Lesson: 39

Topic: Additional Accounts within the Merchandising Income Statement.

Objectives:

Students will analyze merchandising transactions within the periodic inventory system. Students will examine how inventory is purchased, how sales are recorded, and how the merchandise account is adjusted along with the closing entries at the end of the accounting period.

Students will pay particular attention to how the Merchandise account is established within the first accounting period's closing entries. Students will then note how the Merchandise account is then constantly adjusted during the closing entries of all subsequent accounting periods.


Periodic Inventory: A system of calculating the cost of goods sold by physically counting the inventory at the end of the accounting period.

Cost of Goods Sold: Refers to the total expense of inventory which has been sold. Under the "Periodic" inventory system the Cost of Goods Sold is not actually an account. Rather, it is a figure which only appears on the Income Statement. As there is no account to indicate this figure, it must be calculated based on other information.

Purchases: An expense account used only under the "Periodic" inventory system which is used to record the purchase of merchandise for resale. Its balance indicates only the value of merchandise which has been purchased throughout the fiscal period. It does not indicate how much merchandise has been sold, nor does it indicate how much merchandise has not been sold.

Merchandise: A current asset account which is used to record the value of merchandise which remains unsold by the end of the accounting period.


Typical Purchase and Sale Transaction Entries for a Merchandising Firm Which Uses the Periodic Inventory System


Step

Objective

1

Purchase of Merchandise.

2

Sale of Merchandise.


The Closing Entries for a Merchandising Firm Which Uses the Periodic Inventory System


The closing entries for a merchandising firm which uses the periodic inventory system is still a four-step process. However, you will notice the closing entries take on some additional tasks compared to the closing entries for a service firm. To begin with, the Merchandise account is adjusted within the closing entries. You will also notice that the Purchases account is closed along with all of the other expense accounts.

Step

Objective

1

Close the Sales account AND establish the current balance of the merchandise account.

2

Close the expense accounts (including the purchases account) AND erase the previous balance of the merchandise account.

3

Close the Revenue and Expense Summary to the Capital account.

4

Close the Drawings account to the Capital account.



 



A Typical Purchase of Merchandise




A Typical Sale of Merchandise




Step 1




Step 2




Step 3

Transfer the balance of the Revenue and Expense Summary to the Capital account:



 


Step 4

Transfer the balance of the Drawings account to the Capital account.



Method of Instruction and Evaluation Exercise:

The class will view a Power Point presentation which explains the accounting principles associated with maintaining a "Periodic" inventory system.

After a brief discussion of the concepts outlined within the presentation, students will complete exercise #1 on page 433.

Expectations Addressed:

The "Advanced Accounting Practices" strand of the BAF3M Ministry of Education Curriculum Guidelines outlines all of the following specific expectations. The expectations addressed by this lesson have been highlighted below.

References:



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