1. Completing the Accounting Cycle for a Merchandising Company
Chapter 12
Completing the Accounting Cycle for a Merchandising Company

2. Accrued Adjustments If accrued expenses are unrecorded:
Expenses & liabilities understated
Net income & Owner’s Equity overstated
If accrued revenues are not recorded:
Revenue, net income, assets and owner’s equity all understated
If unearned revenue unrecorded:
Revenue, net income, owner’s 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
CR Allowance for Doubtful Accounts* 2000
Use a contra account to A/R to show correct balance owing on balance sheet:
Accounts Receivable
Less: Allowance for Doubtful Accounts

5. Estimating Bad Debts Expense
Income Statement Method:
% of net sales
E.g., 1% of $90 000
Dr Bad Debts Expense
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 it’s 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
cr Allowance for Doubtful Accounts 2500
Assume Allowance account had $300 debit balance:
dr Bad Debts Expense
cr Allowance for Doubtful Accounts 3300

8. Bad Debts Write off: when debt proves uncollectible
dr Allowance for Doubtful Accounts 500
cr A/R
Recovery:
dr A/R cr Allowance for Doubtful Accounts 500
dr Cash

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
cr Bank Loan
Period end at December 31st: dr Interest Expense cr Interest Payable I=PRT=5000x0.07x3/12

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
cr Salaries Payable
One week later into new period:
dr Salaries Payable
cr Cash

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
cr Unearned Revenue (liability) 1200
period ends on December 31:
dr Unearned Revenue
cr Revenue

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