Accounting: The Language of Business (Part 36)

Legacy accounting: Will you have been an asset or a liability on the world's balance sheet?Ryan Lilly

Accounting for Merchandising Businesses

(Part I)

by

Charles Lamson

Work Sheet and Adjusting and Closing Entries for a Merchandising Business

A merchandising business that does not use a computerized accounting system may use a work sheet in assembling the data for preparing financial statements and adjusting and closing entries. In this post, we illustrate such a worksheet, along with the adjusting and closing entries for a merchandising business.

The worksheet in Exhibit 19 is for NetSolutions on December 31, 2025, the end of its second year of operations as a merchandiser. In this work sheet, we list all of the accounts including the accounts that have no balances, in the order that they appear in NetSolutions' ledger.

EXHIBIT 19 Work Sheet for Merchandising Business

The data needed for adjusting the accounts of NetSolutions are as follows:

There is no specific order in which to analyze the accounts in the worksheet, assemble the adjustment data, and make the adjusting entries. However, you can normally save time by selecting the accounts in the order in which they appear on the total balance. Using this approach, the adjustment for merchandise inventory shrinkage is listed first [entry (a) on the worksheet], followed by the adjustment for office supplies used [entry (b) on the worksheet], and so on.

After all the adjustments have been entered on the worksheet, the adjustments columns are totaled to prove the equality of debits and credits. As we illustrated in a previous post, the adjusted amounts of the balances in the Trial Balance columns are extended to the Adjusted Trial Balance columns. The Adjusted Trial Balance columns are then totaled to prove the equality of debits and credits.

The balances, as adjusted, are then extended to the statement columns. The four statement columns are totaled, and the net income or net loss is determined. For NetSolutions, the difference between the credit and debit columns of the Income Statement section is $75,400, the amount of the net income. The difference between the debit and credit columns of the Balance Sheet section is also $75,400, which is the increase in owner's equity as a result of the net income. Agreement between the two balancing amounts is evidence of debit credit equality and mathematical accuracy. 

EXHIBIT 5 Report Form of Balance Sheet

The income statement, statement of owner's equity, and balance sheet are prepared from the work sheet in a manner similar to that of a service business. These financial statements are shown in Exhibit 3, 4, and 5. The adjustment columns in the work sheet provide the data for journalizing the adjusting entries. NetSolutions' adjusting entries at the end of 2025 are as follows:

The Income Statement columns of the worksheet provide the data for preparing the closing entries. The closing entries for net Solutions at the end of 2025 are as follows:

The balance of Income Summary, after the first two closing entries have been posted, is the net income or net loss for the period. The third closing entry transfers this balance to the owners capital account. NetSolutions' income summary account after the closing entries have been posted is as follows:

After the closing entries have been prepared and posted to the accounts, a post-closing trial balance may be prepared to verify the debit-credit equality. The only accounts that should appear on the post-closing trial balance are the asset, contra asset, liability, and owner's capital accounts with balances. These are the same accounts that appear on the end-of-period balance sheet. 

*WARREN, REEVE, & FESS, 2005, ACCOUNTING, 21ST ED., PP. 256-259*

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