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Adjustment For Merchandise Company CH 3 Final

The document outlines the adjustment process for a merchandise company, detailing the purpose of adjustments, types of adjusting entries, and the importance of accurate financial reporting. It includes examples of journal entries for deferred expenses, accrued expenses, and merchandise inventory adjustments, along with the calculation of Cost of Goods Sold (COGS). Additionally, it covers the general ledger, closing entries, post-closing trial balance, double entry principle, and adherence to accounting standards like GAAP and IFRS.

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13 views5 pages

Adjustment For Merchandise Company CH 3 Final

The document outlines the adjustment process for a merchandise company, detailing the purpose of adjustments, types of adjusting entries, and the importance of accurate financial reporting. It includes examples of journal entries for deferred expenses, accrued expenses, and merchandise inventory adjustments, along with the calculation of Cost of Goods Sold (COGS). Additionally, it covers the general ledger, closing entries, post-closing trial balance, double entry principle, and adherence to accounting standards like GAAP and IFRS.

Uploaded by

lemenku738
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Adjustment for Merchandise Company – Summary Notes

1. Purpose of Adjustments

 Adjustments are end-of-period changes made to bring general ledger accounts up to date.
 They ensure financial statements reflect the true financial position of the company.

2. Adjusting Entries

 These are journal entries made to update account balances.


 Common types include: accrued expenses, accrued revenues, deferred expenses, and
deferred revenues.

Merchandise Inventory Adjustments

 Merchandise Inventory is not updated with each purchase/sale but adjusted at period
end.
 Requires two entries:
o To remove beginning inventory
o To record ending inventory

Adjustment Example:

 Beginning Inventory:
Income Summary Dr. / Merchandise Inventory Cr.
 Ending Inventory:
Merchandise Inventory Dr. / Income Summary Cr.

Cost of Goods Sold (COGS) Formula:

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Beginning Inventory + Purchases - Ending Inventory = COGS

General Ledger Overview

 General ledger records all transactions using debits and credits.


 Accounts: Assets, Liabilities, Equity, Revenue, Expenses.
 Transactions must always balance (Debits = Credits).

Closing Entries
 Done to transfer temporary account balances to capital/retained earnings.
 Four main steps:
1. Close revenue to income summary.
2. Close expenses to income summary.
3. Transfer income summary to capital/retained earnings.
4. Close dividends directly to capital (not through income summary).

Post-Closing Trial Balance

 Prepared after adjusting and closing entries.


 Includes only permanent accounts (assets, liabilities, and equity).
 Ensures debits = credits and books are ready for next period.

Double Entry Principle

 Every transaction affects at least two accounts.


 Maintains the accounting equation:

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Assets = Liabilities + Owner’s Equity

Debits increase assets/expenses, decrease liabilities/equity.


Credits increase liabilities/equity, decrease assets/expenses.

Accounting Standards

 GAAP (used in the U.S.) and IFRS (international) ensure consistency, reliability, and
comparability in financial reporting.
 Set by FASB (U.S.) and IASB (international).

1. Purpose of Adjustments

At the end of the fiscal year (Dec 31, 2024), XYZ Merchandise Co. needs to adjust its accounts
to reflect the actual financial status.

2. Adjusting Entries

A. Deferred Expense – Supplies Used


 Supplies bought during the year: Br. 2,500
 Supplies on hand at year-end: Br. 800
 Used supplies = 2,500 – 800 = Br. 1,700

Journal Entry:

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Dr. Supplies Expense 1,700
Cr. Supplies 1,700

B. Accrued Expense – Wages Payable

 Unpaid wages at year-end: Br. 2,000

Journal Entry:

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Dr. Wages Expense 2,000
Cr. Wages Payable 2,000

C. Accrued Revenue – Unbilled Service

 Unbilled service revenue: Br. 3,000

Journal Entry:

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Dr. Accounts Receivable 3,000
Cr. Service Revenue 3,000

3. Merchandise Inventory Adjustments

 Beginning Inventory (Jan 1): Br. 20,000


 Ending Inventory (Dec 31): Br. 25,000
 Purchases during the year: Br. 100,000

COGS Calculation:

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COGS = 20,000 (Beg. Inventory)
+ 100,000 (Purchases)
- 25,000 (End. Inventory)
= Br. 95,000

Adjustment Entries:
1. Remove beginning inventory:

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Dr. Income Summary 20,000
Cr. Merchandise Inventory 20,000

2. Record ending inventory:

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Dr. Merchandise Inventory 25,000
Cr. Income Summary 25,000

4. General Ledger Overview

All transactions recorded as debits and credits.


Each transaction keeps the equation:
Assets = Liabilities + Owner’s Equity

5. Closing Entries

Assume the company had:

 Revenues: Br. 150,000


 Total expenses (including COGS, wages, etc.): Br. 120,000
 Net Income: Br. 30,000
 Dividends: Br. 5,000

Entries:

1. Close Revenues:

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Dr. Revenue 150,000
Cr. Income Summary 150,000

2. Close Expenses:

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Dr. Income Summary 120,000
Cr. All Expense Accounts 120,000

3. Transfer Net Income:


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Dr. Income Summary 30,000
Cr. Retained Earnings 30,000

4. Close Dividends:

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Dr. Retained Earnings 5,000
Cr. Dividends 5,000

6. Post-Closing Trial Balance

Only permanent accounts appear:

 Assets: Cash, Accounts Receivable, Inventory, Equipment


 Liabilities: Accounts Payable, Wages Payable
 Equity: Capital, Retained Earnings
 No revenues or expenses shown — they were closed.

7. Double Entry Principle

Every transaction has:

 At least one debit and one credit


 Ensures Assets = Liabilities + Equity

E.g., when inventory is purchased with cash:

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Dr. Merchandise Inventory 10,000
Cr. Cash 10,000

8. Accounting Standards

XYZ Co. uses GAAP (FASB) for consistency and comparability.


If it operated globally, it would follow IFRS (IASB)

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