First Canadian Edition Price • Haddock • Brock • Hahn • Reed College Accounting First Canadian Edition Price • Haddock • Brock • Hahn • Reed Throughout this presentation I will be referring to the Price text entitled College Accounting, First Canadian edition McGraw-Hill Ryerson 1

MERCHANDISING BUSINESS CHAPTER 9 COMPLETING THE WORKSHEET FOR A MERCHANDISING BUSINESS 2

Determine the adjustments for merchandise inventory. OBJECTIVE 1 Determine the adjustments for merchandise inventory. 3

An End-of-Period Worksheet 4 FASHION WORLD TRIAL BALANCE ADJUSTMENTS Worksheet (Partial) For the Year Ended December 31, 20X4 TRIAL BALANCE ADJUSTMENTS ACCOUNT NAME DEBIT CREDIT DEBIT CREDIT Cash 7,200.00 Petty Cash 100.00 Accounts Receivable 23,500.00 (i) 68.00 Allowance for Doubtful Accounts 100.00 (b) 630.00 Merchandise Inventory 33,009.01 (a) 500.00 Prepaid Insurance 4,800.00 (h) 1,800.00 Supplies 5,900.00 (g) 4,240.00 Store Equipment 12,000.00 Accumulated Amortization: Store Equipment (c) 2,100.00 Office Equipment 3,500.00 Accumulated Amortization: Office Equipment (d) 600.00 Notes Payable: Trade 3,000.00 Notes Payable: Bank 9,000.00 Accounts Payable 3,138.00 Interest Payable 359.01 (f) 75.94 CPP Contributions Payable 610.00 EI Premiums Payable 225.00 Wages Payable (e) 2,700.00 Prepaid GST 1,460.00 GST Payable 2,390.00 Provincial Sales Tax Payable 2,731.00 Carolyn Wells, Capital 71,632.76 Carolyn Wells, Drawing 30,000.00 Sales 409,650.00 Sales Returns and Allowances 13,000.00 Miscellaneous Income (i) 68.00 Cost of Goods Sold 250,000.00 Merchandise Inventory Loss (a) 500.00 Sales Salaries Expense 56,490.00 Wages Expense 12,000.00 (e) 2,700.00 Advertising Expense 7,425.00 Supplies Expense (g) 4,240.00 Cash Short or Over 125.00 An End-of-Period Worksheet 4

An End-of-Period Worksheet (Cont’d.) FASHION WORLD Worksheet (Partial) For the Year Ended December 31, 20X4 TRIAL BALANCE ADJUSTMENTS ACCOUNT NAME DEBIT CREDIT DEBIT CREDIT Amortization Expense: Store Equipment (c) 2,100.00 Amortization Expense: Office Equipment (d) 600.00 Rent Expense 13,500.00 Insurance Expense (h) 1,800.00 Utilities Expense 2,915.00 Payroll Taxes Expense 6,331.76 (f) 201.15 Telephone Expense 2,720.99 Uncollectible Accounts Expense (b) 630.00 Interest Expense 359.01 (f) 75.94 Totals 502,835.77 502,835.77 12,713.94 12,713.94 An End-of-Period Worksheet (Cont’d.) 5

Determine the adjustment for loss from uncollectible OBJECTIVE 2 Determine the adjustment for loss from uncollectible accounts. 6

UNCOLLECTIBLE ACCOUNTS EXPENSE Has a debit balance. Appears in the operating expenses section of the income statement. It is an expense for anticipated uncollectible accounts. There are many methods for determining the amounts to be used for this adjusting entry, including the percentage of net sales on account. 7

Uncollectible Accounts Expense Determine Uncollectible Accounts Expense using a percentage of net sales on account Fashion World estimates 0.3% of their net credit sales of $210,000 will be uncollectible. Revenue x 0.3% = Uncollectible Expense $210,000 x 0.3% = $630 8

ALLOWANCE FOR DOUBTFUL ACCOUNTS Contra-Asset Account Directly reduces the Accounts Receivable Account Has a credit balance Appears on the balance sheet 9

Determine the adjustment OBJECTIVE 3 Determine the adjustment for amortization. 10

ADJUSTMENT FOR AMORTIZATION Amortization is recorded for long-term assets. A long-term asset is defined as having a useful life of more than one year. Amortization allocates the value of long-term assets over their useful life. For example, if an asset has a useful life of five years, we would calculate the total amortization over a five year period. 11

AMORTIZATION OF STORE EQUIPMENT $12,000 (COST) $1,500 (SALVAGE VALUE) $2,100 (YEARLY AMORTIZATION) 5 YEARS (USEFUL LIFE) 12

AMORTIZATION OF OFFICE EQUIPMENT $3,000 (COST) $500 (SALVAGE VALUE) $600 (YEARLY AMORTIZATION) 5 YEARS (USEFUL LIFE) 13

Determine the adjustment for accrued and prepaid OBJECTIVE 4 Determine the adjustment for accrued and prepaid expenses. 14

ADJUSTMENT FOR ACCRUED EXPENSE Accrued expenses are expenses for the current period that have not been paid. An adjustment will be made in order to record the expenses in the proper fiscal period. 15

ACCRUED EXPENSES Fashion World has three accrued expenses that require adjustments: Accrued Salaries Accrued Payroll Taxes Accrued Interest on Notes Payable These items are expenses that will be paid in a later period. To record these items, the expense account is debited and the liability account is credited. 16

ACCRUED WAGES Fashion World has part-time sales employees who are paid every Friday. December 31, 20X4 falls on Wednesday. Payday is not until Friday. We have three days worth of expenses for 20X4 that will not be paid until January 20X5. The Sales Salaries Expense for these three days needs to be recorded in 20X4. 17

ACCRUED INTEREST ON NOTES PAYABLE On December 1, 20X4 Fashion World borrowed $3,000.00 from the bank and promised to repay this amount in two months plus an additional 6% in interest charges. The interest expense accumulates daily but in this case is not to be paid until the $3,000.00 is repaid at the end of the two months. On December 31, one month’s worth of interest has accumulated. 18

Principle X Rate X Time = Interest FORMULA FOR CALCULATING INTEREST Principle X Rate X Time = Interest $3,000 X 6/100 X 30/365 = $14.79 19

Determine the adjustment OBJECTIVE 5 Determine the adjustment for accrued income and unearned income. 20

ACCRUED INCOME Accrued income is income that has been earned but not yet received or recorded. The appropriate revenue account must be credited to increase its balance even though the amount will not be collected until a later period. 21

UNEARNED OR DEFERRED INCOME Any portion of a firm’s income that has been received but not earned during a fiscal period should not be reported on the income statement prepared for the period. The amount should be reported as income in the period when it is earned. 22

UNEARNED OR DEFERRED INCOME The following is an example of a magazine publisher: When the publisher first receives income from subscriptions, it is unearned. The subscriptions represent a liability because the publisher has an obligation to provide the magazines during the specified period of time. As the magazines are sent to the subscribers, the income is gradually earned and the liability decreases. 23

OBJECTIVE 6 Complete a 10-column worksheet. 24

BE SURE COLUMN TOTALS EQUAL FASHION WORLD Worksheet (Partial) Year Ended December 31, 20X4 ACCOUNT NAME TRIAL BALANCE ADJUSTMENTS DEBIT CREDIT DEBIT CREDIT Telephone Expense 2,720.99 Uncollectible Accounts Expense (b) 630.00 Interest Expense 359.01 (g) 75.94 Totals 502,835.77 502,835.77 12,713.94 12,713.94 Net Income BE SURE COLUMN TOTALS EQUAL 25