Accounting for a Merchandising Business Organized As a Partnership

Accounting for a Merchandising Business Organized as a Partnership - Chapter 16 -

Work Sheet for a Merchandising Business

Now that Seth and Steve have their ledgers update, they need to use the new balances from the ledgers to prepare summaries of financial information. Most businesses prepare financial statements at least once each fiscal period. (Many businessesfiscal period begins January 1 and ends December 31 – one year.)

A fiscal period can be anywhere from one month, to six months, or a year. *Take note of when the calendar year of the business you are working for starts. .

To summarize the information from the general ledgers a worksheet is used. TheWORKSHEET is - a columnar accounting form used to summarize the general ledger information needed to prepare financial statements.

There are four reasons to use a work sheet

1- to summarize general ledger account balances to verify that debits and credits are

equal

2- to plan any needed changes that occurred during the fiscal period, and up date all

accounts necessary

3- to separate general ledger account balances according to the financial statements

they are used in

4- to calculate the amount of net income or net loss incurred during the fiscal period

The worksheet for a service business is similar to a merchandising business. However, the Merchandising worksheet will include the following account titles and amount: accounts receivable, merchandise inventory, accounts payable, sales tax and purchases.

First they will start by preparing the heading of the work Sheet. They will need to:

1- Write the Name of the business

2- Write the Name of the Report

3- Write the date of the report

______

Second they will prepare the trial balance debit and credit columns on the worksheet

TheTRIAL BALANCE is used to - prove the equality of debits and credits from the general ledgers.

Information for the trial balance is taken from the general ledgers. Notice the account titles are written in the same order as on the chart of accounts.

The following seven steps are used to prepare the trial balance columns

1- Write the general ledger account titles

2- Write the general ledger account debit balances/write the credit balances

3- Rule a single line across the two Trial Balance columns

4- Add both the Trial Balance Debit and credit columns

5- Write each column’s total, below the single line

6- Rule double lines across both Trial Balance Columns

Third Seth and Steve will look over their asset accounts and see if any adjustments occurred that they need to journalize. An ADJUSTMENT is a - change recorded on a work sheet to update general ledger accounts at the end of a fiscal period.

Certain assets have a portion of their value that is used up during a fiscal period, so the used up portion can no longer be recorded as an asset. The assets value amount is less than when bought.. (E.g. supplies, prepaidinsurance and Merchandise Inventory looses its value, so as the supplies, insurance or inventory are used their value lessens.

The amount that is used is taken away (deducted) from the asset account (supplies, prepaid insurance, merchandise inventory) and recorded in their expense accounts (supplies expense, insurance expense, income summary), because the assets were used up).

The following four questions are considered when analyzing an adjustment.

1- What is the beginning balance of the asset account?

2- What should the balance for this asset account be?

3- What must be done to correct the account balance?

Decrease/Increase the beginning asset balance

4- What adjustments must be made?

A Debit or aCredit

Seth and Steve knew that they had some adjustments that need to be updated from the trial balance. One of the adjustments is to the merchandise inventory and income summary accounts.

Inventory is the amount of goods (merchandise to sell) on hand. In business standards, the amount of goods on hand for sale to the customers is called merchandise inventory. Merchandise inventory is an asset, because the inventory is of value and can be sold. Its T account looks like the following:

Assets = Liabilities + Owner’s Equity

Assets Liabilities Owner’ Equity

Left Side Right Side Left Side Right Side Left Side Right Side

Debit Side Credit Side Debit Side Credit Side Debit Side Credit Side

Normal Balance Normal BalanceNormal Balance

+ - -+ -+

Assets – Merchandise Inventory

Left Side Right Side

Debit Side Credit Side

Normal Balance

+ -

The merchandise inventory account is used to record purchases of merchandise to sell and sales for an entire fiscal period. This account shows the current value of merchandise on hand. To figure out the adjustment made to merchandise during the fiscal period,considerthe following four questions:

What is the balance now of Merchandise Inventory?

What should the balance be for this account due to the changes from the fiscal period?

What must be done to correct the account balance?

What accounts will be affected and how will each account be affected?

Merchandise inventory has no related expense account, so it’s related account (where money is put when the account is closed at the end of the fiscal year), is a temporary account called income summary.

On December 31 Seth and Steve Senior count the video games on hand and find out that they sold a lot of the games. The games still for sale (unused)have a value of $ 1347.00.

