Chapter Three

Accounting for a Merchandising Business Enterprises

1. Definition – Merchandising enterprise refers to a business organization which buys finished
products and resells them to its customers for profit. E.g. supermarkets, drugstores, stationery
shops, car dealers, electronic shops, etc. Assets held for resale in the normal course of business of a
merchandising enterprise are called merchandise inventory.

2. Classification
 Wholesaler – buys/imports and distributes/sells to retailers
 Retailer – buys from wholesaler/manufacturers and sells directly to consumers.

3. Characteristics – The following points distinguish a merchandising enterprise from other types of
businesses:
 difference between merchandising and service enterprises
 A merchandising enterprise sells finished products rather than services and revenues from
sells of finished goods are called sales.
 A merchandising business has two types of major expenses - cost of goods sold which
represent expired cost of merchandise sold and operating expenses which represent all other
expenses necessary to run the business.
 In a merchandising business net income is calculated after two steps: first gross profit is
determined to be the difference between sales and cost of goods sold and then net income is
determined by deducting operating expenses from gross profit.
 A merchandising business uses relatively more types of accounts including sales and
purchase related ones (discussed in subsequent sections).
 difference between merchandising and manufacturing enterprises
 A merchandising enterprise does not manufacture products rather it buys them from
manufacturers or other merchandisers.

4. Major activities
 buying and selling merchandise inventory

5. Merchandise Inventory Systems

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 Definition
 merchandise inventory systems refer to approaches of
o recording purchases and sales of merchandise inventory
o determining cost of inventory sold during an accounting period
o determining cost of inventory remained on hand by the end of an accounting period
 two merchandise inventory systems: periodic and perpetual.

5.1. Periodic Inventory System

 relies on detail listing of inventory on hand (called physical inventory) to know ending
inventory and cost of goods sold
 keep records for inventory cost (and quantity) changes due to acquisition (purchases), cash
discount (purchase discounts), returns and allowances (purchase returns and allowances) and
transportation (freight in)
 does not record decreases in inventory due to sale to customers
 at the time of sale only revenue from sales is recorded and no attempt is made to record cost of
goods sold
 ending inventory is known only at the end of an accounting period by taking physical inventory
 cost of goods sold is also determined at the end of an accounting period after taking physical
inventory as follows
Beginning Merchandise Inventory.................................................. $xxx
Add: Gross Purchases................................................................. $xxx
Less: Purchase Discounts, Returns and Allowances……… (xxx)
Net purchases………………………………………………….. $xxx
Add: Freight in………………………………………………… xxx
Cost of merchandise purchased………………………………………. xxx
Merchandise Available for Sale...................................................... $xxx
Less: Ending Merchandise Inventory (known by physical count).. (xxx)
Cost of Goods Sold........................................................................... $xxx
 any inventory not on hand by the end of an accounting period is assumed to sold
 does not provide timely inventory information for preparation of financial statements and
inventory control
 used by sellers of high-volume low-cost inventory items such as stationery shops and drug

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 stores
 the following entries are made to handle inventory transactions
o to record purchases and transportation costs paid
Purchases xx
Transportation-in xx
Accounts payable/cash xx

o to record purchase discounts, returns and allowances

Accounts payable/cash xx
Purchase discounts xx
Purchases returns and allowances xx

o to record sales
Accounts receivable/ cash xx
Sales xx
o to record sales discounts, returns and allowances
Sales discounts xx
Sales returns and allowances xx
Accounts receivable/cash xx

o to adjusting inventory
Merchandise inventory (ending) xx
Income summary xx

Income summary xx
Merchandise inventory (beginning) xx

5.2. Perpetual Inventory System

 relies on detail inventory quantity and cost records
 keeps continuous records of each and every change in inventory
 provides perpetual timely inventory information
 strong internal control over inventory

