1. CHAPTER FIFTEEN ADJUSTMENTS AND THE WORK SHEET FOR A MERCHANDISING BUSINESS

2. WORK SHEET OF A MERCHANDISING BUSINESS  Similar to service business worksheet  Used to record adjustments oIncluding adjustments for Merchandise Inventory Unearned Revenue  Used to prepare financial statements

3. ADJUSTMENT FOR MERCHANDISE INVENTORY Example: Ponder’s Bike Parts had a beginning merchandise inventory of $25,000. At the end of the year, a physical inventory of merchandise determined that merchandise costing $30,000 was still on hand.

4. ADJUSTMENT FOR MERCHANDISE INVENTORY More inventory at the END then at the BEGINNING of the year?

5. ADJUSTMENT FOR MERCHANDISE INVENTORY More inventory at the END then at the BEGINNING of the year? When PURCHASES EXCEED SALES, the inventory balance is HIGHER at the end of the year

6. ADJUSTMENT FOR MERCHANDISE INVENTORY MERCHANDISE INVENTORY $25,000 BEG. BALANCE

7. ADJUSTMENT FOR MERCHANDISE INVENTORY MERCHANDISE INVENTORY $25,000 This account is NOT changed during the accounting period

8. ADJUSTMENT FOR MERCHANDISE INVENTORY MERCHANDISE INVENTORY $25,000 PURCHASES XXX Merchandise bought during the year is debited to Purchases instead of Merchandise Inventory

9. ADJUSTMENT FOR MERCHANDISE INVENTORY MERCHANDISE INVENTORY $25,000 PURCHASES XXX The COST of merchandise sold is NOT recorded. The selling price is credited to the Sales account XXX SALES

10. ADJUSTMENT FOR MERCHANDISE INVENTORY MERCHANDISE INVENTORY $25,000 After a year of purchasing and selling merchandise, the balance is no longer accurate

11. ADJUSTMENT FOR MERCHANDISE INVENTORY MERCHANDISE INVENTORY $25,000 An adjustment is needed to update the balance of the Merchandise Inventory account

12. ADJUSTMENT FOR MERCHANDISE INVENTORY MERCHANDISE INVENTORY $25,000 TWO-STEP ADJUSTMENT!

13. Ponder’s Bike Parts Work Sheet (partial) TRIAL BALANCE DEBITCREDIT ACCOUNT TITLE For Year Ended December 31, 20-- Merchandise Inventory Income Summary Purchases Purchases Returns and Allowances Purchases Discounts Freight-In 25,000 80,000 1,000 500 700 Let’s look at the adjustment on a partial work sheet.

14. TRIAL BALANCE DEBITCREDIT ACCOUNT TITLE DEBIT CREDIT ADJUSTMENTS Merchandise Inventory Income Summary Purchases Purchases Ret. & Allow. Purchases Discounts Freight-In 25,000 80,000 1,000 500 700 STEP #1 REMOVE THE BEGINNING BALANCE.

15. TRIAL BALANCE DEBITCREDIT ACCOUNT TITLE DEBIT CREDIT ADJUSTMENTS Merchandise Inventory Income Summary Purchases Purchases Ret. & Allow. Purchases Discounts Freight-In 25,000 80,000 1,000 500 700 By crediting Merchandise Inventory, the balance is reduced to zero. 25,000 (a)

16. TRIAL BALANCE DEBITCREDIT ACCOUNT TITLE DEBIT CREDIT ADJUSTMENTS Merchandise Inventory Income Summary Purchases Purchases Ret. & Allow. Purchases Discounts Freight-In 25,000 80,000 1,000 500 700 25,000 (a) 25,000 (a) The corresponding debit is to Income Summary.

17. TRIAL BALANCE DEBITCREDIT ACCOUNT TITLE DEBIT CREDIT ADJUSTMENTS Merchandise Inventory Income Summary Purchases Purchases Ret. & Allow. Purchases Discounts Freight-In 25,000 80,000 1,000 500 700 25,000 (a) 25,000 (a) Step #2 The ending inventory is entered into the Merchandise Inventory account. 30,000 (b)

18. TRIAL BALANCE DEBITCREDIT ACCOUNT TITLE DEBIT CREDIT ADJUSTMENTS Merchandise Inventory Income Summary Purchases Purchases Ret. & Allow. Purchases Discounts Freight-In 25,000 80,000 1,000 500 700 25,000 (a) 25,000 (a) The balance in the Merchandise Inventory account now reflects the actual amount of inventory on hand at the end of the year. 30,000 (b)

