The accounting entries which are made at the end of an accounting period to change the closing balances of various general ledger accounts. They are made to align the reported results and financial position of the business in accordance with the accounting framework, such as GAAP or IFRS.
Rules of
To increase the balance of account one needs to debit assets, expenses, losses and credit all the liabilities, revenues and gains including capital. To decrease the balance of account credit all assets, expenses, losses and debit all liabilities, revenues and gains including capital.
Perpetual Inventory System:
The inventory system in which the inventory accounts are updated on each purchase or sale in inventory. Quantities of inventory are updated on continuous basis. This can be done by integrating the inventory system to order entry and to the retail sale point of system.
Gross margin ratio:
It means the ratio of gross profit earned to net sales. Formula to compute it:
It is ratio which gives idea about the ability of company to pay it liabilities. Formula to compute it:
Acid Test ratio:
It measures the ability of company to use cash or its liquid assets or paying off current liabilities. Formula to compute it:
1.
To prepare: Adjusting entries.
Explanation of Solution
(a)
Physical count of Store supplies at the year end shows $3,700 still available but Store supplies listed shows $9,700.
Date | Account Title and Explanation | Post ref | Debit($) | Credit($) |
Jan 31 | Supplies expense | 6,000 | ||
Store supplies | 6,000 | |||
(To record supplies consumed during the period) |
Table (1)
- Supplies expense account is an expense account. Since Supplies expense is increased, expense is to be increased. So, debit the Supplies expense account.
- Store supplies account is an asset account. Since inventory is shrinked, so it is to be reduced. Therefore, Store supplies account is to be credited.
Working note:
Computation of Inventory shrinkage,
(b)
Prepaid selling expenses worth $1,400 have expired:
Date | Account Title and Explanation | Post ref | Debit($) | Credit($) |
Jan 31 | Insurance expense | 2,800 | ||
Prepaid insurance expense | 2,800 | |||
(To record expired prepaid selling expense) |
Table (2)
- Insurance expense is an expense account. Since Insurance expense is increased, expense is to be increased. So, debit the Insurance expense account.
- Prepaid insurance expense is an asset account. Since Prepaid insurance expense have expired resulting a decrease in asset, so asset is to be decreased. Therefore Prepaid insurance expense account is credited.
(c)
Date | Account Title and Explanation | Post ref | Debit($) | Credit($) |
Jan 31 | Depreciation expense | 3,000 | ||
Store equipment | 3,000 | |||
(To record depreciation on office equipment) |
Table (3)
- Depreciation expense is an expense account. Since Depreciation expense is to be recorded, expense is to be increased. So, debit the Depreciation expense account.
- Store equipment is an asset account. Since,Depreciation expense is to be recorded resulting a decrease in asset, so asset is to be decreased. Therefore Store equipment account is credited.
(d)
Physical count of merchandise inventory at the year end shows $21,300 still available but merchandise inventory listed shows $24,000.
Date | Account Title and Explanation | Post ref | Debit($) | Credit($) |
Jan 31 | Cost of goods sold | 2,700 | ||
Merchandise inventory | 2,700 | |||
(To record inventory shrinkage cost) |
Table (4)
- Cost of goods sold account is an expense account. Since goods are shrinked, expense is to increased. Therefore, Cost of goods sold account is debited.
- Merchandise inventory account is an asset account. Since inventory is shrinked, so it is to be reduced. Therefore, merchandise inventory account is to be credited.
Working note:
Computation of Inventory shrinkage,
2.
To prepare: Multi step Income Statement.
2.
Explanation of Solution
Company F | ||
Multi step Income Statement | ||
For the Year Ended December 31,2017 | ||
Particulars | Amount($) | Amount($) |
Sales Revenue | 227,100 | |
Less: Sales Returns and Allowances | (5,000) | |
Sales discount | (1,000) | (6,000) |
Net Sales | 221,100 | |
Less: Cost of Goods Sold | (78,500) | |
Gross Profit | 142,600 | |
Less: Operating expenses | ||
Selling expenses | ||
Advertising expense | (17,800) | |
General and admin Expenses | ||
Store supply expense | (6,000) | |
Rent expense | (26,000) | |
Insurance expense | (2,800) | |
Depreciation | (3,000) | |
Salaries | (63,000) | |
(100,800) | ||
Total other revenues and gains | 118,600 | |
Net income | 24,000 |
Table (5)
Hence, Net income of Company F is $24,000
3.
