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.
ADJUSTMENT FOR MERCHANDISE INVENTORY
More inventory atthe END then atthe BEGINNING
of the year?
ADJUSTMENT FOR MERCHANDISE INVENTORY
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
ADJUSTMENT FOR MERCHANDISE INVENTORY
MERCHANDISE INVENTORY
$25,000BEG. BALANCE
ADJUSTMENT FOR MERCHANDISE INVENTORY
MERCHANDISE INVENTORY
$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
ADJUSTMENT FOR MERCHANDISE INVENTORY
MERCHANDISE INVENTORY
$25,000
After a year ofpurchasing and selling
merchandise, the balanceis no longer accurate
ADJUSTMENT FOR MERCHANDISE INVENTORY
MERCHANDISE INVENTORY
$25,000
An adjustment is needed to update the balance of the Merchandise Inventory account
ADJUSTMENT FOR MERCHANDISE INVENTORY
MERCHANDISE INVENTORY
$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
Merchandise Inventory
Income Summary
Purchases
Purchases Ret. & Allow.
Purchases Discounts
Freight-In
25,000
80,000
1,000
500
700STEP #1
REMOVE THEBEGINNING BALANCE.
TRIAL BALANCEDEBITCREDIT
ACCOUNT TITLEDEBIT CREDIT
ADJUSTMENTS
Merchandise Inventory
Income Summary
Purchases
Purchases Ret. & Allow.
Purchases Discounts
Freight-In
25,000
80,000
1,000
500
700By crediting Merchandise Inventory,the balance is reduced to zero.
25,000(a)
TRIAL BALANCEDEBITCREDIT
ACCOUNT TITLEDEBIT CREDIT
ADJUSTMENTS
Merchandise Inventory
Income Summary
Purchases
Purchases Ret. & Allow.
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.
TRIAL BALANCEDEBITCREDIT
ACCOUNT TITLEDEBIT CREDIT
ADJUSTMENTS
Merchandise Inventory
Income Summary
Purchases
Purchases Ret. & Allow.
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)
TRIAL BALANCEDEBITCREDIT
ACCOUNT TITLEDEBIT CREDIT
ADJUSTMENTS
Merchandise Inventory
Income Summary
Purchases
Purchases Ret. & Allow.
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)
TRIAL BALANCEDEBITCREDIT
ACCOUNT TITLEDEBIT CREDIT
ADJUSTMENTS
Merchandise Inventory
Income Summary
Purchases
Purchases Ret. & Allow.
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.
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)
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.
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)
30,000
25,000 30,000
80,000
1,000
500
700
The other accounts are extendedwith no adjustments.
ADJUST. T/BDR.CR.
ACCOUNT TITLE DR. CR.
INCOME STMTCR. DR.
BALANCE SHEET
Merch. Inv.
Income Sum.
Purchases
Purch. R &A
Purch. Disc.Freight-In
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.
ACCOUNT TITLE DR. CR.
INCOME STMTCR. DR.
BALANCE SHEET
Merch. Inv.
Income Sum.
Purchases
Purch. R &A
Purch. Disc.Freight-In
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.
ACCOUNT TITLE DR. CR.
INCOME STMTCR. DR.
BALANCE SHEET
Merch. Inv.
Income Sum.
Purchases
Purch. R &A
Purch. Disc.Freight-In
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.
ACCOUNT TITLE DR. CR.
INCOME STMTCR. DR.
BALANCE SHEET
Merch. Inv.
Income Sum.
Purchases
Purch. R &A
Purch. Disc.Freight-In
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
Merch. Inv., January 1
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
Merch. Inv., January 1
Freight-In is added to Net Purchasesto determine the “Cost of Goods Purchased.”
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 700Cost of Goods Purch. 79,200
Merch. Inv., January 1
Cost of Goods Purchasedis added to the Beginning Inventory
to determine Goods Available for Sale.
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 700Cost of Goods Purch. 79,200
Goods available for sale $104,200
Merch. Inv., January 1
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
Less: Purchases R&A $1,000
500Purchases Disc. 1,500
Net purchases $78,500
Freight-In 700Cost of Goods Purch. 79,200
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.