19. TRIAL BALANCE DEBITCREDIT ACCOUNT TITLE DEBIT CREDIT ADJUSTMENTS Merchandise Inventory Income Summary Purchases Purchases Ret. & Allow. Purchases Discounts Freight-In 25,000 80,000 1,000 500 700 25,000 (a) 25,000 (a) Income Summary is credited. 30,000 (b) 30,000

20. TRIAL BAL. DR.CR. ACCOUNT TITLE DR. CR. ADJUSTMENTS CR. DR. ADJ. TRIAL BAL. Merch. Inv. Income Sum. Purchases Purch. R &A Purch. Disc. Freight-In 25,000 80,000 30,000 (b) 1,000 500 700 25,000 30,000 (b) (a) 25,000 (a) The new balance is extended to the “Adjusted Trial Balance” columns. 30,000

21. TRIAL BAL. DR.CR. ACCOUNT TITLE DR. CR. ADJUSTMENTS CR. DR. ADJ. TRIAL BAL. Merch. Inv. Income Sum. Purchases Purch. R &A Purch. Disc. Freight-In 25,000 80,000 30,000 (b) 1,000 500 700 25,000 30,000 (b) (a) 25,000 (a) 30,000 25,00030,000 BE CAREFUL!!! BOTH the beginning and ending inventory amounts are extended to the “Adjusted Trial Balance” columns.

22. TRIAL BAL. DR.CR. ACCOUNT TITLE DR. CR. ADJUSTMENTS CR. DR. ADJ. TRIAL BAL. Merch. Inv. Income Sum. Purchases Purch. R &A Purch. Disc. Freight-In 25,000 80,000 30,000 (b) 1,000 500 700 25,000 30,000 (b) (a) 25,000 (a) 30,000 25,00030,000 80,000 1,000 500 700 The other accounts are extended with no adjustments.

23. ADJUST. T/B DR.CR. ACCOUNT TITLE DR. CR. INCOME STMT CR. DR. BALANCE SHEET Merch. Inv. Income Sum. Purchases Purch. R &A Purch. Disc. Freight-In 30,000 80,000 1,000 500 700 25,00030,000 Merchandise Inventory is extended to the Balance Sheet columns.

24. ADJUST. T/B DR.CR. ACCOUNT TITLE DR. CR. INCOME STMT CR. DR. BALANCE SHEET Merch. Inv. Income Sum. Purchases Purch. R &A Purch. Disc. Freight-In 30,000 80,000 1,000 500 700 25,00030,000 25,000 30,000 BOTH the beginning and ending inventory are extended to the Income Statement columns.

25. ADJUST. T/B DR.CR. ACCOUNT TITLE DR. CR. INCOME STMT CR. DR. BALANCE SHEET Merch. Inv. Income Sum. Purchases Purch. R &A Purch. Disc. Freight-In 30,000 1,000 500 700 25,00030,000 25,000 30,000 80,000 1,000 500 700 Since the Purchases accounts and Freight-In are Income Statement accounts, they are extended to the Income Statement columns.

26. ADJUST. T/B DR.CR. ACCOUNT TITLE DR. CR. INCOME STMT CR. DR. BALANCE SHEET Merch. Inv. Income Sum. Purchases Purch. R &A Purch. Disc. Freight-In 30,000 1,000 500 700 25,00030,000 25,000 30,000 80,000 1,000 500 700 The Cost of Goods Sold can be computed from the Income Statement columns.

27. Merch. Inv., January 1 From Income Summary account on Work Sheet Cost of Goods Sold: $25,000

28. Merch. Inv., January 1 Before we can combine Purchases and Beginning Inventory, we must subtract the contra-purchases accounts. Cost of Goods Sold: $25,000 Purchases$80,000 Less: Purchases R&A $1,000 500Purchases Disc. 1,500

29. Merch. Inv., January 1 Freight-In is added to Net Purchases to determine the “Cost of Goods Purchased.” Cost of Goods Sold: $25,000 Purchases$80,000 Less: Purchases R&A $1,000 500Purchases Disc. 1,500 Net purchases$78,500 Freight-In 700 Cost of Goods Purch. 79,200

30. Merch. Inv., January 1 Cost of Goods Purchased is added to the Beginning Inventory to determine Goods Available for Sale. Cost of Goods Sold: $25,000 Purchases$80,000 Less: Purchases R&A $1,000 500Purchases Disc. 1,500 Net purchases$78,500 Freight-In 700 Cost of Goods Purch. 79,200 Goods available for sale$104,200

31. Merch. Inv., January 1 Merchandise still on hand at the end of the year is subtracted from the amount available for sale to determine the Cost of Goods Sold. Cost of Goods Sold: $25,000 Purchases$80,000 Less: Purchases R&A $1,000 500Purchases Disc. 1,500 Net purchases$78,500 Freight-In 700 Cost of Goods Purch. 79,200 Goods available for sale$104,200 Less: Merch. Inv., Dec. 31 30,000 Cost of Goods Sold $74,200

32. ADJUSTMENT FOR UNEARNED REVENUE Example: Brown County Playhouse sells season tickets. Tickets sell for $10 for each play ($50 for a 5 play season ticket) and a maximum of 1,000 seats can be sold for each play. Let’s assume all shows sell out during the first week that season tickets are available.

