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Adjusting Entries for Merchandising Sole Proprietorship

This document provides information on adjusting entries for a merchandising sole proprietorship. It discusses preparing adjusting entries to (1) convert unused office supplies into an expense, (2) update the merchandise inventory account based on a physical count, and (3) convert unearned revenue into earned revenue. It also differentiates between a periodic inventory system, where inventory is only updated at the end of each period, versus a perpetual system, where inventory is continuously updated for each sale and purchase. Completing a work sheet for a merchandising business is also covered.

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22 views3 pages

Adjusting Entries for Merchandising Sole Proprietorship

This document provides information on adjusting entries for a merchandising sole proprietorship. It discusses preparing adjusting entries to (1) convert unused office supplies into an expense, (2) update the merchandise inventory account based on a physical count, and (3) convert unearned revenue into earned revenue. It also differentiates between a periodic inventory system, where inventory is only updated at the end of each period, versus a perpetual system, where inventory is continuously updated for each sale and purchase. Completing a work sheet for a merchandising business is also covered.

Uploaded by

Jordan P Hunter
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOC, PDF, TXT or read online on Scribd

Chapter Eight Adjusting Entries and Work Sheet for a Merchandising Sole

Proprietorship
I.

Learning objectives

After completing this session, students should be able to


1. Prepare adjusting entries to convert office supplies into expenses;
2. Prepare adjusting entries to update the merchandise inventory account at the end
of accounting period;
3. Prepare adjusting entries to convert unearned revenue into revenue;
4. Differentiate periodic inventory system from perpetual inventory system;
5. Complete the work sheet for a merchandising sole proprietorship.
II. Lecture Notes
1.

2.

Adjustment for office supplies


(1) Why make adjustments at the end of accounting period/month?
It is not practical to make journal entries every few minutes/every day as
the supplies are used.
Example: the consumption of chalk, ink or memo pad
Only make an estimate or take a physical inventory of the supplies
remaining on hand at the end of the period;
The missing supplies are assumed to have been used.
(2) An illustration
Bought memo pads in cash, 500 Yuan
Office supplies (memo pads)
500
Cash
500
Taking a physical inventory/or make an estimate at the end of the period
200 Yuan of supplies is left.
Office supplies (memo pads) expense
300
Office supplies (memo pads)
300
Adjustments for merchandise inventory
(1) Inventory systems
A. Perpetual inventory system
Purchases of merchandise are recorded by debiting the Merchandise
Inventory account.
Example: Beginning inventory (books @20 Yuan each) 2 000 Yuan
Bought 100 books at 20 Yuan each
Merchandise Inventory
+
Beginning bal. 2000
2000

8-1

As the goods are sold, two entries are needed: one to recognize the
revenue earned, and the second to transfer the cost of the goods out of
inventory (into cost of goods sold)
Example: Sold 20 books for cash at 25 Yuan each
Cash
Sales
+ +
500
500

Merchandise inventory
+
+
Beginning bal. 2000 400
2000

Cost of goods sold


400

The basic characteristic of the perpetual inventory system is that the


inventory account is continuously updated for all purchases and sales of
merchandise.
Taking a physical inventory
Beginning inventory + purchases cost of goods sold = Ending
inventory
Who uses perpetual inventory system?
--- Most businesses use perpetual inventory system in accounting for
products with a high per-unit cost but low sales volume, such as
automobiles, heavy machinery, jewelry, home appliances, electronic
equipment, etc.
--- Almost all manufacturing companies use perpetual inventory
system.
--- In the days when all accounting records were maintained by hand,
businesses that sold many types of low-cost products could not use
this system. (Example: Wal-Mart could not use this system when it
kept its accounts by hand)
--- With todays point-of-sale terminals and bar-coded merchandise,
even high-volume retailers like Wal-Mart and Trust-Mart can use
this system.
--- Advances in technology (computer-aided accounting) extend the
use of perpetual inventory system to more businesses and more
types of products.
B. Periodic inventory system
Acquisition of merchandise is recorded by debiting the Purchase
account.
Merchandise inventory
Purchases
+
+
2000
2000

8-2

The merchandise inventory account is brought up to date only at the end


of the accounting period when a physical inventory is taken.
Beginning inventory + Purchases ending inventory = cost of goods
sold
Used when the need for current information about inventories and sales
does not justify the cost of maintaining a perpetual system.
Businesses that sell many low-cost items and have manual accounting
systems have to use periodic system.
Adjusting the Merchandise Inventory account at the end of the period
Merchandise inventory
Income summary
Beginning bal. 2000 adjusting 2000
Ending 3600

2000

3600

8-3

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