CuapterR 12 MERCHANDISE INVENTORY ADJUSTMENTS, WORKSHEET, FINANCIAL STATEMENTS, CLOSING ENTRIES, POST- CLOSING TRIAL BALANCE AND REVERSING ENTRIES th th pTH 9TH OTH a" 5,67 ,8 & 9" Steps of the Accounting Process) earning Objectives After studying this chapter. we should be able t 1. learn how the direct extension method 1 opplied worksheet, 2. apply the various steps or procedures in fillin prepare Financial prepare closing entries and post-closing tral balance et ADJUSTING JOURNAL ENTRIES (4™ step) We already have studied the topic, adjusting journal entries in Chapter 7 of this took and was able to learn adjustments on the following . accrual of income and expenses . deferral of income and expenses provision for estimated uncollectible accounts provision for depreciation of property and equipment unused supplies adjustments an Scanned with CamScannerMerchandise Inventory Adiustments, Worksheet and Financial Statements Be remin entree pia that under merchandising business, the same problem on adjust ‘at you will encounter as in service business. This time, we will focy studies on merchandi: se Inventory adjustments a ere column” worksheet, my aements angen =“ were are two (2) methods of handling merchandise inventory adjustments ang eas the adjusting entry method and the closing entry method oF Direct fension Method. Both methods will arrive at the same results In this problem, we assumed to have determined the physical inventory of unsoig B00ds to be at P190,000. Under the Adjusting Entry Method: Jan. 31 Income & Expense Summary P 250,000 Merchandise Inventory, beg, P 250,000 To close the beginning inventory to Income & Expense Summary. Jan. 31 Merchandise Inventory, end 190,000 Income & Expense Summary 190,000 To set-up or establish the merchandise inventory at the end. Under the Closing Entry Method: The closing entry method is what we applied in this textbook. It is illustrated on page 279 of this book. The advantage of using the closing entry method is for you to being able to identify the cost of sales wherein it includes merchandise inventory, end as an asset and merchandise inventory, beginning which is cost. For better understanding, the trial balance of the Davao Grocery is presented on the next page: 278 Scanned with CamScanner} Debit [PageNo. | __Account Titles Credit [1 | Cashin Bank xor160 | 2 Accounts Receivable facecooll mi - 250,000 | 1,800,000 | 298,500 2,900,000 Sales Returns & Allowances 38__| Parc 19 | Purchase Discounts Purchase Returns & Allowances Utilities Expense _ 25 | Taxes andLicenses owed a beginning inventory of 250,000 as highlighted Grocery merchandise inventory, end (Jan. 31) which unting of unsold goods was P190,000. The above trial balance shi and let us assume that Davao was determined through physical co Closing Entry Methot Merchandise Inventory, End (Jan. 31) 190,000 Purchase Discounts 1,500 Purchase Returns & Allowances 4,500 Income & Expense Summary 556,500 Merchandise Inventory, Bee: 12” 1) 250,000 Purchases 500,000 Freight-In 2,500 Ta close cost of sales account {0 Income & Expense Summary and establish the ending inventory: 279 Scanned with CamScannerMerchondise Setements The balancing account and amount of Income & Expense Summary IS Our Cost os Sales of P556,500. Please see the cost of sales section of the Statement cx Comprehensive Income on page 283 as being highlighted WORKSHEET (5 Step) at the worksheet brida se of preparing 3 wor of the operations ard Financia We have learned on page 201 of Chapter 8 th balance and financial statements. The main purpo order to determine the performance or results condition of the enterprise in a fastly manner ev entries can be recorded in the General Journal en before adjusting ard closing In this worksheet, we feature how merchandise inventory, © merchandise inventory end, are entered in the working paper by simple step after copying “as is” and footing the trial balance. PROCEDURE IN PREPARING AN 8-COLUMN WORKSHEET Step 1- First, indicate the heading and then copy the figures of the Tria ig”. Instead of 0 trial balance, write “Unadjusted Trial Bolan you that the trial balance that you have to prepare is before 03/5 