 In this presentation, we will record a transaction related to inventory shrinkage. We're going to be posting the journal entry over here. We're going to be posting that not to the general ledger, but to a quick worksheet. That quick worksheet ideal for seeing the transactions quickly, seeing the accounts affected and the effect on the accounting equation, assets, liabilities, and equity. We see in our trial balance, we got the assets in green, liabilities in orange capital in blue, and in the dark blue, the revenue and expense accounts. We have in our journal entries, the debits and credits broken out into debit and credit column, as well as credits being represented with brackets. However, in our trial balance, we see debits having non-bracketed numbers or positive for Excel and having bracketed or negative numbers. And therefore, it'll reduce the number of columns we need, save some formula calculations and show that we are in balance through the zeros at the bottoms, showing that the debits minus the credits equals zero, therefore, debits equal the credit. So this is going to be our balancing item. This is going to be where we record the transactions. Here's what we have. We're saying that the ending inventory is 23,000. So what we have so far is the transactions that happened during the period. So we got recording the transaction during the period, even if we are recording on a perpetual system as we are doing here, we still need to do a physical count at the end of the time period. Why? Because that physical count will tell us whether or not there's spoilage, whether or not there's theft or whatever we'll call it just random or just the catch all name of inventory shrinkage. The inventory went down for some reason other than sales. So we're going to do the cost of goods sold calculation in order to figure out what the inventory would be based on and the cost of goods sold based on this physical count. And then we'll see if it matches what we have. So in other words, note that all these journal entries have been recorded already are included in these beginning balance numbers. And we're resulting in cost of goods sold of 5,000 at the end of this process. And we are resulting in merchandise inventory of 27,000. Now note here, of course, that the merchandise inventory we're saying is 23,000. So we'll need to make basically the adjustment to not what we have on the books, but to the physical count to make that more clear how this process works and to practice the calculation of cost of goods sold, which could be used to for any component within that calculation, especially within multiple choice questions will run through this calculation. So we're going to say cost of goods sold in our worksheet down here. And we're going to say first it's going to start with a beginning balance, beginning inventory or I'll just call it balance, beginning balance in inventory. Now the beginning balance we can't see up here because this is not showing the detail of all the activity that we have posted to the inventory account. We would find that in the general ledger. We could find that in the GL, but we're not showing the GL here. So I'm going to give the beginning inventory number, which was the 10,000. So we're going to say the 10,000 is the beginning inventory. Then it went up by the activity that we did here. So it's the activity during the month, the purchases we made during the month. So we're going to say purchases and we see that there's two purchases. Again, I'm looking at the journal entries here. We could look at the merchandise inventory GL account as well. And that would show us the activity, it shows the beginning balances and what we purchased. So here are the two purchases, the 15 and the 7. If we add those up, those will be total purchases for this time period. I'm going to do that by saying equals in cell J20 pointing to the 15,000 and plus and then pointing to the 7. Then you could just type in here equals E5 plus E14. That's going to be the 15 plus the 7 or the 22. So if this is the beginning balance and we made those purchases and there's no estimates with the purchase, that's what we're actually going to pay in dollars, not in units, then at any given time or throughout the month, we had the sum of those two 32,000 available for sale. That's how much we could have sold. We couldn't sell more than that because we don't have more than that and we could have sold less than that, which we probably did. And that's what we're going to figure out. So we're going to call this subtotal then we're going to have a subtotal here and we're going to call it goods available for sale. Could be goods available for sale, inventory available sale, merchandise inventory available for sale. This is what we had that we could have sold. Now we're going to add those up. That's going to be 32,000. I'm going to use the sum function to do that most important calculation or function within Excel. So we really want to know that sum equals sum double click the sum function here. And I'm just going to highlight from 10,000 to 22. Sum G 19 colon G 20 and enter. So there's the 32,000 there. OK, so that's what that's what we could have sold throughout the time period. Now what we do typically if it was a periodic system and we would subtract out our physical count, we're going to do the same thing for perpetual system. We're going to say, hey, there's our physical count. We're going to subtract that out to get what we believe our cost of goods sold should be. So we're going to say this is a physical. Now this we kind of short cut this just