Chapter 9 Work Sheet and Adjustments

for a Merchandising Business

 Adjustments for the Merchandise Inventory

account
 Complete a work sheet for a merchandising
business
 Merchandise Inventory adjustment and
Worksheet Using Perpetual Inventory system

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Chart of Accounts for a Merchandising Business

A Contra
account
listed as a
subaccount
of the
account to
which it is
contra

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Chart of Accounts for a Merchandising Business (continued)

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Determining Needed Adjustments

• Certain accounts listed on the trial balance will need adjusting

to bring their balances up to date

• Items requiring adjustments include:

 Merchandise Inventory

 Prepaid Items

 Depreciation of Long-Term Assets

 Accrued Liabilities

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Merchandise Inventory Account

• An asset account that shows the value of goods on hand at a

given moment

• Adjustments
 Beginning Merchandise Inventory — the dollar value of
merchandise on hand at the beginning of an accounting
period
 Ending Merchandise Inventory — the dollar value of
merchandise on hand at the end of an accounting period

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Adjustment for Merchandise Inventory

Step 1. Transfer the Beginning Inventory figure from the

Merchandise Inventory account to the Income Summary
account. (Assume the beginning inventory was $66,000)

The Income Summary account does

not have a normal debit or credit
balance.

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Adjustment for Merchandise Inventory (continued)

Step 2. Record the Ending Inventory figure in the Merchandise

Inventory account. (Assume the ending inventory is
$72,400)

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Remember!

• The beginning inventory is entered on the debit side of Income

Summary account.

• The ending inventory is entered on the credit side of Income

Summary account.

• After the Merchandise Inventory account has been adjusted, its

balance should be the ending inventory figure.

• When the work sheet is prepared, the two inventory figures are
not combined into a single figure.

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Adjustment for Store Supplies Used

 Assume the Store Supplies account Store Supplies Expense

has a balance before adjustment of + -
$2,015. Adjustment 1,515
 An inventory account on December
31 shows $500 of supplies still on
hand. Store Supplies
+ -
 Therefore $1,515 of supplies has
Balance 2,015 Adjustment 1,515
been used during the accounting
period.
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Adjustment for Office Supplies Used

 Assume the Office Supplies Office Supplies Expense

account has a balance before + -
adjustment of $667. Adjustment 417
 An inventory account on
December 31 shows $250 of
supplies still on hand. Office Supplies
+ -
 Therefore $417 of supplies have
Balance 667 Adjustment 417
been used during the accounting
period.
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 Adjustment for Insurance Expired

 Assume the Prepaid Insurance

account has a balance before
adjustment of $720, representing
a two-year insurance policy,
purchased on Oct. 1.
 The amount of insurance will be
$720 24 months or $30 per month.
 The depreciation for October 1
through December 31 will be for $90
($30 3 months).

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Depreciation of Office Equipment and Office Furniture

• Depreciation — describes the expense that results from the

loss in usefulness of an asset due to age, wear and tear, and
obsolescence

• The purpose of depreciation accounting — to spread the cost

of an asset over its useful life rather than treating the asset’s
cost as an expense in the year it was purchased

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Depreciation Calculations
The straight-line method is one of the most popular
depreciation methods that yield the same amount of
depreciation for each full period an asset is used.

Cost of asset – Trade-in value

= Annual depreciation expense
Estimated years of usefulness

 Assume delivery equipment costs $56,000 with a trade-in

value of $800.

 The delivery equipment has a useful life of 6 years.

 The annual depreciation will therefore be

($56,000 – $800) 6 years = $9,200 per year.

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The Depreciation Entry

Depreciation is always recorded by

 Debiting an expense account —
Depreciation Expense

 Crediting an account — Accumulated

Depreciation
 Contra asset account

 Always has a credit balance

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Adjustment for Salaries Owed but Unpaid

 Assume on December 31 a business

owes sales employees $900 and
office employees $700.
 The adjusting entry for unpaid
salaries includes debits to Sales
Salaries Expense for $900 and Office
Salaries Expense for $700 and a
credit to Salaries Payable for $1,600.

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End-of-Period Work Sheet
• An informal working paper is used by the accountant to
 Organize data
 Make end-of-period work easier

• Not a financial statement, never be published

• An excellent tool that is widely used, particularly by large

businesses that could have hundreds of adjustments

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 17
The Trial Balance and Adjustments Columns
The Trial Balance and Adjustments Columns

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The Adjusted Trial Balance Columns

• If an account does not have an adjustment, carry over the Trial

Balance figure to the appropriate Adjusted Trial Balance
column.
• The ending balance for Merchandise Inventory is carried over
to the debit Adjusted Trial Balance column.
• If an account has a debit balance, and the adjustment is a
credit, the difference between the two amounts is entered in
the Adjusted Trial Balance Debit column.

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The Adjusted Trial Balance Columns

• If an account has a debit balance, and the adjustment is also a

debit, add the two figures and move the total to the Adjusted
Trial Balance Debit column.
• If an account has a credit balance, and the adjustment is also a
credit, add the two figures and enter the total in the Adjusted
Trial Balance Credit column.
• If an account has a credit balance, and the adjustment is a debit,
the difference between the two amounts is entered in the
Adjusted Trial Balance Credit column.

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The Adjusted Trial Balance Columns

• If an account does not have a balance in the Trial Balance

columns, but there is an adjustment, the amount of the
adjustment becomes the balance.
• Both the debit adjustment and the credit adjustment to the
Income Summary account are moved over to the Adjusted Trial
Balance columns. We do this because both figures will appear on
the income statement, which is prepared from the completed
work sheet.

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 Remember!

Income Summary is the only account for which you do not

combine the debit and credit figures. Instead, you move both to
the Adjusted Trial Balance as two distinct figures.
When extending amounts to the Adjusted Trial Balance columns,
“likes” are added and “dislikes” are subtracted.
• If there are two debits or two credits, you add.

• If there is one debit and one credit, you subtract.

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The Financial Statement Columns
From the Adjusted Trial Balance Columns:
• Assets and the owner’s drawing account are moved to the Balance
Sheet Debit column.
• Accumulated depreciation, liabilities, and the owner’s capital
account are moved to the Balance Sheet Credit column.
• Both amounts shown for the Income Summary account are moved
to the Income Statement columns.
From the Adjusted Trial Balance Columns:
• Revenue and contra purchases accounts (Purchase Returns and
Allowances and Purchases Discounts) are moved to the Income
Statement Credit column.
• Expenses, Purchases, and contra sales accounts (Sales Returns and
Allowances and Sales Discounts) are moved to the Income
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Statement Debit column.
Completing the Work Sheet
1. Total the Income Statement Debit and Credit columns.
2. Total the Balance Sheet Debit and Credit columns.
3. Determine the amount of net income (or net loss) by finding the
difference between the Income Statement Credit column and
the Income Statement Debit column.
4. Write the words net income (or net loss) in the Account Title
column.
5. Enter the net income figure under the Income Statement Debit
column and the Balance Sheet Credit column. If a net loss exists,
the net loss figure is entered under the Income Statement Credit
column and the Balance Sheet Debit column.
6. Retotal the Income Statement columns and the Balance Sheet
columns as an arithmetic check.
7. Double rule the column totals.
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Summary of Steps to Complete the Financial Statement
Columns of a Work Sheet

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Procedures for Adjusting the Merchandise Inventory
Account

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Appendix D Merchandise Inventory Adjustment
and Work Sheet Using the Perpetual
Inventory System

 Make adjusting entries to record inventory

shortages or overages

 Prepare a work sheet for a company using the

perpetual inventory system

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Merchandise Inventory Adjustment

• A physical inventory is needed under a perpetual inventory

system so the actual quantity on hand can be compared to the
merchandise inventory account.

• If there is a difference between the physical count and the

perpetual records, it is necessary to make an adjusting entry to
correct the records.

• The Inventory Short and Over account is used to reconcile the

perpetual records to the actual inventory count.

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 Merchandise Inventory Adjustment

• At the end of 20X4, King Company’s perpetual inventory records

show an inventory value of $32,345 but a physical count shows
only $32,205 worth of merchandise on hand.
• King prepares the following entry:

20X4
31 Inventory Short and Over 140
Dec.
Merchandise Inventory 140

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 More on Merchandise Inventory Adjustment
• Now let’s assume at the end of 20X4, King Company’s perpetual
inventory records show an inventory value of $32,345 but a
physical count shows $32,400 worth of merchandise on hand.
• King prepares the following entry:

20X4
31 Merchandise Inventory 55
Dec.
Inventory Short and Over 55

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 Work Sheet for a Company Using the Perpetual
Inventory System
In a periodic inventory system, we adjusted the Merchandise
Inventory account with two entries.
 Beginning Inventory
 Debit Income Summary

 Credit Merchandise Inventory

 Ending Inventory
 Debit Merchandise Inventory

 Credit Income Summary

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 Work Sheet of a Company Using the Perpetual
Inventory System

• Under the perpetual system, these adjusting entries are not

needed because the inventory is updated each time goods are
bought and sold.

• With the exception of the adjustments for Merchandise

Inventory, the work sheet for a company using the perpetual
inventory system is identical to one using the periodic inventory
system.

• A work sheet for a company using the perpetual inventory

system can be found in your textbook App. D.
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