PCHAPTER # 03

ACCOUNTING FOR MERCHANDISING ENTERPRISE

Definitions
Merchandising Enterprises are profit - seeking businesses /entities, which are
predominantly engaged in a continuous purchase and resale of merchandises.
Examples: Supermarkets, Boutiques, Garment and Shoe shops, Drug Stores, Retail
Stores, Import - Export Businesses etc.

Merchandises are those goods that a merchandising enterprise/company purchases

and resale to its customers. The account that shows the cost of merchandise purchased
for resale to the customers is called Inventory or, Purchases. This account is used only
for merchandise bought for resale.
Every cash purchase should be supported by a cash register receipt indicating
the items purchased and the amounts paid.
Each credit purchase should be supported by a purchase invoice, which indicates
the total purchase price and other relevant information

M&M Supply Company

Addis Ababa
S
Firm Name HAS Retail Company
O Attention of Helina A., purchasing agent
L
D Address Adago
Woldia Amhara 0707
T
O City State Zip

Date: May 4,2013 Sales person: Semhal Terms 2/10,n/30 Freight: paid by buyer
Catalog No Description Qty Price Amount
X572 Generator 20 Br. 1,500 Br. 30,000
A254 Production model 100 Br. 200 20,000
circuits
IMPORTANT: ALL RETURNS MUST BE MADE WITHIN 10
DAYS
The source document used for recording purchases of merchandises is called
Purchase Invoice.

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Inventory systems
There are two basic methods used to account for inventory:

(1) Periodic inventory system

An inventory system in which the company does not keep detailed inventory records
throughout the accounting period but determines the cost of goods sold only at the end
of an accounting period.

In a period inventory system ‘’purchase’’ account is used to record inventory

bought for sale and a physical count of inventory is done for two different
purposes:
1. To determine the inventory on hand at the statement of Financial position
date, and
2. To determine the cost of goods sold for the period.

Cost of goods sold = Value of opening inventory + Cost of goods purchased – Value
of closing inventory

(2) Perpetual inventory system

It is an inventory system in which a company maintains detailed records of the cost of
each inventory purchase items and sale, and the records continuously show the
inventory that should be on hand.
In a perpetual system, ‗‘inventory‘‘ account is used to record merchandise inventory
bought for sale and companies take a physical inventory at year-end for two
purposes:
1. to check the accuracy of their perpetual inventory records, and
2. To determine the amount of inventory lost due to wasted raw materials,
shoplifting or employee theft and make adjusting entries as follows.
CMS ……………………. XXX
Mdse. Inventory …………………………. XXX

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Accounting for Purchases
As you have seen above a merchandising enterprise uses the purchase/inventory
account to record the cost of merchandise bought for resale during its accounting
period. Hence, the purchase of merchandise is identified in the ledger as purchase or
inventory. The inventory or purchase account is the cost that will be reported as
expense in the future. The purchase account will be closed to income summary together
with other costs, expenses, & temporary accounts. The inventory or purchase account is
used only for merchandise that will be resold to customers but the asset purchased for
use in the business is not debited for inventory or purchase account rather it will be
debited to the appropriate asset account.

Purchases of merchandises are usually made through one of the following two basic
arrangements:
1. Cash purchase: a transaction in which merchandises are purchased on
immediate cash payment.
2. Credit purchase/purchase on account: a transaction in which merchandises are
purchased with an agreement to pay at a later future date.

When purchases are made on cash, the transaction could be recorded as:

Perpetual inventory system Periodic inventory system

Inventory ………………xx Purchase ………………xx

Cash…………………………xx Cash………………………xx

(To record cash purchase) (To record cash purchase)

When purchases are made on account, the transaction could be recorded as:

Perpetual inventory system Periodic inventory system

Inventory ………………xx Purchase ………………xx

A/payable………………xx A/payable…………………xx

(To record credit purchase) (To record credit purchase)

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Example:
Almaz retail store made two purchase of merchandise from M&M Supply Company.
Almaz purchase Br. 30,000 of merchandise on account on May 4, & on May 21,
purchase Br. 20,000 of merchandise on cash. The required journal entries are:

