Income Summary Merchandise Inventory

Set up t accounts for merchandise inventory and income summary and perform the year end adjustment for merchandise inventory.

Income summary merchandise inventory. A company s merchandise inventory is an account that shows the total amount the company paid for products it has yet to sell to customers. The beginning ending inventory on an income statement. In a periodic inventory system this balance is kept steady until an actual physical count that due to the costs involved usually only happens at fiscal year end. Her beginning inventory as of january 1 20 was 45 000 and her ending inventory as of december 31 20 was 57 000.

In other words move the inventory balance to the income summary account. Debit or increase the income summary account and credit or remove the merchandise inventory account. Merchandise inventory also called inventory is a current asset with a normal debit balance meaning a debit will increase and a credit will decrease. An income statement summarizes revenue and expenses for a given period.

We will take the difference between income summary in step 1 275 150 and subtract the income summary balance in step 2 268 050 to get the adjustment amount of 7 100. Although a company reports this amount on its balance sheet it also uses the amount to calculate its cost of goods sold on its income statement. This should always match net income calculated on the income statement. Close income summary into retained earnings.

Its purpose is to show total sales against expenses and determine the amount of profit or loss incurred. Aacsb analytic aicpa fn measurement chapter 5 accounting for merchandising businesses 281 problem. To determine the cost of goods sold in any accounting period management needs inventory information. Debit the beginning inventory balance to income summary and credit the merchandise inventory account.

This is performed by the following two adjusting entries. If the inventory account is updated during the closing entry process this closing entry includes a credit equal to the beginning inventory balance 37 000 which increases the debit to income summary by a corresponding amount to 1 068 500. Beginning and ending inventory can help a business determine expenses during the. Income summary 512 500 cost of merchandise sold 512 500 dif.