ADJUSTMENT FOR UNEARNED REVENUE
UNEARNED TICKET REVENUE
$50,000
When season tickets are soldCash is debited and
Unearned Ticket Revenue is credited
ADJUSTMENT FOR UNEARNED REVENUE
UNEARNED TICKET REVENUE
$50,000
Following the production of the third show,financial statements are to be prepared
ADJUSTMENT FOR UNEARNED REVENUE
UNEARNED TICKET REVENUE
$50,000
An adjusting entry isneeded to recognize theticket revenue earned
for the three shows
ADJUSTMENT FOR UNEARNED REVENUE
UNEARNED TICKET REVENUE
$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
ADJUSTMENT FOR UNEARNED 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
ADJUSTMENT FOR UNEARNED REVENUE
UNEARNED TICKET REVENUE
$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!
NORTHERN MICROCHART OF ACCOUNTS
Assets Current Assets101 Cash 122 Accts. Rec.131 Merch. Inv.141 Supplies145 Prepaid Ins.
Assets now includeMerchandise Inventory
NORTHERN MICROCHART OF ACCOUNTS
Assets Current Assets101 Cash 122 Accts. Rec.131 Merch. Inv.141 Supplies145 Prepaid Ins.
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
NORTHERN MICROCHART OF ACCOUNTS (cont.)
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
NORTHERN MICROCHART OF ACCOUNTS
Assets Current Assets101 Cash 122 Accts. Rec.131 Merch. Inv.141 Supplies145 Prepaid Ins.
Property, Plant, & Equip161 Land 171 Building 171.1 Acc. Depr. - Bldg
181 Store Equipment 181.1 Acc. Depr. - Store Eq
Revenue401 Sales401.1 Sales Returns & Allow Other Revenue411 Interest Revenue412 Rent Revenue413 Subscrip. Revenue
NORTHERN MICROCHART OF ACCOUNTS
Assets Current Assets101 Cash 122 Accts. Rec.131 Merch. Inv.141 Supplies145 Prepaid Ins.
Property, Plant, & Equip161 Land 171 Building 171.1 Acc. Depr. - Bldg
181 Store Equipment 181.1 Acc. Depr. - Store Eq
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
NORTHERN MICROCHART OF ACCOUNTS (cont.)
Liabilities
201 Notes Payable 202 Accounts Payable 219 Wages Payable
Current Liabilities
231 Utilities Payable 241 Unearned Sub. Rev. Long-Term Liabilities
251 Mortgage Payable
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.
NORTHERN MICROCHART OF ACCOUNTS (cont.)
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
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
TRIAL BALANCEDEBIT CREDIT
ACCOUNT TITLE
For Year Ended December 31, 20--
Let’s look at awork sheet for amerchandising
business!
Name of Company Work Sheet
TRIAL BALANCEDEBIT CREDIT
ACCOUNT TITLE
For Year Ended December 31, 20--
STEP #1Prepare a
Trial BalanceAssetsASSETS are listed
in the debit column.
Name of Company Work Sheet
TRIAL BALANCEDEBIT CREDIT
ACCOUNT TITLE
For Year Ended December 31, 20--
STEP #1Prepare a
Trial BalanceAssets
Mdse. Inv. BEGINNING balance
of merchandiseinventory
Name of Company Work Sheet
TRIAL BALANCEDEBIT CREDIT
ACCOUNT TITLE
For Year Ended December 31, 20--
STEP #1Prepare a
Trial BalanceAssets
Mdse. Inv. LIABILITIES (includingunearned revenues) are
listed in the credit column.
LiabilitiesUnearned Rev.
Name of Company Work Sheet
TRIAL BALANCEDEBIT CREDIT
ACCOUNT TITLE
For Year Ended December 31, 20--
STEP #1Prepare a
Trial BalanceAssets
Mdse. Inv.
OWNER’S EQUITY accounts are shown next.
LiabilitiesUnearned Rev.
CapitalDrawing
TRIAL BALANCEDEBIT CREDIT
ACCOUNT TITLE
Drawing
Income Summary
Income Summary is listedbut it has no balance until
the adjustments are entered.