Perpetual inventory system Periodic inventory system

May 4 Inventory ………..30,000 Purchase ………………30,000

A/payable……………..…30,000 A/payable…………30,000

(To record credit purchase) (To record credit purchase)

May 21 Inventory ………..20,000 Purchase ………………20,000

Cash………………..…20,000 Cash…………………20,000

(To record cash purchase) (To record cash purchase)

Purchase Discounts
The arrangements agreed by the buyer and the seller as to when payments for
merchandise are to be made is called credit terms. If payment is required immediately
upon delivery, the terms are said to be “cash” or “net cash”. Otherwise, the buyer is
allowed a certain amount of time known as the credit period, in which to pay. It is
usual for the credit period to begin with the date of the sale as shown by the date of the
invoice or bill. If payment is due within a stated number of days after the date of the
invoice, for example 30 days, the terms are said to be ―net 30 days ―,which may be
written as ―n/30." If payment is due by the end of the month in which the sale was
made, it may be expressed as ―n/eom.‖

As a means of encouraging payment before the end of the credit period, the seller may
offer a discount for the early payment of cash. Thus the expression ―2/10, n/30‖ means
that, although the credit period is 30 days, the buyer may deduct 2% of the amount of
invoice if payment is made within 10 days of the invoice date. Such discounts taken by
the buyer for early payment of invoice are called Purchase discount. They are recorded

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by crediting the purchases discounts account and are usually viewed as a deduction
from the amount initially recorded as purchases. In this sense, the purchase discounts
account is a contra (offsetting) account for purchases.

Example:
Assume the credit term for Almaz retail store on May 4 purchases are 2/10, n/30, and if
the merchandise is paid on May 14 a 2% discount may be taken .Thus, only Br. 29,400
(30,000-(30,000x 0.02)) must be paid to settle the Br. 30,000 accounts payable. Here, the
entry to record the payment of the invoice on May 14 will be:

Perpetual inventory system Periodic inventory system

May 14 A/payable ………..30,000 A/payable ………………30,000

Cash ……………..…29,400 Cash……………………29,400
Inventory ………… 600 Purchase discount…… 600

(To record payment on account with the (To record payment on account with the
discount period) discount period)

Purchase Returns and Allowances

Purchasers may sometimes return merchandise already purchased or may request a
price adjustment from the seller. There are several reasons for this practice including:
 Interior quality of goods received.
 Wrong specification.
 Damage caused to goods in shipment etc.

Like purchase discounts, purchase returns and allowances have negative impacts on
total purchases made during the period. Merchandise returned and purchases
allowances are often recorded in ‗’purchases returns and allowances’’ account. This
account is a contra purchases account and has a credit balance. The source document
used for recording purchase returns and allowances is a debit memorandum. It is called
debit memorandum because the purchaser debits the sellers account.

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The journal entry to record purchase returns & allowances is:

Perpetual inventory system Periodic inventory system

A/payable ………………xx A/payable ………………xx

Inventory ………………xx Purchase return & Allowance………..xx

(To record purchase return & (To record purchase return & allowances)
allowances)

Example:
Assume Almaz returns Br. 1,500 of merchandise to XYZ Company before paying for
the goods, the journal entry would be:

Perpetual inventory system Periodic inventory system

A/payable ………………1,500 A/payable ………………1,500

Inventory ………… 1,500 Purchase return & Allowance……1,500

(To record purchase return & (To record purchase return & allowances)
allowances)

NB: Purchase discounts are based on the invoice price of goods. If there are purchase
returns or allowances, they must be deducted from the invoice before calculating
purchase discounts, for example, in the above transaction of Almaz retail store, the
invoice price of goods purchased was Br. 30,000 & if Br. 1,500 of the goods were
returned, the purchase discount would be calculated on Br. 28,500 & the payment with
in the discount period will be recorded as follows:

Perpetual inventory system Periodic inventory system

A/payable ………………28,500 A/payable ………………28,500

Cash ……………. 27,930 Cash ……………………………. 27,930
Inventory ………. 570 Purchase discount ……………. 570

(To record payment on discount (To record payment on discount period)

period)

