 The adjusting entries for merchandisers are basically the same as those for service firms with the exception of the adjusting the inventory account. This is a problem for periodic merchandisers because the unadjusted trial balance for inventory is the prior month's ending balance. Additionally, costs of goods sold is zero. The solution to this problem is using something we call the costs of goods sold model, which basically adjusts the inventory account and closes purchases to costs of goods sold. The costs of goods sold model is beginning inventory plus net purchases equals costs of goods available for sale. This represents all the inventory that we could sell. From that, we subtract the ending inventory to arrive at costs of goods sold. Ending inventory is determined by a physical count of inventory. This is done each time ending inventory is adjusted and costs of goods sold is recorded. Beginning inventory is the prior period's ending inventory. Net purchases are calculated by taking purchases minus purchase returns and allowances minus purchase discounts plus freight in. Let's look at an example. Assume the following account balances. Let's plug those into the costs of goods sold model and calculate costs of goods sold. Purchases of $50,000 minus purchase returns and allowances of $2,000 minus purchase discounts of $1,000 plus freight in of $5,000 equals net purchases of $52,000. Now we take beginning inventory of $20,500 plus the net purchases of $52,000 equals costs of goods available for sale of $72,500. From that, we subtract ending inventory of $19,000 to arrive at costs of goods sold of $53,500. So that's the calculation. Let's put that into an adjusting entry. The adjusting entry that results from using the costs of goods sold model is a doozy. Let's break it down into simpler terms. We need to close all of the purchase accounts. So purchase returns and allowances and purchase discounts which have normal credit balances are closed with debits. Purchases and freight in which have normal debit balances are closed with credits. Costs of goods sold needs to be recorded, so let's debit that amount too. Finally, the beginning inventory needs to be replaced by the ending inventory amount. So we debit ending inventory and credit beginning inventory. And with some accounting magic, that whole journal entry balances. This is the more appropriate way to make the entry. We don't actually have accounts called beginning inventory or ending inventory. So we would just credit the inventory account $1,500 to reduce the balance from $20,500 to $19,000. That prior entry was more to aid you in the conceptual understanding. This is how it's actually done. The closing entries for merchandisers are the same as those for service firms except for that we have some new temporary accounts that must be included in the closing process. Since sales returns and allowances, sales discount and costs of goods sold all have normal debit balances. They get closed with credits and are included in the expenses closing entry. Revenues get closed with debits to the revenue accounts and credits to retained earnings. Expenses and contra accounts get closed with credits and retained earnings is debited. Finally, dividends is closed with a credit and a debit to retained earnings.