Eq. 549 Misc. Expense

Other Expenses551 Interest Expense

PREPARING A WORK SHEET:5 STEPS

1 Prepare the trial balance.

2 Prepare the adjustments.

3 Prepare the adjusted trial balance.

4 Extend the adjusted trial balance to the Income Statement and Balance Sheet columns.

5 Complete the work sheet by totaling the Income Statement and Balance Sheet columns to compute the net income or loss.

Name of Company Work Sheet


ACCOUNT TITLE


Let’s look at awork sheet for amerchandising

business!



ACCOUNT TITLE


STEP #1Prepare a

Trial BalanceAssetsASSETS are listed

in the debit column.



ACCOUNT TITLE


STEP #1Prepare a

Trial BalanceAssets

Mdse. Inv. BEGINNING balance

of merchandiseinventory



ACCOUNT TITLE


STEP #1Prepare a

Trial BalanceAssets

Mdse. Inv. LIABILITIES (includingunearned revenues) are

listed in the credit column.

LiabilitiesUnearned Rev.



ACCOUNT TITLE


STEP #1Prepare a

Trial BalanceAssets

Mdse. Inv.

OWNER’S EQUITY accounts are shown next.


CapitalDrawing


ACCOUNT TITLE

Drawing

Income Summary

Income Summary is listedbut it has no balance until

the adjustments are entered.


ACCOUNT TITLE

Drawing

Income Summary

RevenueSales

Sales R&ASales Discounts

CONTRA-REVENUEaccounts are listed in

the debit column


ACCOUNT TITLE

Income Summary

RevenueSales


COST OF GOODS SOLDaccounts are listed next.

ExpensesPurchases

Purch. R&APurch. Disc.

Freight-In

Drawing



ACCOUNT TITLE


STEP #1Prepare a

Trial BalanceAssetsMdse. Inv.


CapitalDrawing

ADJUSTMENTSDEBIT CREDIT

STEP #2Prepare the Adjustments

EI BI

The Beginning Inventory is removed from and the Ending Inventory is entered into

the Merchandise Inventory account.


ACCOUNT TITLEADJUSTMENTS

DEBIT CREDITDrawing

Revenue

Income Summary

SalesSales R&A

Sales Discounts

ExpensesPurchases

Freight-In


BI EI

Income Summary is debited for the amount of the Beginning Inventory and creditedfor the amount of the Ending Inventory.



ACCOUNT TITLE



ADJ. TRIAL BAL.DEBIT CREDIT

STEP #3Prepare the

Adj. Trial Bal.

EI BI

The Ending Inventory is now the balanceof the Merchandise Inventory account and is extended to the Adjusted Trial

Balance columns.

Merchandise Inv. EI Assets



ACCOUNT TITLE




STEP #3Prepare the

Adj. Trial Bal.

EI BI

The Liabilities are extended to the Adjusted Trial Balance columns.

Merchandise Inv. EI Liabilities

Unearned Rev.

Assets



ACCOUNT TITLE




STEP #3Prepare the

Adj. Trial Bal.

EI BI

Owners Equity accounts arealso extended to the

Adjusted Trial Balancecolumns.

Merchandise Inv. EI Liabilities

Unearned Rev.

Assets

CapitalDrawing


ACCOUNT TITLEADJ. TRIAL BAL.

DEBIT CREDIT

Income Summary BI EI

BOTH the Beginning and the EndingInventories are extended into the

Adjusted Trial Balance.

BI EI


ACCOUNT TITLEADJ. TRIAL BAL.

DEBIT CREDIT

Revenue

Income Summary

SalesSales R&A

Sales Discounts

ExpensesPurchases

Freight-In


BI EIBI EI

All the Revenue and Expenseaccounts are extended to

the Adjusted Trial Balance.


DEBIT CREDIT


STEP #4Extend Adjusted

Account Balances

DEBIT CREDIT

EI Assets

ADJ. TRIAL BAL. INCOME STATEMENT BALANCE SHEETDEBIT CREDIT

STEP #3Prepare the

Adj. Trial Bal.Assets

EI Liabilities

Unearned Rev.

CapitalDrawing

The Assets (including the endingbalance of Merchandise

Inventory) are extended tothe Balance Sheet columns.


DEBIT CREDIT


STEP #4Extend Adjusted

Account Balances

DEBIT CREDIT

EI Liabilities

Unearned Rev.

Assets

CapitalDrawing

ADJ. TRIAL BAL. INCOME STATEMENT BALANCE SHEETDEBIT CREDIT

STEP #3Prepare the

Adj. Trial Bal.Assets

EI Liabilities

Unearned Rev.

CapitalDrawing

Liabilities &Owner’s Equityaccounts are alsoextended to the

Balance Sheet columns.

INCOME STATEMENTDEBIT CREDIT

ADJ. TRIAL BAL BALANCE SHEET

DEBIT CREDIT

BI EI

DEBIT CREDIT

BI EI

RevenueSales


ExpensesPurchases

Purch. R&APurch. Disc

Freight-In

BOTH the Beginning and the Endinginventories are extended to the

Income Statement columns for theINCOME SUMMARY account.



DEBIT CREDIT

BI EI

DEBIT CREDIT

BI EI

RevenueSales


ExpensesPurchases


Freight-In

RevenueSales


ExpensesPurchases


Freight-In

Revenue & Expenses are extendedto the Income Statement columns.



DEBIT CREDITDEBIT CREDITSales Discounts

ExpensesPurchases


Freight-In

Sales Discounts

ExpensesPurchases


Freight-In

STEP #5

COMPLETE THE WORK SHEET(1) Sum columns

(2) Compute net income (loss)

Net Income

Net Income



DEBIT CREDITDEBIT CREDITSales Discounts

ExpensesPurchases


Freight-In

Sales Discounts

ExpensesPurchases


Freight-In

STEP #5

COMPLETE THE WORK SHEET(1) Sum columns

(2) Compute net income (loss)

Net Income

Net Income

Net Loss

Net Loss

Documents

CHAPTER FIFTEEN ADJUSTMENTS AND THE WORK SHEET FOR A MERCHANDISING BUSINESS