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  physical inventory is needed for ascertaining accuracy of perpetual inventory records
 used by sellers of low-volume high-cost inventory items such as car/computer dealers
 the merchandise inventory account is used to record all changes in inventory cost and quantity
 the following entries are made to handle inventory transactions
o to record purchases and transportation costs paid
Merchandise inventory xx
Accounts payable/cash xx
o to record purchase discounts, returns and allowances
Accounts payable/cash xx
Merchandise inventory xx
o to record sales
Accounts receivable/ cash xx
Cost of goods sold xx
Sales xx
Merchandise inventory xx

o to record sales discounts, returns and allowances

Sales discounts xx
Sales returns and allowances xx
Merchandise inventory (returns)
Accounts receivable/cash xx
Cost of goods sold xx
o to adjusting inventory difference (difference between physical inventory and perpetual
inventory record balances)
Merchandise inventory (excess inventory) xx
Cost of goods sold (shrinkage) xx
Cost of goods sold xx
Merchandise inventory (shrinkage) xx

6. Accounting for Merchandise Businesses

 Though there are some basic differences between merchandising enterprise and the other types
of businesses, accounting cycle is equally applicable to any kind of business. Accounting for a

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 merchandising business is usually divided into two broad categories – accounting for purchases
and accounting for sales which are covered in the following sections.

Accounting for Purchases

a) Purchasing Procedures – The purchasing of merchandise inventory in a merchandising business
may involve the following procedures
 Issuance of purchase requisition – a business form usually prepared by the storekeeper
requesting the purchasing department of a business for purchase of certain types and quantities
of inventory items not available in store.
 Issuance of purchase order – a business form issued by the purchase department requesting
vendors to supply the business with certain types and quantities of inventory on a specified date
and at an agreed upon price. This form usually contains information such as the type and
quantity of inventory ordered, price, and terms of payment and transportation.
 Preparation of receiving report – a business form usually prepared by the storekeeper
evidencing the types, amounts and conditions of inventory received from vendors.
 Recording purchase – keeping record of purchases which is done by the accounts department
of a business. Journal entries are prepared after checking the consistency of information
contained in three basic purchase source documents: purchase order, receiving report and
purchase invoice.
 Settlement of invoices – this refers to making cash payments for inventories purchased and is
done after checking the accuracy and validity of the invoice to be settled.

b) Recording Purchases – Purchases of merchandise inventory are recorded and accumulated in a

general ledger account called Purchases. A purchase is an income statement account to be
closed at the end of each accounting period to the Income Summary or to Cost of Goods Sold
account. It has a debit normal balance.
Example 3-1
On May 2, 2004, DNN Drugstore purchased $65,000 worth of drugs and sanitary products
(insulin, toothpaste, etc) from ZAF Pharmaceuticals. 20% of the purchases are on cash and the
remaining is on credit.
Required: Record the above transactions for DNN Drugstore.

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c) Deductions from Purchases – refer to reductions in the cost of purchases as a result of such
transactions as early payment of purchase invoices, returns of damaged or defective goods and/or
price reduction received from sellers for minor defects on goods purchased.
i) Purchase Discounts – When goods are sold on credit, sellers usually offer price reduction
called cash discounts to encourage buyers to pay invoices early. Such price reductions are
identified by the purchaser as Purchase Discounts and recorded as a credit to Purchase
Discounts account, while the seller identifies them as Sales Discounts and records them as a
debit to Sales Discounts account. Purchase discounts and sales discounts are contra accounts
reported as deductions from purchases and sales, respectively.