ment urnal entries in the adjusted column The letter djusting entries except for the merchandise inventory. The accounts that ore not found in the unadjusted ("10 balance but are offected in adjustments are listed down below the adjustments column. In this particular worksheet, we skip the adjustment colume becouse we only have merchandise inventory adjustment. Step 2- Enter your adjusting jo identifies the sequencing of a The Merchandise Inventory, January 1 (Beginning) is extended to the deb* column of the Statement of Comprehensive Income which signifies addition to cost of purchases while the Merchandise Inventory, January 4 (Ending) is extended to both the credit column of the Statement of Financ Position and debit column of the Statement of Financial Position withot passing-through the adjustment section. This is called the direct extensio" method. The extension of the Merchandise Inventory, January 31 0 he credit side of the Statement of Comprehensive Income signifies reduction from the cost of goods sold while the extension to the o>! Step 3- Scanned with CamScannerat column of the Stat. fement of Financial Position signifies the recognition of an Asset account (Merch an merchandise whichoreonmens (Mentor) representing the unsold Eero ae of Financial Position section the Assets, Liabilities ar ere cguty counts and to Statement of Comprehensive income i 1€, Cost and Expenses including those accounts that are listed underneath the total of the unadjusted trial balance. sep 4° When you total the columns of the Statement of Comprehensive Income and Statement of Financial Position sections of your worksheet, you'll find out the two will not balonce and the amount of difference between the Statement of Comprehensive Income and Statement of Financial Position are the same. The difference is Profit P227,680. Profit is extended to the Statement of Financial Position credit to remind you that Profit will increase ‘owner's equity while Loss is extended to the Statement of Financial Position step 5~ debit which means reduction from capital balance shown on the next page is an 8-column worksheet of the DAVAO GROCERY, and observe how merchandise inventory, beginning of P250,000 was extended to the debit side of the Statement of Comprehensive Income section being “cost” and how the merchandise inventory at the end of P190,000 was extended to the debit side of the Statement of Financial Position section being an “asset” and credit side of the Statement of Comprehensive Income section. Finally, Davao Grocery made profit of °277,680. 281 Scanned with CamScanner raoa Fe rer Fa aaa PE THOT f OF oF { OST (00st a vor oes ee O58 TOUET rset ont we —| aes | a | ee | Fa BOSE SONICS waunsnpy | eure ev pannipeun senuwnony | aa ‘wor Kienuer Te papue qiuow ayy 205 weysyom ‘Ava2019 oeneg wayDyom wUINIED B Scanned with CamScannerChapter 12 FINANCIAL STATEMENTS (6" Step) sement of Comprehensive jn, i Come ~ is a financial statement which shows the its of operation or perf resul ormance of the enterprise for a given period of time. own below is the Statement of Comprehensive | e Income stile Step Form. of Davao Grocery under Comprehensive Income pene Im Multiple Step Form | Davao Grocery a Statement of Comprehensive Income For the month ended January 31, 20A Net Sales: Gross Sales 885,900 Less: Sales Discount P 5,220 Sales Returns & Allowances 4,500 9,720 | Net Sales P876,180 | Cost of Goods Sold: Merchandise Inventory, Jan. 1 250,000 Purchases P500,000 less: Purchase Discounts 1,500 Purchase Returns & Allowances 4,500 __6,000 | | Net Purchases 494,000 | |Add: Freight-In —2500 | | Delivered Cost of Purchases 496,500 | | Cost of Goods Available for Sale Pee | | less: Merchandise Inventory, Jan. 31 190,000 on | et oot fo eS | Stoss Profit ‘ | Operating Expenses: 4,700 i Freight-Out 415,000 \ Salaries Expense 5,800 | Utilities Expense 6,500 i Taxes and Licenses 10,000 42,000 " Rent Expense 277,680 VA Profit for the month 283 Scanned with CamScannerMerchondise Inventory Adjustments, Worksheet ond Financial Statement) hows the fra, Statement of Financial Position - is a financial statement which s Condition of the enterprise as of a particular date. ial Position of Davao Grocery 2s of Jay Shown below is the Statement of Financi 20A under the “Account Form”: Davao Grocery Statement of Financial Position ‘As of January 31, 20A Assets Liabilities and Owner's Equity Current Assets: Uabilities Cash In Bank P1,011,180 Current Liability: Accounts Receivable 455,000 Accounts Payable | Merchandise invty. 