a bit. Note that we're saying here in the problem that the 23,000 is ending inventory in dollars. And obviously in order to get that, we would have to do the physical count in units, make the conversion to dollars. We're not concentrating here on that conversion process. There's different methods that we can account for the inventory. LIFO, FIFO, AVERAGE, specific identification. We'll talk about that at a later time. Now we're just focusing on the fact that we're going to have we want to do that physical count to see that the records are in alignment or make any adjustment needed. So we're going to say that ending inventory. Inventory is that 23,000, 23,000. Therefore, if this is what we had available and this is the ending inventory, the difference then is what we should have sold. The difference is going to be the cost of goods sold. So we'll subtract that out, the 32,000 minus the 23,000. We're going to say this equals and point to that 32 in J21 minus that 23 in J22, giving us 9,000 in J23. I'm going to underline this just to make it look nice. I'm going to go to the home tab, font group, and we'll select this underline there. And there we have that. Now, if we compare this to what we have in our perpetual system, which should be correct because we recorded the inventory as we went, we recorded the cost of goods sold and the decrease in inventory as we made the sales. So our books should be right, but they're not. Here's the 27,000. We're saying ending inventory according to our account was 23. Here's the cost of goods sold 5,000. And we're saying that it should be 9,000 in accordance with our cost of goods sold calculation. So there's obviously a difference there that we are going to account for. Now, first, you know, why is the difference there? If we recorded on a perpetual system, it's probably theft, loss, spoilage, something like that. And so you might think that this cost of goods sold is not really right because it's not a cost of goods sold. It's spoilage. But note that if the amount is going to be minor, we're typically just going to record it to cost of goods sold because that's the account related to inventory, typically. So we are going to make the cost of goods sold this amount, even though part of that 9,000 isn't sales, but loss, spoilage, theft, something of that nature. So we're going to say then that we're going to compare this to the cost of goods sold on books. What we have right now, which is going to be this 5,000. So that's the 5,000 and this is what we want it to be. This is what we have. We're going to subtract those two out, the 9,000 minus the 5,000 or J23 minus J25, giving us 4,000. That's going to be our adjustments. So note this is similar to what we did when we did an adjusting entry to the supplies account. The supplies is kind of like our introduction to inventory in some ways, so now we're going to make the adjustment in accordance to tie this out to what our physical count was. So how are we going to do that? We're going to have to increase this account to make it go up to the 9,000 and we're going to have to decrease this account to make it go down to the 23 by adjusting at 4,000. So cost of goods sold. We'll start with merchandise inventory. It's got 27,000. It needs to go down to 23. So it's a debit balance account. We're going to do the opposite thing to it, which is a credit. So we'll copy the merchandise inventory. We will scroll down. We're going to put that on the bottom. So we're going to put that in cell D 30, right-clicking, pasting 1,2,3. The amount then will be in F 30 of credit negative 3 or 4,000. Then we'll debit something for that same amount. I'm going to do that by saying negative of that number. So negative of that number, 4,000. And we could indent then go into the home tab, alignment, increase in denting. Then we just need the debit account and the debit account will be cost of goods sold. So there's cost of goods sold. I'm going to copy the cost of goods sold. We will put that in cell D 29, right-click and paste 1,2,3. There's our journal entry. Let's post it out. We're going to have to do some scrolling back and forth here a bit to post it, but it shouldn't be too bad. There's the cost of goods sold. We're going to post it right there in J 13 in J 13. We will say equals scroll down just a bit and point to the 4,000 and then enter. And that's going to make the 5,000 go up by 4,000 to 9,000 matching what we think it should be here in our calculation, putting us out of balance here, bringing down net income. So we're going to actually reduce net income. It's kind of like a loss. We're putting, we're increasing the expense for the stolen item or the, or the loss or spoiled item or something, whatever happened to it, whatever happened to it, it's gone. So here's merchandise inventory. It's going to go down. So we're going to scroll back up. Here's merchandise inventory. We're going to put that in cell J seven. So within J seven, we will say equals scroll back down. We're going to point to that 4,000 and enter. That's going to bring that 27,000 down by 4,000 to 23,000. The amount matching what we calculated in our worksheet for ending inventory. Actually it was given to us. That was the part that was given to us in the problem here. So we are now matching the physical count. And of course we have more reliance on the physical count than our perpetual system or perpetual system needs to be adjusted to what we actually physically count the inventory to be in order to account for losses, spoilage, some random category of all of that called inventory shrinkage.