Agreements between the buyer and the seller concerning such issues as to when to make
payment for the goods, who will pay for transportation, who owns goods in transit, etc are
collectively called sales/purchase terms. Credit terms, part of the sales terms, refer to
arrangements between the buyer and the seller as to when to pay for purchases on credit. The
credit terms indicate:
 Credit period – the time period within which the invoice for credit purchase is due. For
example, net 30 days (usually written as n/30) means that the amount is due 30 days from
the date of invoice. Other terms include n/45 and n/eom (net due by the end of the month in
which the purchase was made).
 Discount rate and period – Discount rate represents cash discount expressed in percentage
of the invoice amount. Discount period is time period, shorter than the credit period, within
which the invoice must be entirely or partly paid to get the stated discount. For example,
2/10 indicates that the buyer can get 2% discount if it settles the invoice within 10 days
from the date of the invoice. Discounts are applicable to only amount of invoice paid within
the discount period and on invoice amount net of returns and allowances (discussed below).
Example 3-2
On May 1, 2004, DNN Drugstore purchased $24,000 of drugs and sanitary products from ZAF
Pharmaceuticals, terms 2/10, n/30. DNN paid the invoice in full on May 11, 2004.
Required: Record the above transactions for DNN Drugstore

ii) Trade Discounts – refer to reduction from list prices of goods. They help sellers to adjust list
prices without changing price catalogs and/or charge different prices to different customers
based on the quantity of goods bought. For example, sellers do not charge the same price for
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 small and large quantity purchases. In our country, trade discounts are commonly identified as
Big Discounts and are used to reduce selling prices of goods so as to attract buyers especially
during holiday weeks. Trades discounts are used to determine the actual invoice price of goods
and do not appear in the accounting records.

Example 3-3
On May 5, 2004, Merewa Music Shop purchased 100 tape recorders from Sky Electronics,
terms 2/10, n/30. The tape recorders are listed at $400 each subject to 30% trade discount.
Merewa paid for 60 of the tape recorders on March 15, 2004.
Required: Record the above transactions for Merewa Music Shop
iii) Purchase Returns and Allowances – When goods purchased are damaged or found to be
defective or with the wrong color and size, the buyer may take any of the following actions
depending mainly upon the extent of the damage or defect:
 Return the goods and get credit (reduction in amount payable to the seller) or refund for the
value of the returned goods resulting in Purchase Returns to the buyer and Sales Returns
to the seller.
 Keep the goods but ask for price adjustment which when approved by the seller results in
Purchase Allowances for the buyer and Sales Allowances for the seller.

Returns and allowances are recorded by the purchaser as credit to Purchases Returns and
Allowances - a contra purchases account while the seller records them as a debit to contra sales
account called Sales Returns and Allowances. The purchaser issues a document called debit
memo to request credit for returns and allowances and the seller issues a credit memo to notify
its acceptance of the buyer’s request for credit.

Example 3-4
On May 1, 2004, DNN Drugstore purchased $54,000 of sanitary products from AFCO Sanitary
Products Share Co, terms 2/10, n/eom. On May 5, 2004 DNN discovered and returned $10,000
of defective goods and on the same date received credit memo from ZAF Pharmaceuticals
acknowledging the returns. DNN settled the outstanding balance in full on May 11, 2004.
Required: Record the above transactions for DNN Drugstore

iv) Shipment Terms – are usually parts of credit terms specifying the party responsible for paying
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transportation costs and transfer of ownership of goods sold/bought. There are two common
shipment terms:

 FOB (Free On Board) Shipping Point – This means that ownership of the goods passes
from the seller to the buyer at shipping point or right after the goods leave the store of the
seller. Under this term the buyer owns the goods in transit and will cover all freight costs.
 FOB Destination – This means that ownership of the goods will not pass from the seller to
the buyer until the goods reach their destination i.e. the buyer’s location or store. Under this
term the seller owns the goods in transit and covers all freight costs.
Transportation costs are recorded by the buyer as a debit to an account called Freight or
Transportation In as shown below. By the end of an accounting period, the balance of this
account is added to the purchases account to determine total cost of purchases during a given
period.
Freight-in xx
Cash xx