33. ADJUSTMENT FOR UNEARNED REVENUE UNEARNED TICKET REVENUE $50,000 When season tickets are sold Cash is debited and Unearned Ticket Revenue is credited

34. ADJUSTMENT FOR UNEARNED REVENUE UNEARNED TICKET REVENUE $50,000 Following the production of the third show, financial statements are to be prepared

35. ADJUSTMENT FOR UNEARNED REVENUE UNEARNED TICKET REVENUE $50,000 An adjusting entry is needed to recognize the ticket revenue earned for the three shows

36. ADJUSTMENT FOR UNEARNED REVENUE UNEARNED TICKET REVENUE $50,000 TICKET REVENUE 3 shows x 1,000 tickets for each show = 3,000 tickets 3,000 tickets x $10 per ticket = $30,000

37. ADJUSTMENT FOR UNEARNED REVENUE UNEARNED TICKET REVENUE $50,000 TICKET REVENUE $30,000 in earned revenue is removed from the unearned account and put into the revenue account. $30,000

38. ADJUSTMENT FOR UNEARNED REVENUE UNEARNED TICKET REVENUE $50,000 TICKET REVENUE The remaining balance of $20,000 in season ticket sales is reported on the Balance Sheet as a current liability. $30,000 $20,000 Bal.

39. NORTHERN MICRO CHART OF ACCOUNTS Let’s review the Chart of Accounts for a merchandising business!

40. NORTHERN MICRO CHART OF ACCOUNTS Assets Current Assets 101 Cash 122 Accts. Rec. 131 Merch. Inv. 141 Supplies 145 Prepaid Ins. Assets now include Merchandise Inventory

41. NORTHERN MICRO CHART OF ACCOUNTS Assets Current Assets 101 Cash 122 Accts. Rec. 131 Merch. Inv. 141 Supplies 145 Prepaid Ins. Property, Plant, & Equip 161 Land 171 Building 171.1 Acc. Depr. - Bldg 181 Store Equipment 181.1 Acc. Depr. - Store Eq

42. NORTHERN MICRO CHART OF ACCOUNTS (cont.) Liabilities 201 Notes Payable 219 Wages Payable Current Liabilities 231 Utilities Payable Long-Term Liabilities 251 Mortgage Payable Owner’s Equity 202 Accounts Payable 241 Unearned Sub. Rev. 311 G.L. Fishel, Capital 312 G.L. Fishel, Drawing

43. NORTHERN MICRO CHART OF ACCOUNTS (cont.) 231 Utilities Payable 241 Unearned Sub. Rev. Long-Term Liabilities 251 Mortgage Payable Owner’s Equity 311 G. L. Fishel, Capital 312 G. L. Fishel, Drawing 313 Income Summary

44. NORTHERN MICRO CHART OF ACCOUNTS Assets Current Assets 101Cash 122 Accts. Rec. 131 Merch. Inv. 141 Supplies 145 Prepaid Ins. Property, Plant, & Equip 161 Land 171 Building 171.1 Acc. Depr. - Bldg 181 Store Equipment 181.1 Acc. Depr. - Store Eq Revenue 401 Sales 401.1 Sales Returns & Allow Other Revenue 411 Interest Revenue 412 Rent Revenue 413 Subscrip. Revenue

45. NORTHERN MICRO CHART OF ACCOUNTS Assets Current Assets 101Cash 122 Accts. Rec. 131 Merch. Inv. 141 Supplies 145 Prepaid Ins. Property, Plant, & Equip 161 Land 171 Building 171.1 Acc. Depr. - Bldg 181 Store Equipment 181.1 Acc. Depr. - Store Eq Revenue 401 Sales 401.1 Sales Returns & Allow Other Revenue 411 Interest Revenue 412 Rent Revenue 413 Subscrip. Revenue Expenses Cost of Goods Sold 501 Purchases 501.1 Purch. Ret. & Allow. 501.2 Purchases Discounts 502 Freight-In