To prepare: Single step Income Statement.
3.
Explanation of Solution
Company F | ||
Single Step Income Statement | ||
Particulars | Amount($) | Amount($) |
Net Sales | 221,100 | |
Less: Expenses | ||
Cost of goods sold | (78,500) | |
Selling expenses | (17,800) | |
General and admin Expenses | (100,800) | (197,100) |
Net income | 24,000 |
Table (6)
Hence, Net income of Company F is $24,000
4.
To Compute: Current and Acid test ratio and Gross margin ratio.
4.
Explanation of Solution
Given,
Cash is $7,400.
Merchandise inventory is $21,300.
Store supplies are $3,700.
Prepaid asset is $3,800.
Current liabilities are $18,000.
Formula to compute Current ratio:
Substitute current assets by $36,200 and current liabilities by$18,000.
Working notes:
Computation of Current Assets,
Calculated,
Current assets are $36,200.
Merchandise inventory is $21,300.
Store supplies are $3,700.
Prepaid asset is $3,800.
Current liabilities are $18,000.
Formula to compute Acid test ratio:
Substitute current assets by $36,200, stock by (21,300+3,700)25,000, prepaid expenses by $3,800 and current liabilities by$18,000.
Gross profit is $142,600. (From part 2)
Net sales is $221,100. (From part 2)
Formula to compute Gross margin ratio:
Substitute Gross profit by $142,600 and Net sales by $221,100.
Hence, Gross Margin ratio of Company F is 64.50%, Current ratio is 2.01, Acid test ratio is 0.41.
Want to see more full solutions like this?
Chapter 4 Solutions
FINANCIAL ACCOUNTING FUNDAMENTALS
- Here are the accounts in the ledger of Mishas Jewel Box, with the balances as of December 31, the end of its fiscal year. Here are the data for the adjustments. Assume that Mishas Jewel Box uses the perpetual inventory system. a. Merchandise Inventory at December 31, 124,630. b. Insurance expired during the year, 1,294. c. Depreciation of building, 3,300. d. Depreciation of store equipment, 6,470. e. Salaries accrued at December 31, 2,470. f. Store supplies inventory (on hand) at December 31, 1,959. Required 1. Complete the work sheet after entering the account names and balances onto the work sheet. Ignore this step if using CLGL. 2. Journalize the adjusting entries. If using manual working papers, record adjusting entries on journal page 63.arrow_forwardJournalize the required adjusting entries for the year ended December 31 for Butler Spa and Pool Accessories. Butler Spa and Pool Accessories uses the periodic inventory system. ab. On December 31, a physical count of inventory was taken. The physical count amounted to 22,624. The Merchandise Inventory account shows a balance of 21,696. c. On July 1 of this year, 2,400 was paid for a one-year insurance policy. d. On November 1 of this year, 420 was paid for three months of advertising. e. As of December 31, the balance of the Unearned Membership Fees account is 15,600. Of this amount, 9,200 has been earned. f. Equipment purchased on May 1 of this year for 8,000 is expected to have a useful life of five years with a trade-in value of 500. All other equipment has been fully depreciated. The straight-line method is used. g. As of December 31, three days wages at 250 per day had accrued. h. As of December 31, the balance of the supplies account is 4,200. A physical inventory of the supplies was taken, with an amount of 1,650 determined to be on hand.arrow_forwardThe accounts and their balances in the ledger of Markeys Mountain Shop as of December 31, the end of its fiscal year, are as follows: Data for the adjustments are as follows. Assume that Markeys Mountain Shop uses the perpetual inventory system. a. Merchandise Inventory at December 31, 140,357. b. Store supplies inventory (on hand) at December 31, 540. c. Depreciation of building, 3,400. d. Depreciation of store equipment, 3,800. e. Salaries accrued at December 31, 1,250. f. Insurance expired during the year, 1,480. Required 1. Complete the work sheet after entering the account names and balances onto the work sheet. Ignore this step if using CLGL. 2. Journalize the adjusting entries. If using manual working papers, record adjusting entries on journal page 63.arrow_forward
