Completing the Accounting Cycle for a Merchandising Company

1
Chapter 12

• Completing the Accounting Cycle for a
  Merchandising Company

2
Accrued Adjustments

• If accrued expenses are unrecorded
• Expenses liabilities understated
• Net income Owners Equity overstated
• If accrued revenues are not recorded
• Revenue, net income, assets and owners equity
  all understated
• If unearned revenue unrecorded
• Revenue, net income, owners equity all
  overstated
• Liabilities understated

3
Bad Debts

• Some debtors (A/R) do not pay on time or at all
• The amount should be recorded as an expense in
  the period of the matching revenue
• GAAP matching principle

4
Bad Debts

• Estimate an amount deemed uncollectible based on
  past experience
• Dr Bad Debts Expense 2000
• CR Allowance for Doubtful Accounts 2000
• Use a contra account to A/R to show correct
  balance owing on balance sheet
• Accounts Receivable 52000
• Less Allowance for Doubtful Accounts 2000 50000

5
Estimating Bad Debts Expense

• Income Statement Method
• of net sales
• E.g., 1 of 90 000
• Dr Bad Debts Expense 900
• Cr Allowance for Doubtful Accounts 900

6
Estimating Bad Debts Expense

• Balance Sheet Method
• Based on age of accounts
• The longer the amount outstanding the greater
  likelihood its uncollectible
• age analysis
• Consider existing balance in the Allowance account

7
Estimating Bad Debts Expense

• Balance Sheet Method
• Estimated 3000 uncollectible
• Allowance account has credit balance 500
• Adjusting entry
• dr Bad Debts Expense 2500
• cr Allowance for Doubtful Accounts 2500
• Assume Allowance account had 300 debit balance
• dr Bad Debts Expense 3300
• cr Allowance for Doubtful Accounts 3300

8
Bad Debts

• Write off when debt proves uncollectible
• dr Allowance for Doubtful Accounts 500
• cr A/R 500
• Recovery
• dr A/R 500 cr Allowance for Doubtful
  Accounts 500
• dr Cash 500
• cr A/R 500

9
Accrued Interest

• Money is borrowed with a bank loan and interest
  owing but not paid at period end
• Loan taken out at October 1st for six months at
  7 rate
• dr Cash 5000
• cr Bank Loan 5000
• Period end at December 31stdr Interest
  Expense 87.50 cr Interest Payable 87.50IP
  RT5000x0.07x3/12

10
Accrued Salaries

• Period ends in between pay weeks, need to record
  salaries earned and owing
• E.g., regular 50000 two week salary for ten days
  is not due for another week
• dr Salaries Expense 25000
• cr Salaries Payable 25000
• One week later into new period
• dr Salaries Payable 25000
• dr Salaries Expense 25000
• cr Cash 50000

11
Unearned Revenue

• Cash received in advance of performance of
  service or sale
• E.g., Three months of services are prepaid on
  December 1 for 1200
• dr Cash 1200
• cr Unearned Revenue (liability) 1200
• period ends on December 31
• dr Unearned Revenue 400
• cr Revenue 400

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(No Transcript)
13
Classified Balance Sheet
14
Income Statement
15
Adjusting Entries

• Journalize all entries indicated in adjusting
  entry columns on worksheet
• Inventory update (periodic)
• Transfer opening inventory from trial balance
  debit column to income statement debit column
• Ending inventory is placed in income statement
  credit column and balance sheet debit column
• Closing entry process updates inventory in ledger

16
Closing Entries

1. Debit all income statement credit balance
   accounts, credit income summary
2. Credit all income statement debit balance
   accounts, debit income summary
3. Close income summary and credit (income) or debit
   (loss) capital
4. Debit capital and credit drawings

17
Post-closing trial balance

• Checks accuracy of ledger at year end

18
Other Issues

• Expenses often separated into selling
  (advertising, delivery, salespeople salary) and
  administrative (office supplies, maintenance,
  office salaries)
• Accrued revenues and expense adjusting entries
  often reversed on first day of new period to
  allow regular entries (e.g., wages to occur)
• Perpetual system simpler due to updated inventory
  figure requiring no or minor adjustment