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In practice, many companies use combination formats that have some of the features of both the single- and multiple-step statements.
Closing Entries for Merchandising Companies
To help understand how information flows through the accounting system into the financial statements, we now discuss the process for closing the temporary accounts of merchandising companies. The process is demonstrated with data from the adjusted trial balance for Meg’s Mart in Illustration 8. In addition, the accountant knows from a physical count that the cost of the ending inventory is $21,000.
ILLUSTRATION 8
A
djusted Trial Balance for Meg’s Mart at December 31,19X2
Cash. $ 8,200
Accounts receivable 11,200
Merchandise inventory 19,000
Office supplies 550
Store supplies 250
Prepaid insurance 300
Office equipment 4,200
Accumulated depreciation, office equipment….......................$ 1,400
Store equipment 30,000
Accumulated depreciation, store equipment………………………….. 6,000
Accounts payable 16,000
Salaries payable 800
Meg Harlowe, capital 34,000
Meg Harlowe, withdrawals 4,000
Sales 321,000
Sales returns and allowances 2,000
Sales discounts 4,300
Purchases 235,800
Purchases returns and allowances 1,500
Purchases discounts 4,200
Transportation-in 2,300
Depreciation expense, store equipment 3,000
Depreciation expense, office equipment 700
Office salaries expense 25,300
Sales salaries expense 18,500
Insurance expense 600
Rent expense, office space 900
Rent expense, selling space ……… 8,100
Office supplies expense 1,800
Store supplies expense 1,200
Advertising expense 2,700
T otals $384,900 $384,900
The trial balance includes these unique accounts for merchandising activities: Merchandise Inventory, Sales, Sales Returns and Allowances, Sales Discounts, Purchases, Purchases Returns and Allowances, Purchases Discounts, and Transportation-In. Their presence in the ledger causes the closing entries to be slightly different from the ones described in Chapter 4. However, the process still consists of four steps.
Step 1—Record the Ending Inventory and Close the Temporary Accounts That Have Credit Balances
The first step accomplishes two goals: First, it adds the $21,000 cost of the ending inventory to the balance of the Merchandise Inventory account. Second, it closes the temporary accounts that have credit balances, including the Sales account and the two contra-purchases accounts. The first closing entry for Meg's Mart is
Dec. 31 Merchandise Inventory…………………..21,000.00
Sales ……………….. 321,000.00
Purchases Returns and Allowances…… 1,500.00
Purchases Discounts ………………. 4,200.00
Income Summary ………………. 347,700.00
To close temporary accounts with credit
balances and record the ending inventory
Posting this entry gives zero balances to the three temporary accounts that had credit balances in the adjusted trial balance. It also momentarily increases the balance of the Merchandise Inventory account to $40,000. However the next entry reduces the balance of this account.
Step 2—Remove the Beginning Inventory and Close the Temporary Accounts That Have Debit Balances
The second step also accomplishes two results: First, it subtracts the cost of the beginning inventory from the Merchandise Inventory account. Second, it closes the temporary accounts that have debit balances, including the expense accounts, the two contra-sales accounts, the Purchases account, and the Transportation-In account. The second closing entry for Meg’s Mart is
Dec. 31 Income Summary ………………………326,200.00
Merchandise Inventory……………………… 19,000.00
Sales Returns and Allowances………………. 2,000.00
Sales Discounts ……………………… 4,300.00
Purchases ……………………… 235,800.00
Transportation-In ……………………… 2,300.00
Depreciation Expense, Store Equipment….. 3,000.00
Depreciation Expense, Office Equipment…. 700.00
Office Salaries Expense 25,300.00
Sales Salaries Expense………………………. 18,500.00
Insurance Expense ……………………… 600.00
Rent Expense, Office Space………………… 900.00
Rent Expense, Selling Space………………. 8,100.00
Office Supplies Expense…………………… 1,800.00
Store Supplies Expense…………………… 1,200.00
Advertising Expense 2,700.00
To close temporary accounts with debit balances and
to remove the beginning inventory balance
Posting this entry reduces the balance of the Merchandise Inventory account down to $21,000, which is the amount produced by the physical count at December 31,19X2. It also gives zero balances to the 14 temporary accounts that had debit balances.
The following Merchandise Inventory account shows you how the first two closing entries create an ending balance equal to the $21,000 cost provided by the physical count:
| Merchandise Inventory Acct. No. 119 | |||||
| Date | Explanation | Debit | Credit | Balance | |
| 19X1 | |||||
| Dec. | 31 | Ending balance for 19X1 | 19,000.00 | ||
| 19X2 | |||||
| Dec. | 31 | First closing entry | 21,000.00 | 40,000.00 | |
| 31 | Second closing entry (Ending balance for 19X2) | 19,000.00 | 21,000.00 | ||
As mentioned earlier in the chapter, this account has the $21,000 balance throughout 19X3 until the accounts are closed at the end of that year.
