Lecture Notes: Adjusting and Closing Entries for a Merchandising Business

Introduction

• Focus: Adjusting and closing entries of a merchandiser.
• Both merchandising and service businesses follow the same process for adjusting and closing accounts:
  • Prepare an unadjusted trial balance.
  • Journalize and post adjusting entries.
  • Prepare an adjusted trial balance.
  • Prepare financial statements.
  • Journalize and post closing entries.
  • Prepare post-closing trial balance.

Merchandising Business: Additional Adjusting Entry

• Perpetual Inventory System:
  • Constantly updated record of inventory using a computerized system.
  • End-of-year physical count necessary due to discrepancies known as inventory shrinkage.
• Inventory Shrinkage:
  • Loss of inventory due to theft, damage, and errors.
  • Example: Smart Touch Learning
    • Computer records show $31,530.
    • Physical count shows $30,000.
    • Adjusting entry required to account for $1,530 in inventory shrinkage.
    • Increase cost of goods sold by $1,530.
    • Decrease merchandise inventory by $1,530.

Final Inventory Accounting

• Physical inventory count is used for final accounting records, not computerized records.
• Merchandise inventory on balance sheet reflects the physical count amount.

Closing Entries for Merchandisers

• Similar process to service businesses, with some distinctions:
  • New accounts highlighted in blue.
• Steps:
  1. Close revenue accounts via income summary.
  2. Close all expense accounts, including cost of goods sold.
  3. Close income summary account to retained earnings.
  4. Close dividends account to retained earnings.

New Accounts for Merchandising Business

• Merchandising Specific Accounts:
  • Merchandise Inventory
  • Estimated Returns Inventory
  • Refunds Payable
  • Sales Revenue (instead of Service Revenue)
  • Sales Discounts Forfeited
  • Cost of Goods Sold
  • Delivery Expense

Smart Touch Learning Example

• Closing Entries:
  1. Close revenue accounts via income summary.
  2. Close expense accounts, including cost of goods sold.
  3. Transfer net income of $101,420 to retained earnings.
  4. Close dividends by debiting $10,000 from retained earnings.

Conclusion

• Understanding adjusting and closing entries for merchandising companies is crucial.
• Aim: Gain confidence in preparing these entries.