To find out the value the merchandiseinventory used during the fiscal period and the merchandise inventory on hand, keep in mind the following equation:

Merchandise Inventory Account Balance on December 31 $ 3120.00

- Merchandise Inventory on Hand, December 31 $ 1347.00

= Merchandise Inventory Used During the Fiscal Period$ 1773.00

Merchandise Inventory Income Summary

Left Side Right Side Left Side Right Side

Debit Side Credit SideDebit Side Credit Side

Normal BalanceNormal Balance

+ -

$ 31200.00 (Beginning Balance) $ 0.00 (Beginning Balance)

$ 1773.00 (Adjustment) $ 1773.00 (Adjustment)

$ 1347.00 (New Balance)

Seth and Steve will need to follow the next three steps to record the adjustment to the Merchandise Inventory account and Income Summary account:

1- Write the debit amount in the debit amount column on the line with the account

title Income Summary

2- Write the credit amount, in the credit amount column on the line with the

account title Merchandise Inventory

3- Label the adjustments with a letter a, b, etc.

On December 31, before any adjustments, to supplies has been made, the balance of the Supply asset account was $ 4250.00, and the balance of the Supplies Expense account was zero.

On December 31 Seth and Steve counted the shops supplies on hand and found that theyused up a lot of paper and ink printing off flyers to pass out, so the supplies value still unused (available) was $ 1431.00.

To find out the value the supplies used during the fiscal period and the supplies on hand at the end of the fiscal period, keep in mind the following equation:

Supplies Account Balance on December 31 $ 4250.00

- Supplies on Hand, December 31 $ 1431.00

= Supplies Used During the Fiscal Period$ 2819.00

Supplies ExpenseSupplies

Left Side Right Side Left Side Right Side

Debit Side Credit SideDebit Side Credit Side

Normal BalanceNormal Balance

- + + -

$ 0.00 (Beginning Balance)$ 4250.00 (Beginning Balance)

$ 2819.00 (Adjustment)$ 2189.00 (Adjustment)

$ 1431.00 (New Balance)

They will need to follow the next three steps to record the adjustment to Supplies

1- Write the debit amount in the debit amount column on the line with the account

title Supplies Expense

2- Write the credit amount, in the credit amount column on the line with the

account title Supplies

3- Label the adjustments with a letter a, b, etc.

On December 31, before any adjustments, to Prepaid Insurance had been made, the balance of the Prepaid Insurance asset account was $ 300.00, and the balance of the Prepaid Insurance Expense account was zero.

On December 31 Seth and Steve looked over the insurance papers and read that the amount of insurance left for the year (on hand) had a value still unused (available) of $ 100.00.

To find out the value of Prepaid Insurance coverage used during the fiscal period and the Insurance coverage for the remainder of the month, keep in mind the following equation::

Prepaid Insurance Balance, on December 31 $ 300.00

- Insurance Coverage Remaining Unused, December 31$ 100.00

= Insurance Coverage Used During the Fiscal Period$ 200.00

Insurance Expense Prepaid Insurance

Left Side Right Side Left Side Right Side

Debit Side Credit SideDebit Side Credit Side

Normal BalanceNormal Balance

- + + -

$ 0.00 (Beginning Balance)$ 300.00 (Beginning Balance)

$ 200.00 (Adjustment)$ 200.00 (Adjustment)

$ 100.00 (New Balance)

Paddle Jockey
Work Sheet
For Fiscal Period Ended December 31, 20 --
Account Title / Trial Balance / Adjustments / Income Statement / Balance Sheet
Debit / Credit / Debit / Credit / Debit / Credit / Debit / Credit
1 / Cash / 7789.00
2 / Petty Cash
3 / Accounts Receivable / 37.50
4 / Merchandise Inventory / 3120.00 / 1773.00 a
5 / Supplies / 4250.00 / 2819.00 b
6 / Prepaid Insurance / 300.00 / 200.00 c
7 / Accounts Payable / 6200.00
8 / Sales Tax Payable / 448.14
9 / Seth Senior, Capital / 1500.00
10 / Seth Senior, Drawing / 25.00
11 / Steve Senior, Capital / 2050.00
12 / Steve Senior, Drawing / 125.00
13 / Income Summary / 1773.00 a
14 / Sales / 6790.19
15
16 / Advertising Expense / 212.00
17 / Credit Card Fee Expense
18 / Insurance Expense / 200.00 c
19 / Miscellaneous Expense / 34.00
20 / Rent Expense / 1000.00
21 / Supplies Expense / 123.00 / 2819.00 b
22 / Utilities Expense / 40.00
23 / Totals / 17022.33 / 17022.33
24

After they successfully record the adjustment to Prepaid Insurance they are ready to prove the adjustment columns of the worksheet. To prove the adjustment columns means you are going to make sure that all debit amount columns equal all credit amount columns.

