The adjusting entries for merchandisers are basically the same as those for service firms with the exception of adjusting the inventory account.
This is a problem for periodic merchandisers because the unadjusted trial balance for inventory
is the prior month's ending balance. Additionally Costs of Goods Sold is zero.
The solution to this problem
is using something we call the Costs of Goods Sold model.
which basically adjusts the inventory account and closes purchases to Cost of Goods Sold.
The Cost of Goods Sold model is beginning inventory plus net purchases. This equals the
Cost of Goods available for sale. This represents all the inventory that we could sell.
From that we subtract ending inventory to arrive at Cost of Goods Sold.
Ending inventory is determined by a physical count of inventory. This is done each
time ending inventory is adjusted and Costs of Goods Sold is recorded
Beginning inventory is the prior period's ending inventory.
Net purchases are calculated by taking purchases, minus purchase returns and
allowances, minus purchase discounts, plus for freight-in.
So let's look at an example. Assume the following account balances.
Let's plug those into the Cost of Goods Sold model and calculate cost of goods sold.
The purchases of $50,000, minus the purchase returns and allowance of 2000,
minus purchase discount of 1000, plus freight-in of 5000, equals net purchases of $52,000.
Now we take the beginning inventory of $20,500
plus the net purchases of 52,000, and that equals the Cost of Goods available for sale of $72,500.
From that we subtract ending inventory of $19,000 to arrive at Cost of Goods Sold of $53,500.
So that's the calculation, let's put it into an adjusting entry.
The adjusting entry that results from using the Cost of Goods Sold model is a dozy, so let's break it down into simpler terms.
We need to close the purchases account.
So purchase returns and allowances and purchase discounts, which normal credit balances, are closed with debits.
Purchases and freight-in have normal debit balances so they are closed with credits.
Costs of Goods Sold needs to be recorded so let's debit that amount.
Finally, the beginning inventory needs to be replaced by the ending inventory amount. so we
So we debit ending inventory and credit beginning inventory.
And with some accounting magic that whole journal entry balances.
This is the more appropriate way to make that entry we don't actually have accounts called beginning inventory and ending inventory,
so we would just credit the inventory account for $1500 to reduce the balance from 20,500 to 19,000.
That prior entry was more of an aid for your conceptual understanding, this is how it's actually done.
The closing entries for merchandisers are the same as those for service firms
except for that we have some new temporary accounts that must be included in the closing process.
Since sales, returns, and allowances, sales discounts and Cost of Goods Sold all have normal debit balances,
they get closed with credits and are included in the expenses closing entry.
Revenues get closed with debits to the revenue accounts and credits to the income summary.
Expenses and the contra-revenue accounts get closed with credits and income summary is debited.
Income summary has a $10,000 credit balance so it gets closed with a debit and owner's capital is credited for $10,000.
Finally, owner's withdrawals is closed with a credit and a debit to owner's capital.
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