Completing the Accounting Cycle

A merchandising company requires similar kinds of adjusting entries as a service company. This is essential for maintaining accurate financial records and ensuring compliance with accounting standards.
There is one additional adjustment specifically needed for a merchandising company, which pertains to inventory. This adjustment is crucial to confirm that the recorded inventory amount matches the actual quantity of inventory physically present.

Physical Count: This is a critical control feature in the inventory management process. While a perpetual inventory system provides ongoing tracking of inventory levels and indicates what should be present, a physical count checks and confirms what is actually available in stock. This helps identify discrepancies and ensures accurate reporting of inventory.

In addition to adjusting entries, a merchandising company must also implement the same types of closing entries as a service company. Closing entries are necessary for resetting account balances to prepare for the next accounting period.
The specific accounts that require closing in a merchandising company include:
  - Sales: Represents total revenue generated from merchandise sold.
  - Sales Returns and Allowances: This account records returns of merchandise by customers and any allowances made due to defects or disputes regarding sales transactions.
  - Cost of Goods Sold (COGS): This account reflects the direct costs attributable to the production of goods sold by the company.
  - Freight Out: Refers to shipping costs incurred when delivering merchandise to customers, which is considered an expense for the company.
It is important to note that Merchandise Inventory is classified as an asset account and, unlike the other accounts mentioned, it is not closed at the end of the accounting period. This is because the balance of this account carries over into the subsequent period, reflecting the value of inventory the company holds.