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Generally, when a business determines its purchases for a given time period, the
balance of both purchase discounts and purchase returns and allowances accounts
should be deducted from the balance of purchases account. In other words, if there are
purchases discounts and purchase returns and allowances, net purchases are
determined as:

Purchases……………………………………………………………………... XXX
Less: Purchase discounts……………………………….XX
+ Purchase returns & allowances………………… XX (XX)
Net Purchases ………………………………………………………………... XXX

Accounting for Sales

The sale of goods occurs between two parties (i.e. the buyer and seller). The seller of
the good transfers them to the buyer in exchange for cash or agreed to receive a
specified amount of money at a later future date. In either case, sale of merchandise
transaction are recorded in a ledger account identified as ―Sales‖. This is a revenue
account used to record the sale of merchandise during an accounting period.

If sales to a customer is made for cash:

Cash……………………xx
Sales……………………….xx

If sales to a customer is made on account (Credit sales):

A/R……………………xx
Sales……………………….xx

 The source document used for recording sales of merchandise is

called Sales Invoice.

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Example:
On May 9, 2013 E.C Almaz Retail Store sold 3 Generator on account to Royal Co., Br.
6,000, 2/10, n/30. The cost of the merchandise sold was Br. 4,500.

Perpetual inventory system Periodic inventory system

A/Receivable ………………6,000 A/Receivable ………………6,000

Sales ……………. 6,000 Sales ……………. 6,000

Cost of Goods Sold ………4,500 No entry for cost of goods sold

Inventory......………. 4,500

(To record sales of inventory on Account) (To record sales of inventory on Account)

Sales Discounts
A sales discount refers to an available discount offered by the seller to encourage early
payments of invoices by the purchaser. Sales discounts are mirror images of purchases
discounts. They affect the amount of total sales negatively and are recorded in contra
sales account called sales discounts. Since sales account has a credit balance, sales
discount is an account with normal balance of debit.

Example:
On May 19, 2013 E.C Almaz Retail Store collected its receivable that was made on
account at May 9, 2013 to Royal Company, term 2/10, n/30.

Journalize the transaction for the receipt of cash on May 19.

Solutions:

Perpetual inventory system Periodic inventory system

Cash ………………… 5,880 Cash …..…………… 5,880

Sales discount………. 120 Sales discount………. 120
Accounts Receivable ………... 6,000 Accounts Receivable ………... 6,000

(To record Cash received on account (To record Cash received on account within
within a discount period) a discount period)

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 Sales Returns and Allowances
A seller of merchandise may receive a return of merchandise that was sold to a
purchaser and may make reductions in the original sale price. The former represents
sales returns while the latter one represents sales allowances. Sales returns and
allowance transaction result in a reduction from the sales revenue as well as from cash
or account receivable. Like sales discounts, they are contra sales accounts and are
accounted for in sales returns and allowances ledger account, which has a debit balance.
The source document used for recording sales returns and allowances is called credit
memorandum. It is called because the customer‘s account is credited for the amount of
sales returns and allowances.

Example:
Assume that a Br. 2,000 of goods sold on account is returned by the customers. And if
the payment has not yet been received, the journal entry is as follow:

Sales returns& allowances ……………Br. 2,000

A/Receivable ………………………… Br. 2,000

If the customer has already been paid the amount & the seller gives the customers a
refund (assume also the customer took 2% discount) the journal entry will be as follow:

Sales returns & allowances ……………Br. 2,000

Cash ………………………… Br. 1,960
Discount gain……………….. Br. 40

Generally, the balance of Sales Discounts together with balance of Sales Returns and
Allowances should be deducted from total sales in determining net sales.
Sales……………………………………………………………………………….XXX
Less: Sales Discounts………………………………XX
+ Sales Returns and Allowances…………….. XX (XX)
Net Sales…………………………………………………………… XXX

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Trade Discounts, Transportation Costs, and Sales Tax

Trade Discounts
To attract more customers and to increase the volume of their sales, suppliers of
merchandise may arrange for several packages. One of such arrangement is offer trade
discount. A trade discount is a discount from the list or catalogue price of commodities
offered usually for customers who purchase in large amounts. The main purpose of a
trade discount offer is to induce purchases of goods by customers in larger quantities.
Trade discounts are commonly stated as percentages of purchase amounts. The
discount rates could be flat rates like 40% of purchases or progressive like 5% discount
for purchase up to Br. 50,000 and 10% discount for purchases from Br. 50,000 up to
100,000 and so on.

