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Accounting Cycle for a Merchandising Business - Part 3

What is the Accounting Cycle in a Merchandising Business?

Written by Jason Gordon

Updated at April 7th, 2022

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Accounting for a Merchandising Business


Back to: Accounting & Taxation

0:00:01.199,0:00:03.439

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


0:03:03.280,0:03:06.159

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


0:04:18.880,0:04:22.160

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,


0:04:58.639,0:05:01.919

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


0:05:03.360,0:05:07.199

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.


0:05:10.240,0:05:13.919

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,


0:05:14.960,0:05:18.479

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


0:05:46.800,0:05:51.280

on you I know it took three


0:05:48.639,0:05:52.000

three videos to do it but um you kind of


0:05:51.280,0:05:53.840

get the idea


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of you know everything that goes into


0:05:53.840,0:05:56.080

the accounting cycle so hopefully that


0:05:55.280,0:05:57.680

made sense


0:05:56.080,0:05:59.520

if you have any questions please let me


0:05:57.680,0:06:02.560

know in the comments below. Y'all have a


0:05:59.520,0:06:02.560

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
accounting cycle merchandising business

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