Chapter 16 Teacher Outline With Answers

Accounting for a Merchandising Business Organized as a
Partnership - Chapter 16 -
Work Sheet for a Merchandising Business
Now that Seth and Steve have their ledgers update, they need to use the new balances from
the ledgers to prepare summaries of financial information. Most businesses prepare financial
statements at least once each fiscal period. (Many businesses fiscal period begins January 1
and ends December 31 – one year.)
A fiscal period can be anywhere from one month, to six months, or a year. *Take note of when
the calendar year of the business you are working for starts. .
To summarize the information from the general ledgers a worksheet is used. The WORKSHEET
is - a columnar accounting form used to summarize the general ledger information needed to
prepare financial statements.
There are four reasons to use a work sheet
1- to summarize general ledger account balances to verify that debits and credits are
equal
2- to plan any needed changes that occurred during the fiscal period, and up date all
accounts necessary
3- to separate general ledger account balances according to the financial statements
they are used in
4- to calculate the amount of net income or net loss incurred during the fiscal period
The worksheet for a service business is similar to a merchandising business. However, the
Merchandising worksheet will include the following account titles and amount: accounts
receivable, merchandise inventory, accounts payable, sales tax and purchases.
First they will start by preparing the heading of the work Sheet. They will need to:
1- Write the Name of the business
2- Write the Name of the Report
3- Write the date of the report
_______________________________
_______________________________
_______________________________
Second they will prepare the trial balance debit and credit columns on the worksheet
The TRIAL BALANCE is used to - prove the equality of debits and credits from
the general ledgers.
Information for the trial balance is taken from the general ledgers. Notice the
account titles are written in the same order as on the chart of accounts.
The following seven steps are used to prepare the trial balance columns
1- Write the general ledger account titles
2- Write the general ledger account debit balances/write the credit balances
3- Rule a single line across the two Trial Balance columns
4- Add both the Trial Balance Debit and credit columns
5- Write each column’s total, below the single line
6- Rule double lines across both Trial Balance Columns
Paddle Jockey
Work Sheet
For Fiscal Period Ended December 31, 20 --
Account Title Trial Balance Adjustments Income Statement Balance Sheet
Debit Credit Debit Credit Debit Credit Debit Credit
1 Cash 7789.83
2 Petty Cash
3 Accounts Receivable 37.50
4 Merchandise Inventory 3120.00
5 Supplies 4250.00
6 Prepaid Insurance 300.00
7 Accounts Payable 6200.00
8 Sales Tax Payable 448.14
9 Seth Senior, Capital 1500.00
10 Seth Senior, Drawing 25.00
11 Steve Senior, Capital 2050.00
12 Steve Senior, Drawing 125.00
13 Income Summary
14 Sales 6790.19
15
16 212.00
Advertising Expense
17 Credit Card Fee Expense
18 Insurance Expense
19 Miscellaneous Expense 34.00
20 Rent Expense 1000.00
21 Supplies Expense 123.00
22 Utilities Expense 40.00
23
24
Third Seth and Steve will look over their asset accounts and see if any adjustments occurred
that they need to journalize. An ADJUSTMENT is a - change recorded on a work sheet to
update general ledger accounts at the end of a fiscal period.
Certain assets have a portion of their value that is used up during a fiscal period, so the used up
portion can no longer be recorded as an asset. The assets value amount is less than when
bought.. (E.g. supplies, prepaid insurance and Merchandise Inventory looses its value, so as the
supplies, insurance or inventory are used their value lessens.
The amount that is used is taken away (deducted) from the asset account (supplies, prepaid
insurance, merchandise inventory) and recorded in their expense accounts (supplies expense,
insurance expense, income summary), because the assets were used up).
The following four questions are considered when analyzing an adjustment.

