 Hello, and welcome to the session. This is Professor Farhad. In this session, we would look at adjustments and closing for merchandising operation. Now, all the adjustments that you learned about from the previous chapter, such as prepaid adjustments on earned revenue, accrued expenses, and accrued revenue still applies to merchandising operation. The only difference is now we have an inventory account and we might have to make an adjustment. So, basically, we're going to look at one adjustment, but all the other adjustments would still apply. Also, the closing process that you learned about, the four steps close revenue to income summary, close expenses to income summary, close income summary to retained earnings, and close dividend to retained earnings, that still applies for merchandising operation, except we have some a few new accounts we would look at shortly. This topic is covered in a financial introductory course, also covered on the CPA exam, the FAR section. As always, I would like to remind you to connect with me only then if you haven't done so. YouTube is where you would need to subscribe. I have 1600 plus accounting, auditing, finance, and tax lectures. This is a list of all the courses that I cover, including CPA questions. If you like my lectures, please like them, click on the like button, share them, put them in playlists, let the world know about them. If they benefit you, if they're benefiting you, it means they might benefit other people, and please connect with me on Instagram. On my website, you will have access to additional resources, so if you are studying for your CPA exam and you'd like to supplement your accounting education, please visit my website. So, adjusting entries for merchandisers. Again, as I said, all the previous adjustments still apply, except now we're going to have a new account called inventory. Now, what happened to inventory is this. Sometime we're going to have something called shrinkage. Now, what is a shrinkage? Shrinkage is a fancy word for loss of inventory, theft, obsolescence. Basically, the inventory either it's no good or it went missing. So, what we need to do, we need to count our inventory, and when we count the inventory, we need to inspect the inventory to make sure it's there, still in saleable condition. If it's not there, we need to write it down and make the proper adjusting and assume inventory general ledger record shows a balance of 2,250. A physical count of inventory determines inventory on hand is 2,000. Now, we're looking at the computer system, it's showing 2,250. When we did the actual physical count, we noticed that we only have 2,000 worth of merchandise. What does that mean? It means 250 went missing. What does that mean? It means we have to record an adjusting entry to reduce the inventory and to book that loss, to record that loss. Therefore, we debit cost of goods sold with credit merchandise inventory. Now, in some textbook, what they will do, rather than debit in cost of goods sold, they debit a loss account, loss due to shrinkage. Then they close this account to cost of goods sold. Here, we are updating cost of goods sold directly. Therefore, we debit cost of goods sold. So, let's just kind of show you the other steps. If we debit loss due to shrinkage, if we did so, at the end of the year, which is this is the end of the year, but let's assume we did so earlier, what we do is we debit cost of goods sold and we credit loss due to shrinkage. Now, what we are assuming here is shrinkage as part of cost of goods sold. Now, if shrinkage is a large item on the income statement and we want the users to see this information, then we do keep loss due to shrinkage as a separate line. But generally speaking, loss due to shrinkage, it cannot be large, it cannot be material. Otherwise, if you think about it, if loss due to shrinkage is a material amount, you might go out of business if you keep losing your inventory. Therefore, most companies, they either debit cost of goods sold and if they do debit loss due to shrinkage, eventually, they will close this account to cost of goods sold. Simply put, we lost that inventory without generating any sales because the key is every time you make this entry, debit cost of goods sold, credit merchandise inventory, you want to debit account receivable and credit sales for like 700. You want, you know, to record the sale. Here, there's no sale, just we're recording the cost, the expense without recording any sale. So, that's not really, that's not really good. And you might think, you might think like, what is $250? Just to tell you how important, from a numerical perspective, those losses for certain company. Just to give you an example, for example, Amazon, Amazon, their net profit margin, and I'm going to be generous. I'm going to be generous and I'm going to tell you it's going to be, I don't know, let's make it 1.5%, which is not 1.5%. It's less, but I'm going to be generous. So, let's assume Amazon as a company lost $250 worth of inventory. How much is that? What is the, how much sales do they have to make to make up this loss? Well, here's what we do. You'll take 250, $250 and divide it by 0.015 and they will need to make $16,666 in sales to make the profit of 250 to make up the loss of the 250 in inventory. So, simply put, they will need to, they will need to have sales of $16,666 and based on these sales, they will make a profit of 1.5 and that 1.5 will give them a profit of 250. This profit would replace the inventory for 250. So, what I'm trying to say is, losing inventory is an extremely costly mistake for, for merchandisers and that's why they implement internal control. That's why they implement security procedures to make sure their inventory is protected. Now, in addition to the adjusting, we, the merchandising companies, just like any other company, they go through the closing process. They have closing entries and the closing entries are the same for all the, for the service company. First thing is, we close sales to income summary. So, assuming this company has $321,000 in sales, we debit sales credit, credit income summary. Step two is, we debit all temporary and we debit close debit balances in all temporary account to income summary. What are we talking about here? We're talking about expenses, cost of goods sold, sales return, sales discount. So, here what we do is we credit all the expenses, including what we introduce in this, in this company is sales discount, which is a contra revenue, sales returns and allowances, which is a contra revenue and cost of goods sold, which is an expense account. So, we close all these accounts to income summary. Now, the difference between $308,000 in income summary and $321,000 in income summary is net income. So, both of these accounts were transferred to income summary. So, simply put, income summary, we have a credit balance of $321,000 and a debit balance of $308,100. The difference between them is $12,200, $12,900, not $200. So, step three is to debit income summary, $12,900 to close it. We debit income summary. Then we credit retained earning. We transfer the balance to retained earning. And the last step, if you have any dividend, you close your dividend to retained earning. So, no surprises here, nothing new, everything is basically the same. This is the closing process, the four steps. If you have any questions, please let me know. If you like my recording, please click on the like button. 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