- Multiple-step income statement The following income statement for Curbstone Company was prepared for the year ended August 31, 20Y5: a. Identify the errors in the income statement. b. Prepare a corrected income statement.arrow_forwardInventory Analysis Callahan Company reported the following information for the current year. Required: 1. Compute Callahans (a) gross profit ratio, (b) inventory turnover ratio, and (c) average days to sell inventory. (Round all answers to two decimal places.) 2. Explain the meaning of each number.arrow_forwardFollowing is the adjusted trial balance data for Garage Parts Unlimited as of December 31, 2019. A. Use the data provided to compute net sales for 2019. B. Compute the gross margin or 2019. C. Compute the gross profit margin ratio (rounded to nearest hundredth) D. Prepare a simple income statement for the year ended December 31, 2019. E. Prepare a multi-step income statement for the year ended December 31, 2019.arrow_forward
- Inventory by three cost flow methods Details regarding the inventory of appliances on January 1, 20Y7, purchases invoices during the year, and the inventory count on December 31. 2O’7. of Amsterdam Appliances are summarized as follows: Instructions Discuss which method (FIFO or LIFO) would be preferred for income tax purposes in periods of (a) rising prices and (b) declining prices.arrow_forwardWORKING BACKWARD FROM ADJUSTED TRIAL BALANCE TO DETERMINE ADJUSTING ENTRIES The partial spreadsheet shown below is taken from the books of Albers Pet Supply, a business owned by Carm Albers, for the year ended December 31, 20--. Albers is on the periodic inventory system. REQUIRED 1. Determine the adjusting entries by analyzing the difference between the adjusted trial balance and the trial balance. 2. Journalize the adjusting entries in a general journal.arrow_forwardThe following accounts appear in the ledger of Sheldon Company on January 31, the end of this fiscal year. The data needed for adjustments on January 31 are as follows: ab.Merchandise inventory, January 31, 55,750. c.Insurance expired for the year, 1,285. d.Depreciation for the year, 5,482. e.Accrued wages on January 31, 1,556. f.Supplies used during the year 1,503. Required 1. Prepare a work sheet for the fiscal year ended January 31. Ignore this step if using QuickBooks or general ledger. 2. Prepare an income statement. 3. Prepare a statement of owners equity. No additional investments were made during the year. Ignore this step if using CLGL. 4. Prepare a balance sheet. 5. Journalize the adjusting entries. 6. Journalize the closing entries. Check Figure Net loss, 1,737arrow_forward
- A firm is preparing to make adjusting entries at the end of the accounting period. The balance of the merchandise inventory account is 100,000. If the firm is using the perpetual inventory system, what does this balance represent?arrow_forwardA firm is preparing to make adjusting entries at the end of the accounting period. The balance of the merchandise inventory account is 200,000. If the firm is using the periodic inventory system, what does this balance represent?arrow_forwardCost of Goods Sold and Income Statement Schuch Company presents you with the following account balances taken from its December 31 adjusted trial balance: Additional data: 1. A physical count reveals an ending-inventory of 22,500 on December 31. 2. Twenty-five thousand shares of common stock have been outstanding the entire year. 3. The income tax rate is 30% on all items of income. Required: 1. As a supporting document for Requirements 2 and 3, prepare a separate schedule for Schuchs cost of goods sold. 2. Prepare a multiple-step income statement. 3. Prepare a single-step income statement.arrow_forward
- College Accounting (Book Only): A Career ApproachAccountingISBN:9781337280570Author:Scott, Cathy J.Publisher:South-Western College PubIntermediate Accounting: Reporting And AnalysisAccountingISBN:9781337788281Author:James M. Wahlen, Jefferson P. Jones, Donald PagachPublisher:Cengage Learning
- Century 21 Accounting Multicolumn JournalAccountingISBN:9781337679503Author:GilbertsonPublisher:CengageCollege Accounting, Chapters 1-27AccountingISBN:9781337794756Author:HEINTZ, James A.Publisher:Cengage Learning,