College Accounting - MCCChorowitk/documents/Chapter14.pdf · College Accounting Heintz & Parry 20th Edition. Chapter 14 Adjustments and the Work Sheet for a Merchandising ... XXX

College

Accounting

Heintz & Parry20th Edition

Chapter 14

Adjustments and the

Work Sheet for a

Merchandising

Business

1

Prepare an adjustment for

merchandise inventory

using the periodic

inventory system.

WORK SHEET OF A

MERCHANDISING BUSINESS

• Is similar to a service business work sheet

• Used to record adjustments

– Includes 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 accounting period, a physical inventory of the merchandise determined that merchandise

costing $30,000 was still on hand.


INVENTORY

• More inventory at the END than at the

BEGINNING of the year?


INVENTORY

• More inventory at the END than at the

BEGINNING of the year?

When PURCHASES EXCEED SALES, the inventory balance is

HIGHER at the end of the year.


INVENTORY

MERCHANDISE

INVENTORY

$25,000BEG. BALANCE


INVENTORY

MERCHANDISE

INVENTORY

$25,000

This account is NOTchanged during theaccounting period.


INVENTORY

MERCHANDISE

INVENTORY

$25,000

PURCHASES

XXX

Merchandise bought duringthe year is debited toPurchases instead of

Merchandise Inventory.


INVENTORY

MERCHANDISE

INVENTORY

$25,000

PURCHASES

XXX

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

XXX

SALES


INVENTORY

MERCHANDISE

INVENTORY

$25,000

After a year ofpurchasing and selling

merchandise, the balanceis no longer accurate.


INVENTORY

MERCHANDISE

INVENTORY

$25,000

An adjustment is needed to update the balance of the merchandise inventory account.


INVENTORY

MERCHANDISE

INVENTORY

$25,000

TWO-STEPADJUSTMENT!

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Ponder’s Bike Parts

Work Sheet (partial)

TRIAL BALANCE

DEBIT CREDITACCOUNT TITLE

For Year Ended December 31, 20--

Merchandise Inventory

Income Summary

Purchases

Purchases Returns and Allowances

Purchases Discounts

Freight-In

25,000

80,000

1,000

500

700

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


TRIAL BALANCE

DEBITCREDITACCOUNT TITLE

DEBIT CREDIT

ADJUSTMENTS


Income Summary

Purchases

Purchases Ret. and Allow.

Purchases Discounts

Freight-In

25,000

80,000

1,000

500

700

Step #1REMOVE BEGINNING INVENTORY


TRIAL BALANCE

DEBITCREDITACCOUNT TITLE

DEBIT CREDIT

ADJUSTMENTS


Income Summary

Purchases


Purchases Discounts

Freight-In

25,000

80,000

1,000

500

700

25,000(a)

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


TRIAL BALANCEDEBITCREDIT

ACCOUNT TITLEDEBIT CREDIT

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 #2INSERT ENDING INVENTORY

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.

ADJUSTMENTS

CR. 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

500

700

25,000

30,000(b)

(a)

25,000(a)

30,000

The new balance isextended to the

Adjusted Trial Balance columns.


TRIAL BAL.

DR.CR.

ACCOUNT

TITLE DR. CR.

ADJUSTMENTS

CR. 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

500

700

25,000

30,000(b)

(a)

25,000(a)

30,000

25,000 30,000

BE CAREFUL WITH INCOME SUMMARY!!! BOTH the beginning and ending inventory

amounts are extended to theAdjusted Trial Balance columns.


TRIAL BAL.

DR.CR.

ACCOUNT

TITLE DR. CR.

ADJUSTMENTS

CR. 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

500

700

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/B

DR.CR.

ACCOUNT

TITLE DR. CR.

INCOME STMT.

CR. DR.BALANCE SHEET

Merch. Inv.

Income Sum.

Purchases

Purch. R & A

Purch. Disc.

Freight-In

30,000

1,000

500

700

25,000 30,000

30,000

80,000

Merchandise Inventory is extendedto the Balance Sheet columns.


