5.6: Adjustments to Merchandise Inventory (Perpetual)

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Henry Dauderis and David Annand
Athabasca University via Lyryx Learning

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learning objective

LO4 – Record adjustments to merchandise inventory.

To verify that the actual amount of merchandise inventory on hand is consistent with the balance recorded in the accounting records, a physical inventory count must be performed at the end of the accounting period. When a physical count of inventory is conducted, the costs attached to these inventory items are totalled. This total is compared to the Merchandise Inventory account balance in the general ledger. Any discrepancy is called shrinkage. Theft and deterioration of merchandise inventory are the most common causes of shrinkage.

The adjusting entry to record shrinkage is:

General Journal
Date	Account/Explanation	F	Debit	Credit
	Cost of Goods Sold		XX
	Merchandise Inventory			XX
	To adjust for shrinkage.

Summary of Merchandising Transactions

As the preceding sections have illustrated, there are a number of entries which are unique to a merchandiser. These are summarized below (assume all transactions were on account):

(a) To record the purchase of merchandise inventory from a supplier:

General Journal
Date	Account/Explanation	F	Debit	Credit
	Merchandise Inventory		XX
	Accounts Payable			XX

(b) To record purchase return and allowances:

General Journal
Date	Account/Explanation	F	Debit	Credit
	Accounts Payable		XX
	Merchandise Inventory			XX

(c) To record purchase discounts:

General Journal
Date	Account/Explanation	F	Debit	Credit
	Accounts Payable		XX
	Merchandise Inventory			XX

(d) To record shipping costs from supplier to merchandiser:

General Journal
Date	Account/Explanation	F	Debit	Credit
	Merchandise Inventory		XX
	Accounts Payable			XX

(e) To record sale of merchandise inventory and cost of the sale:

General Journal
Date	Account/Explanation	F	Debit	Credit
	Accounts Receivable		XX
	Sales			XX

AND

General Journal
Date	Account/Explanation	F	Debit	Credit
	Cost of Goods Sold		XX
	Merchandise Inventory			XX

(f) To record sales returns restored to inventory:

General Journal
Date	Account/Explanation	F	Debit	Credit
	Sales Returns and Allowances		XX
	Accounts Receivable			XX

AND

General Journal
Date	Account/Explanation	F	Debit	Credit
	Merchandise Inventory		XX
	Cost of Goods Sold			XX

(g) To record sales returns and allowances (where returns are not restored to inventory):

General Journal
Date	Account/Explanation	F	Debit	Credit
	Sales Returns and Allowances		XX
	Accounts Receivable			XX

(h) To record discounts:

General Journal
Date	Account/Explanation	F	Debit	Credit
	Sales Discounts		XX
	Cash		XX
	Accounts Receivable			XX

(i) To record adjustment for shrinkage at the end of the accounting period:

General Journal
Date	Account/Explanation	F	Debit	Credit
	Cost of Goods Sold		XX
	Merchandise Inventory			XX

The effect of these transactions on each of merchandise inventory and cost of goods sold is depicted below:

Merchandise Inventory (MI)		Cost of Goods Sold (COGS)
(a) Purchase of MI	(b) Purchase Ret. & Allow.	(e) Cost of MI Sold	(f) Cost of sales returns restored to inventory
(d) Shipping Costs	(c) Purchase Discounts	(i) Shrinkage Adjustment
(f) Sales Return (when restored to inventory)	(e) Sale of MI
	(i) Shrinkage Adjustment
Adjusted Balance Reported on the Balance Sheet		Adjusted Balance Reported on the Income Statement