190,000 Total Current Assets 1,656,180 Owner's Equity M. Suelan, Capital | Non-Current Assets: Property and Equipment | Transportation Eqpt. 1,800,000 ‘Total Liabilities and | Total Assets 3,456,180 ‘Owner's Equity P3,456,180 Statement of Changes in Owner's Equity - this statement summarizes the changes that occurred in Owner’s Equity. It is arrived at by determining the Beginning Owner's Equity which is found in the general ledger plus Additional investment and Profit which is found in Statement of Comprehensive Income, Drawing account which is found in the Statement of Financial Position and the Ending Owner's Equity which reconciled with the balance of this statement and what is appearing in the ‘Statement of Financial Position. (highlighted) Shown on the next page is the Statement of Changes in Owner's Equity of Davao Grocery for the month ended 31 January 20A. Scanned with CamScannerchapter 32 of or th inges in Owner’ he month ended 31 lnavan M. ~~ Capital-Beginnin, Add: Profit for the month ee Total 2m, ' 277,680 Less: M. Suelan, Drawing ae M. Suelan, Capital-end — 20.000 | { 3,257,680 | CLOSING ENTRY (7™ step) reparation of ue : ee ee Entries is the seventh step of the accounting process ul Seta ie Closing entries are usually prepared at the end of an accoun 1B PE : of one year. Closing the books at the end of the period is only a compliance with the accounting requirements Asa reminder, only nominal accounts are closed while real accounts are not because these are being carried forward to the next accounting period. Again, through the Worksheet, closing entries can easily be prepared by looking at the Statement of Comprehensive Income section. For purposes of discussion, the closing entries of Davao Grocery is prepared and presented below comprising of the following steps: Step 1 - Close the sales and its related accounts to Income and Expense Summary account. 20A Jan. 31 sales 885,900 Sales Discounts P 520 les Returns & Allow. ' es 876,180 Income & Expense Summary ‘To close sales and its related accounts ect: While sales, sales discounts balance, the Income & Expens! 06,180. 285, nd allowances are already in “zero” sales returns a 2 = int is open with a credit balances of ‘e Summary accour Scanned with CamScanner‘Merchenalse inventory Adjustments, Worksheet and Financial Statements The General Ledger Balances Before and After the closing of Sales and its related accounts to Income & Expense Summary follows Sales 15) Sales Discounts 6 | 116,400 1/5 ie 3,620 185,000 1/8 1/23, (1,600 5.220 Step 80,000 1/13 5,220 ' 5.220 49,500 1/20 CLOSED 420,000 1/26 Step 1 885,900 | 35,000 1/31 Sales Returns & Allow. is 885,900 | 885,900 yi0 4,000 1722 500 4,500 Step ‘CLOSED 14) Income & Expense Summary | 876,180 Step 1 the Step 2 - Establish the Merchandise Inventory at the end and low Merchandise Inventory at the beginning together with other Cust of S and other related accounts. 20A Jan. 31 Merchandise Inventory, End P190,000 Purchase Discounts 1,500 Purchase Returns & Allow. 4,500 Income & Expense Summary 556,500 | Merchandise Inventory, Beg. 250,000 Purchases 500,000 Freight-In 2,500 To close cost of sales and establish the Merchandise Inventory at the end. Effect: The Purchases, Purchase Discounts, Purchase Returns and Allowances and Freight! accounts are already in “zero” balance. The Merchandise Inventory, End. is oper with a debit balance of P190,000 while the Income & Expense Summary accounts 5 open with a debit and credit balances of P556,500 and P876,180 respectively Scanned with CamScannerss __chepter 12 Merchandise Inventory yi P20,000 ie Purchase Discounts geo? 190,000 | P250,000 stepr NSP P_1s00| P1500 1/1? 