The seller, if responsible to cover for transportation costs, records transportation costs paid as
operating expenses by debiting an expense account called Delivery Expense or
Transportation/Freight Out as follows.
Freight-Out/Delivery Expense xx
Cash xx
Example 3-5
On May 1, 2004, DNN Drugstore purchased $60,000 of drugs from NAN Drugs Factory, terms
2/10, n/eom, FOB Shipping point and paid $2,000 for transportation. DNN settled the invoice in
full on May 11, 2004.
Required: Record the above transactions for DNN
In some cases, the seller may pay for transportation costs on behalf of the buyer under FOB
Shipping point terms. In such cases, the seller will add the mount paid to the invoice price and
record it as a debit to Accounts Receivable increasing the mount due from the buyer. The buyer,
in its part will record the amount as a credit to the Accounts Payable account increasing the
amount payable to the seller and as a debit to freight-in account. Prepaid transportation costs are
not subject to discount.
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 Example 3-6
On June 1, 2004, DNN Drugstore purchased $32,000 of drugs and sanitary products from ZAF
Pharmaceuticals, terms 2/10, n/45, and FOB shipping point. ZAF Pharmaceuticals paid $500
cash for transportation and added it to the invoice. DNN settled the invoice in full on June 11,
2004.
Required: Record the above transactions for DNN

Accounting for Sales

a. Selling Procedures – The selling process may involve the following procedures
 Approving purchase orders – usually done by the credit department of a business, this
step involves making sure that incoming purchase orders are valid and the information
related to price and product type match with the currently available price policy and types of
product. Besides, if the buyer is requesting for credit, this procedure aims at making sure
that such buyer worth giving credit. When a purchase order is approved it will be converted
into a sales order.
 Inventory dispatch order – a form prepared by the sales department ordering the store to
ship certain inventory items to a buyer whose purchase order is approved.
 Issuance of sales invoice – done by the accounts section in consultation with the sales
department and the store, contains the terms related to payment, transportation and related
issues. Is prepared based on information contained on customer purchase order, inventory
dispatch order and sales order.
 Recording sales – keeping record of sales which is done by the accounts department of a
business. Journal entries are prepared after checking the consistency of information
contained in three basic sales source documents: sales order, inventory dispatch order and
sales invoice.
 Collection of invoices – this refers to collection of cash from customers for inventories sold
to them.
b. Recording Sales – Sales of merchandise inventory are recorded and accumulated in a general
ledger account called Sales. This is an income statement account to be closed at the end of each
accounting period to Income Summary. As a revenue account, it has a credit normal balance.

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 Example 3-7
On June 1, 2004, DNN Drugstore sold $32,000 of sanitary products to Nanu Hospital. 30% of
the sales are on cash and the remaining are on credit, terms 2/10, n/30.
Required: Record the above transactions for DNN Drugstore

c. Deductions from Sales – refer to reductions from the total sales arising from such transactions
as early settlement of invoice by customers, returns of damaged or defective goods and/or price
reduction offered for minor defects of goods sold to customers.
i) Sales Discounts – Refer to discounts taken by customers who settle their accounts within the
discount period. Sales discounts are recorded as a debit to the Sales Discounts, contra sales
account whose balance is reported on the income statement as a deduction from the related
sales.
Example 3-8
On June 11, 2004, DNN Drugstore received cash from Nanu Hospital in full settlement for the
credit sales made on June 1, 2004 in example 3-7 above.
Required: Record the above transactions for DNN Drugstore
ii) Trade Discounts – refer to reduction from list prices of goods which are used to adjust list
prices without changing price catalogs and/or charge different prices to different customers
based on the quantity of goods bought. Trade discounts are used to determine the actual invoice
price of goods and do not appear in the accounting records.
Example 3-9
On March 5, 2004, DNN Drugstore sold $40,000 of drugs subject to 20% trade discount to
AAT Clinic, terms 2/10, n/30. AAT settled the invoice in full on March 15, 2004.
Required: Record the above transactions for DNN Drugstore
iii) Sales Returns and Allowances - arise when credit is given to customers returning
unsatisfactory goods and/or requesting for price adjustment for such goods.

