Perpetual Inventory-2 Lesson Slides: 58 Slides (9th Grade)

1

College Accounting: A Practical Approach

Fifteenth Edition

Chapter 12

Completion of the Accounting

Cycle for a Merchandise

Company Using the

Perpetual Inventory Method

2

Learning Objectives

12.1 Prepare Financial Statements for a Merchandise
Company Using the Perpetual Inventory Method

12.2 Complete Adjusting Entries, Closing Entries, and a
Post-Closing Trial Balance for a Merchandise Company

12.3 Complete Reversing Entries

3

Learning Objective 12.1

Prepare Financial Statements for a Merchandise Company
Using the Perpetual System

4

Completing the Accounting Cycle

• Completing the accounting cycle steps

– Preparing financial reports

▪ Income statement
▪ Statement of owner’s equity
▪ Classified balance sheet

– Journalizing and posting adjusting and closing entries
– Preparing a post-closing trial balance
– Reversing entries

5

The Income Statement (1 of 2)

• Companies want to know:

– What was its net sales?
– Were there many returned goods from customers?
– What was the cost of the goods sold versus the

selling price received?

6

Multiple Choice

Gross profit is calculated by...

1

Revenue - Expense

2

Revenue + Expense

3

Revenue - Liabilities

4

Revenue + Liabilities

7

Multiple Choice

The Income Statement lists a business:

1

Assets and Expenses

2

Owner's Equity and Revenue

3

Revenue and Expenses

4

Expenses and Net Assets

8

The Income Statement (2 of 2)

• The income statement is broken down into several

sections. Remembering the sections can help you make
sense of the statement and set it up correctly on your
own. Basically what it presents is this:

Net Sales

Minus Cost of Goods Sold

= Gross Profit

Minus Operating Expenses

= Net Income from Operations
+ Other Income

Minus Other Expenses

= Net Income

−

9

Partial Worksheet and Income Statement

10

Sections of the Income Statement (1 of 4)

• Revenue Section: Net Sales

– Amount of Net Sales is not found on the worksheet

– Calculated as Gross Sales

Sales Returns and

Allowance

Sales Discounts

−

• Cost of Goods Sold Section

– Most important adjustment needed for merchandiser

is to adjust inventory to match the physical account

– Adjusting entry completed in Chapter 11.

11

Sections of the Income Statement (2 of 4)

• Gross Profit

– Not found on the worksheet

–

Calculated as Net Sales

Cost of Goods Sold−

• Operating Expenses Section

– Total not found on the worksheet
– Many companies break down into two categories:

▪ Selling Expenses
▪ Administrative Expenses (General Expenses)

12

Sections of the Income Statement (3 of 4)

Selling Expenses

• Sales Salaries Expense

• Delivery Expense

• Advertising Expense

• Depreciation Expense,

Store Equipment

• Insurance Expense

Administrative Expenses

• Rent Expense

• Office Salaries Expense

• Utilities Expense

• Supplies Expense

• Depreciation Expense,

Office Equipment

13

Sections of the Income Statement (4 of 4)

• Other Income (or Other Revenue) Section

– Any other revenue besides Sales Revenue
– Examples: Rental Income

• Other Expense Section

– Any nonoperating expenses, those not related to the

main operating activities of the business

– Example: Interest Expense

14

Statement of Owner’s Equity (1 of 2)

• Financial statement that reveals changes in capital

• Information comes from the worksheet

• Ending capital figure is transferred to the balance sheet

15

Multiple Choice

Net worth of a business

1

balance sheet

2

financial statement

3

Income statement

4

Owners Equity

16

Multiple Choice

The financial statement that reports the revenues and expenses for a period of time such as a year or a month is the:

1

Balance Sheet

2

Income Statement

3

Statement of Cash Flows

4

None of These

17

Multiple Choice

The income statement can be expressed as an equation:

1

Income = Income - Expenses

2

Revenue - Expenses = Net Income (Loss)

3

Revenue + Expenses = Income/Loss

4

Expenses = Net Income + Revenue

18

Multiple Choice

What is owner's equity?

1

The value of the business after liabilities are subtracted from assets; the value of the owner's investment in the business.

2

What a company owes.

3

Documents that are used to record and analyze the financial performance of a business.

4

All income a company receives overtime.

19

Statement of Owner’s Equity (2 of 2)

• Check for additional

investment

• Increases from profits

• Decreases from

losses and withdrawal

20

Classified Balance Sheet

• Provides more detail for assets and liabilities

• Provides stakeholders with information about their ability

to pay current and long-term debts

• Provides a more complete financial picture

21

Current Assets (1 of 2)

• Cash and assets that will converted into cash or used up

within 1 year or the operating cycle

– Operating cycle is the time it takes to buy and sell

merchandise and then collect accounts receivable

• Are listed in order of how easily they can be converted

into cash

– Called liquidity

22

Current Assets (2 of 2)

• The accounts and balances are carried over from the

worksheet

23

Capital Assets

• Log-lived assets used in the production or sale of goods

or services

• Longest-lived assets are listed first

– Land (longest)
– Building
– Equipment (shortest)

• Shown with its contra-account —accumulated

depreciation

24

Long-Lived Assets

25

Current Liabilities (1 of 2)

• Debts or obligations that must be paid within 1 year or

one operating cycle

• Listed in the order they expect to pay them

• Current portion of a long-term debt are moved to current

liabilities

26

Current Liabilities (2 of 2)

27

Long-Term Liabilities (1 of 2)

• Not due and payable for a comparatively long period

• Usually for more than 1 year or operating cycle

• Current portion is listed under current liabilities

28

Long-Term Liabilities (2 of 2)

29

Learning Objective 12.2

Complete Adjusting Entries, Closing Entries, and a Post-
Closing Trial Balance for a Merchandise Company

30

Journalizing and Posting Adjusting
Entries (1 of 2)

• Adjustments on the worksheet are not in the journal or

ledger.