Step 3—Close the Income Summary Account to the Owner’s Capital Account
The third closing entry for a merchandising company is the same as the third closing entry for a service company. Specifically, it closes the Income Summary account and updates the balance of the owner’s capital account. The third closing entry for Meg’s Mart is
Dec. 31 Income Summary………………………………….. 21,500.00
Meg Harlowe, Capital………………………. 21,500.00
To close the Income Summary account
The amount in the entry equals the net income reported on the income statement.
Step 4—Close the Owner’s Withdrawals Account to the Owner’s Capital Account
The fourth closing entry for a merchandising company is the same as the fourth closing entry for a service company. Specifically, it closes the owner’s withdrawals account and reduces the balance of the owner’s capital account to the amount shown on the balance sheet. The fourth closing entry for Meg’s Mart is
Dec. 31 Meg Harlowe, Capital …………………4,000.00
Meg Harlowe, Withdrawals ………………. 4,000.00
To close the withdrawals account
When this entry is posted, all the temporary accounts are cleared and ready to record events in 19X3. In addition, the owner’s capital account has been fully updated to reflect the events of 19X2.
A Work Sheet for a Merchandising Company
Illustration 9 presents a version of the work sheet that the accountant for Meg’s Mart could prepare in the process of developing its 19X2 financial statements. It differs in two ways from the 10-column work sheet described in Chapter 4.
ILLUSTRATION 9
Work Sheet for Meg’s Mart for the Year Ended December 3119X2
| № | Account | Unadjusted Trial Balance | Adjustments | Income Statement | Statement of Changes in Owner’s Equity and Balance Sheet | |||||||
| Dr. | Cr. | Dr. | Cr. | Dr. | Cr. | Dr. | Cr. | |||||
| 101 | Cash | 8,200 | 8,200 | |||||||||
| 106 | Accounts receivable | 11,200 | 11,200 | |||||||||
| 119 | Merchandise inventory | 19,200 | 19,200 | 21,000 | 21,000 | |||||||
| 124 | Office supplies | 2,350 | (с) 1,800 | 550 | ||||||||
| 125 | Store supplies | 1,450 | (b) 1,200 | 250 | ||||||||
| 128 | Prepaid insurance | 900 | (a) 600 | 300 | ||||||||
| 163 | Office equipment | 4,200 | 4,200 | |||||||||
| 164 | Accum. Depr., office | 700 | (e) 700 | 1,400 | ||||||||
| 165 | Store equipment | 30,000 | 30,000 | |||||||||
| 166 | Accum. Depr., store equip. | 3,000 | (d) 3,000 | 6,000 | ||||||||
| 201 | Accounts payable | 16,000 | 16,000 | |||||||||
| 209 | Salaries payable | (f) 800 | 800 | |||||||||
| 301 | Meg Harlowe, capital | 34,000 | 34,000 | |||||||||
| 302 | Meg Harlowe, withdrawals | 4,000 | 4,000 | |||||||||
| 413 | Sales | 321,000 | 321,000 | |||||||||
| 414 | Sales returns and allow. | 2,000 | 2,000 | |||||||||
| 415 | Sales discounts | 4,300 | 4,300 | |||||||||
| 505 | Purchases | 235,800 | 235,800 | |||||||||
| 506 | Purchases ret. And allow. | 1,500 | 1,500 | |||||||||
| 507 | Purchases discounts | 4,200 | 4,200 | |||||||||
| 508 | Transportation-in | 2,300 | 2,300 | |||||||||
| 612 | Depr. Expense, store | (d) 3,000 | 3,000 | |||||||||
| 613 | Depr. Expense, office | (e) 700 | 700 | |||||||||
| 620 | Office salaries expense | 25,000 | (f) 300 | 25,300 | ||||||||
| 621 | Sales salaries expense | 18,000 | (f) 500 | 18,500 | ||||||||
| 637 | Insurance expense | (a) 600 | 600 | |||||||||
| 641 | Rent expense, office | 900 | 900 | |||||||||
| 642 | Rent expense, selling | 8,100 | 8,100 | |||||||||
| 650 | Office supplies expense | (c) 1,800 | 1,800 | |||||||||
| 651 | Store supplies expense | (b) 1,200 | 1,200 | |||||||||
| 655 | Advertising expense | 2,700 | 2,700 | |||||||||
| Totals | 380,400 | 380,400 | 8,100 | 8,100 | 326,200 | 347,700 | 79,700 | 58,200 | ||||
| Net income | 21,500 | 21,500 | ||||||||||
| Totals | 347,700 | 347,700 | 79,700 | 79,700 | ||||||||
The first difference is the deletion of the adjusted trial balance columns. This simplification has nothing to do with the fact that Meg’s Mart is a retail business. This commonly used format is designed to simplify the work sheet by reducing its size. The omission of the columns causes the accountant to first compute the adjusted balances and then extend them directly into the financial statement columns.
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