When available trade discounts are taken, purchases of merchandise are recorded net of
trade discounts. There is no requirement to account trade discounts, in a separate
account

Example:
Assume on April 15, 2013, Bahir Dar Garments Plc purchased merchandise on account
from Kombolcha Textile Factory. The list price is Br. 60,000 and 20% trade discount. The
Br. 60,000 list price does not represent the invoice price for purchase of merchandise.
Invoice price rather is the deference between list price and trade discount as:
Trade discount = List Price * Trade discount rate
= Br. 60,000 * 0.2
= Br. 12,000
Then, the invoice price can be computed as:
Invoice price = List price – Trade discount
= Br. 60,000 – 12,000
=Br. 48,000
Or else, Invoice price = List price * (100 % - Trade discount rate)
= Br. 60,000 *(100% - 20%)
= Br. 60,000 * 0.8
= Br. 48,000

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Finally, the journal entry to record the Purchases and Sales of merchandise by Bahir Dar
Garments Plc and Kombolcha Textile Factory would appear as follows:

Perpetual inventory system Periodic inventory system

2013 M. Inventory ……..48,000 2013 Purchase ……..48,000

April 15 A/payable ……..…48,000 April 15 A/payable ……..…48,000

(To record the purchase of mdse by Bahir (To record the purchase of mdse by Bahir
Dar Garments Plc) Dar Garments Plc)

Perpetual inventory system Periodic inventory system

2013A/ Receivable ………48,000 2013 A/Receivable ……48,000

April, 15 Sales ……………. 48,000 April, 15 Sales ………. 48,000

(To record the sale of mdse by (To record the sale of mdse by Kombolcha
Kombolcha Textile Factory) Textile Factory)

Transportation Costs
Transportation costs may be incurred by the buyer or the seller depending on the term
of shipment. The terms of agreement between the buyer and the seller could be two
types.
1. FOB Shipping Point
2. FOB Destination.
If the term of agreement is FOB Shipping Point, ownership of the goods passes to
the buyer at shipment. Under this term, the buyer is responsible for transportation
costs. Here, the transportation cost paid by the buyer will be debited to
Transportation in or Freight in account.
If the term of agreement is FOB Destination, ownership of the goods passes to the
buyer when the buyer receives the merchandise. Under this term, transportation
costs are covered by the seller. Here, the amounts paid by the seller for delivery will
be debited to Transportation out or Freight out accounts. The total of such costs

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 incurred during a period is reported on the seller‘s income statement as a selling
expense.

Notes:
- In some cases, the seller may prepay the transportation costs & add them to the
invoice; even though the agreement states that the buyer bear such costs (terms
FOB Shipping Point). In such cases the buyer will debit Transportation
in/Freight in for the transportation cost.
- When the term provides for a discount for early payment, the discount is based
on the amount of sale rather than on the invoice of total.

Example:

On June 1, 2012 XYZ Company purchase merchandise on account from Yaa Co., Br.
1,900, terms FOB Shipping Point, 2/10, n/30 and Paid transportation charges of Br. 150,
which were added to the invoice.
Required: pass the necessary journal entries on June 1 and 10 for the buyer and seller.
Solution:

On the books of buyer

Perpetual inventory system Periodic inventory system

2012 M. Inventory ……..1,900 2012 Purchase ……..1,900

June 1 A/payable ……..…1,900 June 1 A/payable ……..…1,900

(To record the purchase of mdse on credit (To record the purchase of mdse on credit
by XYZ) by XYZ)

2012 M. Inventory ……..150 2012 Freight in ……..150

June 1 A/payable.………….150 June 1 A/payable.………….150

To record Freight costs on purchases To record Freight costs on purchases

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 Perpetual inventory system Periodic inventory system