1- What is the beginning balance of the asset account?
2- What should the balance for this asset account be?
3- What must be done to correct the account balance?
Decrease/Increase the beginning asset balance
4- What adjustments must be made?
A Debit or a Credit
Seth and Steve knew that they had some adjustments that need to be updated from the trial
balance. One of the adjustments is to the merchandise inventory and income summary accounts.
Inventory is the amount of goods (merchandise to sell) on hand. In business standards, the
amount of goods on hand for sale to the customers is called merchandise inventory.
Merchandise inventory is an asset, because the inventory is of value and can be sold. Its T
account looks like the following:
Assets = Liabilities + Owner’s Equity

Assets Liabilities Owner’ Equity
Left Side Right Side Left Side Right Side Left
Side Right Side
Debit Side Credit Side Debit Side Credit Side Debit Side Credit Side
Normal Balance Normal Balance Normal Balance
+ - - + - +
Assets – Merchandise Inventory
Left Side Right Side
Debit Side Credit Side

Normal Balance
+ -
The merchandise inventory account is used to record purchases of merchandise to sell and sales
for an entire fiscal period. This account shows the current value of merchandise on hand. To
figure out the adjustment made to merchandise during the fiscal period, consider the following
four questions:
What is the balance now of Merchandise Inventory?
What should the balance be for this account due to the changes from the fiscal
period?
What must be done to correct the account balance?
What accounts will be affected and how will each account be affected?
Merchandise inventory has no related expense account, so it’s related account (where money is
put when the account is closed at the end of the fiscal year), is a temporary account called
income summary.
On December 31 Seth and Steve Senior count the video games on hand and find out that they
sold a lot of the games. The games still for sale (unused) have a value of $ 1347.00.
To find out the value the merchandise inventory used during the fiscal period and the
merchandise inventory on hand, keep in mind the following equation:
Merchandise Inventory Account Balance on December 31 $ 3120.00
- Merchandise Inventory on Hand, December 31 $ 1347.00
= Merchandise Inventory Used During the Fiscal Period $ 1773.00
Merchandise Inventory Income Summary

Left Side Right
Side
Debit Side Credit Side Debit Side
Credit Side
Normal Balance Normal Balance
+ -
$ 31200.00 (Beginning Balance) $ 0.00 (Beginning Balance)
$ 1773.00 (Adjustment) $ 1773.00 (Adjustment)
$ 1347.00 (New Balance)
Seth and Steve will need to follow the next three steps to record the adjustment to the
Merchandise Inventory account and Income Summary account:
1- Write the debit amount in the debit amount column on the line with the account
title Income Summary
2- Write the credit amount, in the credit amount column on the line with the
account title Merchandise Inventory
3- Label the adjustments with a letter a, b, etc.
On December 31, before any adjustments, to supplies has been made, the balance of the Supply
asset account was $ 4250.00, and the balance of the Supplies Expense account was zero.
On December 31 Seth and Steve counted the shops supplies on hand and found that they used
up a lot of paper and ink printing off flyers to pass out, so the supplies value still unused
(available) was $ 1431.00.
To find out the value the supplies used during the fiscal period and the supplies on hand at the
end of the fiscal period, keep in mind the following equation:
Supplies Account Balance on December 31 $ 4250.00
- Supplies on Hand, December 31 $ 1431.00
= Supplies Used During the Fiscal Period $ 2819.00
Supplies Expense Supplies

Left Side Right
Side
Debit Side Credit Side Debit Side
Credit Side
- + + -
They will need to follow the next three steps to record the adjustment to Supplies
1- Write the debit amount in the debit amount column on the line with the account
title Supplies Expense
2- Write the credit amount, in the credit amount column on the line with the
account title Supplies
3- Label the adjustments with a letter a, b, etc.
On December 31, before any adjustments, to Prepaid Insurance had been made, the balance of
the Prepaid Insurance asset account was $ 300.00, and the balance of the Prepaid Insurance
Expense account was zero.
On December 31 Seth and Steve looked over the insurance papers and read that the amount of
insurance left for the year (on hand) had a value still unused (available) of $ 100.00.
To find out the value of Prepaid Insurance coverage used during the fiscal period and the
Insurance coverage for the remainder of the month, keep in mind the following equation::
Prepaid Insurance Balance, on December 31 $ 300.00
- Insurance Coverage Remaining Unused, December 31 $ 100.00
= Insurance Coverage Used During the Fiscal Period $ 200.00
Insurance Expense Prepaid Insurance