TRIAL BALANCEDEBIT CREDIT
ACCOUNT TITLE
Drawing
Income Summary
RevenueSales
Sales R&ASales Discounts
CONTRA-REVENUEaccounts are listed in
the debit column
TRIAL BALANCEDEBIT CREDIT
ACCOUNT TITLE
Income Summary
RevenueSales
Sales R&ASales Discounts
COST OF GOODS SOLDaccounts are listed next.
ExpensesPurchases
Purch. R&APurch. Disc.
Freight-In
Drawing
Name of Company Work Sheet
TRIAL BALANCEDEBIT CREDIT
ACCOUNT TITLE
For Year Ended December 31, 20--
STEP #1Prepare a
Trial BalanceAssetsMdse. Inv.
LiabilitiesUnearned Rev.
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.
TRIAL BALANCEDEBIT CREDIT
ACCOUNT TITLEADJUSTMENTS
DEBIT CREDITDrawing
Revenue
Income Summary
SalesSales R&A
Sales Discounts
ExpensesPurchases
Freight-In
Purch. R&APurch. Disc.
BI EI
Income Summary is debited for the amount of the Beginning Inventory and creditedfor the amount of the Ending Inventory.
Name of Company Work Sheet
ADJUSTMENTSDEBIT CREDIT
ACCOUNT TITLE
For Year Ended December 31, 20--
STEP #2Prepare the Adjustments
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
Name of Company Work Sheet
ADJUSTMENTSDEBIT CREDIT
ACCOUNT TITLE
For Year Ended December 31, 20--
STEP #2Prepare the Adjustments
ADJ. TRIAL BAL.DEBIT CREDIT
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
Name of Company Work Sheet
ADJUSTMENTSDEBIT CREDIT
ACCOUNT TITLE
For Year Ended December 31, 20--
STEP #2Prepare the Adjustments
ADJ. TRIAL BAL.DEBIT CREDIT
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
ADJUSTMENTSDEBIT CREDIT
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
ADJUSTMENTSDEBIT CREDIT
ACCOUNT TITLEADJ. TRIAL BAL.
DEBIT CREDIT
Revenue
Income Summary
SalesSales R&A
Sales Discounts
ExpensesPurchases
Freight-In
Purch. R&APurch. Disc.
BI EIBI EI
All the Revenue and Expenseaccounts are extended to
the Adjusted Trial Balance.
Name of Company Work Sheet
DEBIT CREDIT
For Year Ended December 31, 20--
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.
Name of Company Work Sheet
DEBIT CREDIT
For Year Ended December 31, 20--
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
Sales R&ASales Discounts
ExpensesPurchases
Purch. R&APurch. Disc
Freight-In
BOTH the Beginning and the Endinginventories are extended to the
Income Statement columns for theINCOME SUMMARY account.
INCOME STATEMENTDEBIT CREDIT
ADJ. TRIAL BAL BALANCE SHEET
DEBIT CREDIT
BI EI
DEBIT CREDIT
BI EI
RevenueSales
Sales R&ASales Discounts
ExpensesPurchases
Purch. R&APurch. Disc
Freight-In
RevenueSales
Sales R&ASales Discounts
ExpensesPurchases
Purch. R&APurch. Disc
Freight-In
Revenue & Expenses are extendedto the Income Statement columns.
INCOME STATEMENTDEBIT CREDIT
ADJ. TRIAL BAL BALANCE SHEET
DEBIT CREDITDEBIT CREDITSales Discounts
ExpensesPurchases
Purch. R&APurch. Disc.
Freight-In
Sales Discounts
ExpensesPurchases
Purch. R&APurch. Disc.
Freight-In
STEP #5
COMPLETE THE WORK SHEET(1) Sum columns
(2) Compute net income (loss)
Net Income
Net Income
INCOME STATEMENTDEBIT CREDIT
ADJ. TRIAL BAL BALANCE SHEET
DEBIT CREDITDEBIT CREDITSales Discounts
ExpensesPurchases
Purch. R&APurch. Disc.
Freight-In
Sales Discounts
ExpensesPurchases
Purch. R&APurch. Disc.
Freight-In
STEP #5
COMPLETE THE WORK SHEET(1) Sum columns
(2) Compute net income (loss)
Net Income
Net Income
Net Loss
Net Loss
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