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

12
(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

• Debit all income statement credit balance
  accounts, credit income summary
• Credit all income statement debit balance
  accounts, debit income summary
• Close income summary and credit (income) or debit
  (loss) capital
• 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