190,000 CLOSED purchase Returns & Allowane nase es sep? P 4,500] P 3,000 1/3 Enel - purceses ____ | 1500 ato T. a en 2/7 P 4,500 | P_4,500 a ana al | seen 2/15 70,000 | P500,000 step2 500,000 _P500,000 CLOSED Income & Expense Summary ¥3 [P876,180 step 110 Step? 556,500 step3 - Close all the expense accounts to Income and Expense Summary. Journal Entry: Income & Expense Summary P 42,000 Freight-Out Pp 4,700 Salary Expense 15,000 Utilities Expense 5,800 Taxes and Licenses 6,500 10,000 Rent Expense To close the expense accounts to Income and Expense Summary accounts tect: Al expense accounts are Summary is open with 2 credit ces before and after the closing already in “zero” balance while Income & Expense it balance of P277,680. all expenses to Income & The General Ledger balan’ Expense Summary follows: ___ Freight-Out___ —Ws «P3500 ) Step us 287 Scanned with CamScanner1 ‘Merchandise Inventory Adjustments, Worksheet and Financial Staterm ee —_ Salaries Expense _ Utilities Expense_ 1/28 P_ 15,000 [P_15,000_ Step 3 1/728 5,800 | P_5,800_Step3 CLOSED ‘CLOSED —___Tanes and Licenses _ Rent Expense _ 1/28 P 6,500] P_ 6,500 Step3 Step2 P 10,000 |P 10,000 Steps — ‘CLOSED CLOSED Income ense Summary _ ‘Step 2 556,500 | P876,180 Step1 Step 3 42,000 __ 277,680 _ The income & Expense Summary showed a debit total of P598,500 (P556,500 + 42,000) and credit total of P876,180. The amount of difference represents profit of P277,680 because Income side is bigger than the Expense side. Step 4 - Profit of P277,680 is closed to capital account, Journal Entry 20A Jan. 31 Income and Expense Summary M. Suelan, Capital To close Income & Expense to Capital account. P 277,680 277,680 Summary The General Ledger before and after closing profit to capital. Income & Expense Summary M. Suelan, Capital Step2 P556,500 | P876,180 Step 1 Step3 42,000 Step4 277,680 876,180 | P876,180 ‘CLOSED Step 5 - Drawing of P20,000 is also closed to Capital 2,900,000 1/31 277,680_step4 3,177,680 account. Scanned with CamScanner—_ J Journal Entry 20A jan. 31 M. Suelan, Capital P 20,000 M. Suelan, Drawing "—P 20,000 T 0 close Drawing to Capital account. int, Drawing acc peti point 8 account is closed while Ca f “ees Sern ccna pital account will show 2 balance o! ___M.Sueian, Drawing 128 20,000 P 20,000_ Step 5 CLOSED M. Suelan, Capital | P2,900,000 BB Step5 _ P 20,000| 277,680 Step 4 3,157,680 57,680 which is the same in amount Financial Position and 277 ind of M. Suelan is P3,1 er’s Equity section of the Statement of 5 Equity on pages 276 an the capital balance, e' that appear in the Own capital balance, end in Statement of Owner’ the General Journal as shown on the next The closing entry is formally recorded in page. | : | Scanned with CamScannerond Statement ——— SSS General Journal |__| Particulars 1/31_|_ | Sales _ Sales Discount - Sales Returns & Allowances Income & Expense Summary To close sales and other related accounts [ to Income & Expense Summary. { ‘Merchandise Inventory, January 31 4 Purchase Discounts 1,500, 1 Purchase Returns & Allowances Income & Expense Summary Merchandise Inventory, Jan. 1 250,000 Purchases a - | 500,000 | Freight-In _{@-2af | 2,500 To close cost of sales and related = accounts to Income & Expense Summary a | Income & Expense Summary a Freight-Out 7 Salaries Expense _ Utilities Expense Taxes and Licenses Rent Expense To close expense accounts to Income & _ Expense Summary account. - Income & Expense Summary Gi-14] M. Suelan, Capital To close profit to capital. M, Suelan, Capital [er1a| M. Suelan, Drawing G1-13 To close Drawing to Capital. POST-CLOSING TRIAL BALANCE (8 Step) In compliance with the accounting requirement, the General Ledger of all nominal Then, the Post-closing Trial Balance is prepared to test or check accounts are closed. counts the equality of the debit and credit amounts after closing the nominal acc Shown in the post-closing trial balance are the same accounts that appeared in the 290 Scanned with CamScanner“—.SsMsMwVwvmM——qu~“_ $$$ ean Journal Entry 20 an. 31 , M. Suelan, Capital P 20,000 M. Suelan, Drawing pb 20,000 To Close Drawing to Capital account. atthis point, Drawing account is clo: le int will show a balance of od ral ‘ losed while Capital account will t f a M. Suelan, Drawing y P 20,000 | P_20,000_ Step S CLOSED