46. NORTHERN MICRO CHART OF ACCOUNTS (cont.) Liabilities 201 Notes Payable 202 Accounts Payable 219 Wages Payable Current Liabilities 231 Utilities Payable 241 Unearned Sub. Rev. Long-Term Liabilities 251 Mortgage Payable Owner’s Equity 311 G. L. Fishel, Capital 312 G. L. Fishel, Drawing Operating Expenses 511 Wages Expense 521 Rent Expense 523 Supplies Expense 525 Telephone Expense 533 Utilities Expense 535 Insurance Expense 540 Depr. Exp. - Building 541 Depr. Exp. - Store Eq. 549 Misc. Expense 512 Advertising Expense 513 Bk Credit Card Exp.

47. NORTHERN MICRO CHART OF ACCOUNTS (cont.) 231 Utilities Payable 241 Unearned Sub. Rev. Long-Term Liabilities 251 Mortgage Payable Owner’s Equity 311 G. L. Fishel, Capital 312 G. L. Fishel, Drawing 313 Income Summary 523 Supplies Expense 525 Telephone Expense 533 Utilities Expense 535 Insurance Expense 540 Depr. Exp. - Building 541 Depr. Exp. - Store Eq. 549 Misc. Expense Other Expenses 551 Interest Expense

48. PREPARING A WORK SHEET: 5 STEPS 1 Prepare the trial balance. 2 Prepare the adjustments. 3 Prepare the adjusted trial balance. 4 Extend the adjusted trial balance to the Income Statement and Balance Sheet columns. 5 Complete the work sheet by totaling the Income Statement and Balance Sheet columns to compute the net income or loss.

49. Name of Company Work Sheet TRIAL BALANCE DEBITCREDIT ACCOUNT TITLE For Year Ended December 31, 20-- Let’s look at a work sheet for a merchandising business!

50. Name of Company Work Sheet TRIAL BALANCE DEBITCREDIT ACCOUNT TITLE For Year Ended December 31, 20-- STEP #1 Prepare a Trial Balance Assets ASSETS are listed in the debit column.

51. Name of Company Work Sheet TRIAL BALANCE DEBITCREDIT ACCOUNT TITLE For Year Ended December 31, 20-- STEP #1 Prepare a Trial Balance Assets Mdse. Inv. BEGINNING balance of merchandise inventory

52. Name of Company Work Sheet TRIAL BALANCE DEBITCREDIT ACCOUNT TITLE For Year Ended December 31, 20-- STEP #1 Prepare a Trial Balance Assets Mdse. Inv. LIABILITIES (including unearned revenues) are listed in the credit column. Liabilities Unearned Rev.

53. Name of Company Work Sheet TRIAL BALANCE DEBITCREDIT ACCOUNT TITLE For Year Ended December 31, 20-- STEP #1 Prepare a Trial Balance Assets Mdse. Inv. OWNER’S EQUITY accounts are shown next. Liabilities Unearned Rev. Capital Drawing

54. TRIAL BALANCE DEBITCREDIT ACCOUNT TITLE Drawing Income Summary Income Summary is listed but it has no balance until the adjustments are entered.

55. TRIAL BALANCE DEBITCREDIT ACCOUNT TITLE Drawing Income Summary Revenue Sales Sales R&A Sales Discounts CONTRA-REVENUE accounts are listed in the debit column

56. TRIAL BALANCE DEBITCREDIT ACCOUNT TITLE Income Summary Revenue Sales Sales R&A Sales Discounts COST OF GOODS SOLD accounts are listed next. Expenses Purchases Purch. R&A Purch. Disc. Freight-In Drawing

57. Name of Company Work Sheet TRIAL BALANCE DEBITCREDIT ACCOUNT TITLE For Year Ended December 31, 20-- STEP #1 Prepare a Trial Balance Assets Mdse. Inv. Liabilities Unearned Rev. Capital Drawing ADJUSTMENTS DEBITCREDIT STEP #2 Prepare the Adjustments EIBI The Beginning Inventory is removed from and the Ending Inventory is entered into the Merchandise Inventory account.

58. TRIAL BALANCE DEBITCREDIT ACCOUNT TITLE ADJUSTMENTS DEBITCREDIT Drawing Revenue Income Summary Sales Sales R&A Sales Discounts Expenses Purchases Freight-In Purch. R&A Purch. Disc. BIEI Income Summary is debited for the amount of the Beginning Inventory and credited for the amount of the Ending Inventory.