Left Side Right
Side
Debit Side Credit Side Debit Side Credit
Side
- + + -
Paddle Jockey
Work Sheet
1 Cash 7789.00
2 Petty Cash
4 Merchandise Inventory 3120.00 1773.00 a
5 Supplies 4250.00 2819.00 b
6 Prepaid Insurance 300.00 200.00 c

13 Income Summary 1773.00 a
14 Sales 6790.19
15
16
Advertising Expense 212.00

18 Insurance Expense 200.00 c
21 Supplies Expense 123.00 2819.00 b
23 Totals 17022.33 17022.33
24
After they successfully record the adjustment to Prepaid Insurance they are ready to prove
the adjustment columns of the worksheet. To prove the adjustment columns means you are
going to make sure that all debit amount columns equal all credit amount columns.
To prove the adjustment columns follow the next three steps:

1- Rule (draw) a single line across the two Adjustments columns
2- Add all of the amounts in the Adjustment Debit Column and add all of the amounts in
the Adjustment Credit columns, write the totals for the adjustment amount
columns
3- If the debit amount column totals equal the credit amount column totals, rule (draw)
Paddle Jockey
Work Sheet
1 Cash 7789.00
2 Petty Cash
4 Merchandise Inventory 3120.00 1773.00 a
5 Supplies 4250.00 2819.00 b
6 Prepaid Insurance 300.00 200.00 c
13 Income Summary 1773.00 a
14 Sales 6790.19
15
16
Advertising Expense 212.00

18 Insurance Expense 200.00 c
21 Supplies Expense 123.00 2819.00 b
23 Totals 17022.33 17022.33 4792.00 4792.00
24
Seth and Steve have successfully proven the adjustment columns and the debit total amount
equals the credit total amount. However, they realized that there are still four more amount
columns that haven’t been used yet. They ask their teacher what the columns are used for.
The teacher explains that the last four columns (to the right) are used to prepare up to date
account balances for the end of the fiscal period. The information from the last four columns
are used to prepare two special financial reports – the income statement and the balance sheet.
Seth and Steve weren’t sure what an income statement was and so their teacher explained that
the INCOME STATEMENT is - a financial statement showing the up to date revenue and
expense amounts for a fiscal period. The BALANCE SHEET if you remember reports the value
of the assets, liabilities, and owner’s equity on a specific date. The teacher also explained that
although the balance sheet columns are at the far right of the worksheet, the up to date
amounts starting with Cash, working down to the Drawing accounts need to be extended (moved)
into the balance sheet debit and credit columns.
The following three steps are used to extend (move) the updated amounts from the trial
balance columns and adjustment columns to balance sheet debit and credit columns.
1- Extend the up to date balance of each asset account
2- Extend the up to date balance of each liability account
3- Extend the up to date balances of the owner’s equity account
After extending all of the balance sheet account balances, the income statement account
balances need to be updated. The amounts from the trial balance columns and
adjustment columns are extended (moved) to the income statement debit and credit
columns.
1- Extend the up to date balance of the revenue account (Sales)
2- Extend the up to date balance of each expense account
Although all of the income statement account balances have been extended, the net income
(profit) or net loss needs to be calculated, so that Seth and Steve can summarize their business
outlook and make good final decisions regarding the finances of their business.
Paddle Jockey
Work Sheet
1 Cash 7789.83 7789.83
2 Petty Cash
3 Accounts Receivable 37.50 37.50
4 Merchandise Inventory 3120.00 1773.00 a 1347.00
5 Supplies 4250.00 2819.00 b 1431.00
6 Prepaid Insurance 300.00 200.00 c 100.00
7 Accounts Payable 6200.00 6200.00
8 Sales Tax Payable 448.14 448.14
9 Seth Senior, Capital 1500.00 1500.00
10 Seth Senior, Drawing 25.00 25.00

