216
Closing entries
Closing entries and Inventory in a Periodic system
Although there are a few
variations of how inventory
is adjusted through the
closing entries when a
periodic system is used, the
main objective is the same—
to remove the beginning
inventory balance and add
the new ending inventory
balance.
One approach that is
frequently used is shown in
Figure 7A.18.
When closing the accounts with a credit balance on the income statement, the new ending inventory
balance of $22,856 is debited to the inventory account. To understand the logic of this entry,
refer to the detailed cost of
goods sold section previously
discussed.
The
ending
inventory is deducted from
the cost of goods available
for sale to determine the
amount of cost of goods sold
because ending inventory
represents the amount a
company still has on hand
at the end of the accounting
period. It is available for sale
at the beginning of the next
accounting period.
In closing the expense
accounts, notice that the
beginning inventory balance
of $20,000 is credited. Refer to Figure 7A.14, the detailed cost of goods sold section is shown.What
effect does the beginning inventory have on the cost of goods available for sale? It is added together
with purchases and therefore represents an expense of the period.The logic is: expenses are credited
through the closing entries; therefore, the beginning inventory balance of $20,000 must be credited.
Journal
Page 1
date
account title and explanation
debit Credit
2016
Dec 31 Sales Revenue
20,000
Inventory
22,856
Purchase Returns & Allowances
360
Purchase Discounts
84
Income Summary
43,300
Close revenue and credit balances and
update inventory
________________
fIGuRe 7A.18
Journal
Page 1
date
account title and explanation
debit Credit
2016
Dec 31 Income Summary
40,360
Inventory
20,000
Sales Returns & Allowances
4,300
Sales Discounts
250
Purchases
14,200
freight-in
100
Operating expenses
1,510
Close expenses and debit balances and
update inventory
________________
fIGuRe 7A.19
Inventory: Merchandising Transactions
Chapter 7
Appendix
