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, cost 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 equals the cost of
goods available for sale. This represents all the inventory we could sell.
From that we subtract the ending inventory to arrive at costs of goods sold.
Ending inventory is determined by a physical count of inventory. This needs to be done each
time 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 freight-in.
Let's look at an example, assume the following up account balances.
Let's plug those into the cost of goods sold model and calculate cost of goods sold.
Purchases of $50,000
minus purchase returns and allowance of 2000
minus purchase discounts of 1000
plus freight-in of 5000 equals
net purchases of $52,000.
Now we'll take the beginning inventory of 20,500 plus the net purchases of 52,000 and that equals our costs of goods available for sale of $72,500.
From that we subtract ending inventory of $19,000 and arrive at cost of goods sold of $53,500.
So that's the calculation. Let's put that into an adjusting entry.
The adjusting entry that results from using the cost of goods sold model is a doozy.
Let's break it down in simpler terms.
We need to close all of the purchase accounts so purchase returns and allowances, and purchase
discounts, which have normal credit balances are closed with debits.
Purchases and freight-in have normal debit balances so they're closed with credits.
Cost of goods sold needs to be recorded, so let's debit that amount.
Finally, beginning inventory needs to be replaced with ending inventory,
so we will 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 the entry. We don't actually have accounts called beginning inventory and ending inventory.
So we would just credit the inventory account $1500 to reduce the balance from 20,500 to 19,000.
That prior entry was more to aid you with the conceptual understanding. This is how it's actually done.
The closing entries for merchandisers are the same as for service firms except that we have some new temporary accounts that must be
included in the closing process. Sales returns and allowances, sales discount, and cost of goods sold
all have normal debit balances. They get closed of credits and are included in the expenses closing entry.
Revenues get closed with debits to revenue ccounts and credits to income summary. Expenses and contra-revenue accounts
get closed with credits and income summary is debited.
An income summary has a balance of 10,000 and it's a credit balance so we would close that
with a debit and retained earnings is credited for 10,000.
Finally, dividends is closed with a credit and a debit to retained earnings.