Accounting Cycle for a Merchandising Business - Part 3
What is the Accounting Cycle in a Merchandising Business?
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Accounting for a Merchandising Business
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All right. Here we are with the third and
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final
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uh part to the example for chapter four
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and in this one we're going to be doing
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the closings and the post post closing
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trial balance.
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So here's again here's our t tables
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nothing has changed
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actually this one doesn't have the
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retained earnings like the other ones
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did so that's actually a good thing
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because we're not supposed to
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uh we shouldn't have been there. So we
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need to do the
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closings first and remember the closings
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we only affect the temporary accounts we
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only close out the temporary accounts or
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what I call the red accounts,
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revenues, expenses, and dividends so I'm
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just going to go ahead and lay out those
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and only those
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get rid of the rest of them for right
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now. So there's our revenues our expenses
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and our
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t tables and we know that we close
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out our revenues and our expenses to a
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in an intermediate account called
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uh income summary, so let's go ahead and
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create the income summary t table there.
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All right. So let's start with the rs the
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reds uh for
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the r in red which is revenues so sales
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revenue we have
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a credit account of thirty thousand so
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in order to get rid of that credit
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account we need to debit it
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thirty thousand, and if we debit sales
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revenue thirty thousand then we need to
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credit
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income summary t table by 30 000 as
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well,
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so debit sales revenue credit income
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summary that's what our
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journal entry is going to be our
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corresponding journal entry.
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All right. Let's look at gain on the sale
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of land,
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same thing we have a credit of 2500 so
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in order to get rid of it we need to
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debit
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2500 that cancels that out and if we
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debit gain on sale plan for 2500 then we
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need to credit
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income summary for the same amount, so
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again
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debit gain on sale of land credit income
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summary for 2 500.
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All right. Let's look at sales revenue
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excuse me sales returns and allowances,
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I have a debit balance of 2 000
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so in order to get rid of it I need to
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credit that 2000
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and if I credit sales return allowances
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for 2000 then I need to debit
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income summary for that 2000. So again
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my journal entries can be debit income
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summary and credit sales
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or sales return allowance for 2000.
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Same thing for sales discount, I'm going
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to
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credit sales discount for 100 to get rid
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of that to close it out
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and if I credit it then I'm going to
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need to debit income summary for that
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100. So I'll go ahead and do that post
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my or
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journalize that so debit income summary
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for 100
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credit sales discount for 100. All right.
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Now let's look at cogs
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I have a debiting balance of fourteen
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thousand one hundred so it's closed it
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out I will credit it fourteen thousand
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one hundred
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and if I credit it then I will debit uh
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income summary for the same fourteen
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thousand one hundred,
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my journal entry will be income summary
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for fourteen thousand one
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and credit cost of goods sold for 14001.
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S&a expense same thing I'm going to
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credit 3000
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to close that out and if I credit it
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then I need to debit income summary for
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3 000. So I'll do that there journal
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entry would be income summary and
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selling an admin expense
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for 3 000. All right. Delivery expense
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same thing 300 on the credit side
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that'll close it out
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if I credit delivery expense for 300
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then I need to debit
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income summary for 300. So I'll do that
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to my journal entry so income summary
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300 delivery expense
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300. And then finally I have my interest
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expense same thing credit 250
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to close that out and if I credit it I
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need to
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debit income summary so I'll do that and
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my journal entry will be
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income summary 250 and interest expense
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250. Okay. So that takes care of that now
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I can
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total up my income summary find my
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account balance for that
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add up the debits add up to credit
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subtract two that's going to give me
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twelve thousand seven fifty.
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And the next step would be to close that
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out to retained earnings, now up to this
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point we shouldn't have had a retained
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earnings t table,
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so we're going to create one and in
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order for me to get rid of that twelve
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thousand seven
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fifty on the credit side of income
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summary I need to debit income summary
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by twelve thousand seven hundred fifty,
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and if I debit income summary by twelve
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thousand seven fifty then I need to
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credit
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retained earnings for twelve thousand
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seven fifty.
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Now the next step would also be to close
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dividends but remember we don't have
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dividends in this one so we don't have
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anything else to do
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to retain the earnings so we can also
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total out retained earnings excuse me
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put the journal entry there for
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debit income summary and credit retained
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earnings but we can also total out
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retained earnings to be
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twelve thousand seven fifty, and if we go
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back to our statement of retained
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earnings
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we will see that it will match up to our
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ending retained earnings that we found
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on the statement retained earnings which
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is exactly what we want,
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so that takes care of the closings. Now
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the last thing we need to do
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to finish up this accounting cycle is to
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do the post-closing trial balance,
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so we need to go back to our original t
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tables minus
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all the temporary ones, all I want to
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keep now is the permanent ones
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and so that is all the assets the
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liabilities and the equity plus the
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retained earnings.
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So if I list those out that's going to
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be cash for forty eight thousand eight
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sixty,
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accounts receivable still zero, inventory
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for eight thousand
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eight hundred ninety, again finish this
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up real quick
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land zero, ap zero, notes payables uh ten
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thousand,
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common stock is thirty five thousand, and
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now we have retained earnings of twelve
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thousand seven fifty,
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if I add up the debits that's going to
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give me a total of fifty seven seven
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fifty,
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and if I add up the credits that's going
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to give me a total of 57750,
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so we are good we did the
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entire accounting cycle for a single
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problem. So
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hopefully that was wasn't too terrible
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on you I know it took three
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three videos to do it but um you kind of
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get the idea
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of you know everything that goes into
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the accounting cycle so hopefully that
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made sense
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if you have any questions please let me
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know in the comments below. Y'all have a
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good one.
Related Topics
- What is Merchandising? – Financial Accounting
- Recognizing Inventory Sales – Financial Accounting
- Perpetual vs Period Systems – Financial Accounting
- Special Merchandising Transactions – Financial Accounting
- Adjustments for Inventory – Financial Accounting
- Multi-Step Income Statement – Financial Accounting
- Accounting Cycle for Merchandising Business Example Part 1
- Accounting Cycle for Merchandising Business Example Part 2
- Accounting Cycle for Merchandising Business Example Part 3