2012 A/ payable ……..2,050 2012 A/ payable ……..2,050

June 10 Cash …..…… 2,012 June 10 Cash ……..…… …….. 2,012
Inventory……… 38 Purchase discount…… 38

(To record the payment of credit by XYZ) (To record the payment of credit by XYZ)

On the books of seller

Perpetual inventory system Periodic inventory system

2012 A/Receivable ……..2,050 2013 A/Receivable ……..2,050

June 1 Sales revenue…..…1,900 April 15 Sales revenue…..…1,900
Cash……………… 150 Cash……………… 150

(To record the sales of mdse on credit by (To record the sales of mdse on credit by
Yaa Com) Yaa Com)

Perpetual inventory system Periodic inventory system

2012 Cash ……………..2,012 2012 Cash ……………..2,012

June 10 sales discount ….. 38 June 10 sales discount ….. 38
A/receivable……….. 2,050 A/receivable……….. 2,050

(To record the Receipt of Cash by Yaa) (To record the Receipt of Cash by Yaa)

Example:
Assume that on March 5, 2011 ABC company Sold merchandise on account to Rolex
Co., Br. 10,000, terms FOB Destination, 1/10, n/30. The cost of the merchandise was Br.
6,000 and Paid transportation charges of Br. 200, which were added to the invoice.
Required: Record the journal entries for the sale and collection assuming the customer
has paid the seller on March 15, 2011.

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 Perpetual inventory system Periodic inventory system

March 5 A/Receivable….…10,000 March 5 A/Receivable….…10,000

2011 Freight out ……… 200 2011 Freight out ……… 200
Sales ……………… 10,000 Sales ……………… 10,000
Cash……………… 200 Cash……………… 200

Cost of Goods Sold ………6,000 No entry for cost of goods sold

Inventory......………. 6,000

(To record sales of inventory on Account) (To record sales of inventory on Account)

Perpetual inventory system Periodic inventory system

March 15 Cash….…………….9,000 March 15 Cash….…………….9,000

2011 Sales Discount …… 100 2011 Sales Discount …… 100
A/Receivable…… 10,000 A/Receivable…… 10,000

(To record sales of inventory on Account) (To record sales of inventory on Account)

Sales tax

Government and states commonly levy/impose various types of taxes. A tax imposed
by governmental units on sale of goods is known as a Sales Tax. Businesses are
required by law to collect tax from customers for the sales they make. At the time they
make sales taxes are imposed as a percentage of sales. In Ethiopia, for example, sales tax
rate was 15% of sales price (Sales tax now is replaced by Value Added Tax (VAT))

Example:
Rita Trading sold merchandise on account to Marathon Motor Engineering Ltd., Birr
25,000 plus a 15 % sales tax.
Sales Tax = Selling Price of Goods * Sales Tax Rate
= Birr 25,000 * 15%
= Br. 3,750
Total amount of sale = Selling Price of Goods +Sales Tax
= Br. 25,000 + Br. 3,750
= Birr 28,750

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Out of the total Birr 28,750 Rita is going to collect fromMarathon Motor Engineering
Ltd., only Br. 25,000. The remaining balance (Birr 3,750) is a liability to be paid to the
government. Accordingly, the transaction can be recorded in the books of Rita Trading
as follow:
A/Receivable …………………….Birr 28,750
Sales……………………………………………..Birr 25,000
Sales tax payable ……………………………… 3,750

When Rita periodically pays the appropriate amount of sales tax to the concerned
revenue office, the sales tax payable account will be debited and cash is credited.

Chart of Accounts
A company‘s Chart of Accounts is a list of all Asset, Liability, Equity, Revenue, and Expense
accounts included in the company‘s General Ledger. The number of accounts included in the
chart of accounts varies depending on the size of the company.
Following is an example chart of accounts of a merchandising company

