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Completing The Merchandising Accounting Cycle

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Chloe Lynnesse
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25 views40 pages

Completing The Merchandising Accounting Cycle

Uploaded by

Chloe Lynnesse
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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COMPLETING THE MERCHANDISING

ACCOUNTING CYCLE
Learning Objectives:

1. Prepare the work sheet under periodic and perpetual inventory system
2. Prepare financial statements of a merchandising company
3. Prepare the closing and reversing entries
4. Compare functional and natural presentation of income statement
The accounting cycle of a merchandising business is the same as the
service business. The following steps of the accounting cycle again are:

1. Analyzing the business transactions and events


2. Journalizing
3. Posting
4. Preparation of unadjusted trial balance
5. Adjusting entries
6. Preparation of adjusted trial balance
7. Preparation of Financial Statements
8. Preparation of closing entries
9. Post-closing trial balance
10. Reversing entries
PREPARING THE WORKSHEET
The preparation of worksheet under merchandising business is the same as that of
the service business except that of some accounts used under merchandising
business such as sales, sales discount , sales return and return, purchase, freight-
in, freight-out, purchase discounts and purchase return and allowances.

Perpetual Versus Periodic Inventory System Worksheet


A. Perpetual Inventory System
Using the perpetual inventory system, the Merchandise Inventory account in the
unadjusted trial balance shows the balance of the account before the adjusting
entries. In the adjusting entry column, it shows the adjusting entry for inventory
shrinkage. In the income statement column shows the credit balance for Sales
Revenues, debit balance for Sales, Discount and Sales Return and Allowances and
debit balance for Cost of Goods Sold. The balance sheet debit column shows the
balance of Merchandise Invertory after the adjustment for inventory shrinkage.
B. Periodic Inventory System
Using the periodic inventory system, the Merchandise Inventory account in the unadjusted trial balance column shows the balance of the
account at the beginning of the accounting period. It is only updated once at the end of the accounting period. The adjusting entries column
has no adjusting entry for inventory shrinkage. In the income statement column of worksheet it reports the new accounts used in the
calculation of cost of goods sold. The account that increase cost of goods sold are recorded in the debit column of the income statement
such as: Beginning balance of inventory, Purchases and Freight-in.
Accounting for the Merchandise Inventory (Periodic Inventory)

Two Approaches to reflect the ending merchandise inventory:


1. At the time of adjusting entry
Adjusting Entry:
Merchandise Inventory, end xx
Income Summary xx
To recognize ending inventory at year end
2. At the time of closing entries
Closing Entry: Ending Inventory
Merchandise Inventory, end xx
Income Summary xx
To recognize ending inventory at year end

Closing Entry: Beginning Inventory


Income Summary xx
Merchandise Inventory, beg. xx
To close beginning inventory to income statement
2 Types of Income Statement
(1) Single Step Income Statement (Natural Presentation)

All data are divided into two groups.


2 Types of Income Statement
(2) Multi Step Income Statement (Functional Presentation)
2 Types of Income Statement
(2) Multi Step Income Statement (Functional Presentation)

The following are the items to be considered in preparing the multi step income statement:
1. Net Sales are the revenue arising from the sale of merchandise inventory.

2. Cost of Goods Sold are cost of merchandise inventory that has been sold.

3. Operating expenses are the expenses relating to administrative and selling expenses of the
company.

4. Non-operating Income are incomes not related to sales income or service income such as
Interest Income on investment, dividend income, gain on sale of property etc.

5. Non-operating expenses are expenses not related to purchase of inventory, selling and
administrative expenses such as interest expense, bank service charge, loss on sale of property
etc.
Illustration: Periodic Inventory System
The trial balance of John Store have the following balances on January 1, 2030.
The following transactions were transpired during the year:

a. Purchased of goods on account amounted to P100,000 on January 10 from ABC Co.


b. Purchased merchandise on account with credit terms 2/10, n/30, FOB shipping point
for P20,000 on July 1, 2030 from Mr. Tan. The freight cost paid was P500.
c. Paid P50,000 for the goods purchased on January 10.
d. Paid the goods purchased from Mr. Tan on July 9.
e. Acquired one-year insurance premium of P24,000 on Oct. 1
f. Sold goods on account P50,000 to Mr. Ang. The cost of goods is P10,000.
g. Collected P30,000 from Mr. Ang.
h. Sold goods on account to ABC, terms 1/10, n/30 on Nov. 30 for P40,000, FOB
destination. The cost of the goods is P5,000. The freight cost paid was P200.
i. Issued a credit memorandum for P1,000 to a customer who returned goods purchased
on Nov. 30. The returned goods had a cost of P600.
j. Received payment from ABC on Dec. 5.
k. Withdrew cash amounting to P20,000 for personal use.
I and II. Analyzing and Journalizing the Business Transactions
III. Posting
IV. Preparation of Unadjusted Trial Balance
V. Adjusting Entries

Additional information for John Store on Dec. 31:


The following are the adjustments at the end of the year:
a. The total depreciation for the year is P20,000.
b. The total supplies on hand is P600.
c. The accrual of salaries amounted to P24,000.
d. The physical count of inventory on Dec. 31, 2030 amounted to P110,700.
The adjusting entries at the end of the year are:
VI. Preparation of Adjusted Trial Balance
VII. The Income Statement and Balance Sheet columns of worksheet are shown below:
INCOME STATEMENT COLUMNS
The accounts and its balances is transferred from the adjusted trial balance to the
Income Statement columns if the account affects the Income Statement. The sales
account is extended to the credit column while its contra accounts (sales discount
and sales return and allowance) are extended to the debit column. Also, the
purchase and freight in accounts are extended to the debit column while its contra
accounts (purchase discount and purchase return and allowances) are extended to
the credit column. The inventory beginning is extended to the debit column and
inventory ending balance (represented by the income summary account in the
income statement column) is extended to the credit column.

Then, total the debits and total credits amounts are compared to get the net income
or net loss for the period. If the total credits exceeds the total debits in the income
statement columns, the company has net income. But, if total debits exceeds total
credits, the company has net loss.
BALANCE SHEET COLUMNS
The main difference of Merchandising and Device business balance sheet is the
inventory. The assets accounts except the accumulated depreciation (contra
account) are extended to the balance sheet debit column. The accumulated
depreciation and liabilities accounts are extended to the balance sheet credit
column. Also, the Owner's capital account is extended to the credit column
while the Owner's drawing account is extended to the debit column.

Then, the total debits and total credits amounts are computed. It will result to net
income, if the total debit columns exceed the total credit column in the balance
sheet columns of the worksheet. But, if total credit column exceeds total debit
column it results to net loss.
VIII. THE CLOSING ENTRIES:
The closing entries are prepared as follows
1. Closed the Beginning inventory
2. Closed all revenue and expense accounts to Income Summary account
a. Sales revenue account is credited
b. Contra-revenue accounts are debited
c. Expenses accounts are debited
3. Closed the Income Summary account to Owner's Equity
4. Closed Owner's, Drawing account to Owner's Equity
IX. Preparation of Post-Closing Trial Balance
The Financial Statement
A. Income Statement
C. Balance Sheet
Illustration: Perpetual Inventory System
I and II. Analyzing and Journalizing the Business Transactions
IV. Preparation of Unadjusted Trial Balance
V. Adjusting Entries
VI. Preparation of Adjusted Trial Balance
VII. Preparation of Financial Statements
VIII. Preparation of Closing Entries
IX. Preparation of Post-Closing Trial Balance

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