Accounting Solution 5.2 (Accounting in Merchandising Companies)

Once we calculated the cost of goods sold, we can record the closing entries. First, we need to transfer all amounts from the Purchases, Transportation-in, Purchase Returns, and Cash accounts to the Inventory account. Second, we move the amount of cost of goods sold from Inventory to the expense account, Cost of Goods Sold. Finally, we close the nominal expense account Cost of Goods Sold to Retained Earnings together with other revenue and expense accounts:

Event No	Account titles	Debit	Credit
cl.-1a	Inventory Purchases Transportation-in	3,250	3,000 250
2cl.-1b	Purchase Returns Cash Discounts Inventory	500 75	575
cl.-2	Cost of Goods Sold Inventory	1,800	1,800
cl.-3	Sales Revenue Cost of Goods Sold Transportation-out Retained Earnings	4,200	1,800 670 1,730

The effects of the above transactions on T-accounts are as follows:

Assets		=	Liabilities		+	Equity
Cash			Accounts Payable			Contributed Capital
(1) 6,000 (10) 4,200	(3) 250 (7) 670 (11) 2,425		(4) 500 (5) 75 (11) 2,425	(2) 3,000			(1) 10,000
							Bal. 10,000

Bal. 6,855			Bal. 0			Retained Earnings
							cl. 1,730
Accounts Receivable							Bal. 1,730
(6a) 5,000	(8) 300 (9) 500 (10) 4,200
						Sales Revenue
						(8) 300 (9) 500 cl.-3 4,200	(6a) 5,000
Bal. 0

Inventory						Bal. 0
(1) 4,000 cl.-1a 3,000 cl.-1a 250	cl.-1b 500 cl.-1b 75 cl.-2 1,800
						Cost of Goods Sold
						cl.-2 1,800	cl.-3 1,800
Bal. 4,875						Bal. 0

Purchases						Transportation-out
(2) 3,000	cl.-1a 3,000					(7) 670	cl.-3 670
Bal. 0						Bal. 0

Transportation-in
(3) 250	cl.-1a 250
Bal. 0

Purchase Returns
cl.-1b 500	(4) 500
	Bal. 0

Cash Discount
cl.-1b 500	(5) 75
	Bal. 0
*Totals*
Assets 11,730		=	Liabilities 0		+	Equity 11,730

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Accounting Solution 5.2 (Accounting in Merchandising Companies)