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5.6: Adjustments to Merchandise Inventory (Perpetual)

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    20097
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    • Contributed by Henry Dauderis and David Annand
    • Athabasca University
    • Sourced from Lyryx Learning

    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