Returns and allowances are recorded as a debit to the Sales Returns and Allowances, a contra
sales account whose balance will be reported on the income statement as a deduction from the
related sales.

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 Gross sales – (sales discounts + sales returns and allowances) = Net sales

Example 3-10
On March 15, 2004, DNN Drugstore sold $40,000 of drugs and sanitary products to AAT
Clinic, terms 2/15, n/30. On March 17, 2004, AAT returned $5,000 of defective goods and
DNN issued credit memo for the returned goods. AAT settled the invoice in full on March 30,
2004.
Required: Record the above transactions for DNN Drugstore
iv) Shipment Terms – determine ownership of goods in transit and the party responsible for
payment of transportation costs. Two shipment terms
 FOB Shipping Point – buyer owns goods in transit and pays for transportation costs.
 FOB Destination – seller owns goods in transit and pays for transportation costs, and
records them as follows.
Freight-Out/Delivery Expenses xx
Cash xx

Example 3-11
On May 1, 2004, DNN Drugstore sold $30,000 of sanitary products to AX Laboratory, terms
2/10, n/30, FOB Destination and paid $2,000 cash for transportation. On May 11, 2004, AX
settled its invoice in full.
Required: Record the above transactions for DNN

Example 3-12
On May 1, 2004, DNN Drugstore sold $30,000 of sanitary products to AX Laboratory, terms
2/10, n/30, FOB Destination. AX paid $2,000 cash for transportation. On May 11, 2004, AX
settled its invoice in full.
Required: Record the above transactions for DNN
v) Sales Tax (Value Added Tax) – refers to a tax levied on buyers of certain goods and services.
The seller is responsible by law to collect tax from its customers and regularly submit them to
the tax authority. Until remitted, taxes are recorded by the seller as liability as follows:
Accounts Receivable/Cash xx
Sales Tax/VAT/ Payable xx

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 Taxes are calculated on invoice prices less returns and allowances. However, sales discounts are
not exempted from sales taxes. The transportation company has to collect taxes on
transportation services it sell to its customers.
Example 3-13
On January 21, 2004, DNN Drugstore sold $80,000 of sanitary products subject to a 2% sales
tax and 10% trade discount to AX Laboratory, terms 2/10, n/30, FOB Shipping Point. DNN
paid $2,000 for transportation and added it to the invoice. On January 23, 2004, AX returned
defective goods with an invoice price of $10,000 excluding sales tax. On January 31, 2004, AX
settled its invoice in full.
Required: Record the above transactions for DNN

Home taking Assignment

Below are transactions completed by ABC Share Co for the month of January 2004:
a) inventory of $10,000 was on hand at the beginning of the month
b) purchased $20,000 of merchandise on account from BC Co, terms 2/10, n/30, FOB
Shipping point and paid $3,000 cash for transportation
c) returned $5,000 of defective goods to BC and received credit memo
d) sold, terms 2/10, n/30, $12,000 of merchandise to AX Co which cost ABC $8,000
e) paid in full amount due to BC within the discount period
f) issued credit memo for $4,000 of unsatisfactory (no defect) merchandise returned by
AX Co. which cost ABC $2,500
g) collected within the discount period amount due from AX
h) physical inventory showed $20,000 of merchandise inventory

Required: Record the above transactions and determine CGS for ABC under
i) periodic inventory system
ii) perpetual inventory system