To prove the adjustment columns follow the next three steps:

1- Rule (draw) a single line across the two Adjustments columns

2- Add all of the amounts in the Adjustment Debit Column and add all of the amounts in

the Adjustment Credit columns, write the totals for the adjustment amount columns

3- If the debit amount column totals equal the credit amount column totals, rule (draw)

Seth and Steve have successfully proven the adjustment columns and the debit total amount equals the credit total amount. However, they realized that there are still four more amount columns that haven’t been used yet. They ask their teacher what the columns are used for. The teacher explains that the last four columns (to the right) are used to prepare up to date account balances for the end of the fiscal period. The information from the last four columns are used to prepare two special financial reports – the income statement and the balance sheet.

Seth and Steve weren’t sure what an income statement was and so their teacher explained that the INCOME STATEMENT is - a financial statement showing the up to date revenue and expense amounts for a fiscal period. The BALANCE SHEETif you remember reports the value of the assets, liabilities, and owner’s equity on a specific date. The teacher also explained that although the balance sheet columns are at the far right of the worksheet, the up to date amounts starting with Cash, working down to the Drawing accountsneed to beextended (moved) into the balance sheet debit and credit columns.

The following three steps are used to extend (move) the updated amounts from the trial

balance columns and adjustment columns to balance sheet debit and credit columns.

1- Extend the up to date balance of each asset account

2- Extend the up to date balance of each liability account

3- Extend the up to date balances of the owner’s equity account

After extending all of the balance sheet account balances,the income statement account

balances need to be updated. The amounts from the trial balance columns and

adjustment columns are extended (moved) to the income statement debit and credit

columns.

1- Extend the up to date balance of the revenue account (Sales)

2- Extendthe up to date balance of each expense account

Although all of the income statement account balances have been extended, the net income (profit) or net loss needs to be calculated, so that Seth and Steve can summarize their business outlook and make good final decisions regarding the finances of their business.

Paddle Jockey
Work Sheet
For Fiscal Period Ended December 31, 20 --
Account Title / Trial Balance / Adjustments / Income Statement / Balance Sheet
Debit / Credit / Debit / Credit / Debit / Credit / Debit / Credit
1 / Cash / 7789.83 / 7789.83
2 / Petty Cash
3 / Accounts Receivable / 37.50 / 37.50
4 / Merchandise Inventory / 3120.00 / 1773.00 a / 1347.00
5 / Supplies / 4250.00 / 2819.00 b / 1431.00
6 / Prepaid Insurance / 300.00 / 200.00 c / 100.00
7 / Accounts Payable / 6200.00 / 6200.00
8 / Sales Tax Payable / 448.14 / 448.14
9 / Seth Senior, Capital / 1500.00 / 1500.00
10 / Seth Senior, Drawing / 25.00 / 25.00
11 / Steve Senior, Capital / 2050.00 / 2050.00
12 / Steve Senior, Drawing / 125.00 / 125.00
13 / Income Summary / 1773.00 a / 1773.00
14 / Sales / 6790.19 / 6790.19
15
16 / Advertising Expense / 212.00 / 212.00
17 / Credit Card Fee Expense
18 / Insurance Expense / 200.00 c / 200.00
19 / Miscellaneous Expense / 34.00 / 34.00
20 / Rent Expense / 1000.00 / 1000.00
21 / Supplies Expense / 123.00 / 2819.00 b / 2942.00
22 / Utilities Expense / 40.00 / 40.00
23 / Totals / 17022.33 / 17022.33 / 4792.00 / 4792.00 / 6167.00 / 6824.19 / 10855.33 / 10198.14
24

To calculate the NET INCOME which is - the difference between total revenue (money received) and total expenses (money paid out) when total revenue is GREATER, follow the following five steps:

1- Rule (draw) a single line across the Income Statement and Balance Sheet Columns

2- Add both the Income Statement amount columns and the Balance Sheet amount

columns, then write the column totals below the last entry and the single line

3- Calculate the net income

Income Statement Credit Column Total$ 6824.19

- Income Statement Debit column Total$ 6167.00

= Net Income$ 657.19

Balance Sheet Debit Column Total$ 10855.33

- Balance Sheet Credit Column Total$10198.14

= Net Income$ 657.19

4- Write the amount of net income below the Income Statement Debit Column. Balance Sheet Credit column and Net Income on the same line in the Account Title