1. Assets 3. Equity
110 Cash 310 Share Capital —Ordinary
111 Accounts Receivable 311 Retained Earnings
112 Notes receivable 312 Dividends
113 Interest receivable 313 Income Summary
115 Merchandise inventory 4. Revenue
116 Office Supplies 410 Sales
117 Prepaid Insurance 411 Sales return & allowance
120 Land 412 Sales discount
123 Store Equipments 5. Expenses
124 Acc. Deprn – Store Equip‘t 510 Cost of Goods sold
125 Office Equipment 520 Salaries Expense
126 Acc. Deprn. –Office Equipment 521 Advertise Expense
2. Liabilities 522 Depreciation Expenses – Store equip‘t
210 Accounts payable 529 Miscellaneous selling Expenses
211 Salaries payable 530 Rent Expenses
212 Unearned revenue 531 Depreciation Expenses – Office equip‘t
215 Notes payable 532 Insurance Expenses
533 Office Supplies Expenses
518 Truck Expenses
539 Misc. Administrative Expenses

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3.1. Periodic Reporting for Merchandising Enterprises

At yearly intervals throughout the life of business enterprise, the operating data for the
fiscal year must be summarized & reported for the users of accounting information, like
managers, owners, creditors, governmental agencies and other interested bodies.
Summaries of the various assets of the enterprise on the last day of fiscal year, together
with status of the equities of creditors & owners must also be reported. The ledger,
which contains the basic data for the reports, must then be brought up-to date through
proper adjusting entries. Finally, the accounts must be prepared to receive entries for
transactions that will occur in the following year. The sequence of year end procedures
may be changed slightly, but in general, the following outline is typical;
1. Prepare a trial balance of the ledger on a work sheet form.
2. Review the accounts and gather the data required for the adjustments.
3. Journalize the adjusting entries and post to the ledger.
4. Insert adjustments and complete the work sheet.
5. Prepare financial statements from the data in the work sheet.
6. Journalize the closing entries and post to ledger.
7. Prepare a post closing trial balance of the ledger.

In a merchandising enterprise, the purchase during the period has been recorded in the
purchase account. Some of this purchase may have been sold during the period, and
some may be unsold at the end of the period. This ending inventory becomes the
beginning inventory of the next period.

Merchandise Inventory Adjustments

At the end of the period it is necessary to remove from merchandise inventory the
amount representing the inventory at the beginning of the period and to replace it with
the amount representing the inventory at the end of the period. This is accomplished by
two adjusting entries:

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The first entry transfers the beginning inventory to income summary. Since the
beginning inventory is part of the cost of merchandise sold it is debited to income
summary. It is also a subtraction from the asset account Merchandise inventory, is
credited to that account.
Income Summary…………………………..xx
Merchandise Inventory ……………………xx

The second adjusting entry debits the cost of merchandise inventory at the end of the
period to the asset account, Merchandise inventory. The credit portion of the entry
effects a deduction of the unsold merchandise from the total cost of merchandise
available for sale during the period.

Merchandise inventory………………………xx
Income summary………………………………………xx

Example:
Assume the following inventory purchases and sales data for x company.
January 1. Merchandise inventory (beginning inventory)…… Birr 52, 500
1-31. Purchases on account………………………………………. 26, 200
1-31. Sales (on account): Selling price………………………….. 49, 750
Cost price…………………………. 28,000
31. Merchandise inventory (ending inventory)…………. 50, 700
Required:
Record the necessary journal entries and adjusting entries under both periodic &
perpetual inventory systems

Solutions:
Entries to record the Purchases from January 1 -31:

Periodic Inventor System Perpetual Inventory System

Merchandise inv. ……Br. 26,200
Purchases…. Br. 26, 200 A/P……………Br. 26,200
A/P……………..Br. 26,200

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 Entries to record the Sales from January 1 -31:
A/R……………Br. 49,750 A/R……………Br. 49, 750
Sales………………Br. 49, 750 Sales …………………Br. 49,750
No Entry to record – CMS CMS ……………Br. 28,000
Merchandise inv. . .………Br. 28,000

Adjusting entries on January 31,For merchandise inventories:

Income summary …………Br. 52,500
Merchandise inventory….Br. 52, 500
Merdise inventory ……Br. 50,700
Income summary…………Br. 50,700

Illustration: Consider the following data which is maintained by Alpha plc (a

merchandising business solely owned and managed by Mr. Larsen) for the year ended
December 31, 2002.