– The journal does not reflect adjustments.
– The ledger still contains only unadjusted amounts.

• Use the adjustments column to journalize adjusting

entries.

31

Figure 12.4 Completed Worksheet (1 of 2)

32

Figure 12.4 Completed Worksheet (2 of 2)

33

Figure 12.5 Journalized and Posted
Adjusting Entries

34

Journalizing and Posting Adjusting
Entries (2 of 2)

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Journalizing and Posting Closing Entries (1 of 4)

• The goals of closing are the same for a merchandise

company.

– To clear all temporary accounts in the ledger to zero
– To update capital in the ledger to its latest balance.

36

Journalizing and Posting Closing Entries (2 of 4)

1. Close all balances on the income statement credit

column of the worksheet by debits. Then credit the total
to the Income Summary account.

2. Close all balances on the income statement debit

column of the worksheet by credits. Then debit the total
to the Income Summary account.

3. Transfer the balance of the Income Summary account to

the Capital account.

4. Transfer the balance of the owner’s Withdrawals

account to the Capital account.

37

Journalizing and Posting Closing Entries (3 of 4)

38

Journalizing and Posting Closing Entries (4 of 4)

39

The Post-Closing Trial Balance (1 of 2)

• Is prepared from the general ledger.

• All temporary accounts have been closed.

• The ending inventory of the last period becomes the

beginning inventory.

40

The Post-Closing Trial Balance (2 of 2)

Figure 12.7 Post-Closing Trial Balance for Belen's Wholesale
Clothing Company

41

Learning Objective 12.3

Complete Reversing Entries (Optional Section)

42

Reversing Entries—Why?

• Optional bookkeeping technique

• Certain adjusting entries are reversed (switched)

• The first day of the new accounting period only

• Transactions in the new period can be recorded without

referring back to prior adjusting entries

43

Reversing Entries—When?

• When there is an increase in an asset account (no

previous balance)

– Example: Debit Interest Receivable, credit Interest

Income

• When there is an increase in a liability account (no

previous balance)

– Example: Debit Salaries Expense, credit Salaries

Payable

44

Reversing Entries—Example (1 of 2)

Figure 12.8 Reversing Entries Not Used

Without the reversing entry, the bookkeeper must refer
back to prior year adjusting entries.

45

Reversing Entries—Example (2 of 2)

• Reversing results in switching the adjustment the first day

of the new period.

• Each of the accounts ends up with the same balance no

matter which method is chosen.

46

Figure 12.9 Entry When Optional
Reversing Entry is Not Used

47

Figure 12.10 Reversing Entries Used

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Summary of the Chapter (1 of 4)

• The formal income statement can be prepared from the

income statement columns of the worksheet.

• No debit or credit columns are used on the formal income

statement.

• The most important adjusting entry for a Merchandising

company compared t a service-industry is to update the
Merchandise Inventory account.

• Operating expenses could be broken down into selling

and administrative expenses.

49

Summary of the Chapter (2 of 4)

• The ending figure for Capital is not found on the

worksheet. It comes from the statement of owner’s equity.

• A classified balance sheet breaks assets into current and

plant and equipment. Liabilities are broken down into
current and long term.

• The information for journalizing, adjusting, and closing

entries can be obtained from the worksheet.

50

Summary of the Chapter (3 of 4)

• In the closing process, all temporary accounts will be

zero and the Capital account is brought up to its new
balance.

• Inventory is not a temporary account. The ending

inventory, along with other permanent accounts, will be
listed in the post-closing trial balance.

• Reversing entries are optional. They can aid in reducing

potential errors and simplify the recordkeeping process.

51

Summary of the Chapter (4 of 4)

• The reversing entry “flips” the adjustment on the first day

of a new fiscal period. Thus, the bookkeeper need not
look back at what happened in the old year when
recording the current year’s transactions.

• Reversing entries are only used if (a) assets are

increasing and have no previous balance or (b) liabilities
are increasing and have no previous balance.

52

Questions?

53

Figure 12.11 Completed Worksheet for
Mikolaski Modern Design Company

54

Blueprint for Success (1 of 3)

55

Blueprint for Success (2 of 3)

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Blueprint for Success (3 of 3)

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Figure 12.12 Partial Worksheet for A.
Slow Co

58

Figure 12.13 Partial Worksheet for A.
Slow Company

59

Figure 12.14 Partial Worksheet for Mal’s
Dental Supply Company

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Figure 12.15 Partial Worksheet for
Goodfried Company

61

Figure 12.16 Worksheet for Jay’s
Supplies

62

Figure 12.17 Partial Worksheet for
Emerson’s Tractor Supplies

63

Figure 12.18 Partial Worksheet for Murray
Company

64

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Perpetual Inventory-2

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