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Merchandising: Closing accounts; Adjusting accounts; Inventory Shrinkage - Accounting video - YouTube
Channel: Dr. Brian Routh
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This is Part 4 in our Merchandising
Operations series and we'll be
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discussing Adjusting and Closing entries
for Merchandising Companies. So the first
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thing we'll look at is adjusting the
accounts. Specifically we're going to
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talk about adjusting inventory. So
there's a couple of reasons we may need
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to adjust inventory. The first one is due
to shrinkage. Now recall is talking about
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periodic and perpetual inventory. So no
matter which method you use, even if
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you're using a perpetual method, you're
still going to want to take a periodic
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inventory count. And when you do that you
may find that your physical count does
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not equal the count that's currently on
your books, and this can be due to
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shrinkage. Things can walk out the store
due to your employees stealing from you
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or customers stealing from you. Also,
there could be error, or there could be
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damaged goods. So there are several
things that can cause shrinkage.
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We have to adjust our inventory to account
for this because we no longer have that
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inventory on hand, however, we did pay for
that inventory. So if it disappears, or
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walks out the door, we need to expense it.
So if we count our inventory, and it's
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different from what's on the books, we
will need to increase our cost of goods
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sold and decrease our inventory by the
difference.
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Let's look at closing. Now this should be
kind of a review for you, but in addition
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to what we already know, we're going to
be including those contra- revenue
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accounts that we talked about earlier in
an earlier part to the series. So I
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always close my entries, or put my
closing entries in the same order every
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time that way I don't get confused. So I
always close my revenues first. And I
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always use an income summary to close my
revenues. So you close your revenues to
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the income summary. Remember that
revenues carry a credit balance. To get
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rid of the credit balance you would
debit your revenue account and you would
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credit the income summary. That would be
the closing entry for revenues. Expenses,
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we've talked about before, but now we're
adding those contra- revenues. Remember
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expenses carry debit balances also our
contra- revenue accounts carry debit
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balances because they're contra-
revenues. So we want to close all those
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accounts with debit balances. Those will
also close to income summary - so to
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close a debit balance, we would credit
expenses, and our contra- revenues and
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when we we would debit the income
summary.
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Once we've closed our revenues and
expenses we do not want to keep an
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income summary. You want to close that
account out. Remember the income summary
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is a temporary account, and it's only
used during the closing process. So once
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we've closed revenue expenses to the
income summary, we will get our balance
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in the income summary. And remember if we
have a credit balance in the income
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summary, that's net income because
revenues exceed expenses and the contra-
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revenues. If we have a debit balance in
our income summary, that would indicate
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we have a net loss. So once we close the
income summary, we will close our
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dividends to retained earnings. Remember
dividends is not an expense account, it
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just reduces your retained earnings.
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So there's an illustration of the income
summary T-Account.
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So notice we closed our revenues , closed
our expenses, closed our contra-revenues
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to the income summary. And remember if
you have a credit balance in the income
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summary, its net income. If you have a
debit balance, it's net loss. You will not
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have a debit and a credit balance don't
get confused by the T-Account that I
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have here. You will have one or the other
balances here. You'll have a net income
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balance, a credit, or a net loss balance,
a debit. Let's look at an example.
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Candy Creations' accounts at June 30th
included these adjustments. They had
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inventory of 5600, cost of goods sold
$41,200, sales
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revenue of $86, 900, sales discounts of $900,
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and sales returns and allowances of
$1400. The physical count of
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inventory on hand added up to $5,400. This is the only
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adjustment needed. So what we have here
is on our books we show our inventory to
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be 5600, but when we did a
periodic count we only found 5400.
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So we have shrinkage there, we
need we need to take care of that. So we
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have to come up with an entry to show
this adjustment. Now remember we've paid
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for that inventory, so we need to expense.
It it's not there anymore, we can't sell
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it. So we need to expense it. So to
journalize the adjustment, we would
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increase our cost of goods sold with a
debit for the$200 and
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decrease our inventory for the $200.
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Now journalize the closing entries for
the appropriate accounts. So again the
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first accounts we closed are the sales
revenue accounts. Sales revenue was
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$86,900. Sales
revenue carries a credit balance, so we
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will debit sales revenue to get rid of
it, and we close it to the income summary
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with a credit of $86,900. Next we want to close our
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expenses, and our contra-revenues. We
had one expense, it was cost of goods
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sold, and we had two contra- revenues. We
had sales discounts and sales returns
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and allowances. So those all carry debit
balances. To get rid of them we would
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credit those accounts. We're closing them
to the income summary. So we have to
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debit the income summary for the total.
The total of cost of goods sold and our
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to contra- revenues was $43,700. Now we
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need to close our income summary to
retain earnings. Well we can look at our
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numbers here, and I can see that even
without a T-Account, that my income
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summary has a credit balance of $86,900 and a debit
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balance of $43,700. So I know that I'm gonna have a
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net income because my credits outweigh
my debits. So it's going to carry a
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credit balance. So to get rid of that
credit balance in the income summary, I'm
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going to need to debit the income
summary for that balance, which as we can
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see here, the income summary has a credit
balance of $43,200.
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To get rid of that, I
need to debit the income summary for
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$43,200, and I will credit retained earnings for
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$43,200.
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Now I will point out that you need to
take special note to cost of goods sold
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here. They tell me in the problem that
cost of goods sold is $41,200,
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but here I'm closing
cost of goods sold of $41,400.
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Remember
the first entry we made was a shrinkage
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adjustment. We had to expense $200 of
inventory that had disappeared, so that
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brought my balance of cost of goods sold
to $41,400.
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Now let's compute Candy
Creations gross profit. So recall your
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gross profit income statement. We start
with our sales revenue of $86,900,
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then we
need to subtract our contra- revenues to
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get our net sales. So here we'll have net
sales of $84,600,
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then we subtract out the
balance in our cost of goods sold
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account, which was $41,400. Don't forget about
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the shrinkage adjustment, and that will
give us gross profit of $43,200.
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