ADJUST. T/B

DR.CR.

ACCOUNT

TITLE DR. CR.

INCOME STMT.


Merch. Inv.

Income Sum.

Purchases

Purch. R & A

Purch. Disc.

Freight-In

30,000

1,000

500

700

25,000 30,000

30,000

25,000 30,000

80,000

For the Income Summary account, BOTH the beginningand ending inventory

amounts are extended to theIncome Statement columns.


ADJUST. T/B

DR.CR.

ACCOUNT

TITLE DR. CR.

INCOME STMT.


Merch. Inv.

Income Sum.

Purchases

Purch. R & A

Purch. Disc.

Freight-In

30,000

1,000

500

700

25,000 30,000

30,000

25,000 30,000

80,000 80,000

1,000

500

700

Since the Purchases, Purchases Returns and Allowances, Purchase Discounts, and Freight-In

Accounts are income statement accounts, they are extended to the Income Statement columns.


ADJUST. T/B

DR.CR.

ACCOUNT

TITLE DR. CR.

INCOME STMT.


Merch. Inv.

Income Sum.

Purchases

Purch. R & A

Purch. Disc.

Freight-In

30,000

1,000

500

700

25,000 30,000

30,000

25,000 30,000

80,000 80,000

1,000

500

700

Cost of goods sold can be computedfrom the Income Statement columns.


Merch. inv., January 1

From the income summaryaccount on the work sheet.

Cost of goods sold:

$25,000



Before we can combine Purchases andbeginning inventory, we must subtract

the contra-purchases accounts to determine net purchases.

Cost of goods sold:

$25,000

Purchases $80,000

Less: Purchases R & A $1,000

500Purchases disc. 1,500

Net purchases $78,500



Freight-in is added to net purchasesto determine the cost of goods purchased.

Cost of goods sold:

$25,000

Purchases $80,000




Add freight-in 700

Cost 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




Add freight-in 700


Goods available for sale $104,200


Cost of goods sold


Merchandise still on hand at the end of the year is subtractedfrom the amount available for sale to determine the cost of goods sold.

Cost of goods sold:

$25,000

Purchases $80,000




Add freight-in 700


Goods available for sale $104,200

Less merch. inv., Dec. 31 30,000

$74,200

2

Prepare an adjustment of

unearned revenue.

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 that all shows sell out

during the first week that season tickets are available.


REVENUE

UNEARNED

TICKET REVENUE

$50,000

When season tickets are sold,Cash is debited and

Unearned Ticket Revenue is credited.


REVENUE

UNEARNED

TICKET REVENUE

$50,000

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


REVENUE

UNEARNED

TICKET REVENUE

$50,000

An adjusting entry isneeded to recognize theticket revenue earnedfor the three shows.


REVENUE

UNEARNED

TICKET REVENUE

$50,000

TICKET REVENUE

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

$30,000


REVENUE

UNEARNED

TICKET REVENUE

$50,000

TICKET REVENUE

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

$30,000 $30,000


REVENUE

UNEARNED

TICKET REVENUE

$50,000

TICKET REVENUE

The remaining balance of $20,000 in Unearned Ticket Revenue is reported as a current

liability on the balance sheet.

$30,000 $30,000

$20,000 Bal.


CHART OF ACCOUNTS

FOR NORTHERN MICRO

Let’s review thechart of accounts

for a merchandisingbusiness!


CHART OF ACCOUNTS

FOR NORTHERN MICRO

Assets

Current Assets

101 Cash

122 Accts. Rec.

131 Merch. Inv.

141 Supplies

145 Prepaid Ins.

Assets now includeMerchandise Inventory.


CHART OF ACCOUNTS

FOR NORTHERN MICRO

Assets

Current Assets

101 Cash

122 Accts. Rec.

131 Merch. Inv.

141 Supplies

145 Prepaid Ins.

Property, Plant, & Equip.