5- Extend the amount of net income to the Balance Sheet Credit Column

Paddle Jockey
Work Sheet
For Fiscal Period Ended December 31, 20 --
Account Title / Trial Balance / Adjustments / Income Statement / Balance Sheet
Debit / Credit / Debit / Credit / Debit / Credit / Debit / Credit
1 / Cash / 7789.83 / 7789.83
2 / Petty Cash
3 / Accounts Receivable / 37.50 / 37.50
4 / Merchandise Inventory / 3120.00 / 1773.00 a / 1347.00
5 / Supplies / 4250.00 / 2819.00 b / 1431.00
6 / Prepaid Insurance / 300.00 / 200.00 c / 100.00
7 / Accounts Payable / 6200.00 / 6200.00
8 / Sales Tax Payable / 448.14 / 448.14
9 / Seth Senior, Capital / 1500.00 / 1500.00
10 / Seth Senior, Drawing / 25.00 / 25.00
11 / Steve Senior, Capital / 2050.00 / 2050.00
12 / Steve Senior, Drawing / 125.00 / 125.00
13 / Income Summary / 1773.00 a / 1773.00
14 / Sales / 6790.19 / 6790.19
15
16 / Advertising Expense / 212.00 / 212.00
17 / Credit Card Fee Expense
18 / Insurance Expense / 200.00 c / 200.00
19 / Miscellaneous Expense / 34.00 / 34.00
20 / Rent Expense / 1000.00 / 1000.00
21 / Supplies Expense / 123.00 / 2819.00 b / 2942.00
22 / Utilities Expense / 40.00 / 40.00
23 / Totals / 17022.33 / 17022.33 / 4792.00 / 4792.00 / 6167.00 / 6824.19 / 10855.33 / 10198.14
24 / 657.19 / 657.19

Their business had a Net Income (profit)for the past fiscal period. However, the worksheet is still not completed. To complete the worksheet total the Income Statement and Balance Sheet columns and rule the worksheet, to verify the debit amounts equal the credit amounts.,

1- Rule (draw) a single line across the four Income Statement and Balance Sheet Columns

2- Add the subtotal of the amount column and the net income amount for each column to

get proving totals for the Income Statement and Balance Sheet Columns

3- Check the equality of the proving total amounts for each pair of columns.

(Income Statement Debit and Credit, Balance Sheet Debit and Credit)

4- Rule (draw) double (two) lines across the Income Statement and Balance Sheet Columns

Paddle Jockey
Work Sheet
For Fiscal Period Ended December 31, 20 --
Account Title / Trial Balance / Adjustments / Income Statement / Balance Sheet
Debit / Credit / Debit / Credit / Debit / Credit / Debit / Credit
1 / Cash / 7789.83 / 7789.83
2 / Petty Cash
3 / Accounts Receivable / 37.50 / 37.50
4 / Merchandise Inventory / 3120.00 / 1773.00 a / 1347.00
5 / Supplies / 4250.00 / 2819.00 b / 1431.00
6 / Prepaid Insurance / 300.00 / 200.00 c / 100.00
7 / Accounts Payable / 6200.00 / 6200.00
8 / Sales Tax Payable / 448.14 / 448.14
9 / Seth Senior, Capital / 1500.00 / 1500.00
10 / Seth Senior, Drawing / 25.00 / 25.00
11 / Steve Senior, Capital / 2050.00 / 2050.00
12 / Steve Senior, Drawing / 125.00 / 125.00
13 / Income Summary / 1773.00 a / 1773.00
14 / Sales / 6790.19 / 6790.19
15
16 / Advertising Expense / 212.00 / 212.00
17 / Credit Card Fee Expense
18 / Insurance Expense / 200.00 c / 200.00
19 / Miscellaneous Expense / 34.00 / 34.00
20 / Rent Expense / 1000.00 / 1000.00
21 / Supplies Expense / 123.00 / 2819.00 b / 2942.00
22 / Utilities Expense / 40.00 / 40.00
23 / Totals / 17022.33 / 17022.33 / 4792.00 / 4792.00 / 6167.00 / 6824.19 / 10855.33 / 10198.14
24 / Net Income / 657.19 / 657.19
6824.19 / 6824.19 / 10198.14 / 1098.14

Seth and Steve see that they have made $ 657.19. They feel good about that amount because it means that theyare making more money than theyare spending. They are right on track.