11 Steve Senior, Capital 2050.00 2050.00
12 Steve Senior, Drawing 125.00 125.00
13 Income Summary 1773.00 a 1773.00
14 Sales 6790.19 6790.19
15
16
Advertising Expense 212.00 212.00

18 Insurance Expense 200.00 c 200.00
19 Miscellaneous Expense 34.00 34.00
20 Rent Expense 1000.00 1000.00
21 Supplies Expense 123.00 2819.00 b 2942.00
22 Utilities Expense 40.00 40.00
23 Totals 17022.33 17022.33 4792.00 4792.00 6167.00 6824.19 10855.33 10198.14
24
To calculate the NET INCOME which is - the difference between total revenue (money
received) and total expenses (money paid out) when total revenue is GREATER, follow the
following five steps:
1- Rule (draw) a single line across the Income Statement and Balance Sheet Columns
2- Add both the Income Statement amount columns and the Balance Sheet amount
columns, then write the column totals below the last entry and the single line
3- Calculate the net income
Income Statement Credit Column Total $ 6824.19
- Income Statement Debit column Total $ 6167.00
= Net Income $ 657.19
Balance Sheet Debit Column Total $ 10855.33

- Balance Sheet Credit Column Total $ 10198.14
= Net Income $ 657.19
4- Write the amount of net income below the Income Statement Debit Column. Balance
Sheet Credit column and Net Income on the same line in the Account Title
5- Extend the amount of net income to the Balance Sheet Credit Column
Paddle Jockey
Work Sheet
1 Cash 7789.83 7789.83
2 Petty Cash
5 Supplies 4250.00 2819.00 b 1431.00

14 Sales 6790.19 6790.19
15
16

20 Rent Expense 1000.00 1000.00
23 Totals 17022.33 17022.33 4792.00 4792.00 6167.00 6824.19 10855.33 10198.14
24 657.19 657.19
Their business had a Net Income (profit) for the past fiscal period. However, the worksheet is
still not completed. To complete the worksheet total the Income Statement and Balance Sheet
columns and rule the worksheet, to verify the debit amounts equal the credit amounts.,
1- Rule (draw) a single line across the four Income Statement and Balance Sheet Columns
2- Add the subtotal of the amount column and the net income amount for each column to
get proving totals for the Income Statement and Balance Sheet Columns
3- Check the equality of the proving total amounts for each pair of columns.
(Income Statement Debit and Credit, Balance Sheet Debit and Credit)
4- Rule (draw) double (two) lines across the Income Statement and Balance Sheet
Columns
Paddle Jockey
Work Sheet
1 Cash 7789.83 7789.83
2 Petty Cash
5 Supplies 4250.00 2819.00 b 1431.00
14 Sales 6790.19 6790.19
15
16
20 Rent Expense 1000.00 1000.00
23 Totals 17022.33 17022.33 4792.00 4792.00 6167.00 6824.19 10855.33 10198.14
24 Net Income 657.19 657.19
6824.19 6824.19 10198.14 1098.14
Seth and Steve see that they have made $ 657.19. They feel good about that amount because
it means that they are making more money than they are spending. They are right on track.
However, they ask the teacher how to calculate and record a net loss if something were to
happen where they were struggle financially.
First, a NET LOSS is - the difference between total revenue (money received) and total
expenses (money paid out) when total expenses is GREATER, it means that you are spending
more money than you are making and your business needs to make some changes. Recording a
net loss is similar to recording net income.
Paddle Jockey
Work Sheet
1 Cash 1789.83 1789.83
2 Petty Cash
5 Supplies 4250.00 2819.00 b 1431.00
14 Sales 790.19 790.19
15
16


