a perpetual inventory system or a periodic inventory system
Sales may be made on credit or for cash. A business document should support every sales transaction, to provide written evidence of the sale. Cash register documents provide evidence of cash sales. A sales invoice
For internal decision-making purposes, merchandising companies may use
more than one sales account. For example, PW Audio Supply may decide to keep
separate sales accounts for its sales of TV sets, DVD recorders, and microwave ovens.
A merchandising company generally has the same types of adjusting entries as a
service company. However, a merchandiser using a perpetual system will require
one additional adjustment to make the records agree with the actual inventory on
hand. Here’s why: At the end of each period, for control purposes, a merchandising
company that uses a perpetual system will take a physical count of its goods on
hand. The company’s unadjusted balance in Inventory usually does not agree with
the actual amount of inventory on hand. The perpetual inventory records may be
incorrect due to recording errors, theft, or waste. Thus, the company needs to adjust
the perpetual records to make the recorded inventory amount agree with the inventory
on hand. This involves adjusting Inventory and Cost of Goods Sold.
For example, suppose that PW Audio Supply has an unadjusted balance of
$40,500 in Inventory. Through a physical count, PW Audio Supply determines
that its actual merchandise inventory at year-end is $40,000. The company would
make an adjusting entry as follows.
A merchandising company, like a service company, closes to Income Summary all
accounts that affect net income. In journalizing, the company credits all temporary
accounts with debit balances, and debits all temporary accounts with credit
balances, as shown below for PW Audio Supply. Note that PW Audio Supply
closes Cost of Goods Sold to Income Summary.
Forms of Financial Statements
The multiple-step income statement is so named because it shows several steps
in determining net income. Two of these steps relate to the company’s principal
operating activities. A multiple-step statement also distinguishes betw
operating and nonoperating activities. Finally, the statement also highlights
intermediate components of income and shows subgroupings of expenses
total revenues—is required in determining net income.
In a single-step statement, all data are classifi ed into two categories: (1) revenues,
which include both operating revenues and other revenues and gains; and (2)
expenses, which include cost of goods sold, operating expenses, and other expenses