Alpha Com
Unadjusted Trial Balance
December 31, 2002
Cash 2,300 00
A/Receivable 12,500 00
Prepaid Insurance 5,600 00
Merchandise Inventory 23,700 00
Supplies 5,700 00
Equipment 17,300 00
Acc. Deprn._ Equipment 3,500 00
A/Payable 3,500 00
Notes Payable 19,600 00
Sales Tax Payable 3,400 00
Larsen, Capital 25,600 00
Larsen Drawing 3,000 00
Sales 110,200 00
Sales Returns & Allowances 3,100 00
Sales Discounts 2,300 00
Purchases 67,800 00
Purchase Returns& Allowances 1,200 00
Purchase Discounts 1,300 00
Freight In 3,900 00
Salary Expense 11,400 00
Miscellaneous Expense 9,700 00
Totals 168,300 00 168,300 00

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Additional Information’s
a) The ending merchandise inventory amounts Br. 18,500.
b) Accrued salary expense on December 31, 2002 amounts Birr 3,500.
c) The prepaid insurance reported in the trial balance is amount paid on January 1,
2002 .This amount applies for four years starting from the date of payment.
d) Supplies on hand amounts Br. 3,100 as of December 31, 2002
e) The depreciation expense for the equipment on December 31, 2002 amounts Br.
500.
Required: Prepare the following items for Alpha Com.
1. All the necessary adjusting entries.
2. Ten column work sheet
3. Multiple step income statement
4. Capital (owner‘s equity) statement
5. Statement Financial position (report form)
6. Pass all the necessary closing entries
Solution
1. Adjustment

Two Column General Journal Page 3

Date Description PR Debit Credit
Adjusting Entries
2012 Income summary 23,700 00
Jan. 31 Merchandise inventory 23,700 00
31 Merchandise inventory 18,500 00
Income summary 18,500 00
31 Supplies Expense 2,600 00
Supplies 2,600 00
Salary Expense 3,500 00
31 Salary Payable 3,500 00
Insurance Expense 1,400 00
31 Prepaid Insurance 1,400 00
Depreciation Expense 500 00
31 Acc. Deprn. –Equipment 500 00

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 2. Ten Column Worksheet
Alpha Com
Worksheet
December 31, 2002
Account titles Trial balance Adjustments Adjusted trial balance Income statement Financial Position
Dr Cr Dr Cr Dr Cr Dr Cr Dr Cr
Cash 2,300 2,300 2,300
Account Receivable 12,500 12,500 12,500
Pre Paid Insurance 5,600 (c)1400 4,200 4,200
Merchandise Inventory 23,700 (a)18,500 (a)23,700 18,500 18,500
Supplies 5,700 (d)2,600 3,100 3,100
Equipment 17,300 17,300 17,300
Acc.Dep. –Equipment 3,500 (e)500 4,000 4,000
Account Payable 3,500 3,500 3,500
Notes Payable 19,600 19,600 19,600
Sales Tax Payable 3,400 3,400 3,400
Larsen Capital 25,600 25,600 25,600
Larsen Drawing 3,000 3,000 3,000
Sales 110,200 110,200 110,200
Sales Returns & Allowance 3,100 3,100 3,100
Sales Discount 2,300 2,300 2,300
Purchase 67,800 67,800 67,800
Purchase Returns & Allowance 1,200 1,200 1,200
Purchase Discount 1,300 1,300 1,300
Freight In 3,900 3,900 3,900
Salary Expense 11,400 (b)3,500 14,900 14,900
Miscellaneous Expense 9,700 9,700 9,700
Totals 168,300 168,300
Income Summary (a)23,700 (a)18,500 23,700 18,500 23,700 18,500
Insurance Expense (c)1400 1,400 1,400
Supplies Expense (d)2,600 2,600 2,600
Depreciation Expense (e)500 500 500
Salary Payable (d)3,500 3,500 3,500
Totals 50,200 50,200 190,800 190,800 129,900 131,200 60,900 59,600
Net Income 1,300 1,300
Balance 131,200 131,200 60,900 60,900

[20] WU/2015 E.C

 Note for the worksheet:
Both the debit of Birr 23,700 and credit of Birr 18,500 made to the income summary account
are extended to the adjusted trial balance and income statement columns. This is the only
time that the individual figures, rather than the net amount, are extended on the worksheet
because the individual amounts are needed for the calculation of cost of merchandise sold
on the income statement.