161 Land

171 Building

171.1 Acc. Depr.–Bldg.

181 Store Equipment

181.1 Acc. Depr.–Store Eq.


CHART OF ACCOUNTS

FOR NORTHERN MICRO

Liabilities

201 Notes Payable

219 Wages Payable

Current Liabilities

231 Sales Tax Payable

Long-Term Liabilities

251 Mortgage Payable

Owner’s Equity

202 Accounts Payable

241 Unearned Sub. Rev.

311 G. L. Fishel, Capital

312 G. L. Fishel, Drawing


CHART OF ACCOUNTS

FOR NORTHERN MICRO





Owner’s Equity



313 Income Summary


CHART OF ACCOUNTS

FOR NORTHERN MICRO

Assets

Current Assets

101 Cash

122 Accts. Rec.

131 Merch. Inv.

141 Supplies

145 Prepaid Ins.

Property, Plant, & Equip.161 Land

171 Building


181 Store Equipment


Revenue

401 Sales

401.1 Sales Ret. & Allow.Other Revenue

411 Interest Revenue

412 Rent Revenue

413 Subscrip. Revenue


CHART OF ACCOUNTS

FOR NORTHERN MICRO

Assets

Current Assets

101 Cash

122 Accts. Rec.

131 Merch. Inv.

141 Supplies

145 Prepaid Ins.

Property, Plant, & Equip.

161 Land

171 Building


181 Store Equipment


Revenue

401 Sales

401.1 Sales Ret. & Allow.Other Revenue

411 Interest Revenue

412 Rent Revenue

413 Subscrip. Revenue

Expenses

Cost of Goods Sold

501 Purchases

501.1 Purch. Ret. & Allow.

501.2 Purchases Discounts

502 Freight-In


CHART OF ACCOUNTS

FOR NORTHERN MICRO

Liabilities

201 Notes Payable

202 Accounts Payable

219 Wages Payable

Current Liabilities





Owner’s Equity



Operating Expenses

511 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.


CHART OF ACCOUNTS

FOR NORTHERN MICRO





Owner’s Equity



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 Expenses

551 Interest Expense

3

Prepare a work sheet for a

merchandising business.

PREPARING A WORK SHEET: 5

STEPS

• Prepare the trial balance.

• Prepare the adjustments.

• Prepare the adjusted trial balance.

• Extend the adjusted trial balance to the

Income Statement and Balance Sheet

columns.

• Total the Income Statement and Balance

Sheet columns to compute the net income

or loss.


Name of Company

Work Sheet


TRIAL BALANCE


Let’s look at awork sheet for amerchandising

business!


TRIAL BALANCE


STEP #1Prepare a

Trial BalanceAssetsASSETS are listed

in the Debit column.

Name of Company

Work Sheet



TRIAL BALANCE


STEP #1Prepare a

Trial BalanceAssets

Mdse. Inv.

BEGINNING balanceof Merchandise

Inventory

Name of Company

Work Sheet



TRIAL BALANCE


STEP #1Prepare a

Trial BalanceAssets

Mdse. Inv.LIABILITIES (including

unearned revenues) are listed in the Credit column.

LiabilitiesUnearned Rev.

Name of Company

Work Sheet



TRIAL BALANCE


STEP #1Prepare a

Trial BalanceAssets

Mdse. Inv.

OWNER’S EQUITY accounts are shown next.


Capital

Drawing

Name of Company

Work Sheet



TRIAL BALANCE

DEBIT CREDIT

ACCOUNT TITLE

Drawing

Income Summary

Income Summary is listed,but it has no balance until

the adjustments are entered.


TRIAL BALANCE

DEBIT CREDIT

ACCOUNT TITLE

Drawing

Income Summary

Revenue

Sales

Sales R & A

Sales Discounts

CONTRA-REVENUEaccounts are listed in

the Debit column.


TRIAL BALANCE

DEBIT CREDIT

ACCOUNT TITLE

Income Summary

RevenueSales

Sales R & A

Sales Discounts

COST OF GOODS SOLDaccounts are listed next.

ExpensesPurchases

Purch. R & A

Purch. Disc.