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Financial Statements
 Income statement
 Two forms
i) Single-step
o has two sections only: total revenues and total expenses
o no details of net sales, cost of goods sold, operating expenses, etc
o net income is computed in a single step by deducting total expenses from total revenues
o revenues
 net sales
 rent income
 other income
o cost and expenses
 cost of goods sold
 selling expenses
 administrative expenses
 other expense
o net income = total revenues – total expenses

ii) Multiple-step
o shows in detail net sales, cost of goods sold, operating expenses and other items
o you have to go several steps to compute net income
o has several sections, subsections, totals and intermediate balances
Gross sales xx
Less: Sales discounts……………………………………. xx
Sales returns and allowances……………………… xx (xx)
Net sales $xx
Cost of goods sold:
Beginning Merchandise Inventory...................................... $xxx
Add: Gross Purchases....................................................... $xxx
Less: Purchase Discount, Return and Allowance… (xxx)
Net purchases…………………………………….. $xxx
Add: Freight in…………………………………… xxx
Cost of merchandise purchased…………………………... xxx
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 Merchandise Available for Sale.......................................... $xxx
Less: Ending Merchandise Inventory (physical count)….... (xxx)
Cost of Goods Sold (xx)
Gross profit $xx
Operating expenses:
Selling expenses (see below for detail)
total selling expenses……………………………. $xx
Administrative expenses (see below for detail)
total administrative expenses……………………. xx
Total operating expenses (xx)
Net income $xx

o Operating expenses section

 Selling expenses which comprise all expenses incurred in connection with selling
activities including sales salary expenses, delivery expenses, advertising expenses,
store supplies expenses, depreciation on store equipment, etc.
 Administrative/general expenses which comprise all expenses incurred in
connection with administration or general operations including office salary
expenses, utility expenses, office supplies expenses, depreciation on office
equipment, etc.
o Other income and expenses section
 rent income, interest income, gain from disposal of plant assets, etc
 interest expenses, loss from disposal of plant assets, etc
 Capital statement
 Balance sheet – report and account forms
 Statement of cash flows

Illustration on Preparation of Worksheet

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 (Case of Merchandising Enterprise)

The unadjusted trial balance of Alpha Trading Private Limited Company on December 31, 2020 is
presented below.

Alpha Trading Plc

Unadjusted Trial Balance
December 31, 2020
Debit Credit
Cash $ 2,300
Accounts Receivable 12,500
Prepaid Insurance 5,600
Merchandise Inventory 23,700
Supplies 5,700
Equipment 17,300
Accumulated Depreciation-Equipment $3,500
Accounts Payable 3,500
Notes Payable 19,600
Sales Tax Payable 3,400
Larson, Capital 25,600
Larson, Drawing 3,000
Sales 110,200
Sales Returns and Allowance 3,100
Sales Discount 2,300
Purchases 67,800
Purchase Returns and Allowance 1,200
Purchase Discount 1,300
Freight-In 3,900
Salary Expense 11,400
Miscellaneous Expense 9,700
Total $168,300 $168,300

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Additional Information:

a. The ending merchandise inventory amount is $18,500.

b. Accrued salary expense on December 31, 2020 amounts $3,500.
c. The prepaid insurance reported on the trial balance is an amount paid on January 1, 2020. This
amount applies for four years starting from the date of payment.
d. Supplies on hand amounts $3,100 as of December 31, 2020.
e. The depreciation expense for 2020 is $500.

Required: Prepare the following items for Alpha Trading Private Limited Company.

a. Ten column worksheet

b. Multiple-step statement of profit or loss; the statement of change in equity; and statement of
financial potion.
c. Pass the necessary adjusting and closing entries

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 a) Worksheet
Alpha Trading Plc
Worksheet
For the year ended December 31, 2020
Trial balance Adjustments Adjusted Trial Income Statement Balance sheet
Account Titles balance
Debit Credit Debit Credit Debit Credit Debit Credit
Cash 2,300 2,300
Accounts Receivable 12,500 12,500
Prepaid Insurance 5,600 (d)1,400 4,200
Merchandise Inventory 23,700 (b)18500 (a)23,700 18,500
Supplies 5,700 (e)2,600 3,100
Equipment 17,300 17,300
Accumulated Depreciation- 3,500
Equipment (f)500 4,000
Accounts Payable 3,500 3,500
Notes Payable 19,600 19,600
Sales Tax Payable 3,400 3,400
Lemma, Capital 25,600 25,600
Lemma, Drawing 3,000 3,000
Sales 110,200 110,200
Sales Returns and Allowance 3,100 3,100
Sales Discount 2,300 2,300
Purchases 67,800 67,800

