Page 258 - Accounting Principles (A Business Perspective)

6. Merchandising transactions

beginning inventory. The sales and sales-related accounts and the purchases and purchases-related accounts
summarize the merchandising activity for December 2010.
Lyons carries any revenue accounts (Sales) and contra purchases accounts (Purchase Discounts, Purchase

Returns and Allowances) in the Adjusted Trial Balance credit columns of the work sheet to the Income Statement
credit column. It carries beginning inventory, contra revenue accounts (Sales Discounts, Sales Returns and
Allowances), Purchases, Transportation-In, and expense accounts (Selling Expenses, Administrative Expenses) in
the Adjusted Trial Balance debit column to the Income Statement debit column.
Assume that ending inventory is USD 8,000. Lyons enters this amount in the Income Statement credit column
because it is deducted from cost of goods available for sale (beginning inventory plus net cost of purchases) in
determining cost of goods sold. It also enters the ending inventory in the Balance Sheet debit column to establish

the proper balance in the Merchandise Inventory account. The beginning and ending inventories are on the Income
Statement because Lyons uses both to calculate cost of goods sold in the income statement. Net income of USD
5,843 for the period balances the Income Statement columns. The firm carries the net income to the Statement of
Retained Earnings credit column. Retained earnings of USD 18,843 balances the Statement of Retained Earnings
columns. Lyons Company carries the retained earnings to the Balance Sheet credit column.
Lyons carries all other asset account balances (Cash, Accounts Receivable, and ending Merchandise Inventory)
to the Balance Sheet debit column. It also carries the liability (Accounts Payable) and Capital Stock account
balances to the Balance Sheet credit column. The balance sheet columns total to USD 29,543.
Once the work sheet has been completed, Lyons prepares the financial statements. After entering any adjusting

and closing entries in the journal, the firm posts them to the ledger. This process clears the records for the next
accounting period. Finally, it prepares a post-closing trial balance.
Income statement Exhibit 41 shows the income statement Lyons prepared from its work sheet in Exhibit 40.
The focus in this income statement is on determining the cost of goods sold.
Statement of retained earnings The statement of retained earnings, as you recall, is a financial statement
that summarizes the transactions affecting the Retained Earnings account balance. In Exhibit 42, the statement of
retained earnings shows an increase in equity resulting from net income and a decrease in equity resulting from

dividends.

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