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Financial Acccounting: Adjusting & Closing Entries to Income Summary (Perpetual Method)

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The adjusting entries for merchandisers are basically the same as those for service firms with the exception of possibly the adjusting of the inventory account. Perpetual inventory trackers must take a physical account of inventory at least once a year to make sure that the inventory account balance is correct. If it’s different then an adjusting entry is required to correct it. The adjusting entry for inventory is a debit to cost of goods sold and a credit to inventory. Sometimes these are reversed but that’s usually correcting an error rather than a true adjusting entry. Let’s look at an example. Assume that Championship Vinyl has an unadjusted balance of $20,500 in inventory. That balance comes from the accounting cycle step four, the unadjusted trial balance. After a physical count of inventory, Championship Vinyl determines that the actual merchandise inventory at year end is $19,000. So it has to make a $1500 adjusting entry so that the physical inventory amount equals the ledger balance for inventory. The closing entries for merchandisers are the same as for service firms except for the we have some new temporary accounts that must be included in the closing process.

Since sales returns and allowances, sales discounts, and costs of goods sold all have normal debit balances, they get closed with a credit and are included in the expenses closing entry. Revenues get closed with debits to the revenue account and a credit to income summary. Expenses and contra-revenue accounts get closed with credits and income summary is debited. Then income summary has a balance of $10,000, a credit balance, so it gets closed with a debit and retained earnings is credited for 10,000. Finally, dividends is closed with a credit and debit to retained earnings. .

Perpetual Inventory

 

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