Income Statement For Year Ended December 31,19X2

Net sales…………………………………………………………..$314,700

Cost of goods sold……………………………………             230,400

Gross profit from sales………………………………              $ 84,300

Operating expenses:

Selling expenses:

Depreciation expense, store equipment………………… . $  3,000

Sales salaries expense……………………………………..             18,500

Rent expense, selling space……………………………….                8,100

Store supplies expense……………………………………               1,200

Advertising expense……………………………………….              2,700

Total selling expenses……………………………………….       $33,500

General and administrative expenses:

Depreciation expense, office equipment…………………  $             700

Office salaries expense ……………………………………           25,300

Insurance expense…………………………………………                 600

Rent expense, office space……………………………….                  900

Office supplies expense…………………………………..             1,800

Total general and administrative expenses………………            29,300

Total operating expenses…………………………                       62,800

Net income……………………………………………                 $ 21,500

In Illustration 6, we use the multiple-step income statement format that would probably be used in external reports. The only difference between this format and the one in Illustration 5 is that it leaves out the detailed calcula­tions of net sales and cost of goods sold. The format is called multiple-step because it shows several intermediate totals between sales and net income.

In contrast, we present a single-step income statement for Meg’s Mart in Illustration 7. This simpler format presents only one intermediate total for total operating expenses.

ILLUSTRATION 7 Single-Step Income Statements

MEG’S MART

Income Statement For Year Ended December 31,19X2

Net sales………………………………………………………….$314,700

Cost of goods sold………………………………………………$ 230,400

Selling expenses………………………………………              33,500

General and administrative expenses…………………………… 29,300

Total operating expenses………………………………            293,200

Net income……………………………………………             $ 21,500

In practice, many companies use combination formats that have some of the features of both the single- and multiple-step statements.

Closing Entries for Merchandising Companies

To help understand how information flows through the accounting system into the financial statements, we now discuss the process for closing the tem­porary accounts of merchandising companies. The process is demonstrated with data from the adjusted trial balance for Meg’s Mart in Illustration 8. In addition, the accountant knows from a physical count that the cost of the end­ing inventory is $21,000.

ILLUSTRATION 8

Adjusted Trial Balance for Meg’s Mart at December 31,19X2

Cash............................................................................. $ 8,200

Accounts receivable........................................................ 11,200

Merchandise inventory...................................            19,000

Office supplies.................................................................... 550

Store supplies..................................................................... 250

Prepaid insurance...........................................                 300

Office equipment.............................................................. 4,200

Accumulated depreciation, office equipment….......................$ 1,400

Store equipment.............................................            30,000

Accumulated depreciation, store equipment………………………….. 6,000

Accounts payable......................................................................... 16,000

Salaries payable.............................................                               800

Meg Harlowe, capital.....................................                          34,000

Meg Harlowe, withdrawals.............................................. 4,000

Sales........................................................................................... 321,000

Sales returns and allowances..........................              2,000

Sales discounts...............................................              4,300

Purchases.......................................................          235,800

Purchases returns and allowances  ................                            1,500

Purchases discounts.......................................                            4,200

Transportation-in...........................................              2,300

Depreciation expense, store equipment..........              3,000

Depreciation expense, office equipment.........                 700

Office salaries expense...................................            25,300

Sales salaries expense  ...................................            18,500

Insurance expense..........................................                 600

Rent expense, office space..............................                 900

Rent expense, selling space................... ………         8,100

Office supplies expense..................................              1,800

Store supplies expense...................................              1,200

Advertising expense .....................................                  2,700

Totals.............................................................................. $384,900  $384,900

 

The trial balance includes these unique accounts for merchandising activ­ities: Merchandise Inventory, Sales, Sales Returns and Allowances, Sales Dis­counts, Purchases, Purchases Returns and Allowances, Purchases Discounts, and Transportation-In. Their presence in the ledger causes the closing entries to be slightly different from the ones described in Chapter 4. However, the process still consists of four steps.

Step 1—Record the Ending Inventory and Close the Temporary Accounts That Have Credit Balances

 

The first step accomplishes two goals: First, it adds the $21,000 cost of the ending inventory to the balance of the Merchandise Inventory account. Sec­ond, it closes the temporary accounts that have credit balances, including the Sales account and the two contra-purchases accounts. The first closing entry for Meg's Mart is

Dec. 31 Merchandise Inventory…………………..21,000.00

Sales.............. ………………..               321,000.00

Purchases Returns and Allowances……  1,500.00  

Purchases Discounts ……………….    4,200.00

Income Summary ……………….      347,700.00

 To close temporary accounts with credit

 balances and record the ending inventory

Posting this entry gives zero balances to the three temporary accounts that had credit balances in the adjusted trial balance. It also momentarily increases the balance of the Merchandise Inventory account to $40,000. How­ever the next entry reduces the balance of this account.

 Step 2—Remove the Beginning Inventory and Close the Temporary Accounts That Have Debit Balances

 

The second step also accomplishes two results: First, it subtracts the cost of the beginning inventory from the Merchandise Inventory account. Second, it closes the temporary accounts that have debit balances, including the ex­pense accounts, the two contra-sales accounts, the Purchases account, and the Transportation-In account. The second closing entry for Meg’s Mart is

 

Dec. 31 Income Summary.. ………………………326,200.00

Merchandise Inventory………………………      19,000.00

Sales Returns and Allowances……………….     2,000.00 

Sales Discounts..... ………………………           4,300.00

Purchases  ............ ………………………           235,800.00

Transportation-In.. ………………………           2,300.00

Depreciation Expense, Store Equipment…..        3,000.00

Depreciation Expense, Office Equipment….       700.00

Office Salaries Expense                                       25,300.00

Sales Salaries Expense……………………….     18,500.00

Insurance Expense ………………………            600.00

Rent Expense, Office Space…………………       900.00  

Rent Expense, Selling Space……………….         8,100.00 

Office Supplies Expense……………………       1,800.00 

Store Supplies Expense……………………        1,200.00 

Advertising Expense                                            2,700.00

To close temporary accounts with debit balances and

 to remove the beginning inventory balance

Posting this entry reduces the balance of the Merchandise Inventory account down to $21,000, which is the amount produced by the physical count at De­cember 31,19X2. It also gives zero balances to the 14 temporary accounts that had debit balances.

The following Merchandise Inventory account shows you how the first two closing entries create an ending balance equal to the $21,000 cost provided by the physical count: