PREPARING WORKSHEET

Prepared by: JHOYLIE L. BESIN-NOBLE

Reference: Fundamentals of Financial Accounting and Reporting by Win Ballada

PREPARING WORKSHEET
The extension of the beginning and ending inventory balances requires some new procedures.
First, the beginning inventory balance is extended to the debit column of the income
statement. This procedure has the effect of adding beginning inventory to net cost of
purchases; observe that the purchases account is also in the debit column of the income
statement.

Second, the ending inventory balance which is not in the trial balance is entered in the credit
column of the income statement. This procedure has the effect of subtracting the ending
inventory from goods available for sale. Note that two inventory amounts appeared in the
income statement columns. This is because both the beginning inventory and the ending
inventory are needed in the computation of cost of sales.

Finally, the ending inventory is also entered in the debit column of the balance sheet

STATEMENT OF FINANCIAL PERFORMANCE FORMAT

Nature of Expenses Format
All expenses are presented under the general label of Operating Expenses in the Statement of
Financial Performance. Examples include raw materials, supplies used, employee benefits
expense, depreciation and amortization expense, transportation costs, advertising costs and
other operating expenses.

Function of Expense Format

This method, also referred to as the “cost of sales” format, classifies expenses according to
their function. The expenses are presented under the following categories:
● cost of sales
● distribution /selling expense
● administrative expense
● other operating expenses

ADJUSTING ENTRIES FOR A MERCHANDISING ENTITY

Adjusting entries are generally the same for merchandising and service entries except for an
entry to set up the ending inventory under the periodic inventory system after physical count
is made.

CLOSING ENTRIES
Closing entries are also similar to service entities except for some unique nominal accounts
that arise from merchandising operations. These accounts include Purchases, Freight In,
Purchase Returns and Allowances, Purchase Discount, Sales, Sales Returns and Allowances,
Sales Discount and Freight Out.
PREPARING WORKSHEET
Prepared by: JHOYLIE L. BESIN-NOBLE
Reference: Fundamentals of Financial Accounting and Reporting by Win Ballada

ILLUSTRATION

ADJUSTING AND CLOSING ENTRIES

CPA Company
Trial Balance
As of December 31, 2021
PREPARING WORKSHEET
Prepared by: JHOYLIE L. BESIN-NOBLE
Reference: Fundamentals of Financial Accounting and Reporting by Win Ballada

THE ADJUSTING ENTRY IS:

DATE PARTICULARS DEBIT CREDIT

Merchandise Inventory 98,000

Income Summary 98,000

CLOSING ENTRIES FROM THE ABOVE ILLUSTRATIVE PROBLEM ARE AS FOLLOWS:

DATE PARTICULARS DEBIT CREDIT

Dec Sales 141,250

Sales Returns and Allowances 1,200

Sales Discount 1,140

Freight Out 2,000

Income Summary 136,910

Dec Income Summary 198,558

Purchase Returns and Allowances 1,500

Purchase Discounts 1,542

Purchases 148,600

Merchandise Inventory, beg 50,000

Freight In 5,000
PREPARING WORKSHEET
Prepared by: JHOYLIE L. BESIN-NOBLE
Reference: Fundamentals of Financial Accounting and Reporting by Win Ballada
ACTIVITY
Directions: The Unadjusted Trial Balance of Godofredo Company, prepared by a bookkeeper
who was new in the practice, is present below. Correct the Unadjusted Trial Balance below,
Prepare adjusting entries, enter it to the blank worksheet provided and complete it.
Godofredo Company
Unadjusted Trial Balance
As of December 31, 2020

DEBIT CREDIT

Cash 100,000

Accounts Receivable 500,000

Merchandise Inventory 700,000

Prepaid Rent 300,000

Shop equipment 1,600,000

Accumulated Depreciation 200,000

Accounts Payable 400,000

Godofredo, Capital 1,300,000

Godofredo, Withdrawals 100,000

Sales 2,900,000

Sales discounts 100,000

Purchases 800,000

Purchase Returns and Allowances 200,000

Transportation In 100,000

Salaries expense 400,000

Advertising expense 150,000

Utilities expense 100,000

Supplies expense 50,0000

TOTAL 5,000,000 5,000,000

ADDITIONAL INFORMATION:
A. Accrued salaries at year-end amounted to P30,000.
B. Rent in the amount of P100,000 has expired during the year.
C. Depreciation on shop equipment is P200,000.
D. The Dec. 31 merchandise inventory amounted to P500,000.