Chapter 7
Inventory: Merchandising Transactions
188
An actual company’s balance sheet and income statement will usually look similar to what we have
seen up to this point. However, most companies’ financial statements will also have an additional
column to show amounts from the previous fiscal year. for instance, a company reporting for fiscal
year 2016 will have a column with the header
“
2016
”
in each of the balance sheet and income statement
to report financial information for the most recent fiscal year. There may also be an additional column with
the header
“
2015
”
to show amounts from the previous fiscal year. This form of financial reports is referred
to as comparative financial statements. This allows users to easily compare the financial performance and
position of a company to that of the previous year.
Some companies go beyond the two-year comparison. This allows users, such as investors, to identify both
short-term and long-term trends in the financial data. The investors can then assess whether or not the
business is growing at a rate they anticipated.
INTHE REAL WORLD
Closing entries
When using a perpetual inventory system, inventory is immediately updated after each purchase
and sale transaction. However, the value of inventory on the balance sheet may not accurately
represent the value of inventory actually on hand. To verify the accuracy of the accounting records,
a physical inventory count should be performed at the end of the reporting period. If the count
does not match the records, an adjustment must be made to bring the inventory to its correct
balance.This difference is often referred to as “inventory shrinkage,” resulting either from an error
in recording transactions, theft or breakage. If the amount is considered immaterial, the following
entry would be made where the balance in the inventory account was more than the physical count.
Assuming that the amount of shrinkage is $200, the journal entry for this transaction is shown in
Figure 7.22.
Journal
Page 1
date account title and explanation debit Credit
2016
Dec 31 Cost of Goods Sold
200
Inventory
200
Adjust inventory to physical count
______________
fIGuRe 7.22
SALES RETURNS & ALLOWANCES
INCOME STATEMENT
GROSS PROFIT
OPERATING EXPENSES
SALES REVENUE
COST OF GOODS SOLD
BALANCE SHEET
CURRENT ASSETS
CASH
INVENTORY
ACCOUNTS
RECEIVABLE
ACCOUNTS
PAYABLE
BANK LOAN
CURRENT LIABILITIES
UNEARNED
REVENUE
LONG-TERM
LIABILITIES
+ $200 DR
– $200 CR
After this adjustment and all other adjustments have been made, assume Tools 4U has the adjusted
trial balance shown in Figure 7.23.
