 The adjusting entries for merchandisers are basically the same as those for service firms with the exception of 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 the cost of goods available for sale. This represents all the inventory we could sell. From that we subtract the ending inventory to arrive at costs of goods sold. Beginning inventory is determined by a physical count of inventory. This needs to be done each time 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 allowance of $2,000 minus purchase discounts of $1,000 plus freight in of $5,000 equals net purchases of $52,000. Now we'll take the beginning inventory of $20,500 plus the net purchases of $52,000 and that equals our costs of goods available for sale of $72,500. From that we subtract ending inventory of $19,000 and 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 in 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. And freight in have normal debit balances so they are closed with credits. Costs of goods sold needs to be recorded so let's debit that amount. Finally, beginning inventory needs to be replaced with ending inventory so we will debit ending inventory and credit beginning inventory and with some accounting magic that hold journal entry balances. This is the more appropriate way to make the entry. We don't actually have accounts called beginning inventory and ending inventory so we would just credit the inventory account of $1,500 to reduce the balance from $20,500 to $19,000. That prior entry was more to age you with the conceptual understanding. This is how it's actually done. The closing entries for merchandisers are the same as for service firms except that we have some new temporary accounts that must be included in the closing process. Sales returns and allowances, sales discounts 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 revenue accounts and credits to income summary. Revenues and contra revenue accounts get closed with credits and income summary is debited. An income summary has a balance of $10,000 and it's a credit balance so we would close that with a debit and retained earnings is credited for $10,000. The dividends is closed with a credit and a debit to retained earnings.