Preparing a Worksheet for a Merchandise Company

1. Preparing a Worksheet fora Merchandise Company Chapter 12

2. Learning Objective 1 Figuring adjustments for merchandise inventory, unearned rent, supplies used, insurance expired, depreciation expense, and salaries accrued.

3. Learning Unit 12-1 • In a periodic inventory system, inventory is counted at the end of the accounting period. • Adjusting entries are needed to update to this balance.

4. Learning Unit 12-1 Beginning Inventory + Net Purchases + Freight-in – Ending Inventory = Cost of Goods Sold

5. Learning Unit 12-1 What are some adjustments for merchandise inventory? • Credit beginning inventory to remove this “old” inventory balance. • Debit ending inventory for the counted and priced amount to leave this balance in the Inventory account. • This is the balance that will be on the balance sheet.

6. Learning Unit 12-1 Merchandise Inventory Adjustment 19,000 Beginning Balance 19,000 Adjustment 4,000 Income Summary Adjustment 19,000 Adjustment 4,000

7. Learning Unit 12-1 First Month BALANCE SHEET Assets Beginning inventory $19,000 (assume sold) INCOME STATEMENT Cost of goods sold Beginning inventory $19,000 Less ending inventory $4,000 Second Month BALANCE SHEET Assets Beginning inventory $4,000

8. Learning Unit 12-1 Accounts Affected Category Rules Merchandise Inventory Asset Dr. Income Summary Cr. — —

9. Learning Unit 12-1 Assume that Martha received $600 in advance for renting a room to an art dealer for three months. Is the $600 considered rental revenue? • No. Unearned Rent is a liability account. • This account is used to record rent payments received from renters in advance.

10. Learning Unit 12-1 • The rent will not be earned until the months have gone by. • The rental money will be recorded as revenue only after the unit is used for each month. • What accounts will be affected at the end of the month? • Unearned Rent and Revenue

11. Learning Unit 12-1 Adjustment for Rent Accounts Affected Category Rules Unearned Rent Liability Dr. 200 Rental Income Revenue Cr. 200

12. Learning Unit 12-1 Adjustment for Supplies Accounts Affected Category Rules Supplies Expense Expense Dr. 500 Supplies Asset Cr. 500

13. Preparing a worksheet for a merchandise company. Learning Objective 2

14. Worksheets Worksheets for merchandise companies include accounts that aid in accounting for inventories.

15. Worksheet Example Adjusted Income Balance Trial Balance Statement Sheet Account Title Dr. Cr. Dr. Cr. Dr. Cr. Cash Merch.Inventory Receivables Supplies Equipment Accounts payable Capital Sales Sales Returns Purchases Purchases Returns Totals 4,065 1,850 200 100 1,200 7,415 4,065 1,850 200 100 1,200 200 1205 8,820 320 5,000 5,320 320 5,000 3,450 50 8,820 3,450 50 3,500 200 1,205 1,405 2,0952,095 3,500 3,500 7,415 7,415 Net income

16. Learning Unit 12-2 • The worksheet provides the information needed to prepare the expanded income statement needed for a merchandising company.

17. Learning Unit 12-2 • The income statement columns balance with a net income if the columns must have a debit entry to balance them. • The income statement columns balance with a net loss if the columns must have a credit entry to balance.

18. Learning Unit 12-2 Sales revenue $3,450 Sales discounts 0 Returns and allowances – 200 Net sales revenue $3,250 Cost of goods sold –1,155 Gross profit $2,095

19. Learning Unit 12-2 Gross Profit – Operating Expenses = Net Income

20. Perpetual Inventory • The Purchases account, Purchases Returns and Allowance account, and the Purchases Discount account are not used. • Merchandise Inventory is debited when purchases are made. • Merchandise Inventory is credited when sales are made. • Merchandise Inventory is credited for any discounts, returns, or allowances.

21. End of Chapter 12