Freight-In

Drawing


TRIAL BALANCE


STEP #1Prepare a

Trial BalanceAssets

Mdse. Inv.


Capital

Drawing

ADJUSTMENTS

DEBIT CREDIT

STEP #2Prepare the Adjustments

EI BI

The beginning inventory is removed from and the ending inventory is entered into

the merchandise inventory account.

Name of Company

Work Sheet



TRIAL BALANCE


ADJUSTMENTS

DEBIT CREDIT

Drawing

Revenue

Income Summary

SalesSales R&A

Sales Discounts

ExpensesPurchases

Freight-In

Purch. R & A

Purch. Disc.

BI EI

Income Summary is debited for the amountof the beginning inventory and creditedfor the amount of the ending inventory.


ADJUSTMENTS



ADJ. TRIAL BAL.

DEBIT CREDIT

STEP #3Prepare the Adj. Trial Bal.

EI BI

The ending inventory is now the balanceof the merchandise inventory accountand is extended to the Adjusted Trial

Balance columns.

Merchandise Inv. EI

Assets

Name of Company

Work Sheet



ADJUSTMENTS



ADJ. TRIAL BAL.

DEBIT CREDIT


EI BI

Liabilities are extended to theAdjusted Trial Balance columns.

Merchandise Inv. EI


Assets

Name of Company

Work Sheet



ADJUSTMENTS



ADJ. TRIAL BAL.

DEBIT CREDIT


EI BI

Owner’s equity accounts arealso extended to the

Adjusted Trial Balancecolumns.

Merchandise Inv. EI


Assets

Capital

Drawing

Name of Company

Work Sheet



ADJUSTMENTS


ADJ. TRIAL BAL.

DEBIT CREDIT

Income Summary BI EI

For the Income Summary account, BOTH the beginning and the ending

inventories are extended into theAdjusted Trial Balance columns.

BI EI


ADJUSTMENTS


ADJ. TRIAL BAL.

DEBIT CREDIT

Revenue

Income Summary

Sales

Sales R & A

Sales Discounts

ExpensesPurchases

Freight-In

Purch. R & A

Purch. Disc.

BI EIBI EI

All the revenue and expenseaccounts are extended to the Adjusted Trial Balance

columns.


DEBIT CREDIT

STEP #4Extend AdjustedAccount Balances

DEBIT CREDIT

EI

Assets

ADJ. TRIAL BAL. INCOME STATEMENT BALANCE SHEET

DEBIT CREDIT

STEP #3Prepare the

Adj. Trial Bal.Assets

EI


CapitalDrawing

The assets (including the endingbalance of Merchandise

Inventory) are extended tothe Balance Sheet columns.

Name of Company

Work Sheet



DEBIT CREDIT

STEP #4Extend AdjustedAccount Balances

DEBIT CREDIT

EI


Assets

Capital

Drawing

ADJ. TRIAL BAL. INCOME STATEMENT BALANCE SHEET

DEBIT CREDIT

STEP #3Prepare the

Adj. Trial Bal.Assets

EI


CapitalDrawing

Liabilities andowner’s equity

accounts are alsoextended to the

Balance Sheet columns.

Name of Company

Work Sheet



INCOME STATEMENT

DEBIT CREDIT

ADJ. TRIAL BAL. BALANCE SHEET

DEBIT CREDIT

BI EI

DEBIT CREDIT

BI EI

RevenueSales

Sales R & A

Sales Discounts

ExpensesPurchases

Purch. R & A

Purch. Disc

Freight-In

BOTH the beginning and the endinginventories are extended to the

Income Statement columns for theINCOME SUMMARY account.


INCOME STATEMENT

DEBIT CREDIT


DEBIT CREDIT

BI EI

DEBIT CREDIT

BI EI

RevenueSales

Sales R & A

Sales Discounts

ExpensesPurchases

Purch. R & A

Purch. Disc

Freight-In

RevenueSales

Sales R & A

Sales Discounts

ExpensesPurchases

Purch. R & A

Purch. Disc

Freight-In

Revenue and expenses are extendedto the Income Statement columns.