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Purchase Returns and Allowance 1,200 1,200
Purchase Discount 1,300 1,300
Freight-In 3,900 3,900
Salary Expense 11,400 (c)3,500 14,900
Miscellaneous Expense 9,700 9,700
Total 168,300 168,300
Income Summary (b)18,5
(a)23,700 00 23,700 18,500
Salary Payable (c)3,500 3,500
Insurance expense (d)1,400 1,400
Supplies expense (e)2,600 2,600
Depreciation Expense (f)500 500
Total 50,200 50,200 129,900 131,200 60,900 59,600
Net Income 1,300 1,300
Total 131,200 131,200 60,900 60,900

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b) Multiple–Step profit or loss statement

Alpha Trading Plc

Statement of profit or loss
For Year Ended December 31, 2020

Revenue from sale:

Sales $110,200
Less: Sales returns and allowance $3,100
Sales discount 2,300 5,400
Net sales $104,800
Cost of merchandise sold:
Merchandise inventory, January 1, 2020 $23,700
Purchases $67,800
Add: Fright-in 3,900 $71,700
Less: Purchase discount 1,300
Purchase returns and allowance 1,200 2,500
Net purchases 69,200
Merchandise available for sale $92,900
Less: Merchandise inventory, December 31, 2020 18,500
Cost of merchandise sold 74,400
Gross profit $30,400
Operating expenses:
Salary expense $14,900
Supplies expense 2,600
Insurance expense 1,400
Depreciation expense-Equip. 500
Miscellaneous expense 9,700
Total operating expenses 29,100
Net income $ 1,300

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c) Statement of change in equity

Alpha Trading Plc

Statement of change in equity
For Year Ended December 31, 2020
Capital, January 1, 2020 $25,600
Add: Net income $ 1,300
Deduct: Drawing (3,000)
Decrease in capital (1,700)
Capital, January 31, 2020 $23,900

d) Statement of financial position

Alpha Trading Plc
Statement of financial position
December 31, 2020
Assets
Current assets:
Cash $2,300
Accounts receivable 12,500
Merchandise inventory 18,500
Supplies 3,100
Prepaid insurance 4,200
Total current assets $40,600
Plant assets:
Equipment $17,300
Accumulated depreciation-Equipment 4,000
Total plant assets 13,300

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 Total assets $53,900
Liabilities
Accounts payable $3,500
Notes payable 19,600
Sales tax payable 3,400
Salaries payable 3,500
Total liabilities $30,000
Capital
Larson, Capital 23,900
Total liabilities and capital $53,900

e) Adjusting Entries:

a) Income Summary 23,700

Merchandise Inventory 23,700

b) Merchandise Inventory 18,500

Income Summary 18,500

c) Salary Expense 3,500

Salary Payable 3,500

d) Insurance Expense 1,400

Prepaid Insurance 1,400

e) Supplies Expense 2,600

Supplies 2,600

f) Depreciation Expense-Equipment 500

Accumulated Depreciation-Equipment 500

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Closing Entries (Case of Periodic inventory system):

a) Sales 110,200
Purchases Discount 1,300
Purchase Returns and Allowance 1,200
Income Summary 112,700

b) Income Summary 106,200

Sales Returns and Allowance 3,100
Sales Discount 2,300
Purchases 67,800
Freight-In 3,900
Salary Expense 14,900
Insurance Expense 1,400
Supplies Expense 2,600
Depreciation Expense-Equipment 500
Miscellaneous Expense 9,700

c) Income Summary 1,300

Larson, Capital 1,300

d) Larson, Capital 3,000

Larson, Drawing 3,000

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