20 Rent Expense 1000.00 1000.00
23 Totals 11022.33 11022.33 4792.00 4792.00 6167.00 824.19 4855.33 10198.14
24 Net Loss 5342.81 5342.81
6167.00 6167.00 10198.14 10198.14
1- Rule (draw) a single line across the four Income Statement and Balance Sheet
account columns
2- Add both the Income Statement amount columns and the Balance Sheet amount
columns and write the amount totals below the single line
3- Calculate the net loss
Income Statement Debit Column Total $ 6167.00
- Income Statement Credit Column Total $ 824.19
= Net Loss $ 5342.81
Balance Sheet Credit Column Total $ 10198.14

- Balance Sheet Debit Column Total $ 4855.33
= Net Loss $ 5342.81
4- Write the amount of net loss below the Income Statement Credit amount column,
Balance Sheet Debit Column and, write the words Net Loss on the same line under the
Account Title.
5- Extend (move) the amount of net loss, to the Balance Sheet Debit column
6- Total and rule the work sheet using the same steps as Net Income
Seth and Steve have completed their worksheet with both outlooks of a net profit and a net loss. They prefer
the worksheet with the net profit because it means that they are making money and their business shows a good
outlook. However, many companies, particularly in their early years, often show a net loss as they get their
business started.

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Chapter 16 Teacher Outline With Answers

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Accounting for a Merchandising Business Organized as a

4 Merchandise Inventory 3120.00

6 Prepaid Insurance 300.00

7 Accounts Payable 6200.00

8 Sales Tax Payable 448.14

9 Seth Senior, Capital 1500.00

10 Seth Senior, Drawing 25.00

11 Steve Senior, Capital 2050.00

12 Steve Senior, Drawing 125.00

19 Miscellaneous Expense 34.00

20 Rent Expense 1000.00

21 Supplies Expense 123.00

22 Utilities Expense 40.00

The following four questions are considered when analyzing an adjustment.

Assets = Liabilities + Owner’s Equity

Debit Side Credit Side

Merchandise Inventory Income Summary

Supplies Expense Supplies

Insurance Expense Prepaid Insurance

4 Merchandise Inventory 3120.00 1773.00 a

5 Supplies 4250.00 2819.00 b

6 Prepaid Insurance 300.00 200.00 c

8 Sales Tax Payable 448.14

9 Seth Senior, Capital 1500.00

10 Seth Senior, Drawing 25.00

11 Steve Senior, Capital 2050.00

12 Steve Senior, Drawing 125.00

13 Income Summary 1773.00 a

17 Credit Card Fee Expense

19 Miscellaneous Expense 34.00

20 Rent Expense 1000.00

21 Supplies Expense 123.00 2819.00 b

22 Utilities Expense 40.00

23 Totals 17022.33 17022.33

To prove the adjustment columns follow the next three steps:

4 Merchandise Inventory 3120.00 1773.00 a

5 Supplies 4250.00 2819.00 b

6 Prepaid Insurance 300.00 200.00 c

7 Accounts Payable 6200.00

8 Sales Tax Payable 448.14

9 Seth Senior, Capital 1500.00

10 Seth Senior, Drawing 25.00

11 Steve Senior, Capital 2050.00

12 Steve Senior, Drawing 125.00

13 Income Summary 1773.00 a

17 Credit Card Fee Expense

19 Miscellaneous Expense 34.00

20 Rent Expense 1000.00

21 Supplies Expense 123.00 2819.00 b

22 Utilities Expense 40.00

23 Totals 17022.33 17022.33 4792.00 4792.00

4 Merchandise Inventory 3120.00 1773.00 a 1347.00

5 Supplies 4250.00 2819.00 b 1431.00

6 Prepaid Insurance 300.00 200.00 c 100.00

7 Accounts Payable 6200.00 6200.00

8 Sales Tax Payable 448.14 448.14

9 Seth Senior, Capital 1500.00 1500.00

10 Seth Senior, Drawing 25.00 25.00

12 Steve Senior, Drawing 125.00 125.00

13 Income Summary 1773.00 a 1773.00

14 Sales 6790.19 6790.19

17 Credit Card Fee Expense

19 Miscellaneous Expense 34.00 34.00

20 Rent Expense 1000.00 1000.00