INCOME STATEMENT

DEBIT CREDIT


DEBIT CREDITDEBIT CREDIT

Sales Discounts

ExpensesPurchases

Purch. R & A

Purch. Disc.

Freight-In

Sales Discounts

ExpensesPurchases

Purch. R & A

Purch. Disc.

Freight-In

STEP #5

(1) Sum columns

(2) Compute net income (loss)

Net

Income

Net

Income

COMPLETE THE WORK SHEET


INCOME STATEMENT

DEBIT CREDIT


DEBIT CREDITDEBIT CREDIT

Sales Discounts

ExpensesPurchases

Purch. R & A

Purch. Disc.

Freight-In

Sales Discounts

ExpensesPurchases

Purch. R & A

Purch. Disc.

Freight-In

STEP #5

(1) Sum columns

(2) Compute net income (loss)

Net

Income

Net

Income

Net

Loss

Net

Loss

COMPLETE THE WORK SHEET

4

Journalize adjusting entries

for a merchandising

business.


ADJUSTING ENTRIES FOR NORTHERN

MICRO

DATE DESCRIPTION PR DEBIT CREDIT

Adjusting Entries1

2

3

4

5

6

7

8

9

10

11

25,000Income Summary

25,000Merchandise Inventory

Dec. 31


Income Summary

30,000

30,000

31

31 Supplies Expense

Supplies

1,400

1,400

Journal entries must be made to enter the adjustments

into the accounting system.

20--



MICRO


Adjusting Entries1

2

3

4

5

6

7

8

9

10

11

1,800Insurance Expense

1,800Prepaid Insurance

Dec. 31

Depr. Exp.–Bldg.

Accum. Depr.–Bldg.

4,000

4,000

31

31 Depr. Exp.–Store Equip.

Accum. Depr.–Store Equip.

3,000

3,000

20--



MICRO


Adjusting Entries1

2

3

4

5

6

7

8

9

10

11

450Wages Expense

450Wages Payable

Dec. 31

Unearned Ticket Revenue

Ticket Revenue

30,000

30,000

31

20--

5

Prepare adjusting journal

entries under the perpetual

inventory system.


ADJUSTING ENTRIES FOR A

PERPETUAL INVENTORY SYSTEM


1

2

3

4

5

6

7

8

9

10

11

800Merchandise Inventory

800Accounts Payable

Accounts Receivable

Sales

400

400

Cost of Goods Sold


300

300

Purchased merchandise on account

Sold merchandise on account

Cost of goods sold recognized

Under the PERPETUAL inventorysystem, Merchandise Inventory

and Cost of Goods Sold are continually updated

as merchandise is purchased and sold.

ADJUSTING ENTRIES FOR A PERPETUAL

INVENTORY SYSTEM

• After the physical inventory is completed:

– The perpetual records must be

compared with the physical inventory to

discover and correct any errors or

losses of merchandise from theft,

breakage, or spoilage

– If a difference is found, the records

must be corrected by an adjusting entry

– Differences are recorded in an account

called Inventory Short and Over

ADJUSTING ENTRIES FOR A PERPETUAL

INVENTORY SYSTEM

EXAMPLE: A physical inventory shows $3,710 worth of merchandise, but the

inventory account has a balance of $3,840.

$130 short





1

2

3

4

5

6

7

8

9

10

11

Dec. 31 Inventory Short and Over 130

Merchandise Inventory 130

To adjust inventory per

physical count

Merchandise Inventory is reduced by $130.





1

2

3

4

5

6

7

8

9

10

11

Dec. 31

Inventory Short and Over

60Merchandise Inventory

60

To adjust inventory per

physical count

If a physical count hadshown $3,900,…a $60 overage.

Documents

College Accounting - MCCChorowitk/documents/Chapter14.pdf · College Accounting Heintz & Parry 20th Edition. Chapter 14 Adjustments and the Work Sheet for a Merchandising ... XXX