3. Multiple Step Income Statement

Alpha Com
Income Statement
For The Year Ended December 31, 2002
Revenues from sales:
Sales …………………………………………………………………110,200
Less: Sales Return & Allowance…………………… 3,100
Sales Discount………………………………... 2,300 (5,400)
Net Sales…………………………………………………….. …………………Br. 104,800
Less: Cost Of Merchandise Sold:
Merchandise Inventory Jan 1, 2002 ……………………………… 23,700
Purchase…………………………………………… 67,800
Less: Purchase Return &Allowance…… 1,200
Purchase Discount……………… 1,300 (2,500)
Net Purchases ……………………………………… 65,300
Add: Freight in……………………………………… 3,900
Cost Of Merchandise Purchase……………………………………69,200
Merchandise Available For Sale ………………………………...... 92,900
Less: Merchandise InventoryDec 3 1, 2002 ………………… (18,500)
Cost of Merchandise Sold……………………………………………………… (Br. 74,400)
Gross Profit …………………………………………………………. Br. 30,400
Less:Operating Expenses:
Salary Expense …………………………………… 14, 900
Supplies Expense………………………………… 2,600
Insurance Expense……………………………… 1,400
Depreciation Expense-Equipment……………… 500
Miscellaneous Expense ………………………… 9,700
Total Operating Expense…………………………………………………………. (29,100)
Net Income …………………………………………………………. Br. 1,300

[21] WU/2015 E.C

 4. Capital (owner’s equity) statement
Alpha Com
Statement of Owner’s Equity
For The Year Ended December 31, 2002
Larsen Capital January 1, 2002………………………………………………Br. 25,600
Add: Net income………………………….1,300
Less: Drawing …………………………… (3,000)
Decrease in owner‘s equity………………………………………………… (1,700)
Larsen, Capital December 31, 2002…………………………………………Br. 23,900

5. Balance sheet (report form)

Alpha Com
Statement of Financial Position
As of December 31, 2002

Assets:
Plant assets:
Equipment ……………………………………. 17,300
Less: Acc.Dep_Equipment…………………. (4,000) 13,300
Current assets:
Supplies ………………………………………….. 3,100
Merchandise inventory…………………………… 18,500
Prepaid insurance…………………………………... 4,200
A/Receivable………………. ………………………12,500
Cash ………………………………………………Birr 2,300
Total current assets ……………………………………………………Br. 40,600
Total assets……………………………………………………. Br. 53,900

Owner’s equity:
Larson, Capital, December 31, 2012…………………………………23,900
Liabilities:
Salaries payable……………………………… 3,500
Sales tax payable …………………………….. 3,400
N/P……………………………………………. 19,600
A/P………………………………………….... 3,500
Total liabilities………………………………………………………Br. 30,000

Total owner’s equity & liabilities ………………………… Br. 53,900

[22] WU/2015 E.C

 6. The necessary adjusting & closing entries

Closing entries:

a) Sales ……………………………………… Br. 110,200

Purchase Returns& Allowances………………. 1,200
Purchase Discounts……………………………… 1,300
Income Summary ………………………… Br. 112,700

b) Income Summary …………………………Br. 106,200

Sales Returns &Allowance………………… Br. 3,100
Sales Discount………………………………… 2,300
Purchases……………………………………………………… 67,800
Freight in……………………………………………………. . 3,900
Salary Expense ……………………………………………….. 14,900
Insurance Expense ……………………………………………. 1,400
Supplies Expense …………………………………………… 2,600
Depreciation Expense……………………………………… 500
Miscellaneous Expense……………………………………….. 9,700

c) Income Summary …………………………Br. 1,300

Larson, Capital …………………………………………………… Br. 1,300

d) Larson, Capital …………………………………… Br. 3,000

Larson, Drawing ………………………………………Br. 3,000

[23] WU/2015 E.C