M, Suelan, Capital P2,900,000 6B ‘ StepS —_P_20,000| 277,680 Step 4 3,157,680 the capital balance, end of M. Suelan is P3,157,680 which is the same in amount 1’s Equity section of the Statement of Financial Position and that appear in the Owne ges 276 and 277 capital balance, end in Statement of Owner's Equity on pa nal as shown on the next The closing entry is formally recorded in the General Jou page. Scanned with CamScannerGeneral Journal [To close sales and other related accounts _ tolncome & Expense Summary. | Merchandise Inventory, January 31. [ Purchase Discounts __ — ‘on 19) Purchase Returns & Allowances GH 20] 4500 [ Income & Expense Summary __ {61 14] 556, p00] aes aos | Merchandise Inventory, Jan. 1 iia ieee | oe ~| Purchases |ou-18 a _ | Freight-in Gu-24 To close cost of sales and related f ‘accounts to Income & Expense Summary 7 Income & Expense Summary 1G)-14 “Freight-Out [oi-21 ae Salaries Expense 6123 15,000 Utilities Expense [ou-24 5,800 Taxes and Licenses [ou-25 6500 Rent Expense [Gi-27 : 10,000 To close expense accounts to Income & | | Expense Summary account. | | —— - [| Income & Expense Summary [ouaa] 277,680 | M. Suelan, Capital [ou-12 277,680 To close profit to capital. [ 2 M. Suelan, Capital 1Gi-12' __P 20,000 M. Suelan, Drawing = G13 | P 20000 To close Drawing to Capital. = I 7 [eee] _ POST-CLOSING TRIAL BALANCE (8” step) In compliance with the accounting requirement, the General Ledger of all nomina accounts are closed. Then, the Post-closing Trial Balance is prepared to test or ¢ the equality of the debit and credit amounts after closing the nominal accou's Shown in the post-closing trial balance are the same accounts that appeared in Scanned with CamScanner—— chapter 2 gaecises/Problems ee aon Hardware & construction Su Nata S: AIEEE, the owner mangpest, 2 cent of Elses Cudadano & Co, CPAs taowiN: Ber sought your assistance to prepare for her the ‘ schedule of Cost of Goods Sold 7 schedule of Operating Expenses Q Seema of Financial Position * Soenen lon age | Son Jordan Hardware & Construction Supply L Trial Balance —_ December 31, 208 ‘cash in Bank 12,050,000 | [Accounts Receivable | 185,000 | Estimated uncollectible Accounts, 4,000 Merchandise Inventory, Jan. 1 2,980,000 | [unused Supplies 54,000 | jFurniture and Fi "1,300,000 | Accumulated Depreciation Furniture and Fietures 520,000 [ Accounts Payable | 980,000 IN. Alegre, Capital - | 2,382,010 [N. Alegre, Drawing — : 60,000 | [Sales | "5,452,000 | Sales Discounts _ L 1 212,500 | j Sales Returns & Allowances | Purchases - Purchase Discounts Purchase Returns & Allowances_ freightin — (Sales Salaries _ Office Supplies iOffice Supplies Tues and Licenses _ Rent Expense end is P1,010,000. “éttional Data: Merchandise Inventory, rar Scanned with CamScannerMerchondise Inventory Adjustments, Worksheet and Financial Statements 12-2 The Farmacia Guardarama which started its operations on January 20A prepares its financial statements on a quarterly basis. Adjusting and closing entries are also! Prepared at the end of each quarter. The external auditor, Merlinda Mendez & Co, CPAs has prepared the trial balance before adjustments during the first quarter of 204 which is given below March 31, 208 I Debit Cash in Bank P 98,110 | | Accounts Receivable Furniture & Fixtures Accounts Payable E. Guardarama, Capital E. Guardarama, Drawing [ 12,000) Sales 850,420 Sales Returns & Allowances Sales Discounts | Purchases zie Purchase Returns & Allowances Freight-In Freight-Out Taxes and Licenses Rent Expense [34,000 Salaries Expense 3,000 | | Insurance Expense 10,000 | Miscellaneous Expense 5,000 Total P1,189,320 | P1,189,320 | Data for adjustments: a) Merchandise inventory, March 31, is P277,000. b) Estimated Uncollectible Accounts should be provided at 5% of the outstanding Accounts Receivable account. c) Furniture & Fixtures has an estimated life of 5 years. It was acquired on Jan. 1, 20A d) Insurance Premium is good for 6 months period only, effective Jan. 1, 20A. Required: 1, An8-column worksheet 4. Closing Entries 2. Statement of Comprehensive Income 5. Post-closing trial balance 3. Statement of Financial Position 294 Scanned with CamScanner