Balance of the merchandise inventory account, Accounting Basics

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Q. Balance of the Merchandise Inventory account?

The balance of the Merchandise Inventory account is a cost of the inventory that should be on hand. This fact is a major reason a few companies choose to use perpetual inventory procedure. The cost of inventory that must be on hand is readily available. A physical inventory determines the accurateness of the account balance. Management may perhaps investigate any major discrepancies between the balance in the account and the cost based on the physical count. It thus achieves greater control over inventory. While a shortage is discovered an adjusting entry is required. Presumptuous a USD 15 shortage (at cost) is discovered the entry is

Dec.   31    Loss from Inventory Shortage (-SE)     15
                  Merchandise Inventory (-A)                  15
                  To record inventory shortage

Presume that the Cost of Goods Sold account had a balance of USD 200000 by year-end when it is closed to Income Summary. There are no former purchase-related accounts to be closed. The entry to close the Cost of Goods Sold account is as

Dec.   31     Income Summary                              200,000
                  Cost of Goods Sold                            200,000
                  To close Cost of Goods Sold account to Income
                  Summary at the end of the year.


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