59. Name of Company Work Sheet ADJUSTMENTS DEBITCREDIT ACCOUNT TITLE For Year Ended December 31, 20-- STEP #2 Prepare the Adjustments ADJ. TRIAL BAL. DEBITCREDIT STEP #3 Prepare the Adj. Trial Bal. EI BI The Ending Inventory is now the balance of the Merchandise Inventory account and is extended to the Adjusted Trial Balance columns. Merchandise Inv. EI Assets

60. Name of Company Work Sheet ADJUSTMENTS DEBITCREDIT ACCOUNT TITLE For Year Ended December 31, 20-- STEP #2 Prepare the Adjustments ADJ. TRIAL BAL. DEBITCREDIT STEP #3 Prepare the Adj. Trial Bal. EI BI The Liabilities are extended to the Adjusted Trial Balance columns. Merchandise Inv. EI Liabilities Unearned Rev. Assets

61. Name of Company Work Sheet ADJUSTMENTS DEBITCREDIT ACCOUNT TITLE For Year Ended December 31, 20-- STEP #2 Prepare the Adjustments ADJ. TRIAL BAL. DEBITCREDIT STEP #3 Prepare the Adj. Trial Bal. EI BI Owners Equity accounts are also extended to the Adjusted Trial Balance columns. Merchandise Inv. EI Liabilities Unearned Rev. Assets Capital Drawing

62. ADJUSTMENTS DEBITCREDIT ACCOUNT TITLE ADJ. TRIAL BAL. DEBITCREDIT Income SummaryBIEI BOTH the Beginning and the Ending Inventories are extended into the Adjusted Trial Balance. BI EI

63. ADJUSTMENTS DEBITCREDIT ACCOUNT TITLE ADJ. TRIAL BAL. DEBITCREDIT Revenue Income Summary Sales Sales R&A Sales Discounts Expenses Purchases Freight-In Purch. R&A Purch. Disc. BIEIBI EI All the Revenue and Expense accounts are extended to the Adjusted Trial Balance.

64. Name of Company Work Sheet DEBITCREDIT For Year Ended December 31, 20-- STEP #4 Extend Adjusted Account Balances DEBITCREDIT EI Assets ADJ. TRIAL BAL. INCOME STATEMENT BALANCE SHEET DEBITCREDIT STEP #3 Prepare the Adj. Trial Bal. Assets EI Liabilities Unearned Rev. Capital Drawing The Assets (including the ending balance of Merchandise Inventory) are extended to the Balance Sheet columns.

65. Name of Company Work Sheet DEBITCREDIT For Year Ended December 31, 20-- STEP #4 Extend Adjusted Account Balances DEBITCREDIT EI Liabilities Unearned Rev. Assets Capital Drawing ADJ. TRIAL BAL. INCOME STATEMENT BALANCE SHEET DEBITCREDIT STEP #3 Prepare the Adj. Trial Bal. Assets EI Liabilities Unearned Rev. Capital Drawing Liabilities & Owner’s Equity accounts are also extended to the Balance Sheet columns.

66. INCOME STATEMENT DEBITCREDIT ADJ. TRIAL BALBALANCE SHEET DEBITCREDIT BI EI DEBITCREDIT BI EI Revenue Sales Sales R&A Sales Discounts Expenses Purchases Purch. R&A Purch. Disc Freight-In BOTH the Beginning and the Ending inventories are extended to the Income Statement columns for the INCOME SUMMARY account.

67. INCOME STATEMENT DEBITCREDIT ADJ. TRIAL BALBALANCE SHEET DEBITCREDIT BI EI DEBITCREDIT BI EI Revenue Sales Sales R&A Sales Discounts Expenses Purchases Purch. R&A Purch. Disc Freight-In Revenue Sales Sales R&A Sales Discounts Expenses Purchases Purch. R&A Purch. Disc Freight-In Revenue & Expenses are extended to the Income Statement columns.

68. INCOME STATEMENT DEBITCREDIT ADJ. TRIAL BALBALANCE SHEET DEBITCREDITDEBITCREDIT Sales Discounts Expenses Purchases Purch. R&A Purch. Disc. Freight-In Sales Discounts Expenses Purchases Purch. R&A Purch. Disc. Freight-In STEP #5 COMPLETE THE WORK SHEET (1) Sum columns (2) Compute net income (loss) Net Income

69. INCOME STATEMENT DEBITCREDIT ADJ. TRIAL BALBALANCE SHEET DEBITCREDITDEBITCREDIT Sales Discounts Expenses Purchases Purch. R&A Purch. Disc. Freight-In Sales Discounts Expenses Purchases Purch. R&A Purch. Disc. Freight-In STEP #5 COMPLETE THE WORK SHEET (1) Sum columns (2) Compute net income (loss) Net Income Net Loss