CHAPTER 8 Completing the Cycle for a Merchandising Business

NEED FOR A PHYSICAL COUNT

- In the periodic inventory system, purchases of merchandise are accumulated in the
purchases account.
- During the accounting period, no entry is made to the merchandise inventory account
such that its balance at the end of the period, before adjusting and closing entries, is the
same as the beginning inventory.
- With no perpetual record of the cost of sales during the period, the only way to obtain the
cost of the ending inventory is to make a physical count.
The steps involved in the physical count follows:
a. All merchandise owned by the entity is counted.
b. The quantity counted is multiplied by the cost per unit for each inventory item.
c. The costs of various items are added to determine the total cost of inventory.

- The resulting total cost of inventory is the ending inventory; this amount will appear as
a deduction in the cost of sales section of the income statement, and as a current asset in
the balance sheet.
MERCHANDISE INVENTORY AT THE END OF THE PERIOD
- At the end of the period, entries are made to reflect in the inventory account the ending
balance. The objectives of these entries are as follows:
a. to remove the beginning balance from the merchandise inventory account and to transfer
it to income summary;
b. to enter the ending balance in the merchandise inventory account and to establish it in the
income summary.
PREPARING THE FINANCIAL STATEMENTS
Income Statement